Whitecap Resources Inc.

Whitecap Resources Inc.

March 17, 2014 07:26 ET

Whitecap Resources Inc. Announces Acquisition of Strategic Long Life, Low Decline Light Oil Assets, $500 Million Financing, Increased Dividend by 10% and Increased 2014 Guidance

CALGARY, ALBERTA--(Marketwired - March 17, 2014) -


Whitecap Resources Inc. ("Whitecap" or the "Company") (TSX:WCP) is pleased to announce that it has entered into an agreement to purchase certain strategic light oil assets focused primarily in Whitecap's Pembina Cardium / West Central core area, as well as at Boundary Lake in northeast BC, which is located just northwest of its core Valhalla area. Total net consideration is $692.7 million after giving effect to the disposition of certain Nisku natural gas production and related facilities located in the Pembina area to Keyera Corp. and deducting estimated purchase price adjustments of $49.4 million at closing (the "Acquisition"). The Acquisition is highly accretive to Whitecap and adds a concentrated land and operating base with 6,500 boe/d (83% oil and NGLs) of high netback production with a low base decline rate of 16% and significant low risk oil reserves upside. The Acquisition includes material facilities infrastructure and the assets being acquired will be operated by Whitecap providing for low cost future development and a near-term reduction in overall operating costs.

The Acquisition will be funded with a concurrent $500 million bought deal equity financing (the "Financing") and debt. Whitecap's credit facilities are anticipated to increase to $1 billion on closing of the Acquisition of which approximately 30% will be undrawn.


Since converting to a dividend-growth strategy in January 2013, our objective has been to maximize total shareholder return through a combination of sustainable dividends and per share growth in cash flow, production and reserves. The Acquisition greatly enhances our sustainable dividend-growth model and is accretive on all key measures both in 2014 and 2015. In 2014, based on the May 1 closing date, we anticipate investing 71% of the cash flow generated from the acquired assets to grow production by 20% leaving $20.5 million of free cash flow. In 2015, we anticipate investing 56% of the cash flow from the acquired assets to grow production by 16%, leaving significant additional free cash flow of $74.0 million. The significant free cash flow will allow Whitecap to prudently increase its monthly dividend by 10% to $0.0625 per share ($0.75 per share annualized) from $0.0567 per share ($0.68 per share annualized).

Pro forma the Acquisition, Whitecap will have production of approximately 33,500 boe/d (72% oil and NGLs), a total payout ratio of 96% reducing to 84% in 2015, and a strong balance sheet with a debt to run-rate cash flow ratio of 1.2x decreasing to 0.9x in 2015. Whitecap continues to position itself as a long-term sustainable dividend-growth entity focused on organic growth and accretive acquisitions within its primary core areas. The acquired assets have significant original oil in place ("OOIP") with low recovery factors and limited development in recent years. With the current oil price environment and advances in technology, Whitecap has identified considerable upside potential in the assets. Further details are provided below:

West Pembina Cardium Legacy Waterfloods - Stable base production with significant growth potential

The West Pembina legacy Cardium assets include 6 operated units with an average working interest of 69% and current production of 1,400 boe/d (83% oil) from the Cardium formation. Whitecap's initial growth focus will be on the Pembina Cardium Unit #11 and Cynthia Cardium Unit #1. Initial development of these pools, including secondary recovery (waterflood) occurred in the late 1950's with minimal development drilling occurring beyond the 1960's. Both properties have been producing at a very predictable average annual decline rate of less than 5% for the past 30 years, very low watercuts (averaging less than 10%) and estimated operating netbacks of $45.00/boe. We have identified 86 (47.1 net) horizontal drilling locations of which 76 are planned as extended reach horizontal ("ERH") wells within these two units to provide additional long-term stable growth. Development drilling using modern technologies has, in conjunction with waterflood optimization and expansion, the potential to increase oil recoveries to over 20% in the two units from the current booked recovery factor of 14%.

West Pembina Non-Unit Cardium Horizontal Developments - Exceptional economics

In addition to the opportunities within the legacy units, there is significant growth potential outside the units on high working interest lands. To date, the previous owner has participated in 52 wells, of which 34 were operated, with production from these wells currently over 2,900 boe/d (91% oil). Results have been exceptional with estimated operating netbacks of $72.00/boe and type curve economics generating payouts of approximately 1 year and rates of return of greater than 200%. Initial declines associated with these wells are lower than our current type curve profile which will have a positive impact on our corporate decline rate. Whitecap has identified 42 (39.1 net) additional locations on these lands at this time of which 16 are being planned as ERH wells. In addition, Whitecap believes it will be able to implement cost saving measures which have been successfully applied in its other development areas that will further improve on the economics.

Rocky Mountain House (Ferrier) - Synergies with existing assets

The Rocky Mountain House region includes the Ferrier and Willesden Green area and directly offsets lands in which we are currently active and will be drilling 7 wells in 2014. Current acquired production is 1,050 boe/d (56% oil and NGLs) primarily from the Cardium Belly River and Glauconitic reservoirs. The infrastructure being acquired includes a gas plant and battery in Ferrier and increases our flexibility to transport and process our production providing us with opportunities to decrease costs and increase throughput. In addition to the operational efficiency opportunities, Whitecap has identified 27 (20.5 net) oil development locations in the Cardium for additional growth in the future.

Boundary Lake, Northeast B.C. - Low decline with significant development upside

The Boundary Lake assets include 3 operated units which are pipeline-connected to the Peace oil pipeline system. The assets are 100% operated and have an average working interest of 55% with current production of 1,150 boe/d (91% light oil) and production capability of 2,200 boe/d from the Boundary Lake (Triassic) formation (including behind pipe production due to third party curtailments which will be brought on stream by the fourth quarter of 2014). This property is currently under waterflood and has been producing at a very low and predictable annual decline rate of less than 5% for the past 20 years and has estimated operating netbacks of $45.00/boe. Initial development of these pools occurred in the late 1950's and early 1960's with no development occurring since 1998. Whitecap sees considerable upside in these pools and has identified 114 vertical and horizontal drilling locations for future sustainable growth.

In addition to the development drilling, we have also identified several waterflood optimization opportunities which, in combination with the vertical and horizontal drilling, have the potential to increase the recovery factor to over 45% from the current 38% recovered to date under waterflood. The combination of large OOIP in a concentrated and operated land base presents a very attractive, long-term development opportunity.

In summary, the key benefits to Whitecap shareholders pro forma the Acquisition, the Financing and with consideration of new 2014 and 2015 guidance are as follows:

  • 2014 accretion on a fully diluted share basis of 7% on cash flow, 2% on current production, 9% on total proved plus probable reserves and 13% on net asset value.
  • 2015 accretion on a fully diluted share basis of 23% on cash flow and 4% on production.
  • Increases our cash flow netback in 2014 by 7% to $42.70/boe and by 18% to $47.45/boe in 2015.
  • Decreases our current corporate base decline of 29% to 27% in 2014 and further declining to 24% in 2015.
  • Decreases our estimated 2015 total payout ratio to approximately 84% (from 96% currently) despite a 10% increase in our current annual dividend.
  • Significantly increases free cash flow in 2015 (post-dividend increase) to $98.0 million or $0.40 per share.
  • Increases our light oil development drilling inventory by 269 (169.6 net) drilling locations of which 92 are ERH wells, and our total drilling locations to 2,372 (1,719.5 net) of which 191 are ERH wells.

The Acquisition generates free cash flow and further strengthens the sustainability of our dividend-growth strategy. We estimate the Acquisition will positively impact Whitecap's 2014 and 2015 forecasts as follows:

2014 2015
Average production (boe/d) 3,700 7,800
Cash flow ($MM) (1) (2) $71.2 $168.2
Development capital ($MM) $50.7 $94.2
Free cash flow ($MM) (2) $20.5 $74.0
Note: Current acquired production is 6,500 boe/d. The impact on 2014 is based on an estimated closing date of May 1, 2014 and therefore 2014 numbers do not represent full year 2014 average production, cash flow, development capital spending and free cash flow.


The Acquisition has the following characteristics:

Total net purchase price $692.7 million
Current production 6,500 boe/d (83% light oil and NGLs)
2014 base decline 16%
2015 base decline 15%
Proved reserves (3) 36,177 Mboe (82% light oil and NGLs)
Proved NPV10 (4) $704.0 million
Proved plus probable reserves (3) 48,971 Mboe (81% light oil and NGLs)
Proved plus probable NPV10 (4) $926.0 million
Proved plus probable RLI 21 years
2014 operating netback (1) (2) $52.75/boe
2015 operating netback (1) (2) $59.07/boe

Acquisition metrics are as follows:

Current production $106,600/boe/d
2015 production $88,800/boe/d
2015 cash flow multiple 4.1x
Proved reserves $19.15/boe
Proved plus probable reserves $14.15/boe
Recycle ratio 3.7x
Proved NPV10 1.0x
Proved plus probable NPV10 0.7x

Whitecap also announces that it has entered into an unrelated purchase and sale agreement to acquire a private oil and gas company with assets in north central Alberta for a purchase price of $107 million, subject to adjustments. This acquisition is expected to close on or before April 30, 2014.


Whitecap takes a measured approach to its dividend policy with the objective of providing shareholders with meaningful and consistent dividends in the near-term with potential increases in the future. Pro forma the Acquisition, Whitecap is forecasted to grow cash flow per share by 16% year over year generating $18.2 million ($0.07/share) of free cash flow in 2014 and $98.0 million ($0.40/share) in 2015 after accounting for development capital spending and the dividend payments. Based on our improved decline profile, per share cash flow growth, significant free cash flow and financial strength, Whitecap's Board of Directors has approved a 10% increase to our monthly dividend from $0.0567 to $0.0625 per share ($0.75 per share annualized). Based on the anticipated closing date of early May 2014, the dividend increase is expected to start with our May 2014 dividend payable in June 2014. Whitecap believes this is a conservative dividend increase that is sustainable long-term.


The Company's increased guidance for 2014, after giving effect to the Acquisition, Financing and dividend increase is as follows:

2014 Guidance

% Increase
Average production (boe/d) 27,900 31,600 13%
Per share (fully diluted) 136 137 1%
% oil and NGLs 70% 73% 3%
Development capital ($MM) $255.0 $306.7 20%
Cash flow netback ($/boe) (1) (2) $40.00 $42.70 7%
Cash flow ($MM) (1) (2) $407.3 $492.5 21%
Per share (fully diluted) $1.99 $2.13 7%
Net debt to cash flow (5) 1.0x 1.2x 20%

Pro forma the Acquisition, Whitecap will have $18.2 million of free cash flow in 2014 after spending development capital of $306.7 million and paying dividends of $167.6 million, resulting in a total payout ratio of 96%.

Whitecap anticipates drilling 23 (15.2 net) wells on the acquired assets in 2014 including 13 Cardium oil horizontal multi-frac wells at West Pembina of which 4 - 6 are planned to be ERH wells, and 10 oil wells at Boundary Lake including 6 - 7 unstimulated horizontal wells with the remainder being vertical wells. All of these operations will be seamlessly included into our existing drilling program utilizing our existing fleet of drilling rigs.

Historical operating costs associated with the acquired assets are $17.80/boe. We have forecasted that these will be reduced to $13.00/boe in 2015 through cost efficiencies.

The Company's preliminary guidance for 2015, after giving effect to the Acquisition, Financing and dividend increase is as follows:

2015 Estimate
Average production (boe/d) 36,500
Per share (fully diluted) 145
% oil and NGLs 75%
Development capital ($MM) $348.3
Cash flow netback ($/boe) (1) (2) $47.45
Cash flow ($MM) (1) (2) $632.1
Per share (fully diluted) $2.51
Exit net debt to cash flow 0.9x

2015 Sustainability
Cash flow ($MM) (1) (2) $632.1
Development capital ($MM) $348.3
Dividends ($MM) $185.8
Free cash flow ($MM) (2) $98.0
Total payout ratio 84%

Whitecap will continue to maintain and build on its significant free cash flow surplus of $18.2 million in 2014 increasing to $98.0 million in 2015 (after accounting for the dividend increase). We have the option to apply the surplus cash flow towards (a) continued debt reduction and increasing our financial strength, (b) additional dividend increases over time or (c) increasing our cash flow and production per share growth through an increased capital program.

Whitecap's post-acquisition cash flow netback and cash flow in 2014 and 2015 have been calculated on an after tax basis giving effect to the Acquisition, Financing, dividend increase and the acquisition of the private company referenced above, and Whitecap does not anticipate being taxable in 2014 and 2015.


In connection with the Acquisition, Whitecap has entered into an agreement with a syndicate of underwriters co-led by National Bank Financial Inc. and TD Securities Inc. and including GMP Securities L.P., Dundee Securities Inc., RBC Capital Markets, Scotia Capital Inc., CIBC World Markets, FirstEnergy Capital Corp., Macquarie Capital Markets Canada Ltd., Peters & Co. Limited, Raymond James Ltd., and Cormark Securities Inc. (collectively, the "Underwriters"), pursuant to which the Underwriters have agreed to purchase for resale to the public, on a bought deal basis, 44,643,000 subscription receipts ("Subscription Receipts") of Whitecap at a price of $11.20 per Subscription Receipt for gross proceeds of approximately $500 million. Members of the Whitecap Board of Directors, management team and employees intend to participate in the Financing for approximately $3.1 million. The gross proceeds from the sale of Subscription Receipts will be held in escrow pending the completion of the Acquisition. If all outstanding conditions to the completion of the Acquisition (other than funding) are met and all necessary approvals for the Financing and the Acquisition have been obtained on or before June 30, 2014, the net proceeds from the sale of the Subscription Receipts will be released from escrow to Whitecap and each Subscription Receipt will be exchanged for one common share of Whitecap for no additional consideration. If the Acquisition is not completed on or before June 30, 2014, then the purchase price for the Subscription Receipts will be returned to subscribers, together with a pro rata portion of interest earned on the escrowed funds.

The Subscription Receipts will be distributed by way of a short form prospectus in all provinces of Canada except Quebec and Prince Edward Island and in the United States, the United Kingdom and certain other jurisdictions as the Company and the Underwriters may agree on a private placement basis. Completion of the Acquisition and the Financing is subject to certain conditions including the receipt of all necessary regulatory approvals, including the approval of the Toronto Stock Exchange. Closing of the Financing is expected to occur on April 8, 2014 and the Acquisition is expected to close on or about May 1, 2014.

This press release is not an offer of the securities for sale in the United States. The securities have not been registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States absent registration or an exemption from registration. This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in any state in which such offer, solicitation or sale would be unlawful.


National Bank Financial Inc. has acted as financial advisor to Whitecap and GMP Securities L.P., and TD Securities Inc. have acted as strategic advisors to Whitecap with respect to the Acquisition.

Notes to the Tables above

(1) Based on a WTI price of US$95.00/bbl, C$4.00/GJ AECO and CAD/USD exchange rate of $0.90 for balance 2014 and calendar 2015.
(2) Cash flow, free cash flow and operating netback are non-GAAP measures. Refer to the Non-GAAP measures section of this press release.
(3) Based on McDaniel & Associates Consultants Ltd. ("McDaniel") reserves evaluation effective March 1, 2014.
(4) Before tax net present value based on a 10 percent discount rate and McDaniel's January 1, 2014 forecast prices. Estimated values of future net revenues do not represent the Fair Market Value of the reserves.
(5) Whitecap post-acquisition net debt to cash flow ratio based on a run-rate cash flow of $48 million per month.

Forward-Looking Statements and Other Advisories

This press release contains forward-looking statements and forward-looking information (collectively "forward-looking information") within the meaning of applicable securities laws relating to the Company's plans and other aspects of Whitecap's anticipated future operations, management focus, objectives, strategies, financial, operating and production results and business opportunities, including expected 2014 and 2015 production, product mix, cash flow, operating netbacks, net debt to cash flow, income taxes, our capital expenditure program, drilling and development plans and the timing thereof and sources of funding. In addition, and without limiting the generality of the foregoing, this press release contains forward-looking information regarding the Acquisition, the Financing and the benefits to be acquired therefrom including anticipated production, drilling and reserves potential, recovery factors, waterflood potential, decline rates, drilling inventory, recycle ratios, reserve life index, anticipated rates of return, operating costs, operating netbacks, cash flow and other economics,, and the impact of the Acquisition on Whitecap and its financial and operating results and development plans, including, on its production, cash flow, net asset value, drilling inventory, production weighting, operating and cash flow netbacks, decline rates, recovery factors, reserves, development capital spending, transportation and processing opportunities, outstanding debt levels, dividend sustainability and policy, including anticipated dividend increases and the amount and timing of such increases, total payout ratio, debt levels, debt to cash flow ratio and free cash flow. This press release also contains forward-looking information relating to the estimated purchase price of the Acquisition, plans and expectations with respect to the disposition of certain assets to Keyera Corp., the sources of funding of the Acquisition, the anticipated increase in Whitecap's credit facilities in connection with the Acquisition, the anticipated closing date for the Acquisition, the Financing and the private oil and gas company acquisition referred to in this press release. Forward-looking information typically uses words such as "anticipate", "believe", "project", "expect", "goal", "plan", "intend" or similar words suggesting future outcomes, statements that actions, events or conditions "may", "would", "could" or "will" be taken or occur in the future.

