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 2020 Strategic Combination Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A 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. And I would like to turn the meeting over to Whitecap's President and CEO, Grant Fagerheim. Please go ahead, sir.
Good morning, everyone, and thank you for joining us this morning. I'm 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, our 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 the news release that was issued earlier this morning. We are very excited to advise you of our strategic combination with NAL Resources Limited, including the pro forma equity position of Manulife, as the enhanced size and scale will allow the pro forma company to more effectively navigate the current commodity price environment and increases our ability to generate substantial free funds flow.
This will be a significant competitive advantage for Whitecap as we continue to execute our long-term income and growth strategy in a market where availability of both debt and equity capital remain restricted and selective. The pro forma entity will be run by Whitecap's management team, and we anticipate being able to maintain pro forma G&A per BOE of less than CAD 1. Manulife, as a 12.5% shareholder, will have observer rights as a non-voting observer of the board. Manulife has agreed to lock up their shares for a period of 12, 15, and 18 months from the closing date of the transaction. 1/3 of the shares will become available for trading after the initial 12-month period of time. We are very pleased to be working with Manulife, who is an existing equity and noteholder in Whitecap.
Current NAL production is approximately 27,000 BOE per day, and with minimal capital spending for the balance of the year, production is estimated to average 22,000 BOE per day in 2021. The transaction has an effective date of September the 1st and a closing date of January the 4th, 2021, whereby NAL will have no debt outstanding. This is the largest transaction to date from an operational perspective for Whitecap, and the longer closing than normal will allow for a seamless and efficient integration of technical expertise, operations, accounting, and IT systems of the two companies, especially in light of the current COVID-19 environment. Lastly, I'd like to acknowledge the experience, hard work, and dedication of the NAL team, as they should be proud of the success they've achieved to date, and thank you.
I will now pass this over to Dave Mombourquette, who will provide an overview of the transaction. Dave?
Thanks, Grant. As Grant mentioned, current NAL production is approximately 27,000 BOE per day, 55% oil and NGLs, and is expected to produce an average of 22,000 BOE per day in 2021, with a 19% decline rate. One of the major attractions of the NAL asset base is that 80% of the production is focused in our long-held core areas in the Cardium and Viking, where we have substantial expertise. Specifically, approximately 69% of the production is in our West Central Alberta business unit, primarily in the Garrington and Ferrier areas, and 11% is in West Central Saskatchewan. The remaining two areas are Sturgeon Lake, with 11% of production in the Northwest Alberta Montney Pool and 9% in Southeast Saskatchewan. With respect to the reserves, we are only quoting developed reserves at this time.
We will further evaluate the undeveloped portion of the reserves once we have fully integrated the land basis and drilling inventory. Darin will discuss the upside and locations on the assets in more detail shortly. PDP reserves are 51.6 million BOE, valued at 254.1 million NPV10. TP reserves of 54.4 million, valued at 271.1 million NPV10, and total proved plus probable reserves of 68.5 million BOE, with an NPV10 of $379 million, based on our internal estimates, all used at July 1st, 2020, three consultants' average price deck. For asset retirement obligations, we completed a detailed review as part of our due diligence process. In total, the NAL assets have a very similar age and liability profile as Whitecap's current assets. Our corporate LLR ratio is 4.5 x, and NAL is 2.6 x, slightly lower than ours, but combined is still a very healthy 3.8 x.
The NAL assets have a discounted ARO liability of CAD 66.5 million relative to our existing CAD 109.8 million, so CAD 176.4 million combined, very manageable relative to our reserve value and funds flow being generated. The undiscounted ARO is CAD 367 million, which is 37% of the combined pro forma undiscounted ARO. This compares to the assets contributing 27% on production, 20% on PDP reserves, and 35% on free funds flow, so very reasonable. I will now pass it on to Darin to provide more color on the upside potential of the NAL assets.
