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 Resources' 2020 Third Quarter Financial and Operating 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 the number one on your telephone keypad. If you would like to withdraw your question, please press star then the number two. I would like to turn the meeting over to Whitecap's President and CEO, Mr. Grant Fagerheim. You may now begin, sir.
Good morning, everyone, and thank you for joining us this morning. I'm joined with three members of our senior management team, our CFO, Thanh Kang, as well as Darin Dunlop, our VP of Engineering, and Joel Armstrong, our Vice President of Production and Operations. 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 third quarter news release issued earlier this morning. In the third quarter, we saw clear improvements to our financial results compared to the second quarter, where we faced an extremely low crude oil price environment and the challenges created from the ongoing COVID-19 pandemic.
Our priority through this period has been to focus on strong operational performance while keeping a specific focus on health and safety for our employees and consultants. The policies and procedures put in place to minimize operational disruptions due to COVID-19 have been successful. Our third quarter safety and environmental performance was exceptional as we completed a second consecutive quarter with no recordable injuries and year-to-date TRIF of 0.22. Although the current environment remains challenging, our team has been successful at reducing our cost structure and adapting our business plans to ensure our funds flow is more than adequate to support the current dividend and our capital program. In the third quarter, we achieved average production of 66,681 BOE per day, which was significantly higher than our expectation of 62 to 63 thousand BOE per day, while limiting capital investment to only CAD 14 million.
Capital expenditures for the first nine months of 2020 were CAD 174 million, which is 43% lower than the same period in 2019. Our base level of production continues to outperform, and as such, we are uplifting our average production guidance for the year to 65,500, 67,500 to 68,000 BOE per day from what was 65,000 BOE per day to 67,000 BOE per day previously. There is no change to our capital guidance of approximately CAD 190 million for 2020. Crude oil benchmark prices increased significantly in the third quarter over the second quarter, resulting in a corporate average realized price of CAD 40.47 per BOE compared to CAD 23.35 per BOE, an increase of 73%. The improvements to the realized prices, combined with our cost reduction initiatives, allowed us to deliver strong operational netbacks at CAD 22.50 per BOE and funds flow netbacks of CAD 19.44 in the quarter.
Funds flow for the quarter was CAD 119.3 million or CAD 0.29 per fully diluted share, with a total Q3 payout of 26% and a year-to-date total of 74% total payout ratio. The actions we took at the onset of the global pandemic to lower capital, reduce our dividend, and implement cost reduction initiatives have allowed us to strengthen our balance sheet with net debt reduced by CAD 120 million since Q1 2020. In the quarter, we also announced the strategic combination with NAL Resources and have subsequently received conditional approval from the TSX for the issuance of 58.3 million Whitecap Common Shares to Manulife. The company has also received an advance ruling certificate from the Competition Bureau approving the transaction. Our team is working hard on the integration of these high-quality assets in our portfolio and look forward to closing the transaction on January the 4th, 2021.
We expect to provide a detailed 2021 budget when we close the transaction in early 2021. Due to the strong outperformance from our base production, our preliminary expectation for capital spending in 2021 will be at the lower end of our previous range of CAD 250 million-CAD 300 million, now expected to be CAD 250 million-CAD 270 million. Our preliminary expectation for average production for 2021 of 81-83 thousand BOE per day remains unchanged. With that, I will pass it on to Thanh to provide some color on our financial results for the quarter. Thanh.
Thanks, Grant. WTI averaged $40.93 in the third quarter compared to $27.85 in the second quarter, a 47% increase. Canadian crude oil price differentials also narrowed with the MSW differential averaging $3.51 and the WCS differential averaging $9.09 per barrel. Realized oil prices prior to hedges and tariffs were CAD 47.67 compared to CAD 26.55 in the second quarter of 2020, an increase of 80%. Realized NGL prices averaged CAD 19.57 per barrel compared to CAD 13.17 per barrel in the second quarter, an increase of 49%. The increase is mainly due to higher butane and pentane prices, which represent 47% of our NGL mix. Realized natural gas prices also increased 13% to average CAD 2.44 per MCF compared to CAD 2.16 in Q2 2020.
The royalty rate in the third quarter was 14%, higher than the second quarter rate of 9%, primarily due to higher crude oil prices. Operating costs in the third quarter were CAD 12.02 per BOE, which is 8% higher than the second quarter. The increase is primarily attributed to higher workovers performed in the third quarter of 2020. In addition, transportation expense of CAD 2.44 per BOE was consistent with the second quarter. G&A expense of CAD 0.80 per BOE was consistent with the second quarter. Stock-based compensation expense of CAD 2.4 million was recorded in Q3 compared to a recovery of CAD 2.4 million in the second quarter. The increase is primarily attributed to a 10.7 million decrease in unrealized gains on total return swaps as Whitecap's share price increased more in Q2 than it did in Q3.
