Q4 2019 Earnings Call
[music].
Good morning, ladies and gentlemen, and welcome to the enterprise.
For and yearend 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 the call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Friday February 21st 2020.
I'd now like to turn the conference over to Mr. Drew Mair. Please go ahead.
Thank you operator, and good morning, everyone. Thanks for joining the call.
Before we get started please take note of the advisories located at the end of today's news release or 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.
Here. This morning, with the engine Das, our President and Chief Executive Officer, Jodi, Jenson Labrie, Senior VP, and Chief Financial Officer, Ray Daniels Senior VP operations, Wade Hutchings, senior VP, and Chief operating Officer, Shana, Morihiro, VP finance and Garth Dol VP marketing.
Following our discussion we'll open up the call for questions.
Don I'll turn it over to you.
Thank you drew good morning, everyone.
I'll run through our 2019 results released this morning before moving onto our plans for Twentytwenty.
Details of which we announced in January.
We have strong results across the company in 2019, which we believe demonstrate our continued to track record of creating value for our shareholders.
To the central pillars, our strategy has been returns focused capital allocation and a conservative financial plan.
The outcome of this has been an operational plan that has generated free cash flow.
And attractive liquids growth.
We believe that our full year results screen very well relative to the strategy, we delivered 9% liquids production growth, 15% on a per share basis.
We maintained capital spending discipline and generated free cash flow of $90 million.
And we returned over $200 million to shareholders through share repurchases and our dividend.
This morning, we also released our 2019 year end reserves.
We replaced 139% of our 2019 production on a tupi basis at a competitive finding and development cost of approximately $13 per.
Really.
That an asset level, we replaced over 200% of North Dakota production.
Overall, we grew our tupi reserves by 3%, which improves to 11% on a per share basis, and it's worth noting we booked less than half of our over 400 remaining identified locations in North Dakota.
Inclusive of these locations. This translates into just under 10 years of drilling inventory at the current pace of development.
Which also doesn't include any benefit.
From our DJ Basin physician.
In summary, 2019 was another year of differentiated execution for Enerplus and I'd like to take a moment. Thank our team for delivering these solid results.
Turning to 2020 the plan look similar to 2019 on many levels.
We expect to provide high returning oil production growth under a capital efficient operating plan.
Free cash flow.
Oil prices above $50 per barrel Wi Fi.
Continued return of capital to shareholders through share repurchases and dividends.
And a resilient business supported by low financial leverage.
Our 2020 capital budget is approximately 12% lower than our 2019 spend.
Which is a function of improving capital efficiencies in the Bakken through lower well costs.
Let's spend in the Marcellus given the low natural gas price environment.
And modest spending in the DJ Basin, where we have an opportunity to advance this project.
Through the year through non operated participation.
On an absolute basis, our liquids production growth is expected to be in the high single digits with low double digit growth on a per share basis.
Although this is a slight moderation of our historic growth profile. It supports a stronger free cash flow, particularly with the continued oil price volatility and weak outlook for natural gas prices.
It also helps to lower based production declines and improves the overall sustainability of the business.
Capital Glenn continues to be focused on the Bakken, where we expect a strong growth in the second half of the year.
We didnt bring any we didnt bring any new wells on production in the Bakken in the fourth quarter of 2019, So we will see production Cline decline into Q1.
We will also see lower natural gas production inclusion as a result of our limited Marcellus capital spending and the shut in and abandonment of our last remaining significant legacy natural gas asset at Tommy Lakes in Canada.
Following the first quarter oil production is expected to meaningfully increase driven by North Dakota volumes.
In fact, we're currently in process of bringing on our first seven well pad in North Dakota.
I'd like to spend a moment on our BSG initiatives.
Although we havent always called at ESG, we are proud of our long history of strong performance in many of our key SG focus areas.
Being said, we believe continuous improvement in all aspects of our business, including ISG is critical to our long term success.
