Good morning. My name is Pam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Whitecap Resources 2020 First Quarter Financial and Operational 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'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, please press star, then the number two. I'd now like to turn the conference over to Whitecap's President and CEO, Mr. Grant Fagerheim. Please go ahead.
Good morning, everyone, and thank you for joining us this morning. I am joined with three members of our senior management team: our CFO, Thanh Kang, as well as Darin Dunlop, our Vice President 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 the call are subject to the same forward-looking disclaimer and advisory that we set forth in the quarter news release issued earlier this morning. We came into 2020 well-positioned and started the year on a very strong note, not feeling the effects of the oversupplied oil market coinciding with the demand shocks caused by COVID-19 until later in the first quarter. Our production in the first quarter was above expectations at 73,452 BOE per day, and capital investments were lower than expected at CAD 138.8 million.
This allowed us to generate funds flow of CAD 131.8 million, or CAD 0.32 per share in the quarter. The lower oil demand due to coronavirus and the crude oil supply glut has created an oil crisis that is unprecedented, with crude oil recently trading off significantly to historic lows. Whitecap has taken real-time measures to deal with the crisis, and to date, we have identified CAD 300 million of cash reductions through capital spending, operating expenses, general administrative costs, and our dividend. The quality of our assets is evident, as only 2,000 BOE per day of production is currently deferred due to our low crude oil price environment, and we anticipate these assets will return to production at approximately $40 WTI, depending on geographical region. Our criteria include capital payouts of less than one year for workovers.
Our operating team has done an exceptional job of scrutinizing our assets down to a field level and, in some cases, down to a well level to determine the uneconomic production, which we define as shut-in operating income greater than ongoing operating income. We do not expect significant voluntary production shut-ins at this time on our assets, as our base production has an operating break-even of approximately $16.50 a barrel. Joel will be discussing our net back analysis in further detail shortly. Our team has also been busy planning for the potential of involuntary shut-ins due to the pending storage constraints in North America. Our objective, if we are forced to shut in, is to do this in a methodical manner, starting with the lowest net back assets, with consideration given to cost and ease of startup, operational constraints, technical reservoir considerations, and current marketing commitments.
In most of our operating regions, we were able to suspend a material amount of production with minimal negative reservoir and operational impacts. We also expect the restart of operations, in most cases, will be straightforward with minimal capital spending. If storage becomes full in North America and we are required to involuntarily suspend production, we have the ability to suspend up to 50,000 BOE per day of corporate production at a minimal incremental cost or risk. I'll now pass on to Joel to provide more color on our shut-in analysis and to provide an update on our health, safety, and environment results to date.
Thanks, Grant. In response to the potential for forced production suspensions, we created a detailed interactive tool to analyze our net backs at a property level to provide us with operating income sensitivity, including shut-in fixed costs. This then allows us to further scrutinize the data down to the well level. As mentioned, 2,000 BOE a day of current production remains shut in as the economics for incremental capital do not meet our minimum return requirements at this time. On our remaining production, we continue to generate positive operating income and will continue to produce at these levels unless it requires workover capital that does not meet our return thresholds or forced suspensions occur.
The operating income break-even WTI price within our business units ranges from $12.25 per barrel in West Central Alberta to $19.50 per barrel in Northwest Alberta and BC, with a corporate operating income break-even WTI price of $16.50 per barrel. Health, safety, and environmental performance was exceptional, with a TRIF rate of 0.33, which is less than our two-year average and better than any quarter in 2019. Spill performance was also vastly improved from previous years in both frequency and volume. The quarter was concluded with substantial efforts put towards addressing the COVID-19 crisis, including development of a field policy to ensure personnel safety and minimize business continuity risk. Procedures were developed for the entire company in the event that someone at a work site tests positive. Two policies were developed for managing both construction and well-servicing work sites.
The policies will allow Whitecap to minimize the risk of infection and ensure contractors have developed and are following COVID-19 procedures. We have had no incidents of COVID-19 in our field operations or head office. With that, I will pass it on to Thanh to provide some color on our financial results.