Thanks, Dave. The NAL lands and production are geographically and operationally synergistic with ours. The pro forma land base will allow for optimization of the location inventory on both sides of the transaction. Please note, unbooked locations may or may not be drilled and may or may not have reserves associated with them. The following are examples of some of the opportunities this combination provides us. In the Ferrier and Garrington areas, which is primarily Cardium Light Oil, 22 locations have been identified as candidates to be optimized from standard length horizontals to extended reach horizontals, also known as ERHs. The NAL assets add 26 top-tier Cardium locations in Garrington. 97 of the Cardium locations identified by Whitecap on NAL's lands could be optimized with high-intensity frac completion designs.
There is potential to lower the DCE and T costs by 15%-20% on the acquired inventory to be more in line with Whitecap's historical cost in the area, and the combined land base increases and enhances the oil and liquids-rich gas opportunities in the Ellerslie and Glauconitic formations. In the West Central Saskatchewan Viking Light Oil play, we have identified 125 locations on the acquired lands. The amalgamation with our lands, as well as our development experience in the Viking, will enable us to optimize the economics by converting many of the standard length horizontal locations to ERHs. 89% of the 124 locations identified are ERHs. On average, we feel there is a potential to lower DCE and T costs in the Viking by 10%-15% on the acquired inventory.
Our Whitecap team has drilled over 700 wells in the Viking play since 2012, and we continue to deliver best-in-class results. There are also opportunities to apply our CO2, EOR, and carbon capture experience and expertise to the NAL assets. The Joffre Viking Pool, which is partially under a CO2 flood, is now only 23 kilometers away from an additional source of CO2, which could allow for additional EOR upside to be realized. In Southeast Saskatchewan, there are several Midale Oil Pools with similar characteristics to Weyburn, within 15 kilometers of a source of CO2 supply. The Sturgeon Lake Montney Oil Pool, which is analogous to our Valhalla Montney Pool, has significant upside potential with only 12% of the 100 million barrels in place recovered to date. Our preliminary review of the NAL assets has identified 495 or 385.6 net high-quality drilling locations, all of which are currently unbooked.
We will be integrating this inventory with our existing inventory and will evaluate reserves assignment post-closing. With that, I will pass it on to Thanh to provide some color on the financial aspects of the transaction.
Thanks, Darin. This is a very positive transaction for Whitecap and our combined shareholders, as we believe that this combination of assets brings additional scale and strength with no additional debt. The transaction metrics are very strong, as it is highly accretive to all of our key operating and financial metrics. More importantly, this transaction aligns with our commitment to prioritizing our balance sheet strength. We anticipate net debt of CAD 1.1 billion on closing, and we will not be requesting an increase to our credit lines of CAD 1.77 billion, as we have more than ample liquidity, with WTI currently range-bound between $40-$45 USD. This improves our expected 2021 net debt-to-EBITDA ratio by 25%. There is no change to our 2020 guidance of 65,000 to 67,000 BOEs per day and capital expenditures of about CAD 190 million, as the transaction is not expected to close until January 4th, 2021.
At this time, our preliminary estimate of Whitecap on a standalone basis has us maintaining our Q4 2020 production at approximately 60,000 BOEs per day for the 2021 calendar year and spending CAD 200 million-250 million to achieve this. With NAL production expected to average 22,000 BOEs per day, our pro forma base case is now projected to be 81,000-83,000 BOEs per day on a capital investment of between CAD 250 million-300 million in 2021. We will formalize our 2021 budget in late October as part of our Q3 release. I will now pass it on to Grant for his closing remarks.
Thanks, Thanh. We see this strategic combination with NAL as providing a very well-capitalized platform to continue to grow our business, whether organically or through selective and targeted consolidation opportunities. We are excited to add the incremental opportunities from the transaction into our existing portfolio, and we are pleased with the improvement of our long-term sustainability along with the stability of our dividends. We look forward to executing our income and growth strategy and reporting back to shareholders on this business combination and our ongoing operations. On behalf of our management team 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 safety. With that, I will turn the call over to the operator for any questions you may have. Thank you.
