Good morning. My name is Miranda, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Q2 2022 Results Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then the number two. I would now like to turn it over to Whitecap President and CEO, Mr. Grant Fagerheim. You may now begin your conference call.
Thanks, Miranda. Good morning, everyone, and thank you for joining us here this morning. Here with me today are two members of our senior management team, our Senior Vice President and CFO, Thanh Kang, as well as Darin Dunlop, Senior Vice President of Engineering. Before we get started today, I would like to remind everybody that all statements made by the company during this call are subject to the same forward-looking disclaimer and advisory that we set forth in our news release issued earlier this morning. We are pleased to advise that our second quarter results were excellent across the board with successful operations in each of our four business units, paving the way for our record financial results.
To give it perspective, our second quarter funds flow of CAD 1.08 per share was higher than the CAD 1.06 per share that we earned for all of 2020. What a difference a year and a half makes. The quarter also ended with the announcement of our acquisition of XTO Canada on June 28. We are very excited about this transaction. We are on track to close it before the end of the third quarter. In the second quarter, we generated record funds flow of almost CAD 600 million, which was CAD 175 million of it being returned to shareholders through our base dividend and share repurchases.
We also ended the quarter with approximately CAD 675 million of debt, well below our CAD 800 million target that we set leading into the end of the quarter. Darin will give a few more details on our operational highlights, but I wanted to touch base on our recent Montney wells that we alluded to in our press release this morning. Both the initial well results from the 12-33 pad and the continued productivity from the 14-13 pad validate our assessment of the quality of the Montney opportunity that we have, along with the improvement in well placement and associated completion techniques that we have employed.
Our ownership in both of these pads and a total of 34 sections at Kakwa will be increasing to 100% working interest once we close the XTO transaction. We look forward to closing the XTO acquisition and putting capital to work on these assets in the fourth quarter. I will now pass it on to Darin to highlight more of our recent operational achievements. Thank you.
Thanks, Grant. Our Q2 production outperformance was driven by, one, continued identification and implementation of production optimizations on our acquired assets, particularly in Central Alberta. Two, our Q1 drilling program significantly outperforming initial productivity expectations. Since taking over operations at Kakwa in mid-2021, we have been utilizing advanced analytics and modeling to proactively optimize the design and implementation of our Montney fracture simulations. This includes optimizing well bore placement within the Montney package and refining volumes, rates, entry point design and spacing. As a result, our frack efficiency continues to improve as evidenced by the strong initial rates from the 12-33 pad referenced in our Q2 release. XTO last drilled Montney wells as part of their winter 2019-2020 program, and we are excited to implement this optimized well design to our new Montney acreage.
Moving on to our other assets. In Southeast Saskatchewan, our 16 Frobisher wells from the Q1 program averaged over 213 BOE per day per well over their first 90 days of production. This is 47% higher than our expectation of 144 BOE per day. These wells are also declining at a much lower rate than expected, which accounts for some of the outperformance. In Central Alberta, our four Q1 operated Glauconite wells now have over 90 days of production, for which they average 839 BOE per day per well, with 77% liquids. This is also 57% above our expectations. Lastly, in Southwest Saskatchewan, our four well Lower Shaunavon program now has been on for over 90 days and has averaged 245 BOE per day, which is 72% higher than our expectations.
This program includes a reservoir extension well to the northeast that will likely upgrade the expectations for 15-30 locations. I would now like to pass it on to Thanh to comment on our financial results and outlook.
Thanks, Darin. Our record funds flow in the second quarter driven by excellent operational results and strong commodity prices with WTI averaging over $108 per barrel and AECO over CAD 7 per Mcf in the quarter. Tight differentials and a weak Canadian dollar further improved the high benchmark pricing that we realized. Funds flow of CAD 677 million or CAD 1.08 per share and free funds flow of CAD 589 million or CAD 0.94 per share were all up over 150% from Q2 of last year. Further, we continued to generate strong returns to shareholders by returning a total of CAD 176 million in the quarter through base dividends and share buybacks.
