Good morning. My name is Sylvie, I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap Resources Q1 2023 Results Conference Call. Note that 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 1 on your telephone keypad. If you would like to withdraw your question, please press star then 2. I would like to turn the conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may begin your conference, sir.
Thanks, Sylvie. Good morning, everyone, and thank you for joining us here today. Here with me are three members of our senior management team, our Senior Vice President and CFO, Thanh Kang, our Senior Vice President, Production and Operations, Joel Armstrong, as well as Dave Mombourquette, Senior Vice President, Business Development and Information Technology. 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 yesterday afternoon. There has been a significant commodity price volatility to start the year, and I'm proud of the way our team has made adjustments to our program and the results they've delivered in the first quarter.
We generated almost CAD 200 million of free funds flow in the quarter as our total liquids production of approximately 103,000 barrels per day, including oil and condensate, outperformed our expectations, while we spent approximately CAD 50 million less in capital than anticipated compared to our released in September 2022. Our first quarter capital spending of CAD 254 million included the drilling of 69 gross, 60.8 net wells, resulting in average production of 155,124 BOE per day in the first quarter. We also completed the disposition of 10,500 BOE per day of high-cost non-strategic assets during the quarter.
Consistent with our commitment to returning a significant amount of free funds flow back to our shareholders, we returned CAD 121 million in the first quarter, or over 60% of free funds flow to our base dividend of CAD 0.58 per share annually and over CAD 30 million in share repurchases. We ended the quarter with net debt of CAD 1.47 billion, which is nearing our second of two debt milestone targets of CAD 1.3 billion.
At current strip prices, we are forecasting that we reach this milestone in mid-2023, at this time, intend on increasing our dividend by 26% to CAD 0.73 per share annually and returning a total of 75% of free funds flow back to the shareholders through increased base dividend as well as share buybacks. Not only were our teams active in drilling 69 gross wells in the quarter, early in the year it became apparent that natural gas prices were not going to be as strong as originally forecasted, and we made the decision to begin reallocating capital towards our higher netback drilling inventory.
The primary enhancement to our capital program included the additions of 5 gross, 4.4 net high liquid yield glauconitic wells, and the removal of 1 lower liquid glauconitic drill, as well as the addition of 4 well Duvernay pad as a substitute for a Montney pad at LaTour. These changes are forecasted to result in higher netback at current strip prices. In particular, these specific Duvernay wells are expected to have higher liquids rates than the planned Montney pad at LaTour and will increase the utilization of our 100% owned 15-07 gas processing facility at Kaybob.
Since the closing of the XTO acquisition, our teams have advanced their technical understanding of the Duvernay through offset operator activity, along with significant seismic data that we own across the asset, which provides us with the confidence to accelerate the development of our Duvernay play from a technical and operational perspective. Our production guidance of 160,000-162,000 BOE per day and capital spending guidance of CAD 900 million-CAD 950 million has not changed despite the delays we encountered earlier this year on our Montney drilling and completion program due to a third-party supply chain issue. The outperformance of both of our Central Alberta and Saskatchewan business units in the first quarter, along with the continued execution of the remaining capital program, expected to help offset the delay.
I'll now pass it on to Joel Armstrong to provide more detailed operational update. Joel?
Thanks, Grant. First, I'd like to walk through a quick update on our health, safety, and environmental progress throughout the quarter. We continue to have a strong track record of outstanding health and safety performance. While we accumulated a record 3.5 million person-hours in the first quarter, our TRIF was outstanding at 0.17, which compares to our already low average of 0.4 over the preceding 3 years. We're always striving for continuous improvement, but I also wanna commend our staff and contractors for keeping safety as a top priority at all of our sites. From an operational perspective, in our Central Alberta business unit, we brought on production 4 of the 8 glauconite wells, spud in the first quarter, with the remaining expected to be on production by the end of June.
Since we acquired a larger position in the Southern Alberta Glauconite in early 2022, our well results have consistently outperformed our expectations. Our four most recent wells with over one year of production have produced 11% more than our type curve on a BOE basis, more importantly, the oil and liquids production has outperformed with first-year average rates that are approximately 50% higher than our type curve, which provides Whitecap with stronger funds flow than projected. As part of our capital enhances, we've chosen to add five or 4.4 net Glauconite wells to our 2023 program, targeting the higher liquids yields area of our asset, while we've removed one well in our western portion of our assets that are expected to have lower liquid yields. Our full-year program includes 15 or 13.8 net Glauconite wells.
Now moving over to our Northern Alberta business unit, where supply chain issues contributed in a deferral of CAD 40 million of capital into the third and fourth quarters, resulting in no additional Montney wells being spud in the first quarter. Completion activities on the 7 wells spud last year are ongoing, and onstream dates for the two pads are expected by the end of the second quarter. Both pads are in the Kakwa area, where liquid rates are expected to be strong and are driving the robust economics. As mentioned, we have substituted out a Montney pad at LaTour and replaced it with a Duvernay pad to begin drilling later in the second quarter, as these wells are expected to have higher liquid rates than the pad at LaTour.
