Q3 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Enterprise Corporation Q3, 2019 results conference call. At this time all lines are in listen only mode. Following the presentation, we will conduct a question and answer session.

If at any time during this call you require immediate assistance. Please press star Zero Friday operator. This call is being recorded on Friday November eight 2019, I would now like to turn the conference over to Mr. true Ma'am. Please go ahead Sir.

Thank you operator, and good morning, everyone. Thank you for joining the call.

Before we get started please take note of the advisories lot advisories located at the end of today's news release.

Our financials have been prepared in accordance with U.S. GAAP all discussion of production volumes today on a gross company working interest basis. It all financial figures are in Canadian dollars unless otherwise specified I'm here. This morning, with Ian Dundas, Our President and Chief Executive Officer, Jodi, Jenson Labrie, Senior VP, and Chief Financial Officer Ray Daniels theaters.

He operations, Sheena Morihiro, VP finance and Garth all VP marketing.

Following our discussion we'll open up the call for questions with that I'll turn it over to you.

Thanks drew and thanks to all of you for joining us today.

Get right into our third quarter results.

We delivered another strong sequential increase in our oil production in the third quarter. Following a very active completions program in the Bakken during the summer months.

Bakken production was up 18% from the prior quarter driving company liquids production growth of 14%.

And with the meaningful reduction to our share count over the last year, our liquids production per share increased 22% compared to the same period a year ago.

Production continues to track our guidance, we provided fourth quarter production guidance of 103 to 107000 Boe per day.

With liquids production of 58000 260000 barrels per day.

We've effectively completed our program this year for bringing new wells Onstream in the Bakken and fourth quarter capital activity will be approximately 30% lower compared to third quarter.

And primarily focused on drilling in preparation for 2020.

This will result in modestly lower sequential production in the fourth quarter.

The relatively late fourth quarter capital program is also expected to result in significant fourth quarter free cash flow.

Moving on to share repurchases.

As highlighted in our release today, we were actively buying our stock in the quarter.

We repurchased approximately 7 million shares at a weighted average price of about $9 per share.

Since we began buying our stock through third quarter last year, we've now repurchased and canceled over 24 million shares representing approximately twit, 10% or shares outstanding.

We continue to see attractive value on our shares at current levels, but we'll remain disciplined with our capital allocation as we continue to focus on ensuring we maintain our balance sheet strength.

Through the first nine months of the year, we had effectively been pre spending our fourth quarter free cash flow to buy back stock Jody will provide more color on this later in the call.

So to recap our outlook this year.

Plant is expected to provide strong corporate level returns, 15% liquids production per share growth over $200 million return to our shareholders and low financial leverage.

Importantly, we are delivering our plan on budget and have tightened our 2019 capital spending guidance to $625 million.

I'll leave it there for now and pass the call the Jody to talk through the financial highlights.

Thanks Ian.

Bakken oil differential widened in the third quarter, while we expected that differentials in the second half of a year with the softer due to growing Bakken production. We also saw at U.S. Gulf coast prices relative to W.P. I'd Miss tighter very quickly during August and September .

A differential between Brent W.P.I. tightens by three to $4 a barrel compared to the first half of the year and as a result, I realize Bakken differential is expected to be wider than our previous forecast.

This weakness persisted into October however, lower rig counts less completions and stabilizing U.S. Gulf coast pricing brought some support into November and December .

As a result, we're expecting our average Bakken differential for the year to be approximately $3.60 U.S. per barrel below double your t. <unk>.

Moving onto Marcellus pricing, our third quarter realize differential averaged 44 cents U.S. per Mcf below nine act.

Pricing in the U.S. northeast markets was relatively weak during the quarter, particularly in September after a cooler than normal summer a lot more gassy injected in storage.

We continue to expect seasonally stronger pricing in the Marcellus in November and December as a result of colder weather.

We are maintaining our full year differential guidance for the Marcellus out you have 35 cents U.S. per Mcf below Nymex.

Our unit cost trend, it's 7% lower in the third quarter compared to the prior quarter, mainly driven by higher production volumes.

We are reducing our cash <unk> expense guidance by five cents could be a week with operating and transportation cost guidance unchanged.

Turning to the balance sheet, our total debt net of cash increased to $521 million at September thirtyth, leading to a net debt to adjusted funds flow ratio at 0.7 times.

The increase that's net of cash was primarily due to use of cash on hand to repurchase shares and find working capital.

Through the nine months ended September Thirtyth, we repurchased 15.5 million shares for total consideration at $155 million.

Although our forecasting strong free cash flow in the fourth quarter, our total spending related to our share buybacks will exceed our free cash flow and 29 team.