And that spirit, we published any SG presentation on our website today, which provides additional information on our approach TSG and how we have further integrated into the business.
The overarching principle of our SG strategy is to focus on areas or material issues, which we believe directly map to shareholder value.
Risk mitigation and enhancing our overall business resilience.
To repeat our SG strategy is about value.
And not values.
We have identified the following as our material SG focus areas.
Greenhouse gas emissions.
Water management.
Culture.
Stakeholder engagement health and safety.
And board expertise and engagement.
Today's announcement highlighted two specific areas, where we've established intensity based targets for greenhouse gas emissions and fresh water use to be achieved by year end 2020.
These will provide us with a baseline from which to continue to build our longer term strategy.
Our focus will be on reductions in North Dakota operations, which represents the most significant opportunity for improvement in both areas.
We'll also be writing more communication about our DSD initiatives and integration as we move through the year.
Finally, I want to comment on a recent management change and.
Change of responsibilities at the board level.
Ray Daniels RSVP operations is retiring in April and after a 35 year career in industry, including 12 years at Enerplus I'm happy for Ray and his family owned sad to see him go see as an exceptional leader and a trusted colleague and has been instrumental in so many of our accomplishments over the year.
Yes.
With raised pending retirement Wade Hutchings has joined US as Chief operating officer Wade brings a depth of technical and leaders have experienced enerplus and we're fortunate to have him on the team and we'll be looking for opportunities to introduce them to the market.
At the board level, our chair Elliot few has announced his intention to step down as chair at our annual meeting of shareholders in May.
Leading guidance has been a strong asset enerplus and I'm happy to say he is continuing to serve on the board as an independent director.
Hillary folks currently chair of the corporate governance and nominating committee has been appointed as the New Board chair upon Elliot stepping down.
Hillary who many of you know has been a strong director and I'm excited to work with her as our new chair.
So I'll leave it there and now pass the call the Jody to talk to our financial highlights.
Great. Thank Dan.
We generated $175 million of adjusted funds flow in the fourth quarter, resulting in $709 million had a full year.
However, we reported a loss of $429 million in the fourth quarter and a lot of $260 million for the year as a result of a noncash goodwill impairment charge related to our Canadian business unit.
The entire Canadian goodwill balance at $451 million was written off in the fourth quarter as a result to the cumulative impact of noncore Canadian asset sales over the past several years the plan shut in and abandonment of our Tommy Lakes asset in British Columbia, and lower forecasted commodity prices.
We did not however record any impairment on our property plant and equipment.
Turning to our oil price realization, our Bakken oil differential widened in the fourth quarter two $4.40 you asked per barrel below Wi Fi.
This led to a full year Bakken oil differential at $3.61 U.S. per barrel below Wi Fi, which was consistent with our guidance.
In 2020, we expect our realized Bakken oil differential to widen to approximately $5 U.S. per barrel below Wi Fi. This modest increase reflects the tightening balance in the basin doing increasing Bakken production versus pipeline takeaway capacity, along with a narrower Brent oil.
Oil price spread.
However, we are constructive on Bakken differentials in 2021 based on the timing of a plan pipeline expansion, which could meaningfully increase based firm takeaway.
Our capital spending for 2019 came in at $619 million, which was below our guidance of $625 million. We also spent 206 million during the year, returning capital to shareholders through share repurchases and dividend.
As we think about our 2020 return of capital we indicated with her budget release that in addition to our dividend we plan to allocate a portion of free cash flow to share repurchases.
We havent defined exactly what portion of free cash flow will go towards share repurchases. However, it needs to be balanced.
We see compelling value to buyback our stock at these levels. However, we also want to ensure our financial position remains rock solid in order to navigate to market volatility and potentially take advantage of opportunities to build for the future.
Our 2020 investment profile with higher capital spending during the first half of the year is expected to result in free cash flow generation during the second half of the air.
Again, as we indicated our budget release, we plan to retain flexibility to pre spend that portion of the anticipated free cash flow to repurchase shares earlier in the air.
