Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the enterprise.
For and year end 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, our financials have been prepared in accordance with U.S. GAAP, all discussion or 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 the indoor das or President and Chief Executive Officer Jodi Jenson.
Debris senior VP, and Chief Financial Officer, Ray Daniels Senior VP operations wait Hutchings, senior VP and Chief operating officer Shana more here, a VP finance and Garth Dol VP marketing.
Following our discussion we'll open up the call for questions.
Scott I'll turn it over to you.
Thank you drew good morning, everyone.
I'll run through our 2090 results released this morning before moving onto our plans for Twentytwenty.
Details of which we announced in January.
We had 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 had 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.
An 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 maintain capital spending discipline and generated free cash flow of $90 million.
And we returned over 200 million hours to shareholders through share repurchases.
Dividend.
This morning, we also released our 2019 year end reserves.
We were placed 139% of our 2019 production on a two p. basis at a competitive finding and development cost of approximately $13 per.
<unk>.
At an asset level.
Were placed over 200% of North Dakota production.
Overall, we grew our two p. 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 position.
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 planned 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 WT <unk>.
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.
Less spend in the Marcellus given the low natural gas price environment.
And modest spending in the DJ Basin, where we have an opportunity to dance this project.
Through the year through Nonoperated 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 we don't look for natural gas prices.
It also helps to little based production declines and improves the overall sustainability of the business.
Capital plan continues to be focused on the Bakken, where we expect strong growth in the second half of the year.
We didn't bring any we didnt bring any new wells on production in the Bakken in the fourth quarter 2019, So we will see production Cline decline into Q1.
We also see lower natural gas production include one as a result of our limited Marcellus capital spending and the shut in in a down at end of our last remaining significant legacy natural gas assets at Tommy Lakes in Canada.
Following the first quarter well 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 like spend a moment on our yes she initiatives.
Although we haven't always called at U.S.G., we are proud of our long history of strong performance in many of our key yes, you folks areas.
Being said, we believe continuous improvement in all aspects of our business, including is cheap it's critical to our long term success.
And that spirit, we published and he or she 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 U.S.G. strategy is to focus on areas or material issues.
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 those areas.
Well also be writing more communication about Rds, you initiatives and integration as we move through the year.
Finally, I want to comment on 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. It Enerplus I'm happy for Ray and his family all I'm sad to see him go. He is an exceptional leader and a trusted colleague and has been instrumental in so many of our accomplishments over the years.
Yes.
With raised pending retirement Wade Hutchings has joined US as Chief operating officer Wade brings a depth of technical and leadership experienced enerplus and we're fortunate to have them all the team and we'll be looking for opportunities to introduce them to the market.
At board level, our chair only a few has announced his intention to step down as chair at our annual meeting of shareholders. In me elements guidance has been a strong acid 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 past called the Jody to talk to our financial highlights.
Great. Thanks again.
We generated $175 million of adjusted funds flow in the fourth quarter, resulting in $709 million for the full year.
However, we reported a loss of $429 million in the fourth quarter and a loss of $260 million for the year as a result of a non cash 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 of the cumulative impact of noncore Canadian assets 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 U.S. per barrel below WT I.
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 talking all differential to widen to approximately $5 U.S. per barrel below double each guy. This modest increase reflects a tightening balance in the basin doing increasing Bakken production versus pipeline takeaway capacity, along with a narrower Brent.
Well price spread.
However, we are constructive on Bakken differentials in 2021 based on the timing of upland pipeline expansion, which could meaningfully increase basin take away.
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 dividends.
As we think about EUR 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 haven't defined exactly what portion of free cash flow will go towards share repurchases. However, it needs to be balance.
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 the 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 a 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 were 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 at approximately 55 to $57 U.S. per barrel Wi Fi.
We have used a combination of swaps put spreads and three way collars 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 open up the question.
Thank you ladies and gentlemen.
I'll 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 reach on prompt acknowledging a 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 teeth one moment for your first question.
Your first question comes from Neil.
Suntrust. Please go ahead.
Morning in team. My first question is around in your slide nine on the new deck and I really like that slide and based on that would certainly pure 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 I'm. Just wondering do you agree with this and do you believe though however that might wall that might be the case based Tom would you kind of look at your stock price, what's been going on to do it in the group because the market do you think preferred.
More growth or is there something that's that's missing here.
Morning, Neil.
Not sure the markets always consistent with a little wants right now [laughter].
A lot of people, they're looking for different kind of things I can say, how how were thinking but we see compelling value in this dark and for those who don't have the slide in front of them you know 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 there's jodi said in her comments.
You know 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. We last couple of years, we spend a little bit doing that based on such a low a starting point for our leverage you were in 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 you know and then how how might that compared to other value creation opportunities.
You know, we're we're we're comfortable with the amount of growth we have.
We were to grow more in.
Internally or organically I guess that when do you expect to free cash flow that might work for some enough for others people have 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 as being very sustainable you layer on the per se.
Share element of that and it becomes even more compelling will the market figured out overtime.
I think people figure out math overtime, and those things all sort of work themselves out as long as we keep focusing on give keeping that strong balance sheet and deploying capital with powerful outsized returns, that's really going to the key for us.
You said 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 really granular and think about treasury here, yes, we see free cash flow for us under most narrows the back half of 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 a relative.