Outspending free cash flow isn't sustainable long term approach to buying back stock. However, our strong financial position has given us flexibility to be opportunistic and still maintain low leverage ratios.

To be clear however, we believe preserving our strong financial capacity is a competitive advantage and we will not put this address.

As noted in our news release today, we've now repurchased the maximum number of shares under our existing normal course, issuer bid, which was for 7% at the public float we received approval from our board along with the stock exchange to increase our current in normal course issuer bid from 7% to 10% to the public float.

This increase equates to an additional 7.1 million shares that maybe repurchased until the expiry of our current bed in March of 2020.

We plan to provide a comprehensive update on our spending plans and capital allocation, including our approach to share buybacks. Let me provide 2020 guidance later this year or early in 2020, but that I'll turn the call over tray. Thanks Jody.

We saw another strong ramp and North Dakota volumes in the third quarter with 11 operated wells brought production.

As is typical for us our completions program as bias to the warmer summer months between if a September we completed a broad after seven gross operated wells on production.

Which is about 90% of up to it doesn't like program.

As I've indicated fourth quarter conference are well below or primarily focused on drilling in preparation for the 2020 program.

The only wells being brought on production in the fourth quarter and the Bakken or north operated.

Well production has continued to be solid they live in wells brought production during the quarter, where across two pads with a four well pads with a peak 30 day production rate parallel of 1600 60 barrels of oil equivalent or a three stream basis, which was 71% oil.

And a seven well tied with the a peak day after day production rate per well of 2590 bought bottles of oil equivalent per day or three stream basis, which was 65% oil.

Turning to the Marcellus.

We saw a 4% decline in sequential production in this quarter as we had fewer and lower working interest wells brought production.

Notwithstanding the modest decline in production well performance in the Marcellus continues to be exceptional.

Across the 15 wells, we participated in during the quarter average peak 30 day production rate farewell was over 40 million cubic feet per day.

Lastly, we completed five gross or four net wells in the DJ basin during the first quarter.

We have continued to test different completion designs to further advance our understanding of the associated drove performance.

Cost structures in this play.

It's still early days, but we are encouraged by the initial production results and will provide further details when we have more run time on the wells.

I'll leave it there and we'll turn the call over to the operator open up for questions.

Thank you.

Ladies and gentlemen should you have a question. Please press star followed by one on your Touchtone phone.

If you using a speaker phone please lift your handset before pricing any case one moment. Please for your first question.

Your first question is from Neal Dingmann from Suntrust. Please go ahead Neil.

Hi, good morning on last quarter's.

So the team, which just wondering your thoughts on activity I.

I guess more specifically broadly speaking maybe around 2020, yes, NGL and gas prices remains depressed in the in the boxes. It then or is this activity much lower I should say primarily driven by.

The Dell couple of oil prices.

Morning, Neil.

Yeah, I think I think at the high level. It really is in the oil well really drives the activity levels. You know I think obviously gas related infrastructure and those things are the margins can affect some producers that broke broadly I think it's just an oil story certain.

It will be for us.

Okay, and then just one last one just M&A thoughts specifically given today's environment I'm just wondering maybe it's not this black and white, but I'm just wondering what you just wait I ask is just if you see yourselves. These days as maybe a net acquirer net acquirer or the towards like returns does.

Our our vision is moving forward and so you know we're we're we're always thinking about both sides of that equation you know over the years, we've had a plan to sell non core assets. When we saw opportunities to do so so I think you always have to think about that you know as as we think we're a core area, we're looking to build it out to the.

Ugly.

And you know we've got a balance sheet that gives us some latitude to think about that so you know this market is pretty complicated.

Generally speaking up buyers with expectations that seem a bit disconnected from.

Certainly from the reality of public company valuations, so not a lot of stuff has been happening.

For Us I guess the key drivers remain similar we're looking at full cycle economics.

We're looking at something that makes operational would make operational sense, we're going to keep our balance sheet strong. So that gives us lots of latitude to look at smaller things you know as you start thinking bigger things it becomes pretty complicated when you look at the imply valuations of our stock and I think it's one of the primary reasons and a lot of stuff is high.

Happening a lot of places.

A very good great great details. Thanks you.

Thanks Neil.

Thank you for your next question is from Greg Pardy from RBC capital markets. Please go ahead.

Thanks. Good morning couple of questions. One is just on that on the balance sheet I mean continues to be very strong.

What are your targeting maybe is a that's it that's cash flow in you know maybe call. It mid fiftys oil price I'm, just trying to get a sense that way.

[noise]. That's it's a good question I'd say at the highest levels, we want to have a robust and resilient plan.

