Good morning, ladies and gentlemen. My name is Sylvia, and I would like to welcome everyone to the Whitecap's 2020 Strategic Combination with TORC 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, simply press star then number two. And I would like to turn the call over to Whitecap's President and CEO, Grant Fagerheim. You may now begin, sir.
Thank you, Sylvia. 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, our Vice President of Production and Operations, and Dave Mombourquette, Vice President of Business Development. 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 last evening. We are pleased to advise you of our at-market strategic combination with TORC Oil and Gas. This strong-on-strong combination will create one of the largest pure-play Canadian conventional light oil producers and the ninth-largest publicly traded oil and gas company in Canada.
The enhanced size and scale, the importance of which we have discussed several times in the past, will allow us to more effectively navigate commodity price volatility through the significantly enhanced free funds profile. We are expecting an improving commodity price environment over the next 12 months, and this transaction provides more optionality to increase shareholder returns through accelerated debt repayment, increasing cash returns to shareholders, and improving our per-share metrics. TORC's current production is approximately 25,000 BOE per day, with a baseline decline rate of 24%. We plan to operate these assets with a slightly different production growth profile to improve free funds flow and the long-term sustainability of our combined entity. Currently, we anticipate managing TORC's asset to generate approximately 22,000 BOE per day in 2021, which will result in a moderated production decline rate of 19% for 2022.
This will enhance our ability to generate stronger free funds flow to provide optionality for increased shareholder returns in the future. The combined new Whitecap entity is expected to have a 2021 base decline rate of 17%. The transaction is expected to close on or before February the 25th, 2021, so we'll add approximately 18,000 BOE per day to the pro forma entity average production for 2021. There will be corporate synergies through G&A costs, interest expense, operating and capital cost reduction, totaling CAD 15 million, we anticipate, which is expected to be realized in the combined entity after closing. In addition, we anticipate opportunities for improving results with the application of appropriate technologies and methods that Darin will discuss shortly. The enhanced free funds flow profile from corporate and operational synergies provides the combined entity with the ability to increase shareholder returns.
We are anticipating pro forma free funds flow of over CAD 312 million in 2021 at $45 WTI, resulting in approximately three times coverage on our dividend obligation. This amount includes the expected 6% increase to our monthly dividend outlined in our press release. With respect to the NAL transaction, integration is progressing very well, with production performing better than forecast. Our team is increasingly more positive on the synergies between the two entities, in particular inventory strengthening and cost reduction. Employees from both Whitecap and NAL continue to work diligently towards a seamless close on January 4th, 2021. I would now like to pass on the mic to Dave to provide an overview of the TORC asset.
Thanks, Grant. As Grant mentioned, current TORC production is approximately 25,000 BOE per day, 88% oil and natural gas liquids, and we are targeting production of 22,000 BOE per day in 2021. One of the attractions to the TORC asset base is that it is highly focused in Southeast Saskatchewan and the Cardium play. As Whitecap continues to grow, it's important for us to maintain a focused asset base within areas that we operate. In total, there's a 92% overlap between TORC and Whitecap's producing regions. For some further details, 82% of the current production is in our Southeast Saskatchewan area, which has an excellent fit with our Weyburn asset and the NAL properties. Of the six Southeast Saskatchewan units that NAL operates, TORC is the other owner in five of those, which takes us to 100% working interest.
NAL and TORC are partners on significant non-unit lands in Elswick, Midale, and Flat Lake as well. TORC's other major region is the Cardium, which is 16% of their production. Their lands are directly on trend between our West Pembina and Wapiti properties. We look forward to working with them, sharing our extensive experience with the Cardium play, a focus area for us since 2010. On asset retirement obligations, we completed a detailed review as part of our due diligence process. TORC's ARO profile is very similar to Whitecap's, with our corporate LLR ratio at 3.8 times and TORC at 3.1 times, so combined a very healthy 3.7 times. The TORC assets have a discounted ARO value of CAD 72.1 million relative to our existing CAD 176.4 million, so CAD 248.5 million combined. Very manageable relative to our reserve value and funds flow being generated.
I will now pass it on to Darin to provide more color on the upside potential of the TORC assets. Thanks, Dave. TORC has done an exceptional job of consolidating assets in their core operating regions and compiling a highly economic drilling inventory of over 1,600, 1,300 net locations. The inventory is very concentrated in four primary play types, allowing for significant improvements to be realized by conducting focused technology and optimization pilots. Some potential opportunities include improving the application of ERH drilling, targeted multi-leg horizontal placement, and advanced fracture stimulation design, all of which will optimize reservoir development and maximize productivity and reserve recovery. The larger combined entity will allow for the acceleration of these pilots and the resulting inventory enhancements. With only 35% of the inventory included in the reserves assignment, the unbooked inventory provides ample opportunities for growth in reserves, net asset value, and production.