Turning to the balance sheet, we continue to be strong financial position with ample liquidity at year end, our net debt to adjusted funds flow ratio was 0.6 times and we are undrawn on our 600 million U.S. dollar credit facility.
Lastly, we have continued to layer on crude oil hedges in 2020.
We now have over 60% of our forecasted 2020 net oil production protected at floor prices of approximately 55 to $57 U.S. per barrel Wi Fi.
We have used a combination of swaps.
Spreads entryway color structures to provide downside protection, while retaining meaningful exposure to higher oil prices.
I'll leave it there and I'll turn the call or to the operator and opening up the question.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone.
We'll hear US return prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the pulling process. Please press star followed by two of using a speakerphone. Please lift your handset before pressing any Keith one moment for your first question.
Your first question comes from Neil.
Gentlemen, Suntrust. Please go ahead.
Good morning, and team. My first question is around in your slide nine on the new deck and I really like that slide in based on it would certainly appear to me that.
Anything less than 10, or possibly even higher it seems apparent that repurchasing shares you're saying on here would be your highest return option and I'm. Just wondering do you agree with this and do you believe so however that might while that might be the case.
Based on kind of look at your stock price, what's been going on you and the group because the market do you think prefer more growth or is there something that's that's missing here.
Morning, Neil.
Not sure the markets always consistent with the launch right now.
Hello.
Lot of people, they're looking for different kind of things I can say, how how were thinking but we see compelling value on the stock and for those who don't have the slide in front of them you're referencing.
Share price versus in slide cost of reserves, which is certainly one of the things we look at so I see strong strong value there as it is very high low risk return option for us that we're very comfortable with.
And so on and Jodi said in her comments.
The the pace at which we'll do that is just largely function free cash flow and and trying to maintain ensuring we continue to maintain a real strong balance sheet over the last couple of years, we spend a little bit doing that based on such a low.
Starting point for our leverage we're such a strong position.
We're really comfortable we our leverage right now, but we're not going to be borrowing to make that happen.
And then how how might that compared to other value creation opportunities.
Yes.
We're we're comfortable with the amount of growth we have.
We were to grow morning.
Internally or organically I guess that would you expect to free cash flow that might work for some enough for others pieper enough to make the decisions what's important to them. We're trying to be very very consistent. This when we step back and think about whether our growth is competitive.
We see as being competitive we certainly see it's been very sustainable.
The layer on the per share element of that and it becomes even more compelling will the market figure that overtime.
I think people figure out math overtime, and those things all sort of work themselves out as long as we keep focusing on keeping that strong balance sheets and deploying capital with powerful outsize returns thats really going to the key for us.
See you soon on this you would use at least early this year some some debt to repurchase does that make sense.
Yeah that would be a strategy we've decided were.
Not going to do very much of that and if you want to get really granular and think about treasury here, we see free cash flow for us under most narrows back half the year not the front half of the or just because the nature of capital program. So we are buying stock now at relatively modest levels, which arguably we are using cash for borrowing for but is that.
Relatively modest level and when we think about our approach to.
Share buyback over the totality of the year, our expectation is not to borrow to make it happen and we will do that out of free cash flow and as we specifically said a couple times it will be a portion of that free cash flow.
Okay. Then my last question just on M&A I'm, just wondering sort of tied in what you're saying given your strong financials I would assume it might make sense. If you could find assets that would be immediately accretive and you do you believe to be this the could you know this to be the case and our their assets like this out in the market.
Uh huh.
Clearly the the other choice capital location would be bringing things into the company and.
You have to think how those things very against existing opportunity sets and how they positioning for future and do we pay attention to that absolutely we pay attention to it.
I think before I get rate to the meet your question I think it's really important people understand we think we are in a really good position relative to our existing inventories that we've we've booked under 200 locations in our reserve, where we see more than double that when we think of our inventories that you and thats not a stretch we in the reason the vast majority of.