Thanks, Joel. Net loss for the quarter was CAD 2.1 billion, or $5.17 per share. The net loss during the quarter was primarily due to a non-cash accounting impairment expense of CAD 2.9 billion, consisting of CAD 2.8 billion charged to PP&E and CAD 123 million charged to Goodwill. The non-cash accounting impairment expense was mainly due to significant decreases to the engineers' average price deck at March 31, 2020, compared to year-end 2019. Forecast WTI prices in 2020 decreased by 52% from $61 per barrel to $29.17, and on average decreased 38% in the first three years. In addition, the after-tax discount rate increased to 13% compared to 10% at year-end to account for increased risk on oil and gas assets. We would expect going forward any significant changes to the engineers' price deck or the discount rate would result in reversal of previous year's expenses or additional impairment expenses impacting net income.
The DD&A rate was CAD 18.72 per BOE in the first quarter compared to CAD 19.55 in the fourth quarter of 2019. For the balance of the year, we are expecting the DD&A rate to be between CAD 12 and CAD 13 per BOE. Funds flow for the quarter was CAD 131.8 million, or CAD 0.32 per share, which included realized hedging gains on commodity contracts of CAD 19.8 million. Based on strip pricing, we are forecasting hedging gains of approximately CAD 200 million in 2020. For further details on our outstanding hedges, refer to note five on our financial statements. Whitecap's balance sheet remains strong with quarter-end net debt at CAD 1.27 billion on total capacity of CAD 1.77 billion. Our debt-to-EBITDA ratio is 1.7 times, and our EBITDA to interest ratio was 14 times, both well within our debt covenants.
With respect to 2020, we are now expecting capital expenditures of CAD 51 million for the rest of the year, for a total of CAD 190 million for 2020. With production deferrals of 2,000 BOE per day, our average production is anticipated to be between 65,000 to 67,000 BOE per day for the full year. I will now pass it on to Grant for his closing remarks.
Thanks, Thanh. We believe that over the last 10 years, through our targeted M&A strategy and our focus on balance sheet strength and flexibility, that Whitecap is very well-positioned to make rational decisions that align with a reasonable view of the market in the long to medium term. Given the extreme volatility and uncertainty, we feel it is prudent to monitor the market dynamics through the remainder of the second quarter before making additional adjustments, if any, to our monthly dividend. We will be definitive in our positioning of our dividend, additional hedges, and our capital program heading into 2021 to ensure that we are able to sustainably advance our company within internally generated funds flow.
These factors we are gauging include the total amount of industry voluntary shut-ins we will experience, as most oil wells in North America are not able to generate positive funds flow at current crude oil prices. As tank capacity fills up in North America and storage gets full, there may be significant involuntary shut-ins required as we progress through the second quarter. We don't know when the peak demand destruction for COVID-19 will occur. However, we expect this could happen sometime in this second quarter, and it will be important to have a better understanding of what the pace and shape of recovery looks like going forward.
Despite the uncertainties we are facing, we believe that our competitive advantages, including our strong financial position, robust hedge portfolio, and the quality of our assets characterized by high operating net backs and low production decline rates, allow us to not only survive through this period of extreme disruption but will allow us to capture incremental opportunities both internally and externally to provide stronger returns for our shareholders when the environment improves. I again want to thank you for your interest and support of Whitecap. With that, I will turn the call over to the operator for any questions. Thank you.
Thank you. Ladies and gentlemen, as stated, if you do have a question, please press star followed by one on your touchtone phone. You will 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 lift your handset before pressing any keys. Please go ahead and press star one if you have a question. Your first question comes from Amir Arif with Cormark. Please go ahead.
Thanks. Good morning, guys. Grant, just a quick question for you in terms of the movements in oil and gas prices. When you are thinking of putting some capital back to work, is there a shift in terms of the specific type of assets you might be thinking about? And if you're looking at more payout ratios instead of NPVs, could you just give some color on that? And at what price do you think it starts to make sense, economic sense, to start putting the drill bit back to work?
So in reverse order on your question, we're looking somewhere in the neighborhood of $40 WTI oil price environment, and that is going to be dependent upon what the differential looks like at that particular time as well. The differentials have come in markedly, as you would know, tighter than what we were expecting, projecting. That's why I say trying to gauge the behaviors of not only producers but also what the market is doing will be interesting over this next three to four-month period of time. Our objective would be to go to our highest net back assets firstly when we recover. We think there will be a recovery, perhaps as late as sometime this year, the back half of 2020, but we would go back to our highest net back assets to put capital to work on an ongoing basis.