And that was the resiliency means you have to maintain balance sheet strength.

And as your debt creeps up you better be thinking very very closely about hedging and those sorts of things.

For us.

I think at a high level money a lot of us think about one times as being the old two times.

And it's very dependent upon are we talking about 50 are we talking about 57 are we talking about 45, those things really really change how things look for US right now maybe another kind of it Greg I think it I think this balance it's a competitive advantage for us and so think about it on a relative basis on some levels as well.

We want to have.

Really really strong balance sheet compared to our peers.

No we don't necessarily have to have the best balance sheet in that space and we will use it but it certainly is going to maintain we're going to give a strong relative.

The strong relative strength there.

Okay. Okay. So it sounds like you probably run a variety of scenarios in terms of what you're only you'll look like in 2020 from on balance sheet perspective free cash flow et cetera. So it's not any one number at any one oil price.

No no I think that's that's very fair.

All of our capital goes into our virtual up a capitalism going into oil yeah. We do have a nice little gas position in the Marcellus and you know gas prices influence affordability as well. So yeah. We looking at all and scenario analysis is certainly become the new norm in the last five years.

Okay. Okay. Second question is it doesn't sound like there is two to much more to say around the DJ and it just may have been in the release I missed it but how large is your is your GJ production now.

[laughter] exactly you can probably see something that looks like around 10000 barrels and release, sorry, I should know that number we haven't given a lot of each we haven't given a lot of detail on it though and I can give you a little more color you raised the words encouraging in the well results. So we had our first five wells, we've got another five down and.

Those wells would have been completed right towards the end of August . So they would have only showed up in the quarter, just a little little bit of production in the actual quarter. So you know.

You bring those things on a staggered basis call. It two months, maybe a little bit more than two months, we have on those wells right. Now so it's just a bit too early to be talking about it you know as we think about spending plans for next year and Joe. He said, we're going to give color right towards the end of this year or into next year.

That would be pretty logical time to give a little more color about those wells and how it all lines up the whole positions over 30000 acres, we've been focusing our activity on about a third of that pretty concentrated block there beyond and not block is the one where we gave them a bit of scope, which we said you could see up to the.

400 wells on that so could could be meaningful and we're really just.

Steve stage right now.

Okay, and just to be sure. The five you referred to the five down where last year Spencer. It's a total of 10 wells down.

Yes, okay terrific, thanks very much.

Thank you.

Thank you. Your next question is from Patrick O'rourke from Altacorp capital. Please go ahead.

Oh, good morning, guys. Hopefully this isn't to redundant I guess my fingers are a little slower again into the queue than the other guys, but I'm just kind of wondering jody touched on maintaining the balance sheet here do you guys have a specific threshold.

In mind that you don't want to go above what the share buyback and then second parts of the question. One World I know you don't have a budget yet for 2020, you've had some pretty impressive per share growth here, which we think is.

Really the right way to look at production growth, how what do you think as the primary driver that per share growth in 2020 as it is it the drill bit is that the share buybacks or how do you look at maybe keeping some of that powder dry for you know some of those opportunistic M&A opportunities out there that seem to resonate best with investors.

If they're done through cash rather than equity.

Good morning about you know, there's a lot going on there I forget so let me let me hit the.

We don't have an absolute single point in time.

Debt metric.

I do think as weak as I mentioned to Greg keeping relative strength is really really important.

And as we think about scenario analysis.

The only thing I'm, absolutely convinced of relative to oil price next year is we will see volatility and so.

Having something having a balance sheet that feels pretty good when oil is in the forties field. It could pretty good plans. So that's or is that some older limits on how much debt you would have and obviously a single risk mitigation and hedging in connection with us.

To your question about.

2020 in how all that works.

Yes, Jody said in her comments you we made a decision this year that we were our balance sheet was so strong we would use some of that strings and we would spend so we took all the free cash flow, we generated more planning on generating and some extra capacity and we're buying shares and so now we.

Weve bought 10% of the stock you can't do that forever obviously.

But you know to frame it $100 million of debt is a pretty small change to our debt cash flow metrics. So we've got flexibility as we think about it.

As we think the principles next year, they're going to drive or spending more spending plans or influence them. There can be very similar to the principles that were a play this year the capital going to be largely focused on the Bakken and that's going to drive competitive liquids growth.

We're not just chasing growth, though because that growth and this kind of price environment is very economic as well.

We are focused on plan that generates free cash flow.

I think that's the plan the.

Plays well in the markets. It's also very sustainable plan and its plan that we delivered we're planning on delivering again.

This year.