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 up before pressing any keys. Please go ahead and press star one now if you have a question. And your first question will be from Jeremy McCrea at Raymond James. Please go ahead.
Yeah, hi guys. I got two questions here. One, can you just provide some better clarity on how NAL's inventory stacks up to your inventory? Basically, do you see more CapEx going toward their lands for next year? And then, as well, what do you guys plan to do with your free cash flow here now? Are you waiting just to see better comfort with oil prices being higher? Are you looking at more transactions? Just some better clarity on what you plan to do with this free cash flow here. Thanks, guys.
Thank you, Darin. Why don't you go ahead?
Yeah, I'll touch base on the inventory question, Jeremy. With regard to the inventory, as David already mentioned, the land base is very well integrated with ours, so a lot of the quality is very similar to ours, and a lot of the inventory is going to be enhanced by being able to combine land bases and go to extended reach horizontals and that. So we don't see it as much of a difference between our inventory and theirs for the most part.
Just regarding. Sorry. And just regarding the free cash flow question, I mean, this does provide us with a significant amount of free cash flow, but that allows us for the optionality that we do have in the transaction form from an overall perspective, whether we consider it to be best on continuing to strengthen our balance sheet, whether it's return of capital back to our shareholders, increasing our capital program in the right pricing environment, or other potential acquisitions that we'll look at as we continue to move forward. So being more specific than that, we can't be at this particular time, but it is a very significant amount of free cash flow being developed within the company on the lands that we have with the combination.
Okay. Okay. Thanks, guys.
Thank you. Next question will be from Travis Wood at National Bank Financial. Please go ahead.
Yeah, thanks, guys, and congrats on the nice consolidation here. Darin, you provided a lot of detail around how you're thinking about development, both primary and secondary. So maybe just could you provide some incremental color in terms of where you see those opportunities and probably thinking more on the EOR initiatives across the newly acquired asset base and if there's potential for any unitization on these newly acquired lands as well?
Thanks for the question, Travis. On the EOR side of things, we're pretty early in the game to be talking any details on that. Obviously, we look at some of the reservoir characteristics in Ferrier and that in our Cardium, where we have active water floods there right now, so it will be parts of the NAL assets that we'll incorporate there. And the same thing on the CO2 side in Joffre and Southeast Sask. There's a lot of things that have to come together to realize that, but we do see the reservoir characteristics that would allow for us to expand our EORs in those areas.
Okay. And then probably a bit too early, but any kind of target in terms of how you're looking at OpEx savings and just directionally over in percentage terms and kind of time horizon?
Hey, Travis. It's Joel. OpEx is bottom flat at this point in time.
Okay. And then very last question. I think, Grant, I think I heard you say effective date of September 1st. So can we make an adjustment off of the 155 as well, making the price a little bit less potentially as an adjustment for year-end?
Hey, Travis. It's Thanh here. I would say that our expectation is that on closing January 4th, that NAL would have no debt outstanding. So there's some variability to that, but that's the expectation at this time. So from a modeling perspective, I would say zero debt on when we close the transaction.
Okay. All right. Thanks, guys.
Thank you. Next question will be from Patrick O'Rourke at ATB Capital Markets. Please go ahead.
Hey, guys. Good morning. I guess Travis kind of touched on this a little bit, but I'm just curious when you're looking at these assets, and I think you mentioned that you're seeing OpEx kind of flat here. Would you consider that these assets are pretty optimized at this point in time, or are there potential synergies down the road by looping them into your overlapping footprint?
That's Joel again. I don't think we've ever done an acquisition without synergies being part of the outcome, so I expect that we will drive efficiencies down the road. But right now, we just modeled everything flat, and we look forward to closing it in early January, and we'll go from there.