Again, trying to generate the best returns for our shareholders on an ongoing basis that we can. We're also surprised to ultimately hear a bit on where natural gas has come to, trading for the 2021 year at just right around that CAD 2.50 a GJ. So that still doesn't take us away from our target is to focus on the highest net back assets that we possibly can going forward into the back half of 2020 and the full year 2021-2022.
Okay. Thanks. And just a quick follow-up question. Just on the $16.50 per BOE break-even price that you mentioned, is that an operating net back break-even or a cash flow net back break-even?
That's an operating net back.
Okay. And just one final quick question. Just on the reduction in the operating cost, is that primarily related to the just shutting of volumes, or this is more structural improvements in your infrastructure?
It was a combination. Sorry, it's Joel here. It's really in two layers. Phase one was more of a mechanical side, chemical usage, power optimization, R&M, and workforce optimization. Kind of phase two, if you want to call that, additional $22 million is more activity-based, so strongly associated with workover activity and vendor reductions.
Thanks.
Your next question comes from Josef Schachter with Schachter Energy Research Services. Please go ahead.
Good morning, Grant and everyone, and thanks very much for taking my questions. You mentioned in the last question about $40 WTI being the trigger for going to your highest net back assets. If in the fourth quarter the U.S. puts in a tariff, Trump needs those six energy states to get the Electoral College votes he needs to be reelected, and let's say North America is covered within that, not having the tariffs. If the prices go up and you end up with an extra $30-$50 million of cash flow, would you put that towards debt? And is debt an issue for you, or because of all the covenants in a situation you have, the money would go directly into spending on your best net back assets?
So yeah, thanks, Josef. Our first objective always, our first priority is going to be debt and balance sheet management. So in the near term, we would definitely look towards continuing to strengthen the balance sheet. But if there's an extra CAD 30 million that could be applied into 2021, we would look to do that. But again, with the backdrop of understanding what our leverage position is at that particular time. So first priority continues to be balance sheet management, and then we'll look to deploy the capital effectively to get the best returns we can going forward after that.
Okay. Thanks. My second question is, with the big write-down that you have and the PDP numbers probably coming down, when the bank takes a look at this, are you going to be looking at taking advantage of any of the EDC? We're seeing comments about them handling the portion of loans that are no longer covered by reserve value. Are you looking at all those numbers, and is it possible you may need that EDC support?
You know what? The way we've looked at that, and we have been working directly with EDC on that, we don't think at this particular time it's something that we're going to be needing. We think we've got significant, substantial enough financial flexibility on our lines. So the liquidity bridge that they're looking at for the one-year period of time, unless potentially it's reworked at a different cost, our cost of debt is 3.6%. So it's very difficult to take on incremental debt unless it's subordinated, strongly subordinated. But we don't really feel the need to use their debt at this particular time, the way they've structured it currently.
Yeah. No, I would agree with that. And just to note that we have a four-year committed facility, so it's secured by financial covenants. And so we're not RBL-based lending. We're subject to fluctuations relative to reserves. So our facility here is much more committed than the RBL space.
Lastly, where is your current production right now?
The current production as of, we were just over.
72,000.
72,000, 72,400 or something last week.
Okay. Wonderful. Thank you so much for taking my questions.
Thanks, Josef.
Your next question comes from Dan Healing with the Canadian Press. Please go ahead.
Oh, hi guys. Thanks for taking my question. I just had a question about the involuntary shut-ins that you were talking about as storage fills. I'm curious if you can help me out to see what that actually looks like, and also, do you know how much of your production now is going into storage?
Sure, Dan. So the involuntary that we're, there's lots of conversation, lots of discussion on that in the market at this particular time, and it's really the pace of shut-in that will determine, I think, how much ultimately companies might be forced to shut in. You look in the U.S., they've got a very significant component. And daily, I see that there was another announcement this morning of another 265,000 barrels a day being suspended. In Canada, we're expecting somewhere probably between one to 1.5 million barrels a day being suspended. We're certainly not there at this particular time, but from an overall perspective, that will be determined by behavior of producers and ultimately help design the shape of what the backside of this thing looks like, how long it's going to take for us to come out of this. So we don't know on the specific to the storage.
We're selling our product as we produce it every day. We've suspended, as we've talked about, 2,000 barrels a day, but we're monetizing our product every day and not putting more specific to Whitecap production into storage at this particular time.