Our balance sheet strength is critical obviously, if we can generate free cash flow that gives us a lot of choices to maintain financial strength.

So then to close it off with yours or last question, how does other spending share buybacks, how do those things that into the mix I think in some levels. You respect you have to be opportunistic, but we see really compelling value in the stock right now and so.

There's there's a reason that we increased our approval limits for the NC IB our expectations. We will continue to execute under that plan and then we'll we'll sort of dial the details in the specifics of that up as we move towards the end of the year.

To try to give people a bit of a bit of a sense as to how we think about spending that free cash flow and directionally.

How much it will be contextual as you say these things compete for.

These things compete we look share buyback today, though you're buying enerplus reserves on a tube basis at about $10.

That's pretty compelling when you think about other M&A opportunities that are out there. So we continue to see share buyback is having a.

Placed in our business.

Okay, and then maybe just one quick follow up question here <unk> are there any implications to moving your credit facility to U.S. dollar denomination. There does that save you interest us obviously must your assets and expenses or south of the border. So that makes sense, but just wondering if there's any other positive implications.

Yeah.

There is it's really no change honestly, it's just the majority of our spending you know and our outstanding senior notes are in US dollars and we can actually borrow either way, we can borrow and Canadian or U.S. dollar is whether you know the actual facility is denominated in U.S. our Canadian so.

Okay. Thank you.

Thank you thanks.

Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.

Your next question asked from Mike Dunn from GMP first energy. Please go ahead Mike.

Thanks, Good morning, everyone.

Yeah, and Oh I see that.

You guys reported $13 million of property on land acquisitions in the quarter sounds like it's mostly in North Dakota.

Can you.

Just wondering I'm, assuming these plans are in and around if not additional working interest on on it on your existing acreage there and then maybe some color on what you think the.

Undrilled inventory that you've picked up there. Thanks.

You are correct on your assumption on the first one.

There's a you know the lines pretty well held out there, but like a little opportunities fair amount of work going on relative swapping and increasing working interest and those sorts of things so.

That activity resulted in connection with that.

The middle leasing going on.

Sorry, the second what are your question Oh.

Oh, just wondering if you guys had an estimate of the number on nuts.

Actions that you've picked up.

Yeah, So oh, sorry locations, we picked up.

No sorry, we haven't updated that number it would largely they'll be working interest change.

I don't have that number Andy okay.

Okay that was all from me thanks, everyone.

Thanks, Mike.

Thank you. Your next question is from.

Jamie cubic from Sea RBC. Please go ahead.

Good morning, Thanks, guys I'm just a quick question with respect to NGL price realizations in the Bakken there obviously.

Pretty light in the U.S. for Q3, two Bucks a barrel do you see them staying at these levels in Q3 or in Q4 and are they contracted can you can help us understand how that looks going forward. Thank you.

Yeah, no sure I'll take that so NGL prices have weakened considerably throughout the year in both Canada and the U.S. I'm, just driven by the significant growth in the associated gas.

A higher NGL production growth.

The Conway NGL mix has decreased from 50% of W.G.I. in Q1, 235% MW tie in Q3. So this this is what.

Driving a lot of the impact on our realized liquids pricing.

However, keep in mind Ngls are less than 5% have our overall production mix I'm going forward, though we expect prices to recover a bet here in Q4 and actually into 2020 as additional fractionation capacity comes on in U.S. Gulf Coast to and some of the de bottlenecking pipeline between Conway and.

By the LTV, So I think it's going to improve.

Going forward here.

Okay, but nothing contracted.

Keep them depressed at these levels.

Sorry, no all of our gas is processed and our majority of it anyway in North Dakota as processed with Targa.

And so there they are the ones that transported and seller entail.

Okay got it and then just a quick one on operating costs.

They trended down nicely in Q3, any reason that they would increase in Q4 I know you hold your guidance flat, but.

How should we expect some similar to Q4.

We're we're comfortable with our.

Guidance.

Yes, I mean, when winter in snow and downtime and things get expensive and so there's also there's always a little bit of seasonality to it that's built into it so.

So we had a good run in the in the summer for sure, but I'll give you an ill give you. An example, we we keep adding 40 producing wells a year and managing downtime continues to be a focus area and workover rigs are part of that and that will serve to opex. So it continues to be focus and yes.

Often have.

Things little more complicated as it services in order.

That's it for me that you guys.

Thanks. Thanks. Thank you there are no more questions at this time. Please proceed.

Alright, well know people busy day so.

Thanks for everyone's time and hope you all the good weekend. Thank you.

Ladies and gentlemen, this concludes your conference call today, we thank you for participating and ask please disconnect your lines.