So just with that, I mean, obviously, we'll welcome the new staff that will be joining our team upon the closing of the deal. As is standard, as Joel has referenced, with transactions of this nature, we'll conduct a full operational overview once the deal closes and while the deal is in the interim period and assess the efficiencies and assets around not only people but operations. We're committed to a fair and open process for assessing the talent for the purpose of their ongoing requirements going forward.
So, is it fair then to say that when you look at, you've got overlapping footprints here, that the netback that these assets are receiving in similar areas to where you're producing would be in the same range right now?
That's correct.
Okay. Perfect. Thank you, guys.
Thank you. Next question will be from Amir Arif at Cormark Securities. Please go ahead.
Thanks. Good morning, guys. Congrats on our great acquisition. Just a couple of quick questions. Just on the 55% liquids mix, can you just break that out between oil and NGLs for us?
Sure. Of the oil and NGLs. So, just one second [audio distortion].
While you're digging up those numbers out, maybe I'll just go to the next question. Just on the ARO side, the CAD 66 million versus the CAD 367 million discounted, can you just give us a sense of a rough split of how much of that is for active wells versus inactive and just a rough idea of how much annual ARO spending you might have to do in the next few years just to try to see how large that is?
Go ahead, Darin.
Yeah. Just to answer your first question, it's hard to find. There's a lot of different productions depending on what you're looking at. But looking at the current production of 27,000, that breaks down into 9,780 of oil and 5,000 of NGL, and then 73.4 million a day of natural gas.
Perfect. And then just on the ARO side, just curious if you can give us a rough idea, a rough split just of how much is for active versus inactive wells and then just an annual requirement on that ARO accretion for the next couple of years?
Sure. So just on that, the active on a combined basis, we have just shy of 5,900 wells that are active and 4,900 wells that are inactive on combination. So when we break that down specific to the NAL assets, they were just shy of 1,580 active wells and under 1,400 inactive wells. So our expectations on ARO capital spending, previously, we were spending between CAD 7 million to CAD 9 million per year, and we'll look to increase that somewhere in the neighborhood. We're thinking up to CAD 15 million per year on a go-forward basis. But we'll come out once we do a detailed analysis, a more thorough detailed analysis together with the NAL team. We'll put together a more consistent and thorough strategy going forward. Hopefully, that's helping Amir.
Yeah. Absolutely, Grant. And then just on the spending profile for next year, the $250 million-$300 million, and I know it's preliminary. You'll have more details later, but does that hold production flat in the 81 to 83 throughout the year?
Yep. No, that's correct there. So originally, for us on a standalone basis, we were going to hold Q4 production in that 60,000 BOE per day level, spending somewhere between CAD 200 million - 250 million of capital. What our base case expectation for the NAL assets is 22,000 BOEs per day next year average for 2021 with an incremental CAD 50 million of capital.
Okay. Yeah. Sounds good. And then just finally, so this acquisition actually makes it easier or even puts you in a better position to do future acquisitions just given that it deleverages your balance sheet. So if prices stay at the current commodity levels, commodity prices just stay at current strip, do you favor with your free cash flow potential further acquisitions given the kind of multiples you can do, or does organic growth come back at 40, 45?
Yeah. I think, Amir, the first priority that we see, I mean, $40-$45 oil, I think we wouldn't be in a hurry to bring back capital at this particular time. Certainly, the free cash flow that we see in excess of CAD 100 million this year and next, our first priority is continuing to strengthen the balance sheet at this particular time. Obviously, evaluating business development opportunities, that's an ongoing initiative here at Whitecap and something that we've articulated in terms of our desire to continue to consolidate right within our core areas here. But certainly, the number one priority, which has been and continues to be, is our balance sheet.