Those additional wells our book to just functions the development profile the timetable as opposed to risk. So I think we're in a really really good place to.
Really good please refer to our existing inventory and are not at all in a position we feel we need to do something.
So that being said your question are there opportunities out there because they compete how would they look there are opportunities out there and the principles for us are around.
Maintaining a strong balance sheet and doing things that make sense for our shareholders.
And so if you then step back and think about enerplus than last year for years clearly been disciplined.
Yes, we brought the DJ in at a time period when people were spending money on lands, we've done those things, but as a general rules and pretty disciplined on that and.
I think by most Anders Theres not a lot of people who have been buying land in inventory over the last three or four years, who were in the money on that inventory has not been getting more expensive. It's been getting cheaper. So I think that has been pretty good plans. So far are things getting into a place where you might see buyers and sellers getting together I think they're getting closer you guys.
Functional sellers out there who have been hanging on to historic price expectations and you've got structural buyers were saying I need to make more money in a full cycle basis. So those things are slowly conversion and they'll get to they will get to a place where they need to get to that point in time. So no loss happened, we see things generally getting cheaper and I think we're in a row.
Hi, good position to stable to add to our inventory at the right time, but we've got time to make it happen.
Perfect. Thanks for the details.
Thanks Neil.
Your next question comes from Greg Pardy RBC capital. Please go ahead.
Yes. Thanks, good morning, actually adding that was that was really the discussion I think and I guess, the only observation I would have yet is that if.
If you're in a situation I guess and that could be completely wrong on this but if I heard a situation where the market is valuing your stock.
Possibly on the basis of inventory are insufficient diversification or what have you. It I just wonder whether that can't lead you down. The road. We are your stock is always going to look cheaper, but it's also giving you quite a false indicator.
So you're always going to buy stock as opposed to take any other route I'm not saying I'm just taking a system is just a broad observation that opted in my head.
I think you've done a good job just answering on the back on the acquisition side. The only just operational thing I'd ask is your volumes were quite strong in the Bakken in fourth quarter.
How maybe how should we think about the first quarter in terms of where are those levels come down to and what the trajectory might look like into the second.
Thanks, Greg.
Trying to decide whether on editorialize on your first comment.
These plays like it's a it's out there like feel free because yeah, you always all over the feedback grade that comes back and you guys is.
Fantastic really strong balance sheet consistent delivery never need to worry about their numbers, but the inventory question, which has been around for I don't know what five six years 10 years Navy has only amped up so the growth is not necessarily seen is as benefiting you and a lot of other at positive ask.
Next on the company seem to be completely overshadowed. So I. Just wonder is is there is not the environment well as opposed to buying back 200 million of stock buy something that has its own risks the task, but it potentially just puts you on a different trajectory and that's the only thing I throw fulfill feel free to push push back.
Oh I don't think this pushback necessarily I do think.
You got a careful false indicators that disconnect from underlying value. There's been lots of companies over time that had a massive embers or acquisitions and then they disappeared.
Right. So vial by all historic measures, a almost 10 year inventory of high rate of high quality projects. That's a lot and we've got a lot of time and there's a reason to the number has continued to stay around this level.
Like if you wanted to hey, let's get 10 years and inventory was 10 years inventory cost in North Dakota, 40, $50 million. It's a small number in a certain additional year is a small number in the grand scheme of things in our financial capacity combined with the Optionality noncore assets is exceptional.
Easily be able to handle those things.
Easily be able to handle those things so.
Well a group of companies our size range and by the way the single strongest correlator of value. These days is market cap rate, we're trading like the other Vod and guys were trading like everyone in our snack rocket and everyone's unhappy with that looking at these smaller.
Companies.
But the real thing is bigger it's not inventory is bigger and so that's just what that is and we can't deal with that right now that's a market dynamics that we can focus on what we can focus on which is creating value. So.