Second quarter gross capital spending was CAD 88 million relative to our forecast of CAD 75 million. Our budget assumed the CAD 13 million pipeline cost at Wapiti would be net against its subsequent disposition. Under IFRS, we have to separate the cost from the disposition. Our 2022 standalone capital budget of CAD 570 million is net of the CAD 13 million Wapiti pipeline disposition. Our balance sheet's in great shape with net debt of approximately CAD 675 million, well below our target of CAD 800 million, and puts us in an even better position to acquire premier Montney and Duvernay assets without issuing any equity into the market. As a reminder, net debt upon closing of the transaction is expected to be approximately CAD 2.1 billion, which represents only 1.5x debt- to- EBITDA at $50 oil.
Our net debt milestone of CAD 1.3 billion represents a debt- to- EBITDA ratio of less than 1x at $50 WTI and only 0.6x at $85 WTI. There's no changes to our capital spending or production guidance for the remainder of 2022 and our preliminary 2023 numbers. We're excited to bring the XTO assets into the Whitecap portfolio as they generate strong, sustainable free cash flow and will enable us to continue to increase returns to shareholders long into the future. I'll now pass it back to Grant for his closing remarks.
Thanks, Thanh. Since the start of July, our teams have been back in the field executing on our active third quarter capital program. We are currently running 10 rigs and will hit a peak of 11 rigs before the end of August. We have secured drilling rigs and completion services through to the end of spring breakup next year to execute on the expanded capital program, including the XTO assets being acquired. We remain very positive about the forward commodity price environment and have prudently planned our capital program using a lower commodity price deck. We are focused on capital allocation decisions that provide the best returns for the company and to our shareholders.
Our intention is to continue to build on recent operational success, improve efficiencies through our processes to increase our free cash flow, achieve our net debt milestones, and continue to increase returns to our shareholders. To reiterate our return of capital framework, once our first net debt milestone of CAD 1.8 billion is reached, we will increase our dividend by 25%-30%, and then again by 25%-30% once we achieve our next milestone of CAD 1.3 billion, for a total annual dividend of CAD 0.73 per share. Once this final net debt milestone is reached, our intention is to return up to 75% of our free cash flow back to our shareholders through dividends and share buybacks.
Lastly, I would like to thank our employees and service providers for their continuous dedication, for our Board of Directors for their guidance, and to our shareholders for your ongoing support. With that, I will turn the call over to the operator for questions. Thank you.
Thank you. Ladies, and gentlemen, as stated, if you do have a question, please press star followed by the number one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to withdraw your question, simply press star followed by two. We do ask if you're using a speakerphone to please lift your handset before pressing any keys. Please go ahead and press star one now if you have a question. One moment for your first question. Your first question today is coming from William Damian, who is a Private Investor. Please go ahead.
Good morning, everyone. My question is regarding the XTO asset purchase. It looks like we're increasing CapEx by CAD 500 million in order to achieve 40,000 barrels of oil equivalent per day in production at a cost of CAD 1.7 billion for the acquisition. I'd like to see if the panel could expand on that a little bit and how that adds to free cash flow for our investors. Second question I have is the press release on the webpage at the beginning of June indicated that 50% of free cash flow would be forwarded to investors throughout the rest of the year. As I understand, this deal was began in January, which would indicate that there was never any intention of forwarding 50% of free cash flow to investors if we were undertaking an XTO deal. Thank you.
Hi, good morning. It's Thanh here. I'll answer the first part of the question. I'll let Grant answer the second one here. The capital program that we've outlined for 2022, we increased that by CAD 50 million in the fourth quarter here. Their current production is about 32,000 BOE per day of production. For 2023, on a very preliminary basis, our standalone capital was about CAD 750 million. You know, these assets, under our commodity price assumption, $85 oil and CAD 4.50 gas here, would generate about $500 million in cash flow. The capital required on this asset to grow it from 32,000 BOE per day to 36,000 BOE per day, which is 16% growth, is about CAD 250 million.
About CAD 1 billion in total that we're spending next year to grow production per share 23%. You can see that, you know, this asset here, this high-quality asset with the inventory that it brings forward, is already generating free cash flow today. CAD 500 million of cash flow, approximately CAD 250 million of capital that we'll spend in 2023 there. It does improve our sustainability, but it also brings more free cash flow per share. You can see that when we look at the accretion numbers, our free cash flow per share accretion is 20% per share.