So just to follow on that, Amir, just one of the things I want to reflect back on is that numerous times we talk about the requirement for appropriate return on capital employed. And in this particular pricing environment, we're not even through the $45 oil price environment at this particular time that we've articulated numerous times. So we would like to see a sustainable above the $45 WTI in order to bring back capital. We think that does happen. We don't know when that happens, and we can't project when that does happen. So at this particular time, we believe that it was better to, rather than drilling out your inventory for very limited return, it's potential to increase your inventories through acquisitions.
So as far as going forward into other assets and other opportunities, we'll continue to be active in looking for other opportunities to strengthen our company for the longer term.
That makes a lot of sense. Okay. Thanks, guys.
Thank you. Next question will be from Josef Schachter at Schachter Energy Research. Please go ahead.
Good morning, everyone, and congratulations on the acquisition of NAL. I have a couple of questions. The first one on Manulife. You mentioned they own 12.5% and that they have participation rights in future equity issuances. Is there a limit where they have a standstill at 18% or 20% on the upside, or is there any part of that in the deal where they have a limit of how high they can go as an owner?
Yeah. They have pro-rata rights, so any financing that we do, they can participate up to the pro-rata amount there. We don't anticipate, I mean, with the acquisition being not significant here, we don't anticipate having to require shareholders' meeting.
Okay, but could they go up to, if they want in the future, can they add to their position to a certain limit, and do they have a standstill at a maximum?
Within the context of the agreement, I believe it's under the threshold that we would require shareholders vote for this transaction. As we move forward, once we close the transaction, they'll be like any other shareholder. They can increase their position through the open market.
Okay. I was just wondering if there's something in the agreement at this point. Second question. You mentioned in the presentation and also in your comments that current production was 27,000 BOEs a day, and you're looking at the average for next year of 22,000. That seems to me, versus the 19% decline rate, that seems a lot more 5,000 BOEs off of that seems a lot more aggressive decline. Can you shed a little more light on why you see production going down to 22,000 by the time of the close?
The 22,000 BOEs per day that we're anticipating for 2021, that's based on the 19% decline rate. So their current decline is higher than that, but it'll continue to moderate down with limited capital spending, similar to our asset-based rate. I mean, we start off with a 19% decline rate, and as we move through the year here, as we spend no capital, our production declines to 60,000 BOEs per day, and we're anticipating the decline at 13%-15%.
Okay. So they need to keep that production at 22,000 going forward, and in 2021, you need to spend CAD 50 million to replace declines. Is that correct?
That's correct.
That's correct. Super. Thanks very much, guys, and congratulations.
Thanks, Josef.
Thank you. As a reminder, if you do have any questions, please press star followed by one on your touch-tone phone. And your next question will be from Juan Jarrah at TD Securities. Please go ahead.
Yeah. Thanks, guys. Just talk a little bit about the synergies that you mentioned. Just curious, I mean, I know in your presentation you mentioned 7% reduction to operating costs, and in your introductory remarks, you talked about 10%-15% on a capital basis in the Cardium and the Viking. I'm just curious how much of that is baked into your 2021 pro forma estimates?
Yeah. Yeah. I mean, right now, the 17% or sorry, the 7% in the operating costs, that's baked into our base case forecast in 2021. On a G&A basis, we're running that at a buck per BOE on a pro forma basis.
But on the capital efficiencies?
And is it, yeah, on the capital part?
Yeah. We have not. We'll work that out in detail. Those are our early estimates. So we'll come out, as John had referenced, to the end of October, early November with what we're estimating for the balance of 2021 once we drive through the synergies and have an opportunity to work with the service providers on the continual program going forward.
That makes sense. Yeah. Everything else I had was answered, so I'm good. Thanks, guys.
Thank you .
Thank you. At this time, we have no further questions. Please proceed.
Okay. Well, thank you, operator, and thanks again for everyone for your interest and support of Whitecap. We remain constructive about the energy investing environment and look forward to reporting back to you as we move forward into 2021 and 2022 on the combination that we put forward here. Wishing you all the best. Stay safe and healthy. 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.