We expect to bring on 12 Montney wells prior to the end of the year, while 10 Montney wells will commence drilling operations in 2023, with onstream dates in the first half of 2024. The Montney wells have been strong with quicker cleanup periods and higher liquid rates than initially expected. Our most recent 4-well pad at Kakwa that came on production in late 2022 has achieved an average rate of 1,200 BOE per day per well over the first 150 days of production. Condensate rates of 570 barrels per day are approximately 30% higher than our type curve expectations. These wells are expected to pay out in approximately 8 months after coming on production.
On the Duvernay, we commenced drilling operations a few weeks ago with our first 3-well pad, which we are currently planning to have onstream in the third quarter. We are expecting to drill the follow-up 4-well pad after breakup. This pad is expected to be on production in the fourth quarter. In Saskatchewan, results across our West Central, Southwest, and Southeast Saskatchewan regions all exceeded expectations in the first quarter. Our 14 Frobisher wells were a mix of single, dual, and triple-leg wells, with results from the 5 wells on production for more than 60 days, outperforming our expectations by over 20%. In Southwest Saskatchewan, our Lower Shaunavon drills were extremely positive, outperforming our type curve by a wide margin, with 2 wells adding a secondary impact from improving upwards of 30 inventory locations in offsetting sections. Lastly, I wanna touch on cost inflation.
We experienced 2%-4% inflation in the first quarter compared to the fourth quarter of 2022 on both capital and operating costs. The two most significant contributors on capital costs are frac spreads and tubulars, and power and labor on operating costs. Despite the continued inflationary pressures, we still anticipate being within our capital guidance of CAD 900 million-CAD 950 million for the year. On operating costs, we're expecting to trend towards under CAD 13 per BOE in the fourth quarter with higher production volumes. I will now pass it on to Thanh Kang to discuss our financial results.
Thanks, Josef. We had a strong first quarter, generating CAD 448 million of funds flow or CAD 0.73 per fully diluted share on capital spending of CAD 254 million, resulting in CAD 194 million of free funds flow or approximately CAD 0.32 per fully diluted share. While first quarter WTI prices averaged approximately $76 US per barrel, with the weak Canadian dollar, WTI averaged over CAD 100 per barrel. AECO averaged CAD 3.05 per GJ in the quarter, significantly below our budget price deck. As Grant mentioned, this resulted in us reallocating a portion of our capital towards higher netback assets. As part of our funds flow netback, we recorded a cash tax expense of CAD 0.93 per BOE, or approximately CAD 13 million. This equates to an approximate pre-funds flow tax rate of 3%.
As the year progresses, we will adjust the tax rate based on our forecast for full-year cash tax expense and true up on our current expense in the subsequent quarters prior to the final full-year assessment. We caution that the tax rate could be volatile over the course of the year and may result in larger variations in our quarterly recorded expense. At the end of the first quarter, we had CAD 3.9 billion of tax pools remaining. In the first quarter, we completed the disposition of non-core assets for proceeds of approximately CAD 400 million. As such, we've removed CAD 426.4 million from assets held for sale and CAD 110.9 million from liabilities on assets held for sale on our balance sheet.
Our net debt at the end of the first quarter was CAD 1.47 billion, as we reduced net debt by over CAD 400 million since the end of 2022 and over CAD 700 million since the closing of the XTO acquisition in the third quarter of 2022, and now have over CAD 1.8 billion of liquidity on our credit facilities. We remain focused on balance sheet strength and anticipate that we will reach our CAD 1.3 billion net debt milestone sometime in mid-2023 at current strip prices. I'll now pass it back to Grant for his closing remarks.
Thanks, Thanh. In 2023, Whitecap is well-positioned to deliver strong performance on both cash returns and per share growth to shareholders with 12 Montney and 7 Duvernay wells scheduled to come on production before the end of the year. At the same time, we also expect the Glauconite program in Central Alberta and our light oil drilling program throughout Saskatchewan will continue to be successful and provide modest growth and strong free cash flow generation for our company. With the capital allocation changes to address the lower natural gas price environment, our production additions will now be more weighted towards the second half of the year.
Our fourth quarter production is expected to average approximately 170,000 BOE per day. This represents a growth rate of 10% from the fourth quarter of 2022 after adjusting for the dispositions completed earlier this year that we've spoken of. I want to take the time to pay special tribute of thanks to Greg Fletcher, who has chosen not to stand for re-election to our board of directors at the upcoming AGM in mid-May. Greg has been a founding director with Whitecap and has provided valuable guidance to our company over the past 13 years. We know that Greg will continue to be a supporter of Whitecap, provide his insights to us on a go-forward basis. Sincere thanks from all of us, Greg.
