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 Q2 2023 Results Conference Call. 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 one on your telephone keypad. If you would like to withdraw from the question queue, please press star then number two. I would like to turn the conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead, sir.
Thank you, 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, Engineering, Darin Dunlop, and our Senior Vice President of Business Development and Information Technology, Dave Mombourquette. Before we get started today, I would like to remind everybody that all the 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 that was issued yesterday afternoon. Our second quarter results emphasize the advantage that we have with our diversified asset base, as we were able to partially mitigate the impact of the wildfires in North Central Alberta through outperformance of our later oil-weighted Saskatchewan and Central Alberta Glauconite development programs.
In the second quarter, we generated CAD 197 million of free funds flow, bringing our total free funds flow to CAD 392 million in the first half of the year, of which 53% or CAD 208 million has been returned to shareholders through our base dividend and share repurchases. During the second quarter, we spent CAD 218 million, including CAD 177 million of drilling and completions capital and CAD 37 million of facility expenditures. We spud 43 gross, 41.6 net wells during the quarter, 32.6 net of which were in our East Division, where breakup conditions subsided earlier than anticipated, our teams were able to get back in the field in June.
Strong results across our East Division have continued, and the team has done a tremendous job on both of our legacy assets as well as those acquired over the past two-year period of time. In our West Division, we commenced drilling nine wells, a three-well Montney pad at Kakwa, and six wells of our seven-well Duvernay program at Kaybob were spud in the second quarter. Since acquiring the XTO assets 10 months ago, we've been able to reduce net debt by CAD 800 million from CAD 2.2 billion at the end of the third quarter of 2022, to now CAD 1.36 billion currently. The balance sheet is in pristine shape, with debt-to-EBITDA at 0.6 x and CAD 1.7 billion of unused debt capacity.
The balance sheet has always been a priority for us. It has allowed us to not only effectively manage through the commodity price cycles, but to also capture value-enhancing opportunities on behalf of our shareholders. We are close to reaching our CAD 1.3 billion debt milestone, which, due to the wildfires, has deferred this to the second half of the year. This is an important milestone for us as it represents debt-to-EBITDA ratio of less than 1 x, using CAD 50 WTI and a CAD 3 per GJ AECO price assumption, which will then allow us to return 75% of our free funds flow back to shareholders, inclusive of the targeted CAD 0.73 per share annual dividend.
Given the significant growth we have undertaken over the last couple of years, we have realigned our business units into two divisions, East and West, to better streamline reporting processes and to drive operational excellence. The East Division consists primarily of conventional assets, which have lower decline rates, annual production growth rates of 1%-2%, and generally outsized free funds flow of the capital expenditures. Our West Division is primarily our unconventional resource plays, which include the Montney and the Duvernay, and will have a higher annual growth rate of 10%-15%, given the depth and quality of inventory in this division.
Our extensive portfolio of 6,584 gross, 5,675 net drilling locations allows us to continue to generate significant free funds flow while growing 3%-8% production per share through organic drilling towards 200,000 boe per day over the next five-year period of time. As reported yesterday, results in our Montney at Kakwa continue to be strong, with 82% of our wells drilled to- date, achieving pay out in less than one year or less, some even paying out in less than five months. The free funds flow potential and results to- date from this asset that validates our initial technical evaluation of the XTO assets.
Furthermore, our teams continue to make significant strides in further enhancing their understanding of the Montney assets, and we believe the continual refinement of our development plans specific to individual areas and pad selections, such as targeted intervals within the Montney benches, well spacing, completion design, and production operation efficiency, will further increase the return characteristics and profitability of this expansive set of assets moving forward. In our West Division, we have now drilled and completed our first three-well pad, and have commenced drilling our second pad, a four-well pad in the Duvernay. We look forward to having the first three wells tied into permanent facilities on production in late- August, while the four-well pad is expected to be on production in the fourth quarter.
We are very encouraged by the execution of our drilling and completion operations to- date, as well as our initial production test rates. Second quarter facilities capital included CAD 15 million towards the expansion of our 3-07, 3-27 facility in the Valhalla region, as well as initial capital for our Musreau Lake battery. This battery is expected to be completed in the second quarter of 2024, allowing us to efficiently develop one of the most attractive areas in the Montney, that was acquired as part of the XTO transaction last year. Drilling operations at Musreau Lake are expected to begin later this year, with production adds coinciding with the completion of the battery.
Our longer-term development planning for the larger undeveloped Montney acreage includes the expansion and increased utilization of current infrastructure, as well as new infrastructure to support and maintain control over our unconventional growth plans. I will now pass the mic on to Thanh to discuss our financial results.