Do I think over time people figure these things that of course, they will and if they don't figured out then we'll keep buying our shares back and we'll keep growing and then we'll end up with one really really expensive share at the end of the day and we'll make money that people [laughter]. You look you look at the valuation that we're sitting at right now and were snick over PDD on a company with tremendous structural.
Advantage, so I hear the question.
I hear playing out miles here a lot of people love Cheryls go there, okay, and they're very comfortable what they're doing and things sort themselves out when you allocate capital based on full cycle returns and new mountain manager balance sheet.
All that being said would it be better when more inventory sure that'd be great.
Got lots of people focused on the issue and thinking about it will be disciplined and it really feels like this discipline has been the right answer.
And just look at some of the basins have gone on and whats rollover on pricing.
I mean, we're not in the Permian, but just think about that as example, because there has been theres been more activity level. There were at 12000 50000 acres proving when were you asked there.
We're we're down by half like big things of incoming they're getting cheaper I think they're coming into the Transactable range I think a lot of people were thinking you actually might be able to get something done in the fourth quarter now we've got some.
Oil price volatility through.
Various places that are out there.
And with back to your.
Back to your question on the Q1 dip.
This has been the same pattern thats happened for years for us as we maintain capital discipline.
We set up a bit of a ramp in the.
Spend in the first quarter.
Last year liquids is down about 10%, we don't provide a Q1 guide and it might be helpful to be but we did but the reality is we're bringing on as some well pad and you bring it on a week earlier a week later it removes the numbers around surprisingly a lot in the quarter. So I think think about that historic Pat.
And is one that's.
Representative of how things will shake out this year.
Terrific. Thanks for thanks for both answers and hopefully we don't get down to one share.
Well.
As I own at home.
[laughter].
Thanks, if I.
Thank you.
Your next question comes from Jordan, Mcniven Tudor Pickering Holt. Please go ahead.
Hey, guys. Just a quick question here first on DSG stuff you mentioned the reduced flaring with infrastructure expansions are able to elaborate a bit on that and let us know kind of where gas capture rates to currently and what the targets over the next few years.
Yes, so gas capture we are currently the 8% gas capture.
Into 91.
In November.
And we.
Believe that well we will meet these guys capture requirements.
With regards to.
Emissions reduction.
We are looking at different.
Techniques are methods to reduce emissions.
Alternative technologies.
We may bring in to help us with that.
So we have some operational.
The way that our operational run. It. This year, then we will have a reduction in our where volumes anyway.
And George if I could add to that we made him. So this is the first time, we've rolled out a specific target on emissions.
Reduction we made a decision to start with a one year target as we are looking at of.
Multi year plan on on on these things and it just wondering what your question. We're also dealing with water.
Freshwater we produce.
We were cycle virtually all of our fresh water in Canada, but in the U.S., we use fresh water fracs and so we're now testing.
[music].
Produced water for that.
So it's it's a it's just a continuation of.
So we're focusing on environmental issues for us and trying to provide the long term visibility, but as Ray said flaring specifically.
Theres lots of things that go on to reduce flaring just building a pipe, but theres also some ideas that are longer term in nature that could be pretty interesting that are also being worked on so we'll we'll continue to update people sort of of course this year in next as we work through those.
Okay. That's great I, just a second question here too and it actually it piggybacks on the first one and it seems like slide nine to real popular one here.
Just.
From a slightly different angle when you look at.
The implied.
Reserve value there and your guys. It implied finding costs all right and you talked about competitive growth and you think you're at that level and don't you need you to pursue higher growth.
Do you look at their relative value of reserves and the ability to to purchase reserves through buybacks and.
Or effectively drill for them is there.
Some thought around potentially save pursuing less growth in the near term to effectively hands free cash flow to purchase shares in there for purchases or is it a lower price or how do you guys think about that.
I think it's a good question and I think.
Many people are wrestling with no is is there an optimal formula out there to help.
Well to help valuations stock valuations, particularly the small cap space and usage growth trade off versus the free cash flow trade off and then share buybacks.