We are also pleased to announce that Vineeta Maguire has agreed to stand for election at our board of directors at the annual general meeting. Vineeta brings a wealth of industry experience, and we are looking forward to her joining the board and having her assist us grow our business into the future. With that, I will now turn the call over to our operator, Sylvie, for any questions. Thank you.
Thank you, sir. Ladies and gentlemen, as stated, if you do have a question, please press Star followed by 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 that if you're using a speakerphone, to please lift the handset before pressing any keys. Please go ahead and press Star one now if you do have any questions. Your first question will be from Luke Davis at RBC. Please go ahead.
Hey, good morning, guys. Wondering if you could just provide some specifics on outages in terms of volume impacts as well as the supply chain issues and just how that impacted Q1 and how that impacts the balance of the year?
Can you repeat that just one more time, Luke? We had troubles hearing that, sorry.
Yeah, no worries. I was wondering if you could just provide a few more specifics just in terms of the outages and supply chain issues and what the actual impact was on Q1 and then through the balance of the year?
Hey, Luke. It's Todd here. I mean, the supply chain issue effectively, and Joel can provide some more details around this, but it was mud contamination that ultimately resulted in waxing issues on the surface there that created 60-day delays effectively on the 2 pads that we drilled late in 2022. What we're expecting is from a Q2 perspective, production volumes to be relatively flat. As we bring in on both the Montney and the Duvernay pads there, we'll see production increase both in Q3 and Q4. As Grant mentioned, we're looking at about 170,000 BOE per day average production for fourth quarter of this year.
Gotcha. That's helpful. Can you expand a little bit just on your initial comments regarding inflation, anything you're doing to mitigate that? And then I know it's pretty early still, but what your expectations would be heading into 2024 in terms of capital outlay.
Yes. Joel here. I mean, we're just out for bid for the balance of our program in 2023, early indications suggest that we're at least gonna be flat, if not, some cost recovery in the balance of the year. That would be our expectation.
Luke, I think it goes to. We're able to make commitments on a larger program with more activity that'll be consistent throughout this year and run through and actually increase into 2000 and into 2024. That actually acts to stabilize with our service providers, that they're gonna be consistent and growing with us as we move forward.
Great. It's helpful. Thank you.
Thank you. Next question will be from Jackson Austin at Jack A. Capital. Please go ahead.
Hi, guys. Can you hear me?
Yes, I can. Thank you.
Awesome. Congrats on another solid quarter. I know you guys are approaching the debt target. You're about CAD 200 million away, say. I can see that you guys are planning to increase about 5%. You say 3%-8% annual growth, and I see the reserves as well. I'm kind of asking is what's the plan after the dividend increase from there? Like, what's the plans after that? Would you consider going to, like, just getting rid of all the debt or even going to a 100% return to shareholders or how do you see really beyond once the dividend increase happens? I know it's a bit of a tough question to ask because it depends on oil prices and everything else, but yeah.
Yeah. First of all, you know, once we, you know, achieve our CAD 1.3 billion of the debt milestone that we provided, increasing our dividend up to that CAD 0.73 a share. Then what we're looking for is to... from a dividend perspective specifically, is have our dividend grow at the pace that we grow our business going forward. Right now we're projecting between 3% to 8% per share growth per year. The 75% of our free cash flow to be returned back to our shareholders in either the form of dividends, on an ongoing consistent basis, as well as share buybacks. The other 25% of the free funds flow, to be used to, what we'll call reduce debt on our balance sheet.
That is really the purpose of that, we think that having debt as part of our capital structure is important because of the return characteristics we're getting in this pricing environment. Our return on invested capital is so strong that what we should be doing is using a responsible level of debt. We've instead of running with no debt, we've stress tested our organization down to $50 oil and CAD 3 gas. At those levels, you're probably not going to look to... our expectation is not to grow aggressively. We want to keep our debt to cash flow well under 1 time. That's a stress-tested level that we use at the $50 level, WTI level.
Ultimately, you'll see us looking to increase our dividend commensurate with our growth rate into the organization as we move forward.
Sounds great. Thank you. Just one more little question. I know you can't answer directly, but is the company looking at any big M&A? Like, I know this October will act as a debt target is achieved. Are you active or not?
Not at this particular time. What we wanted to do this year is demonstrate on the assets that we have under management, that we're just going to look to operational execution and performance, and optimizing our assets as best we possibly can. And again, it goes consistent with our financial strategy of looking to continue to walk down the amount of leverage we have. Certainly as Todd talked about, we have plenty of capacity of CAD 1.8 billion at this particular time once we get to CAD 1.3 billion. 2023 is a year for focused on operational performance, and putting our business development initiatives on hold, and looking we can look at that into 2024, 2025 as we move forward.
