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Processor Profile: Western Canadian junior oil and gas producer Whitecap Resources is bullish on 2017


January 1, 2017  


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Despite industry observers forecasting weak to moderate results within Western Canada’s oil patch in 2017, some producers are still calling for blue skies with no chance of rain. Calgary-based junior oil and gas producer Whitecap Resources Inc. is leading that chorus of optimism.

Citing predictable production profiles, balanced decline rates, strong netbacks and a large repeatable development drilling inventory, the company plans to increase capital spending by 71 per cent to $300 million in 2017. And $420 million in 2018. And $470 million in 2019.

In fact, company president and CEO Grant Fagerheim believes the timing has never been better to strike. “We have positioned Whitecap to be both defensive when required along with the ability to be more offensive when the environment presents itself,” he says. “As a result of the current lower cost of services environment, primarily due to labour cost adjustments across the industry combined with a 25 per cent decrease in the value of the Canadian dollar, Whitecap can grow profitably supported by internally generated cash flow.

“Although we are cognisant of the ongoing headwinds, we are constructive on the forward price of crude as it recovers from the mid-$20 (US) level earlier this year.” Overall, the capital investment of $300 million in 2017 includes the drilling of 187 development oil wells that are anticipated to deliver annual production of 57,000 boe/d compared to 45,700 boe/d in 2016, an increase of 25 per cent. Whitecap plans to allocate $234 million toward drilling, completion, equipping and tie-in of new wells, along with recompletions and workovers of existing wells, $38 million on waterflood and enhanced oil recovery projects, $16 million on facilities and $12 million on health, safety, environment and other costs.

In a note to investors in early November, Whitecap noted 30 per cent of the $234 million in drilling capital, or $71 million, will target EOR/waterflood pools that exhibit shallower decline profiles and produce at lower decline rates for a longer period of time compared to typical resource play wells. Fagerheim says the Whitecap’s focus on EORs is intentional, crediting the use of longer lateral length horizontal wells in stronger per well economics, as well as increasing per well production rates and reserve recoveries.

“We continue to accumulate an inventory of drilling opportunities with consistent geology that can provide exceptional returns and production levels for our company going forward,” he says. The company also expects to continue to apply extended reach horizontal (ERH) drilling technology to enhance economic returns in each of its core areas — primarily in the Deep Basin in northwest Alberta and B.C. Whitecap operates a total of 3,040 oil development drilling locations of which 22 per cent, or 654, wells are ERH locations.

The Deep Basin assets are expected to attract approximately 21 per cent of Whitecap’s capital in 2017 for the drilling of 13 wells versus nine wells in 2016. “These assets have significant growth potential along with enviable economic returns,” says Fagerheim. “We do plan to drill approximately one quarter of our 2017 wells as extended reach horizontals as we continually focus on improving the well economics.”

Saskatchewan: Focus of growth Whitecap is currently active in northwest Alberta and B.C., west central Alberta and west central and southwest Saskatchewan. Yet the company’s 2017 capital budget calls for nearly one-third, or $94 million, to be spent in the company’s Viking play in western Saskatchewan — Kerrobert, Lucky Hills, Whiteside and Eagle Lake areas. Fagerheim says the decision to focus on the area is due to it providing Whitecap with the best opportunities for production growth while demonstrating some of the company’s best returns on capital employed.

Whitecap plans to spend on drilling 113 light oil horizontal wells in Viking, of which 59 will be extended-reach horizontal wells that the company say exhibit a lower decline profile than many areas due to the significant oil in place. An estimated $5 million will be allocated to facility and pipeline upgrades. An additional $8 million will be devoted to waterflood projects, including the drilling of horizontal injectors and the conversion/optimization of vertical and horizontal injectors.

“The Viking resource play provides us with abbreviated drilling to on-stream times together with exceptionally short capital payout time frames, all of which are key performance indicators for our company,” says Fagerheim. Whitecap also expects to remain busy in southwest Saskatchewan. The company notes the newly acquired asset just west of Swift Current, Sask, has multi-zone potential. Production from the area has a low and predictable base decline rate which is underpinned by multiple active waterflood and EOR projects, many of which have significant optimization upside.

The company expects to spend $42 million of the company’s $300 capital spending in the region to drill 24 horizontal oil wells, allocating $5 million toward facility and infrastructure spending and $17 million on waterflood and EOR developments. Spending in the region will also include $14 million for polymer costs associated with Whitecap’s three active Alkaline-Surfactant- Polymer (ASP) floods. Current production from the ASPs is approaching 2,500 boe/d, up from 2,200 boe/d at time of acquisition.

It is forecast to increase further to 2,700 boe/d in 2017. “We are very pleased with the performance and upside potential of the recently acquired southwest Saskatchewan assets,” says Fagerheim. “In 2017 we anticipate spending only 38 per cent of the assets’ cash flow to drill 24 wells and grow the assets by six per cent, a remarkable outcome by all measures.” Alberta and beyond Not to be forgotten is Whitecap’s properties in west central Alberta, where the company plans on investing approximately $66 million, or 22 per cent, of its capital budget specifically on the Cardium resource play.

The investment includes the drilling of 28 light oil horizontal wells of which 12 are ERH wells. “We anticipate $7 million will be spent on waterflood projects including a horizontal injector drill and vertical injector conversions,” Whitecap said to investors. “These EOR activities will optimize the historical waterfloods within the West Pembina units as well as reactivate waterfloods outside of the units.” Whitecap said its Elnora pool, meanwhile, continues to be a significant source of free funds flow. It anticipates only investing $6 million on the property for continued pressure maintenance and optimization of the waterflood including the drilling of two wells.

Fagerheim maintains Whitecap is in the position to expand its Western Canadian operations in 2017 because it has assimilated assets that have consistent reservoirs along with a lower decline rate as a result of being influenced by waterflood and enhanced oil recovery schemes.

“These factors, together with the high cash flow netback we receive on our production along with our 10-plus year inventory of drilling opportunities that have strong capital efficiencies, provide us with a sustainable base to grow from,” he says.

“With respect to balance sheet management, we maintain a conservative approach with the use of debt and use an active hedging program to mitigate price volatility and therefore have a predictable cash flow stream for capital reinvestment and consistent dividend payments. Whitecap lives within cash flow.”

About the author: Jamie Zachary is the editor of PROCESSWest.