This was partially offset by a CAD 4.8 million decrease in realized losses on the total return swaps related to settlements in the second quarter of 2020. Funds flow for the quarter was CAD 119.3 million or CAD 0.29 per share, which generated a total payout ratio of 26% after capital invested and dividends paid to our shareholders. Whitecap's balance sheet remained strong with quarter-end net debt at CAD 1.15 billion on total capacity of CAD 1.77 billion. Our debt-to-EBITDA ratio was two times, and our EBITDA-to-interest ratio was 12.5 times, both well within our debt covenants. With that, I'll now pass it on to Grant for his closing remarks.
Thanks very much, Thanh. Our priorities for the financials of the year remain unchanged: maintain our balance sheet strength and liquidity, return cash to shareholders, relentlessly drive down costs, and pursue value-enhancing transactions. Our team at Whitecap is energized and excited for the opportunities that are in front of us as we enter the 2021 year and beyond. On behalf of our management team and our board of directors, we would like to thank you, our shareholders, for your interest and support of Whitecap and look forward to more reporting into the future. With that, I will turn the call over to the operator for any questions you might have. Thank you.
Thank you. 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. And if you should 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 before pressing any keys. Please go ahead and press star one now if you have a question. And your first question will be from Amir Arif at Cormark Securities. Please go ahead.
Thanks. Good morning, guys. Just a few quick questions. The production came in better than expected, and I know you mentioned the decline rates were better than anticipated. Could you just give us a little more detail in terms of what assets were outperforming your expectations and where you see the combined corporate decline rate in 2021?
Yeah, Darin here. Yeah, I know our outperformance. We did have some less shut-in volumes than we had anticipated back in March. Probably 50% of that beat was that, but the other 50% was related to some of our waterflood properties in the Viking as well as West Pembina. As well, we're still having some exceptional performance from our Coupland wells, our Detrital, Charlie Lake wells up in the Peace River Arch region. So those are the primary reasons, but more exciting is our base performance has been outperforming and declines are lower than anticipated.
Darin, where would that decline be heading into 2021?
That decline heading into 2021 will be in and around 14%, and that is a little bit artificially low just because of our muted second half performance. But going forward, we believe that our normal decline for us will be somewhere between 16%-18%.
Okay. Thanks. And then just I know, Grant, you haven't changed the spending plans, and I know you're weighted towards oil, but just curious, just given the moving gas that we've seen over the last six months, are there any gas assets in the company that start looking particularly attractive at these levels in terms of shifting some capital in 2021 for those projects?
Sure, Amir. Just on a—and that's a good point to make. I mean, we've seen a significant uprise in gas prices. Our associated natural gas in the organization is about between 60-65 million cubic feet a day today. And with the acquisition of NAL, our gas production increases to 120 million or just slightly under 120 million a day of natural gas. So we have exposure to the natural gas environment. We're talking now 74%-76% of our production is oil and 24% natural gas. So we do see the benefit of natural gas. Within the NAL assets, there are some gas drilling that we will be doing in 2021 after we close the transaction. Really, we do not have gas assets in our portfolio at this time prior to the NAL acquisition.
So fortuitously, we do have gas assets to move forward with, but we remain, obviously, a light oil producer going forward.
Okay. And just one final question. I know details on the 2021 guidance will be provided next year, but just given the way the curve looks on oil, I know last year you were more weighted towards—or this year, I should say you were more weighted towards spending in the first half. Is next year more second half weighted based on initial thoughts, just given where the crude oil curve looks by the quarter next year?
Yeah. Our objective here is to stay within cash flow. So as we move through the balance of this quarter, we'll have a pretty good indication of what's taking place on commodity prices going forward into 2021. And our preliminary estimates, again, will remain in cash flow first half and second half of next year, regardless of what the commodity price environment is doing. So again, we'll provide more details when we come out, but our objective here is to remain our capital program within cash flow.
Okay. Sounds great. Thanks.
Thank you. Next question will be from Patrick O'Rourke at Whitecap . Please go ahead.
Thank you, Patrick O'Rourke at ATB Capital.
That's a good clarification.
I've been in the room with you, unfortunately. So I guess I just have a—you answered some questions on the decline profile and that being a driver of the beat here. Wondering, you have kind of lowered the preliminary CapEx guidance next year to the lower half of the range or so. Wondering, how much of that is being driven by a better-than-anticipated decline, and how much of that is sort of on the better capital efficiency side?
Yeah. It's Thanh here, Patrick. I would say that it's primarily driven by better production, so lower declines than we anticipated. So instead of having a same capital and higher production number, I think when we're thinking about a 2021 budget, is really looking at a conservative case allows us to generate free cash flow even in a lower price environment with the potential, if commodity prices are better than we anticipate, to potentially uplift that capital program. So really starting off with a more conservative and disciplined program to start off the year with.