Thanks, Grant. Second quarter fund flow of CAD 450 million or CAD 0.68 per diluted share, equates to a fund flow netback of approximately CAD 31 per boe. Strong liquids production, improved differentials on our sour and medium crude sold in Saskatchewan, one-time GCA adjustments, all contributed positively to our netback in the quarter. Production shut-ins due to the Alberta wildfires resulted in increased per unit operating costs to over CAD 15 per boe in the second quarter. Going forward, we forecast operating costs will decrease to approximately CAD 13 per boe as we increase production in the back half of the year. As Grant mentioned, the balance sheet is in excellent shape, with a debt-to-EBITDA ratio of only 0.6x and CAD 1.7 billion of unutilized capacity.
Our balance sheet will continue to strengthen as we forecast net debt passing the CAD 1.3 billion target and reaching approximately CAD 1.2 billion by year-end, based on current strip prices. At this point, we will have decreased net debt by CAD 1 billion since the closing of the XTO transaction and returned over CAD 500 million to shareholders through base dividends plus share repurchases. Our 2023 capital spending guidance remains unchanged at CAD 900 million-CAD 950 million. We've adjusted our annual production guidance to 157,000 boe-159,000 boe to reflect the impact of the Alberta wildfires.
Oil and liquids production has been stronger than forecasted through the first six months of the year. In combination with some of the program changes we've made earlier this year, we're now expecting our annual liquids weighting to increase to 65% from 64% previously. I will now pass it back to Grant for his closing remarks.
Mr. Fagerheim, we cannot hear you.
Thanks, Thanh. We are excited for the opportunity set that is ahead of us and look forward to capitalizing these assets to extract as much value from the assets as we can. Our teams continue to refine their understanding of each play that we are in. We have an expansive inventory depth that we can efficiently develop and hit our growth targets, while continually improving profitability and returns to shareholders. With our healthy inventory depth, strong balance sheet, low decline, high netback asset base, Whitecap is in a position of strength, and as we advance our business through the remainder of 2023 into 2024 and beyond.
The outlook for Canadian oil and gas is positive, as long-awaited export projects begin to come online and high-quality, responsibly produced Canadian energy can be utilized in markets around the world. Whitecap has and will continue to be a significant supply source of conventional oil, and as of recently, a larger supplier of natural gas to end users across North America. We are also advancing our carbon capture utilization and storage hubs across Alberta and Saskatchewan. As our subsurface expertise and experience with carbon sequestration is highly sought after to assist these large emitters in their decarbonization efforts.
We have multiple projects that are scheduled to begin sequestration in late 2024. While there is still a significant amount of work to be done with all the stakeholders involved, we are confident that the solutions will be found to making significant advancements on moving Canadian energy into a lower carbon economy. With that, I will now turn the call over to the operator, Sylvie, for any questions. Thank you.
Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. If you would like to withdraw from the question queue, please press star followed by two. If using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. The first question will be from Jeremy McCrea at Raymond James. Please go ahead.
Yeah. Hi, guys. I want to talk about some of your operations. Just based on some of the test results that you've been getting in the Montney, some of the early looks at the Duvernay, are you guys looking at shifting any of your CapEx within your budgets here, maybe later this year, or what you're kinda somewhat thinking here for 2024? Just is there any new technology that you're seeing from any, maybe even some of your peers, that could improve any of these plays here?
Yeah. Hi, Jeremy, it's Darin here. No, with the results we're seeing are within our expectations of what we thought. Our budget allocation, capital allocation is gonna remain pretty similar. As for, you know, groundbreaking technology changes, not really. You know, the Montney is, and Duvernay, for that matter, are both fairly well up the learning curve by pad, well by well, reservoir by reservoir basis, nothing earth-shattering from that perspective.
Just to follow on to that, Jeremy, I think that in the Montney, I mean, we're, as Darin referenced, quite far up the learning curve. We've drilled a total of 30 Montney wells to- date, including our Karr and Kakwa areas, through our acquisitions, our joint venture with Hammerhead and our acquisition of TimberRock, as well as the XTO transaction. We're quite far up the learning curve as far as using the newest technologies that are available to us. As Darin said, that getting the results that we're having are as expected and maybe a little bit better than expected.
What was new to us, I think, is the Duvernay, and we're seeing some very good test results at this particular time and look forward to advancing those projects and bringing those onstream for a full-time, and be able to talk to it perhaps, at the end of the third quarter.
Okay. Maybe kind of just shifting gears here a bit. Now that you're kind of close to your targeted debt levels, any more thoughts on the A&D market, what it's looking like, if you're looking to potentially sell some additional non-core assets, or is there anything that, you wanna maybe add to the portfolio now that your balance sheet's in, you know, a much stronger shape to do a cash acquisition?