Awesome. Thank you very much. Congrats on the quarter again.
Thank you.
Next question will be from Patrick O'Rourke at ATB Capital Markets. Please go ahead.
Hey, guys. Good morning, thanks for providing some color in terms of the outlook for the return on capital strategy post the CAD 1.3 billion milestone. I was also curious on that. Maybe I'll move to my other question, though, just very quickly. You know, with the shift of some capital away from the Montney-La Tour over to the Duvernay here, just wondering in the current sort of pricing paradigm where on a relative basis oil is strong relative to gas, is this something that, you know, we can anticipate to be more structural in terms of the way that you're directing capital out into 2024, 2025 and beyond? Will there be sort of more emphasis on these volatile oil-rich Duvernay windows relative to gasier Montney targets?
Yeah. I mean, from our perspective, I think that we have to always be aware of the pricing environment around us, and that's from crude oil, natural gas, differentials, the effect of the Canadian dollar. Overall, what we can say is that we're looking at the highest netback assets that we can generate on a longer term basis. Our principal growth is gonna come up, we believe from the Montney and secondary from the Duvernay. That's not to say that the balance of our assets in Central Alberta and Saskatchewan are able to grow. They provide a very significant amount of free cash flow for us, and it's how we allocate that moving forward.
With the backdrop of, when we're looking at it from a structural perspective at CAD 2 or sub CAD 2 gas, we're not trying to grow that business overly aggressively. You know, we're coming into a summertime period where the natural gas price does have an impact. You know what's interesting, and if I can comment on it this way, 66% of our production is oil and liquids, but it generates between 89%-92% of our cash flow from 66% of our production. Which would mean that the natural gas side is important to us. It is as we move forward. From a cash generation perspective, it isn't as important as the oil and liquids component of our business.
Okay. Thank you very much.
Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by 1 on your touchtone phone. Your next question will be from Josef Schachter at Schachter Energy Research. Please go ahead.
Thank you for taking my call, questions, Grant, Tom, and Joel. First thing, on the portfolio now, you've had some non-core asset dispositions. Are you happy where you are right now, or are there still some assets that are non-core that might help you get quicker to your debt target?
We're happy, very pleased with the portfolio of opportunities we have with us right now. We're not looking for future dispositions at this particular time. Again, as we cycle through our business longer term, when assets become with limited growth on a go-forward basis or limited value opportunity for us, we'll look to monetize. We think we did a very good job in we'll call monetizing the assets that we weren't putting capital towards over the next 5-year period of time. With the suite of assets we have today, the inventory we have, we're very comfortable with the assets that we have and won't be looking for dispositions at this particular time.
Okay, super. This one probably is for Joel. With the success of the, of the 4-well pad at the Montney, beating your type curve and 52% liquids versus your expectation of 40, has that changed around your tier one locations? Do you end up, because of the success here, having, many more locations than you, than you thought you might have had, when you did the acquisition?
Sorry, Josef, it's not gonna have an impact on the balance of our inventory in Kakwa. We still have a pile of tier one locations to drill there.
How many wells would you be looking to drill? Is it a drill to fill situation?
Well, I think the ongoing strategy is gonna be a balance of, you know, Kakwa, Musreau, LaTour, and Kaybob, and just, you know, managing all those particular plays. Every time it goes through capital allocation, that's the context that we're thinking of.
Yeah, just to add onto that, you know, what we're looking at in the Montney, and Joel referenced it as he talked about with the Kakwa, Musreau, LaTour, Resthaven, on the Montney side. We also have other Montney assets at Valhalla, et cetera, what we'll call more of the conventional plays. Kaybob, we're looking in the Montney to about 20-25 wells a year. In the Kaybob, we'll call a Duvernay play, we're looking anywhere between 5-8 wells per year at this particular time. Now, commodity price dependent, results dependent, we can move capital around, and I think it's the benefit of the program that we have in Northern Alberta.
Also with the benefit we have on assets right across from Southeast Saskatchewan through to the deep basin of Alberta. We can actually alter programs around, and we have to be, you know, cautious that that doesn't happen on, you know, just overnight. We have to be very thoughtful in our planning on those going forward. Ultimately, I think that we have an exceptional blend of opportunities in front of us. With the principal growth, the largest exposure to growth coming from the Montney and the Duvernay up in Kaybob.
Thank you. At this time, we have no further questions. Please proceed.
Okay. Well, thanks everyone, and thanks, Sylvie, for your directions today. I want to thank each of you for taking the time and interest to listen to this call today. We look forward to updating you on our progress over the next several months as we move through the balance of 2023 and into 2024. Until then, thanks very much. All the best.
Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.