Good morning. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to Whitecap's strategic a cquisition of Kicking Horse Oil & Gas 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 number one on your telephone keypad, and if you would like to withdraw your question, please press star then the number two. A nd I would like to turn the conference over to Whitecap's President and CEO, Grant Fagerheim. You may now begin, sir.
Thank you, Sylvie. Good morning, everyone, and thank you for joining us this morning. I am joined by four members of our senior management team: our CFO, Thanh Kang , as well as Darin Dunlop, our Vice President of Engineering, Joel Armstrong, Vice President of Production and Operations, and Dave Mombourquette, Vice President of 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 earlier this morning.
This morning, we announced the strategic acquisition of Kicking Horse Oil & Gas, a privately held company owned by Quantum Energy Partners. This acquisition is a continuation of our disciplined approach to consolidating high-quality assets in our existing core areas of operations where we have strong ongoing expertise.
The Kakwa area is characterized by highly prolific condensate-rich wells, which drive strong economic returns. Kicking Horse's current production is approximately 8,000 BOE/D , approximately 32% liquids, 90% of which are condensate.
Pro forma the acquisition, Whitecap's corporate production remains oil-weighted at 76% oil and natural gas liquids. Over the next 12 to 15 months, we plan to increase production from this asset to 18,000- 19,000 BOE/D to deliver an optimal level of free funds flow going forward. This is an exciting opportunity to acquire a Montney asset in an area that has been some of the best productivity to date in the Canadian basin at strong acquisition metrics.
The acquisition, although corporate, is really considered an asset acquisition in our core operating area, as it is very focused and will require no additional office staff. Combined with our existing Montney positions in Valhalla and Karr, we now have 168, 118 net, sections, with 696 drilling locations identified across numerous Montney benches. I'd now like to pass this over to Dave to provide an overview of the acquired assets.
Thanks, Grant. This acquisition essentially doubles our Montney land by adding 60 net sections. It is 99% operated with an average working interest of 65% and includes 110 km of owned and operated pipelines.
The tier one and tier two inventory will allow us to maintain production at 18,000-19,000 BOE/D for over 15 years. There's been significant activity on the acquired acreage by the previous operator, with 12 Montney wells having been drilled to date, and they have achieved top- quartile IPs for this field.
It has also been very active in general, with 19 Montney wells drilled on or offsetting the lands since October 1st, 2020, when we include all operators. There are also four wells being currently drilled by Kicking Horse, and we plan to complete these wells in the second half of 2021. An additional six wells will be spud in the second half of 2021, with two of these wells coming on production prior to year-end.
There are gas and emulsion pipelines in place to support the majority of the tier one and tier two inventory. Spending on additional water handling and recycling infrastructure has started in 2021, and we plan to complete that over the next couple of years.
From a gas processing side, the current take-or-pay obligations are being met with current volumes and will continue to be easily met with our development plans. The asset is also attractive from an environmental perspective, with only $ 5.5 million of discounted asset retirement obligations. I will now pass it on to Darin to provide more color on the reserves and economics of the acquired assets.
Thanks, Dave. As mentioned, the Kakwa area is home to some of the most prolific condensate-rich wells in the Western Canadian sedimentary basin. Of the 575 drilling locations that we have identified, 245 are classified as tier one and two quality, which are characterized by high gas and condensate productivity. The tier one and two wells drilled to date have averaged over 1,500 BOE/D in their first year of production.
Our current well cost assumption is $11 million per well, with our north and south type curves having average IP 365 rates of 1,200 BOE/D . These prolific rates enable payout of the well cost in under one year at $55 WTI and CAD 2.50 AECO.
Despite the strong economics presented, we believe there is still room for significant improvement by balancing cost savings with productivity improvements through pad development efficiencies, optimized well placement, and frac design. Joel will provide more details in his operational review.
Our development strategy of growing the area production to 18,000-19,000 BOE/D in the next 12-15 months and then maintaining that production level for many years by drilling eight-10 gross wells per year aligns with our business model of generating sustainable free funds flow and returning capital to our shareholders. This strategy will have the additional benefit of moderating the decline rate of this asset, resulting in a lower maintenance capital requirement over time. With that, I will pass it on to Joel to provide some color on the operational aspects of the acquisition.
Thanks, Darin. As Dave previously mentioned, there are four wells being drilled with two rigs in operation, and we expect them all to be done by early June. An operating committee is established with Kicking Horse to oversee interim operations prior to closing.
We expect the completion operations will commence in July, and we'll look to maximize efficiency with our 2.4 tonne per meter perf- and- plug frac design. We anticipate further D&C-related cost reductions at approximately 10% for ongoing pad development.
Frac source water opportunities will be assessed to meet the demand for our development program, which includes both fresh and produced water. It is anticipated that our capital will be deployed in 2022 to secure a long-term solution, which has been included in our $ 80 million annual maintenance capital estimate.
From an OpEx perspective, we anticipate construction of a water disposal pipeline in 2021 to alleviate this second largest cost contributor. It is anticipated that the savings will be approximately $ 1 per BOE once implemented. With that, I will pass it on to Thanh to provide some color on the financial aspects of the acquisition.
Thanks, Joel. This acquisition really checks all the boxes from an accretion standpoint, with it being 10% accretive to funds flow, 9% accretive to free funds flow, 13% accretive to discretionary funds flow, and 11% on production per share, all of those being 2022 metrics. The balance sheet remains in excellent shape, with the acquisition being neutral to our run rate debt- to- EBITDA of 1.2x in 2021, and this further decreases to 1x in 2022.