Just regarding your second question, whether it was our intention to return capital, 50% of our cash flow back to our shareholders. We actually had intended, and we're actually into the future going to be returning more back to our shareholders than the 50% that we were talking about earlier. As far as our intention was concerned, the bids were due on the, you're referencing back to January, or the bids were due on this first, on the XTO were due in mid-March. There was a process that took us through to the end of April before we were even advised that we were going to be the selected party to negotiate a firm transaction.
Our intentions have actually improved, not been reduced from where we were at previously from returning share returns back to or increasing our returns back to shareholders. Thank you.
Yeah. The only thing I would add to that, you know, Grant, is, you know, certainly when you look at the quality of this type of transaction, what we're always trying to do is improve the long-term sustainability of the business, which means improving that free cash flow profile so that we can actually return more back to our shareholders. You're referencing the 50% being returned back to shareholders, and what we wanna do through this transaction is increase that to 75%. Once we reach our debt milestone of CAD 1.3 billion, which we think is gonna be sometime in the first half of 2023 here. We need to balance looking at our business on a long-term basis versus a short-term basis.
We think that's a very fair trade-off in terms of going from zero leverage to low leverage and bringing in such a high-quality asset that improves our free cash flow profile and improves our ability to return more capital back to our shareholders.
When I look at the early June perspective, it's indicating that we can expect CAD 600 million. There was CAD 411 million due to come back to shareholders through the final four months or six months of the year, and that disappeared.
The other-
Instead, we got an increase of CAD 50 million for the rest of the year. Instead of 411 million being returned to shareholders on the plan on June 1, we got CAD 50 million for the rest of the year. If you change that plan now, how do I know that you don't change that plan later? I do note that you said up to 75%.
Yeah. There's definitely a trade-off for sure. We're trying to run this business on a long-term basis here. You know, when you look at the moving the time frame from a return of capital perspective, look, we're looking at six to nine months here. We're not years away from being able to achieve 75% back to shareholders here. We think this is hugely beneficial for our shareholders. It is a medium to longer term trade-off in terms of more free cash flow for short term improvements, I would say, from a balance sheet perspective here. That's something that there was a conscious decision made to ensure that we continue to improve our business from an inventory, from a free cash flow, from a production standpoint here.
There's no question that there's a bit of a deferral here. You know, we agree with that. We think the trade-off is immensely beneficial to our shareholders.
Thank you.
Your next question would be coming from Jeremy McCrea with Raymond James. Please go ahead.
Yeah. Hi, guys. Just with this, you know, maybe a bit of a follow-up question here as well, too. Just with the XTO asset, I know it's really probably high-graded your asset base here. Does it give you pause here to maybe look at some maybe more non-core dispositions, just to enhance that free cash flow? If so, what would those non-core dispositions potentially look like? Then you guys have been, you know, very busy on the M&A front here. Does this XTO asset give you pause, in terms of M&A, or are you still, you know, looking here, you know, pretty proactively?
Sure. Thanks, Jeremy. Just regarding your first question on non-strategic assets, we are in the process of going through an evaluation of assets to put into the market that are non-strategic to Whitecap on a go-forward basis because we haven't applied capital, and we will not be applying capital to those into the future. We could produce them out, assets, but it's somewhere between 9,000-12,000 BOE per day of production that we're doing detailed analysis on, including updated engineering along with the rest of our assets. But we are looking to the potential to put into the market assets between 9,000-12,000 BOE per day.
The option being that we could monetize them, if there's sufficient bid appetite, or we could just continue to produce them out as we have. We've looked at that over the last period of time, if we haven't applied capital to them or expect to project to apply capital to them into the future. That was our criteria that we're looking at our assets on.
Your second question on M&A, pause for sure. We're going to pause at this particular time. There's this acquisition we're very, very excited about with the XTO acquisition. We wanna make sure that we fully integrate not only the assets but the personnel that will be joining us as well, and ensure that through the 2023 year and into the future that we can demonstrate strong results as we have through 2022.
Okay. Perfect. Thanks, Grant.
Ladies, and gentlemen, as a reminder, should you have a question, please press star, then the number one. Your next question is coming from Travis Wood with National Bank Financial. Please go ahead.