The TORC assets increase our operated working interest in the Weyburn CO2 flood by over 3% to 65%. Over 68% of TORC's production is supported by enhanced recovery, also known as EOR, which is a primary driver of its low decline rate and associated sustainability. Whitecap has had an exceptional track record of optimizing and expanding EOR schemes as well as identifying, de-risking, and developing new EOR opportunities to enhance its business model. We feel significant EOR upside opportunities also exist on the TORC assets. Combine this with Whitecap's 15% decline rate, which is driven by 70% of our production being impacted by enhanced recovery, and you have an extremely predictable and sustainable production and cash flow stream.
As a combined entity, we will operate over 90% of our production and will continue to have the lowest net GHG emissions intensity in Canada, with strategies in place to continue to reduce it. With that, I will pass it on to Thanh to provide some color on the financial aspects of the combination.
Thanks, Darin. We see this as a very positive transaction for Whitecap, and when we combine with the previously announced NAL transaction, it creates a pro forma entity that's more resilient in a low-price environment and better positioned for strong shareholder returns as commodity prices improve. Our balance sheet remains very strong as we are combining two entities that have a very disciplined and conservative approach to debt management. On closing of the transaction, net debt is expected to be approximately CAD 1.4 billion and decreasing to CAD 1.2 billion by year-end 2021. That's using a $45 WTI price. Whitecap's bank debt is a four-year secured covenant-based facility with no annual redeterminations. The current capacity, including our private placement notes, is CAD 1.77 billion, with an ability for additional pari passu debt of up to CAD 500 million to be used for acquisitions.
We anticipate absorbing TORC's bank debt into our existing credit facility and post-closing to increase our credit capacity to CAD 2 billion, providing us with CAD 600 million of liquidity in the near term and CAD 800 million of liquidity by year-end 2021, so more than sufficient. The combined credit metrics remain very strong, with debt to EBITDA of 1.8 times at $45 WTI and 1.3 times at $50 WTI, both well below our debt covenant of not greater than four times. There's no change to our 2020 guidance as both the transactions, NAL and TORC, are expected to close in 2021, so our 2020 guidance remains at 65,000-67,000 BOEs per day on capital expenditures of CAD 190 million. Our Q4 2020 average production remains unchanged again between 59,000-61,000 BOEs per day.
Our preliminary guidance for 2021, including NAL and TORC, with closing dates of January 4th and February 25th, 2021, respectively, is average production of between 99,000 and 101,000 BOEs per day on capital investment of CAD 280 to CAD 300 million. At $45 WTI, funds flow is expected to be over CAD 600 million, with free funds flow of over CAD 300 million. After paying for dividend obligations of CAD 106 million, we will have CAD 200 million of discretionary funds flow remaining. As I've mentioned, this is a preliminary guidance, and we'll look to put out our full budget for 2021 when we close the TORC transaction on February 25th, 2021. I will now pass it on to Grant for his closing remarks.
I'm sorry, Mr. Fagerheim, we cannot hear you at this time.
Thanks, Thanh. I want to commend TORC's CEO, Brett Herman, and CFO, Jason Tzydnoff, and the entire team at TORC for the company they've been able to build over the past 10 years. We feel very fortunate to carry forward what they've created into our combined company. The announcement of all this series of strategic combinations, including NAL and now TORC, positions our combined shareholders for significant returns when the world economy recovers from the pandemic. Our combined entity will provide our collective shareholders the size and scale to better withstand commodity price volatility through a more resilient and sustainable platform for investment. We are pleased to have Manulife and now CPP as strategic partners as we continue to execute on both our organic capital plans and selective and targeted consolidation strategies.
We are optimistic on the future and believe that Canadian energy will continue to play an important role in the energy transition and diversification with our existing CO2 carbon capture projects as well as other potential initiatives. Whitecap is well positioned to provide strong shareholder returns well into the future. On behalf of our management team, our employees, and our board of directors, we would like to thank all of our shareholders for your interest and support of Whitecap. Thank you very much. With that, I will turn the call back over to the operator, Sylvia, for any questions.
Thank you, sir. 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 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 before pressing any keys. Please go ahead and press star one now if you have a question. And your first question will be from Jordan McNiven at Tudor Pickering Holt. Please go ahead.