Oh, okay. So when you talk about involuntary storage, that means if you can't find a buyer for your barrel, you just don't produce it?
Correct. Yep.
Oh, okay. I understand. Thank you.
Thanks, Dan.
Your next question comes from Luke Davis with RBC. Please go ahead.
Hey, good morning, guys. Op costs in Q1 were roughly in line with what you posted through 2019. My understanding was that you were previously anticipating a bit of an increase through 2020. Can you maybe just comment on what might have changed there, and then in that same vein, just to answer some of the prior questions, can you comment on whether there are any more levers to pull here as it relates to the current cost structure you're running with?
Sorry, what was that first comment there on the operating relative to Q1 there, Luke?
Q1 was basically in line with 2019. When we previously spoke at times, my understanding was that you had expected an increase through 2020, and that would have been prior to making all these adjustments. Can you just maybe comment on what might have changed there and why they were presumably lower than what you would have expected?
Yeah, a couple of things. I mean, obviously, the comments that Joel made in terms of our op cost initiatives that we've taken, we started that kind of late in the first quarter there. So that impacted some of that. Production obviously was higher than what we anticipated. So on a per unit cost, it ended up being lower as well. So those two combined really resulted in the better-than-forecast operating costs.
Got it, and then any more levers you can pull in terms of where you are currently?
I mean, I don't think this process ever goes away. There's really no finish date. So we'll continue to evaluate our cost structure ongoing. I think we've hit it pretty hard, so I wouldn't expect big changes to that, but the process is never done.
Got it. Thanks. And then, Grant, just as it relates to the federal aid package, which is obviously focused on ARO, based on your current understanding here, can you just provide your general view and just outline whether there's any benefits to Whitecap and maybe anything you're working on now as it relates to potential ARO reductions?
It's Joel here. I think there's been a lot of learnings the last couple of days in terms of the structure of this program. We do think there's opportunity for us, and we're going to try to maximize that as best possible. It is our understanding that the program's basically set up that CAD 30,000 maximum per service vendor per project. So we're going to make sure that we have applications in place for May 1st. We're not sure if the first tranche of CAD 100 million will qualify at this point in time. We're not sure if we'll qualify for the second tranche of the CAD 100 million, but we're certainly hopeful within the CAD 1 billion program that Whitecap will qualify, and we're going to do everything we can to maximize it.
Yeah, makes sense. Got it. Thank you.
Your next question comes from Juan Jarrah with TD Securities. Please go ahead.
Yeah, good morning. Excuse me. Good morning, guys. Just further to the previous question, can you give us a breakdown of CapEx, production, OpEx, etc., for the remaining three quarters?
Sure. From a CapEx JJ, it's explosive. It's about CAD 5 million, somewhere between CAD 4-6 million dollars a month. And that really is not on capital. The majority of that, over 50% of that, comes onto our CO2 purchases for the carbon sequestration progressed in Southeast Saskatchewan. So from a capital perspective, we really have a nominal amount of capital. We had previously put out CAD 210 million and have been able to reduce that back to CAD 190 million for the year. So from a capital perspective, we're not expecting much more. And what were the other components that you would?
Yeah. Just for example, the production, now that you've got the 2,000 shut-in, is that shut-in right now? I know it's not material, but just trying to get our numbers tight.
Yeah. Yes, it is shut-in right now, and as I say, that's why we've altered our forecast from what we were previously, 67-69 thousand barrels a day that we put out on March the 17th to now 65-67 thousand barrels a day. So we've altered it by the 2,000 barrels a day that we shut in.
Gotcha. And then on the OpEx front, obviously, production is decreasing. Looks like you found CAD 42 million of savings for the year. Just trying to think how that factors quarter over quarter.
Yeah. So I mean, it's relatively flat in terms of what our operating costs are. I mean, our expectation is that we're about $300 million on a full-year basis for operating costs there. It's going to run on average somewhere between $24-$25 million on a monthly basis.
Great. That's all I had. Thanks.
Thanks, JJ.
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 at this time, gentlemen, we have no further questions registered. Please proceed.
As we conclude this quarterly earnings call, we wish each of you good health, safe social distancing, and an optimistic attitude. All the best. And until next time. Bye for now. Thank you.
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. Have a great day.