Yeah, just on the M&A market, and I've got Dave Mombourquette sitting here. He's anxious to get going again, for sure, but with his team. No, what we're looking at is, we think that as I had referenced earlier, I think in the last call, that when we did the cleansing of the assets that we weren't going to capitalize, that we did in the first quarter of the year, bringing in CAD 400 million of cash to our balance sheet, that was helpful to us. I think we're very comfortable with Well, we are very comfortable with the asset suite that we have now.
One of the areas we may bring on assets that we're not looking to drill over the next seven-to-10-year period of time, we may look to bring in third-party capital in some of the areas, because we have such an expansive opportunity set in front of us. That's an area that we'll look at, but we have to be cautious, you know, to ensure that if we're truly not going to capitalize them, that maybe we can get others to. That would be something we'll look at as we move into the balance of this year and into 2024. As far as specific acquisitions, we're not, we said that this is a year we're gonna be focused on operations, and we're committed to that.
Okay. Perfect, guys. Thank you very much.
Thanks, Jeremy.
Next question will be from Josh Turanich at Haywood Securities. Please go ahead.
Hey, guys. Strong quarter. Thanks for taking my questions. My first question's on the Montney at Kakwa. I was hoping if you could add some color on what specific opportunities you're seeing to enhance capital efficiencies in the region?
Yes, Darin here. Can you repeat that? I missed the middle part.
I was wondering if you could add some color on what specific opportunities you're seeing to enhance capital efficiencies in the region.
Yeah, primarily just continue to exceed what our expectations are with regards to, you know, proper placement, fit for purpose frack designs, depending on what the reservoir characterization is. Flowing through controlled facilities to optimize our cash flow in the short term. You know, like nothing, like I said in the last question, nothing groundbreaking, just continual improvement, piece by piece.
Okay. My second question is on the Duvernay. How do you think about optimizing the asset going forward, either on the drilling or completion side, now that you've taken over the asset? What would you, or what would increase the confidence to accelerate the development of the play in 2024?
Yeah, first of all, you know, we've walked into this cautiously, the Duvernay play. When we acquired it, we had not been drilling up in this play, so we wanted to do more geoscience and engineering work on it before we went in. We're very, very pleased with what we've seen on our first three-well pad, not just from the drilling, but from completion, and the test results that we're having at this particular time. That has allowed us to shift our capital around and drill the four-well pad that we're on right now.
We're on the third well of a three, of a four-well pad, drilling that out, that we talked about in, in our earlier, about bringing on by the end of the year, the second pad. We're tiptoeing into the play. I would expect that this year we'll have drilled seven wells, but moving forward, we'll set our budget up, depending on results as to what we get here. Darin and the engineering team, together with our geoscientists and operations guys, will put together a budget for, you know, 2024, 2025, that will include, probably advancing these projects a little bit, more where we're not capacity, facility capacity-constrained there.
We own the 15-07 plant, and it is only utilized to the tune of about 65% today, so we have capacity to move our product through that.
Okay, thanks. That's all for me.
Okay, thank you.
Thank you. A reminder to please press star one if you do have any questions. Next will be Travis Wood at National Bank. Please go ahead.
Yeah, thanks. In terms of the facility that came with XTO, so, it's about 65% full.
That to help on the cost side, I expect. Maybe on CCS, with CCS up and running, are you guys seeing any wiggle room to improve costs both on transport, on the liquid side now, or and on the processing side with the some incremental space left at 15-07?
Yeah, just to, I think your two-part question is, first of all, the 15-07 facility. Obviously, we'll continue with more throughput, we'll drive down costs on a per unit basis. That will be an area that we'll look to advance. As far as the CCS pipeline and getting tied into that, that will take place in the first quarter as well. First quarter leading into the second quarter. Which we do have capacity, we have capacity on that, into the CCS system. I think we're in very good shape here. Increasing production, driving down costs, I think it's in these bigger, what we'll call more as a unconventional resource place, both in the Duvernay and the Montney.
Okay. That's perfect. Kind of leveraging off the pipeline in Q1 of next year?
That's correct. Yeah, that's right.
Okay. Okay, thanks, Grant.
Okay.
Thank you. At the time, Mr. Fagerheim, it appears that we have no other questions, sir, please proceed.
Well, that was quick. We, we could keep going here for quite a while. Anyway, thanks, Sylvie. Once again, I want to thank each of you for taking the time and interest to listen to our call today. We are excited to advance our company forward with a strong total returns to shareholders. We look forward to updating you on the progress from an operational perspective over the next several months. All the best. Have a good day. Enjoy the balance of your summer.
Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. At this time, we do ask that you please disconnect your lines.