Hey, guys. Just wondering if it's possible to get a bit more color on the operating cost side of things, looking at Whitecap before the deal being kind of a $12 per BOE range and TORC around 13. And not sure where NAL was, but with the gas weight, I assume it compared pretty well in there too. And so looking at the guide of 13 to 14, I mean, I assume that cost does creep up with the volume declines. But also just wondering, it appears from my seat anyway that there is quite a bit of conservatism built in here. And I can appreciate that it takes a while to get your hands wrapped around these assets and everything. But if we think longer term, say 2022 plus, I mean, what do you think would be achievable on these assets from an operating cost standpoint?
Yeah, thanks, Jordan. It's Thanh here. I mean, when we look at TORC's operating costs and their transportation, in Q3, all-in was about CAD 15. So we are expecting that to increase a little bit here with the lower production profile. So the anticipation is on a pro forma basis that would be ourselves, TORC, as well as NAL, to be in that CAD 13.50-CAD 14. Expect transportation to be in around that CAD 2 per BOE. I think when we've modeled it in, certainly on the TORC side, I mean, they're good operators, but I think with the 92% overlap of the asset bases, certainly we do see that trending down as we think about the future. But as always, we're pretty conservative when we come up with our numbers. Historically, we've been able to achieve not only operating cost reductions but also improve capital efficiencies.
Okay. I guess, I mean, is it possible to put any numbers around that, or do you just want to stay away from that for now? I mean, do you think getting back into the 12-ish range is achievable with these assets, or do they just come with an inherently higher cost structure that does bias things up?
Yeah, I would say it's really early on right now, Jordan. Let the team. Let's close this transaction, first of all. Get the teams' hands on the assets. And we'll be able to find efficiencies at this time. Expect it to be slightly better than that, but again, we're looking to outperform the market.
Certainly understandable. Okay. Thanks a lot, guys.
Thank you. Next question will be from Joseph Schachter at Schachter Energy Research. Please go ahead.
Good morning, guys, and congratulations on the deal. Very accretive. And my first question is, you had, as you said in the commentary, 92% overlap in terms of core areas with the NAL deal and some of your smaller areas. Do you see divesting any of the non-core areas and kind of consolidating, making tighter each of your major core areas going forward?
Yeah, thanks, Joseph. It's Grant speaking here. At this particular time, at a highest level, we're thinking that we may have up to 1,500 barrels a day of production, but again, a production that would be what we'll call non-strategic to Whitecap, but what we'll do is we want to make sure that we, first of all, integrate the assets and see if there's upside that we can potentially capture effectively and have the resources, the financial resources to do so, or potentially look to monetize them into the market, but it is approximately they have one of the assets in Southern Alberta, TORC, that we may look to monetize on, and then there's some other assets, smaller assets in Manitoba and Southeast Saskatchewan that we may look to monetize on.
Okay, super. And in terms of drilling activity, are we to take it that for the first half, given you're spending a lot of focus on integrating, that there will be a lower level of drilling activity, maybe just to offset some of the depletion on the core Whitecap assets, and that any drilling, including you talked in the last conference call about some natural gas opportunities with NAL, that that stuff would be pushed towards post-breakup?
Yeah, Joseph, just, we're anticipating, as we had talked about in our previous calls, that once oil was in that $45 range and we could get appropriate levels of return on the capital we deploy, we'll be more active than we have been since late March. We're anticipating using startup in late December or first part of January using nine rigs, and we're anticipating approximately CAD 120 million of capital being spent in the first quarter, so we will be active, more active than we've been in the last two and a half quarters leading into the end of the year, and once again, we come back to this return on capital, where's the best places to put our capital at this time. Once we get over the $45 hump, we want to start to deploy capital again.
I agree with your comments on reducing some of the depletion that will take place with our production moving forward.
Okay. And last one for me, where is your production now for Whitecap itself?
Yeah, so again, we're estimating the Q4 average to be somewhere between 59,000 and 61,000 BOEs, and we're slightly above that at this particular time.
Super. That does it for me. Thank you so very much and congratulations.
Thanks very much, Joseph.
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. Please proceed.
Okay. I do want to recognize the efforts and dedication of our staff as we advance from the evaluation process to the integration processes that we are currently living through and will have as we move through to the end of February. I just want to say that our team has done a marvelous job, and it's with their dedication that we're able to accomplish the transactions that we've done. And to all the listeners today, thank you for your support as we drive forward to provide advanced returns to our shareholders. Stay safe, stay healthy. Merry Christmas and best of the season to all of you.
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.