Okay. Great. And then maybe we can kind of build on that or elaborate a little. You guys have been beneficiaries of quite a strong risk management strategy in 2020. Just looking out at the curve now, this morning we don't have WTI above $45 till 2027. You talked about optionality in a better price environment. How are you thinking about the risk management and hedging strategy at this point in time relative to the forward curve?
Yeah. It's Thanh here, Patrick. I mean, obviously, where crude oil prices are today, again, very difficult to hedge. What we've been focusing on is really the first half of 2021. So at this particular time, we've increased our oil hedges to 19% on a standalone basis, about 15% on a pro forma basis. And our objective, again, is still to get to that 40% as we get into 2021 here. So we've made some strides here on the oil side. I think what's also kind of missed is how much gas actually that we have under management here. With the NAL transaction, it actually doubles our gas production. So with the run-up in gas prices here, we've actually increased our gas positions quite significantly.
So right now we have, first half of 2021, 57% of our gas that's hedged, 28% on a pro forma basis. On the second half of the year, we've got 42% hedged on a standalone basis and 22% on a pro forma basis. So if you look at all the commodities combined, natural gas and oil, as we get into 2021 here, we'll continue to incrementally layer on those positions, both on the oil side as well as the gas side to get us to that 40%.
Okay. Great. Thank you.
Thank you. Next question will be from Jeremy McCrea at Raymond James. Please go ahead.
Hi, guys. You guys had another quarter where you revised production up, lowered CapEx costs, and I'm just trying to understand how much conservatism you have built into 2021. Just wondering if you can provide some more specific ranges for your well costs. Is that lower by 5% heading into next year? Are your type curves higher by 5%, 10%, just anything like that?
Jeremy is Joel. On the capital side, we're looking at capital reductions of about 8%-10% over what we experienced in the first quarter of this year.
Okay. And then just on type curves, what are you generally seeing on your type curves?
Yeah. It's Darin here. Our type curves on our primary plays are within reason. Some are changing, some are going up, some are staying the same. But where we're seeing the biggest changes in some of our type curves is we're getting more confident on some of the lower decline rates in our injector conversion type curves and our waterflood optimization type curves. We're getting a little more comfortable on the out years beyond two, three years that our declines are flattening out. So that's probably the biggest change in our type curves.
Okay. And is that built into 2021 right now, or did you want to wait until you see a little bit more data six months from now?
We have an appropriate amount built into 2021.
Okay. Okay. Perfect. Thanks, guys.
Thanks, Jeremy.
Thank you. As a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. And your next question will be from Luke Davis at RBC. Please go ahead.
Hey. Good morning, guys. Just on M&A and consolidation, we've seen a few transactions now in Canada and the U.S. Can you just provide your current views on the M&A market in Canada and just sort of frame out how you're positioning following the closing of NAL?
Sure. Yeah. We believe that consolidation continues to take place both in Canada and the United States, and it's really to try and drive more efficiencies into the business. That is, it's not just G&A. What it is, is from an operational perspective, if you can put consolidated assets in existing regions where you produce, you can become more operationally efficient, as well as your capital program on more consistent, longer-term capital programs that are provided, as Joel alluded to. We also believe that the consolidation will take place with size and scale brings better credit capacity for companies on a go-forward basis. The third reason for doing consolidation is for downstream transportation commitments.
I mean, we in Canada, obviously, are always trying to get the best prices possible and equate to the U.S. where we possibly can, but we do need to get further downstream and make longer-term commitments, so size and scale does matter from that perspective. As far as Whitecap, we're positioned. We've been continuing since we started two years ago. We said that consolidation will need to take place, and our objective was to reduce debt as much as we possibly could so we have a strong balance sheet, and Thanh talked about right now we'll draw on CAD 1.15 billion at a CAD 1.77 billion dollar line.
So we have capacity, but going forward, we're going to continue to focus on opportunities where there's an ability for us to improve our plays for our shareholders in terms of cash generation capabilities, less debt, greater inventory, and that's what we're looking forward to. So we think that we will be able to continue to play and consolidate in this environment, but we don't have to be in a hurry to do that either. We think that there's a disciplined approach, there's some very strong entities in Canada, and maybe we start to bring strong and strong together versus many of the opportunities that have been done in the past have been weak on weak. So that's what we're looking forward to. And again, we think we can participate in that. We think that the NAL was one step in the right direction.
We do think that there's more opportunities for Whitecap going forward.
That's great. Thanks.
Thank you. And at this time, gentlemen, we have no other questions registered. Please proceed.
Thanks very much, everyone, again for your time and interest in the Whitecap story. We look forward to reporting back to you early in 2021 once we close the business combination with NAL, outlining a more detailed budget plan for 2021 and future years. So, wishing everyone on this call good health and happy Halloween. Thank you.
Thank you, sir. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines.