Whitecap Consolidates Top Tier Montney Assets

Source: www.gulfoilandgas.com 4/5/2021, Location: North America

Whitecap Resources Inc. is pleased to announce that it has entered into an arrangement agreement (the “Arrangement”) to indirectly acquire Kicking Horse Oil & Gas Ltd. (“Kicking Horse”), a privately held indirect subsidiary of Quantum Energy Partners, for aggregate consideration of $300 million, consisting of 34.5 million Whitecap common shares (determined based on the five-day volume weighted average share prices of the Whitecap shares on the TSX prior to the signing of the Arrangement) and $56 million in cash and the assumption of net debt (the “Acquisition”) estimated at $54 million as at February 28, 2021. Kicking Horse’s assets primarily consist of a condensate rich Alberta Montney development at Kakwa with current production of approximately 8,000 boe/d (~32% liquids, ~90% of which is condensate). The Acquisition is expected to close on or before May 31, 2021.

Strategic Rationale
· The Acquisition is a continuation of Whitecap’s long-term strategy of selectively consolidating high quality assets in our core operating areas to enhance free funds flow and return of capital to shareholders. The Kicking Horse assets are well positioned in the liquids-rich portion of the Alberta Montney, complement our existing Montney position at Karr and have significant offsetting activity. The Acquisition includes 92 (60.0 net) sections of Montney rights that are 99% operated, with an average working interest of 65%, and provide the potential for further working interest consolidation.

· Whitecap’s total acreage in the Montney resource play is now 168 (118.0 net) sections with 696 (437.4 net) drilling locations identified across numerous Montney benches.

· Current production from the Kicking Horse assets is approximately 8,000 boe/d and is expected to be optimized at 18,000 – 19,000 boe/d over the next 12 – 15 months to maximize free funds flow. The Acquisition further strengthens the sustainability of our dividend and growth strategy and is expected to generate annual free funds flow of approximately $72 million at US$55/bbl WTI and C$2.50/GJ AECO.

· Highly accretive to key 2022 per share metrics including 10% on funds flow, 9% on free funds flow, 13% on discretionary funds flow and 11% on production.

· Increases Whitecap’s 2022 discretionary funds flow (after capital investments and dividends) by 20% to approximately $270 million at US$55/bbl WTI and C$2.50/GJ.

· Top tier Montney inventory of 575 (362.0 net) drilling locations of which only 12% are booked in Whitecap’s internal reserves evaluation for the Acquisition, which increases Whitecap’s proved plus probable reserve life index by 6% to 18.8 years.

· Enhances Whitecap’s strong environmental, social and governance (“ESG”) profile with limited asset retirement obligations of $5.5 million and a strong liability management ratio of 17.3 times.

· Strong Acquisition (including 2021 net capital spending) metrics of approximately 2.5 times 2022 funds flow multiple, a 2022 production metric of $19,000/boe/d, $9.50/boe on total proved plus probable reserves (including future development capital) and a free funds flow yield of 20%.

Advancing Whitecap’s Strategy
Grant Fagerheim, Whitecap’s President & CEO, stated: “We are excited about adding this asset to our portfolio as an advancement of our Montney growth strategy, creating an additional opportunity for our team to further generate strong returns for our shareholders. As we have integrated the NAL and TORC assets over the past several months, our team’s execution has been exceptional, and we are confident that will remain the same with this new asset. We would like to thank our employees for their continued diligent efforts as well as our shareholders, now including Quantum, for your ongoing support.”

Steve Harding, Kicking Horse’s CEO, stated: “I’m proud of what our team has accomplished, building a world class asset with strong returns and an attractive free cash flow profile, especially in a challenging energy environment. We see this asset base as another significant facet of the expanding Whitecap footprint which will benefit from the advantages of scale as part of a larger franchise.”

Garry Tanner, Partner at Quantum Energy Partners, stated: “We believe in the Whitecap story of disciplined leadership, superior execution, and low decline, high net-back assets with strong free cash flow. We also recognize their commitment to ESG reflected in their zero net emissions which will become essential for the oil and gas companies of the future. We are proud to be affiliated with Whitecap and look forward to continuing our strong partnership moving forward.”

Summary of Kicking Horse
· Current production is approximately 8,000 boe/d (32% liquids) and is expected to increase to and maintained at 18,000 – 19,000 boe/d over the next 12 – 15 months with the drilling of 8 – 10 wells per year.

· At 18,000 – 19,000 boe/d the Acquisition is expected to generate approximately $72 million of free funds flow, based on $80 million of maintenance capital and an operating netback of $22.50/boe at US$55/bbl WTI and C$2.50/GJ. Whitecap estimates a free funds flow break-even of US$38/bbl WTI and C$1.75/GJ AECO at 18,500 boe/d.

· Current production supports take-or-pay obligations for both gas processing and transportation agreements with no step-ups in subsequent years. Growth plans will utilize available capacity at existing plants in the area.

· Proved developed producing (“PDP”) reserves of 10.5 MMboe (28% liquids), total proved (“TP”) reserves of 59.4 MMboe (33% liquids), and total proved plus probable (“TPP”) reserves of 89.0 MMboe (34% liquids) based on Whitecap’s internal reserves evaluation effective April 1, 2021.

· PDP future net revenue discounted at 10 percent (“NPV10”) of $97 million, TP NPV10 of $384 million and TPP NPV10 of $577 million, which includes $5.5 million of asset retirement obligations based on Whitecap’s internal evaluation.

Pro Forma Outlook
· Whitecp’s balance sheet remains in excellent shape and the Acquisition (including 2021 net capital investments) is expected to be neutral to our run-rate debt to EBITDA ratio of 1.2 times in 2021 and reduces our debt to EBITDA ratio by 2% to 1.0 times in 2022. Whitecap remains committed to its target of $200 million of debt repayment in 2021 and pro forma the Acquisition, Whitecap will have 42% and 44% of its second half 2021 net crude oil and natural gas production hedged, respectively.

· Whitecap plans to spend $75 million (approximately $40 million net of the Acquisition’s operating income including hedging) on the Kicking Horse assets in 2021 which includes the completion of 4 (2.6 net) wells currently being drilled and the drilling of 6 (4.2 net) additional wells. Of these 10 wells, 6 (4.0 net) are expected to be on production by year end. As a result, we are now expecting 2021 production to average approximately 108,000 boe/d (76% liquids), from the previous 102,000 – 103,000 boe/d (78% liquids) and capital spending of $355 - $375 million (from $280 - $300 million previously).

· Of the more than $200 million of 2021 discretionary funds flow that remains after the targeted debt repayment, Whitecap will be utilizing $110 million to fund the cash and debt component of the Acquisition and approximately $40 million (net) to grow this asset and improve long-term free funds flow generation. The remaining discretionary funds flow in 2021 will be allocated towards further debt repayment, return of capital to shareholders, additional consolidation opportunities, or a combination thereof.

· Pro forma, corporate production remains oil weighted at 76% oil and natural gas liquids. The additional natural gas volumes will improve corporate capital efficiencies and diversify our revenue mix, with Whitecap also benefitting from recently improved WCSB natural gas fundamentals and additional intra-basin demand and takeaway capacity on the NOVA Gas Transmission Ltd. (“NGTL”) system scheduled to be completed in late 2021 or early 2022, in line with the planned increase to 18,000 – 19,000 boe/d on the acquired assets.

The strategic Acquisition adds a high-return asset to our existing Northern Alberta and British Columbia business unit with no additional office staff being required. The asset is characterized by prolific condensate-rich wells and has the ability to quickly grow to an optimized production level to generate incremental free funds flow for our shareholders. The stability of our base decline rate, strong balance sheet, high netback assets and recent operational outperformance provides the necessary foundation for Whitecap to execute on the Acquisition that adds to our strength and profitability. Our priorities are unchanged, and we continue to pursue ways to maximize free funds flow to enhance return of capital to our shareholders through debt reduction and dividend growth.

The Acquisition is expected to close on or before May 31, 2021, subject to customary closing conditions, including Kicking Horse securityholder approval and receipt of necessary regulatory approvals, including the approval of the Toronto Stock Exchange. We look forward to reporting back to our shareholders on our progress throughout the remainder of the year.


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