We're in a.
Okay.
Pretty good position.
The balance sheet some flexibility in the operational plan to to work our way through that and so.
If you go back to our 2020 guidance release.
About a month ago, I guess now I mean, that's sort of how we dealt with that question thinking our way through what was.
I guess first of all an operational plan that made sense, you don't want to do something silly there.
The artificially increased free cash flow or growth in.
Destroy value long term value in that process. So an operational plan that made sense.
Then a financial plan that made sense, we were pretty focused on not moving our balance sheet to achieve our growth objectives, and then out of all of that we just we made a decision that we would dial or growth back we viewed to be a little bit in order to enhance free cash flow to be able to facilitate I guess largely share buybacks.
Or anything else you might want to do with regard to flow certainly of this M&A market Atlanta or the landmark it gets in and attractive place I mean, that's also possible use of some of that money.
So it's a we've.
And we'll be responsive, we'll think about the market.
But.
I think neal's first question, what do people want.
Lots, we want different things and past strategies might want different than active strategies and you will you still want you like we're focusing on what we can do.
Turning our right to the market and taking you put in thinking about that and then being able to articulate why we just settled where we settled.
We think our growth profile is quite attractive it's an operational plan.
That allows us to be efficient and still continue look for opportunities get better and better.
Yeah and develop the asset base.
Fundamentally shifted at all this asset base.
And finally falling.
Probably.
A few times, but this is underpinned by.
Okay with the critical factor is the economics of this capital program today.
Our average program, our average well in North Dakota average booking we think it's 40% plus rate or turn at $50 flat deck.
With $7.2 million capital cost allocated against that our goal would be to spend less than that amount of money and outperform that and we're running a little bit above the strip. So there's really compelling economics as if the right now.
Okay, great. Thanks off Thats it very.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.
Your next question comes from Jamie cubic be Ibcs. Please go ahead.
Good morning, guys. Thanks, So just a quick question on near US gas volumes. So those are still pretty strong in Q4 on you mentioned Tommy lakes being shut in to start the year here.
How do you expect a U.S. gas volumes of phase over over 2020 and are you expecting to shut in any volumes in that.
Region, given the price weakness, we've seen with Nymex. Thanks.
Yeah morning, Jamie So yes, two two drivers.
Tommy getting shut down it's actually getting turned down as we speak.
You know that will show up over Q1 on the Canadian side.
If you work your way through than what our guidance ranges mean for us gas volumes. They obviously, there's some associated gas soon.
In the Bakken, but the real driver is the Marcellus at it implies.
It implies decline in the Marcellus first I'm in years and years and years it implies decline in the Marcellus.
We'll see.
Weve three years in a row Marcellus volumes have outperformed.
It's been a bit of a shallower decline, but it's largely been well productivity that succeeded we're not bringing very wells on so we're not we're not going to have that outperformance thing on on new wells to the same extent, we'll see where decline goes but it yet it does imply some decline in the Marcellus.
And again size of capital program, and we're seeing rig count fall and producers scale that capital.
The answer I can review asked this or maybe implied it.
But I think you said curtailment in there.
So we it doesn't imply curtailment.
And so we haven't been in a position in the Marcellus, where anyone's curtailed any meaningful volume for.
Well since Atlantic Sunrise, I guess, a good good strong two years.
Producers will react differently, depending upon their cost structures.
We are in a position where.
Low cost high productivity.
Our primary partner out there if you think about sort of their patterns two ish plus years ago.
We really didnt touch volume until my make sort of the cash market fell under one.
So is that going to be good way to think about it I guess, we'll see that so we've been thinking.
Things would play out but it's.
Not built into our our forecast now it's just sort of normal course decline that we think might play out.
Okay. That's good thank you.
There are no further questions at this time. Please proceed.
Alright, well thank you everybody.
Have a great day and appreciate your time today jurors by.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and asset you. Please disconnect your lines have a great day.