Yeah, good morning, guys. Two questions for you. One, could you help us understand kind of the cadence of OpEx on a pro forma basis as you integrate these lower cost Montney assets and kind of what that pro forma BOE number would look like through next year? Then the second question is a little bit of a carry on from Jeremy's there, just in terms of what low-hanging fruit do you see kind of within the XTO assets that you could start to enhance some margins, improve some kind of operating synergies? I know Darin kind of alluded to some of those, but could you give us some more color around how you plan on optimizing and potentially improving performance coming out of that asset as well?
Hey, Travis, it's Thanh here. I'll answer the first question. From an operating cost perspective, you know, Q2 was higher than normal, and that's due to higher turnarounds and workovers that we typically do in the second quarter here. Also with the NAL acquisition that we did, we did acquire the old gas plant, and we did a turnaround there as well. That's typically done every three years. As we move into the third quarter from a Whitecap standalone basis, we'd expect that to trend down to that CAD 14.25 per BOE range. There's a step change with the XTO acquisition and those assets being folded in because they come with a much lower cost structure.
Pro forma, we're expecting about CAD 13 operating costs for BOE in the fourth quarter as well as moving into 2023 as well.
Perfect. Thank you. Yeah, just some of the opportunities you see within the XTO asset base where you could start to enhance some margin over and above kind of base plan.
Yeah. Travis, Darin here. I'll take that. In the press release, what we're talking about with regards to optimization, that was primarily down in Central Alberta. You know, that's a different situation where there's rerouting of production to more efficient plants, lowering line pressures, stuff like that. You know, a lot of optimization that's happened there by consolidating assets. On the XTO assets, a little bit different. You know, that wasn't, I guess, a core asset for the XTO Exxon portfolio. You know, they hadn't been active there since 2019, 2020.
One optimization there will be, you know, just applying what the learnings on frack design, development design, well spacing, and that that has evolved over the last three to four years in the Montney to those assets on developing them. As well, there are some opportunities for, you know, lowering line pressure, optimizing well performance and that. That being said, you know, there's a lot less wells, but they are a lot bigger, so any percentage gains you gain on an individual well will be significant. A little bit different, but still we see some opportunities.
Okay. Thanks very much for the color. That's all.
Your next question is coming from Josef Schachter with Schachter Energy Research. Please go ahead.
Good morning, guys, and congratulations on the quarter and the XTO deal. Question, as mentioned by Darin just recently, the production activity by Exxon and Imperial was not, you know, after 2019 kind of stalled and stopped. Where was the production at the peak? Given the facilities that they have, are they running their plants and facilities at, you know, we're at 70%-75% so that you have a lot of growth potential before you have to spend money on more infrastructure? Maybe you can put some color on that just to help me understand, you know, what XTO was doing for the last few years and the upside capture for yourselves.
Yeah. Josef, thanks for the question. If we're obviously two different gathering systems with the Montney and the Duvernay, but I'll just talk to Duvernay. In 2020, you know, that's when XTO Duvernay production had peaked. Right now, with the recent completion by Crescent Point of their 16 DUCs. You know, we are now reaching close to capacity, but that'll be short term. In the Duvernay, we plan to live within, you know, drilling five to eight wells a year to drill to fill on the Duvernay.
Our primary growth will be in the Montney, where we will be drilling, you know, over the next few years, you know, upwards of 20-25 wells a year in the Montney. That is, we have a lot of options for takeaway and processing capacity within five different plants there.
Just going to where was the peak production on the two assets, you know, in 2019? Just to get an idea of, you know, the 32,000 that you're getting now versus what was the peak that they had prior to stopping spending money.
You know, at the total peak in, I'm looking at a graph right now, probably in around 40,000-45,000.
Quite a bit of upside there.
Yeah.
Mostly on the Montney then.
Yes.
Yeah. Great. Thanks very much. Good. Thank you for the call. Thanks.
At this time, gentlemen, we have no other questions registered. Please proceed.
Thanks very much, Miranda. Thanks to each of you on the call today as we look forward to reporting back to you with the closing of the XTO acquisition in the third quarter here. Until then, I hope everyone has a pleasant remainder of your summer holidays. Thanks very much. Enjoy the rest of your day.
Thank you, sir. Ladies, and gentlemen, it does indeed conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.