The forward-looking information is based on certain key expectations and assumptions made by Whitecap's management, including expectations and assumptions concerning prevailing commodity prices, exchange rates, interest rates, applicable royalty rates and tax laws; future production rates and estimates of operating costs; performance of existing and future wells; reserve and resource volumes; anticipated timing and results of capital expenditures; the success obtained in drilling new wells; the sufficiency of budgeted capital expenditures in carrying out planned activities; the timing, location and extent of future drilling operations; the state of the economy and the exploration and production business; results of operations; performance; business prospects and opportunities; the availability and cost of financing, labor and services; the impact of increasing competition; ability to market oil and natural gas successfully; Whitecap's ability to access capital, and obtaining the necessary regulatory approvals, including the approval of the Toronto Stock Exchange and satisfaction of the other conditions to closing the Acquisition, the Financing and the other transactions referred to in this press release and on the timeframes contemplated.

Statements relating to "reserves" are also deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future. Actual reserve values may be greater than or less than the estimates provided herein.

Although the Company believes that the expectations and assumptions on which such forward-looking information is based are reasonable, undue reliance should not be placed on the forward-looking information because Whitecap can give no assurance that they will prove to be correct. Since forward-looking information addresses future events and conditions, by its very nature they involve inherent risks and uncertainties. The Acquisition and the Financing and the other transactions referred to in this press release may not be completed on the anticipated time frames or at all and the Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, the forward-looking information and, accordingly, no assurance can be given that any of the events anticipated by the forward-looking information will transpire or occur, or if any of them do so, what benefits that the Company will derive there from. Management has included the above summary of assumptions and risks related to forward-looking information provided in this press release in order to provide securityholders with a more complete perspective on Whitecap's future operations and such information may not be appropriate for other purposes.

Readers are cautioned that the foregoing lists of factors are not exhaustive. Additional information on these and other factors that could affect our operations or financial results are included in reports on file with applicable securities regulatory authorities and may be accessed through the SEDAR website (www.sedar.com).

These forward-looking statements are made as of the date of this press release and Whitecap disclaims any intent or obligation to update publicly any forward-looking information, whether as a result of new information, future events or results or otherwise, other than as required by applicable securities laws.

Non-GAAP Measures

This press release contains the terms "cash flow", "free cash flow", "operating netbacks", "cash flow netbacks" and "total payout ratio" which do not have a standardized meaning prescribed by International Financial Reporting Standards ("IFRS" or, alternatively, "GAAP") and therefore may not be comparable with the calculation of similar measures by other companies. Whitecap uses cash flow, free cash flow, operating netbacks, cash flow netbacks and total payout ratio to analyze financial and operating performance. Whitecap feels these benchmarks are key measures of profitability and overall sustainability for the Company. Each of these terms is commonly used in the oil and gas industry. Cash flow, free cash flow, operating netbacks, cash flow netbacks and total payout ratio are not intended to represent operating profits nor should they be viewed as an alternative to cash flow provided by operating activities, net earnings or other measures of financial performance calculated in accordance with GAAP. Cash flows are calculated as cash flows from operating activities adjusted for changes in non-cash working capital, transaction costs and asset retirement settlements. Free cash flows are calculated as cash flow minus development capital expenditures and dividends paid or declared. Operating netbacks are determined by deducting royalties, production expenses and transportation and selling expenses from oil and gas revenue. Cash flow netbacks are determined by deducting interest, general and administrative expenses and taxes from operating netbacks. Total payout ratio is calculated as development capital expenditures and dividends paid or declared divided by cash flow.

Note: "Boe" means barrel of oil equivalent on the basis of 6 mcf of natural gas to 1 bbl of oil. Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6 Mcf: 1 Bbl, utilizing a conversion ratio at 6 Mcf: 1 Bbl may be misleading as an indication of value.

Contact Information

  • Whitecap Resources Inc.
    Grant Fagerheim, President & CEO
    Main Phone: (403) 266-0767

    Whitecap Resources Inc.
    Thanh Kang, VP Finance & CFO
    Main Phone: (403) 266-0767

    Whitecap Resources Inc.
    500, 222 - 3 Avenue SW
    Calgary, AB T2P 0B4
    Main Phone: (403) 266-0767
    Fax: (403) 266-6975