Our updated 2021 guidance was provided in the press release, with our full year 2021 capital spending increasing by $ 75 million to $ 355 million-$ 375 million and our 2021 average production increasing to approximately 108,000 BOE/D . We forecast approximately $ 800 million of available credit capacity on our $ 2 billion of total credit capacity at the end of 2021. This does not include the additional $ 1.4 billion that we can access without lender approval, which provides us with significant financial flexibility.
As mentioned, we forecast optimizing this asset between 18,000 - 19,000 BOE/D , which we estimate will equate to about $ 150 million of annual funds flow on our price deck, $55 WTI and CAD 2.50 gas, with annual maintenance capital at about $ 80 million. We're forecasting funds flow to equal maintenance capital at as low as $38 WTI and CAD 1.75/ GJ AECO pricing.
With the strong funds flow capabilities of this asset, we forecast at that optimized 18,000 - 19,000 BOE/D , the cumulative free funds flow equates to about $ 300 million by the end of 2026, fully paying out the purchase price. This is a reflection of the quality of the assets and attractive acquisition metrics, which, as a reminder, are less than 20,000 per flowing, 2.5x funds flow multiple, and a 20% free funds flow yield, which includes the capital to optimize the asset at 18,000 - 19,000 BOE/D . So with that, I'll pass it on to Grant for his closing remarks.
Thanks, Thanh, Joel, Darin, Dave. We are extremely excited to get our hands on this asset. This allows us to continue to advance our footprint into the Montney play on a measured basis. Our asset aggregation strategy is intentionally focused on delivering long-term growth in free funds flow for our shareholders, and this asset fits exceptionally well into this strategy.
Whitecap remains well positioned to deliver strong shareholder returns, and we will continue to evaluate opportunities to increase return of capital to shareholders throughout the year. I want to compliment the Kicking Horse team for the asset that they assembled, as we feel that we can continue to advance its value significantly from this point forward. We also want to welcome Quantum Energy Partners as a sizable and supportive shareholder of our ongoing strategy.
On behalf of our management team, our employees, and our Board of Directors, we would like to thank our shareholders for your interest and support of Whitecap, wishing everyone continued good health and strength. With that, I'll turn the call over to the operator, Sylvie, for any questions. Thank you.
Thank you, Mr. Fagerheim. As stated, ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. You will then hear a three-tone prompt acknowledging your request. And 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 your handset up before pressing any keys. Please go ahead and press star one now if you do have a question. And your first question will be from Jeremy McCrea at Raymond James. Please go ahead.
Yeah, hi guys. This deal looks more and more like a land acquisition just in terms of all the inventory that you potentially bought here. And I'm just wondering if you can just give a bit more detail in terms of your locations, especially if it includes some of the lower Montney that's coming along, the NPV per well, where you see some of that upside going in terms of that return on metric equation. Just anything more with the upside that you see here on the land.
Yeah, it's Dave Mombourquette here. And for sure, most of our valuation is based on the tier one and tier two inventory that we talked about, and that's in the middle and upper benches of the Montney. And Kicking Horse has drilled 10, has 10 Montney wells on production in the area.
And so the land base has definitely been very much derisked in that sort of fashion, s o that's why when we took a look at the upside here, we have very high-quality upside, I guess, directly offsetting existing production in those formations.
So the tier three, which is a little more to the southwest and the lower Montney, those certainly add up to, I think it's 245 locations we have in tier one and two and 575 locations total. So the difference there is the tier three and the lower Montney. Those are something we're definitely going to look at over the years upcoming but definitely don't factor directly into our modeling and our free cash flows that you've seen, given that we have 15 years of inventory with tier one and tier two. So [crosstalk].
Okay. And then [crosstalk].
Yeah. A nd on those wells, we're looking at $10 million-$12 million is a range of sort of NPVs on those tier one and tier two locations.
That's still based on the $ 11 million well cost and some of the efficiencies that Kicking Horse have drilled.
That's right, yes.
Okay.
Yeah.
Okay. And then just going back to some of the infrastructure, is there ability to expand past the 18,000 BOE? I know you kind of say that's a good running rate, but is there ability to go past that, just given some of the results here and the payback within a year [and that] on these wells?
Yeah, we definitely have the capability from an infrastructure. Maybe I'll let Joel address that.
Yeah, I think that's just how it's modeled, Jeremy, but there's certainly opportunity to go well past that with three plants that this production is delivering into. So lots of flexibility on the production side.
Okay. Thank you, guys.
Thank you. Next question will be from Travis Wood at National Bank. Please go ahead.
Yeah, good morning, guys. Just kind of following on from Jeremy's question there around infrastructure. Do you have obligations around contracts or take or pay to ramp towards that 18,000-19,000, or is this all kind of a spot basis in terms of access to that infrastructure?
I think, in terms of current take- or- pay obligations, it's in and around 40 MMcf/d of gas through both Tourmaline and Pembina. Going forward, there's opportunities to either produce on interruptible or take out additional firm transportation on these facilities, so lots of flexibility. It all depends on what happens in terms of competition in the area, which we don't see a lot at this point in time, but certainly nothing too concerning from our perspective, Travis.
Okay, so you don't have to sign up for a take or pay as you grow towards kind of that 18,000-19,000. You can do it organically here, kind of as a status quo.
Correct.
Okay. Thank you.
Thank you. As a reminder, if you do have any questions, please press star followed by one on your touch-tone phone. And at this time, we have no other questions registered. Please proceed.
Okay. Thanks very much, everyone. I appreciate your time again and interest and support of our Whitecap story. We're excited about this transaction. Although we've done the previous transactions NAL and TORC, we believe that this fits in relatively easily, with little, no people joining us in the office but little complexities with our Northwest Alberta business unit team to manage this going forward. Thanks very much, everyone. Have a good day and bye for now.
Thank you, Mr. Fagerheim. Ladies and gentlemen, this 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.