The 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 are saying given your strong financials I would assume it might make sense. If you could find assets. It would be immediately accretive and you do you believe to be just like 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 compared against your existing opportunity sets and how they position for future and do we pay attention that absolutely we pay attention to it.
I think before I get rate for 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 report, we see more than double that when we think of our inventories that you and that's not us dredge mean, the reason the vast majority.
Of those additional wells aren't book to just functions the development profile the timetable as opposed to risk. So big we're in a really really good place to.
Really good place relative or existing inventory and are not at all in addition, 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 in the last three or four years, we've clearly been disciplined.
Yeah, we've brought the DJ and at a time period when people were spending money on lands, we've done those things, but as a general rule, we've been pretty disciplined on that and I.
I think by most Anders there's not a lot of people who have been buying land and 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 still.
Actual 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 converging and they will get too 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 real.
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.
Yeah. Thanks, Good morning, actually I mean that 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 I could be completely wrong on this but if I heard a situation where the the market its 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, where your your stock is always going to look cheaper, but it's also giving you quite a false indicator.
And so you're always going to buy stock as opposed to taking the other route I'm not saying I'm just saying that this is just a broad observation thats pop in my head.
I think you've done a good job just answering on the act 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 many how should we think about the first quarter in terms of where 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.
Please please like it's a it's out there like feel free because almost all of the feedback right that comes back 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, maybe has only amped up so the growth is not necessarily seen as as benefiting you and a lot of other at positive aspects 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 the buy something that has its own risks attached but it potentially just put you on a different trajectory.
I think thats rocket fuel feel free to push push back.
Oh, I don't think there's 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 members are positioned and then they disappear.
Right, so bio by all historic measures.
Almost 10 year inventory of high 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 want to say Hey, let's get 10 years of inventory was 10 years inventory cost in North Dakota, 40, $50 million. It's a small number in 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 right. We're trading like the other Vod and guys were trade like everyone in our snack rocket when everyone's unhappy with that looking at these smaller.
Companies.
But the real thing is bigger 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 overtime 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 for people [laughter] you. Let you look at the valuation that we're sitting at right now and were snick over PDP 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 fees on full cycle returns and you balance you manage your balance sheet.
All that being said would it be better if we had 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 printing when were you lost 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 plagues that are out there.
Back to your.
Back to your question on the Q1 dip. Yes. This has been the same pattern that's happened for years for us as we maintain capital discipline.
We set up a bit of a ramp in the.
And in the first quarter.
Last year.
Which is down about 10%.
We don't provide a Q1 guide and it might be helpful to people, who did but the reality is we're bringing on this seven well pad and you bring it on a week earlier a week later, if you lose the numbers around surprisingly a lot in the quarter. So I think think about that historic pattern 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.
[laughter] well.
As long as Ioannis home [laughter].
Yes.
Thank you.
Your next question comes from Jordan, Mcniven Tudor Pickering Holt. Please go ahead.
Hey, guys. Just quick question here first on the DSG stuff you mentioned, the reduce flaring infrastructure expansions.
Are you 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 88% gas capture move into 91.
In November.
And we.
I believe that well we will meet these guys got to requirements.
With regards to.
Emissions reduction.
We are looking at different.
Techniques are methods to reduce emissions alternative technologies.
We make bring in to help us with that.
But we have some operational.
Uh huh.
The way that our operational run it. This year, then we will have a reduction in our flared volumes anyway.
And George if I just 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 if wondering what your question. We're also dealing with water.
Freshwater we produce.
We recycle virtually all of our freshwater in Canada, but in the U.S., we use fresh water fracs and so we're now testing.
Produced water for that.
So it's a it's just a continuation of.
Focusing on environmental issues for us and trying to provide people long term visibility, but as Ray said flaring specifically.
There's lots of things that go on to reduce flaring just building a pipe, but there's 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 it piggybacks on the first one and it seems like slide nine to real popular one here.
Just.
Got it from a slightly different angle when you look at.
The implied.
Reserve value there and your guys. It implied finding costs and you talked about competitive growth and you think you're at that level and don't you need to pursue higher growth. When 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 hedge 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 is is there an optimal formula out there to help.
Well to help valuations stock valuations picking a small cap space and usage growth trade off versus the free cash flow trade off and then share buybacks.
We're in a.
Pretty good position.
With 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.
Artificially increased free cash flow or growth and you don't have destroy value of 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 free cash flow certainly if this M&A market Atlanta or the landmark it.
It's in and attractive place I mean, that's also possible use of some of that mine.
So it's yes.
And we'll be responsible thinkable to market.
But I.
I think neil's first question what people want.
Well, let's be want different things and past strategies might want different than Activestrategy and you know you so much.
We're focusing on what we can do.
Turning our right to the market in taking you put in thinking about that and then being able to articulate why we just say 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 to look for opportunities get better and better.
And develop the asset base.
Fundamentally we have to develop this asset base.
And mid funding falling it's probably said a few times, but this is underpinned by.
Okay. The critical factor is the economics of discount program today.
Our average program our average well in North Dakota average booking we think it's 40% plus greater turn at $50 lot 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, a lot that fits 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 VI BC. 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, and you mentioned Tommy lakes being shut ins 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.
So that will show up over Q1 on the Canadian side.
If you work your way through then 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 ties of capital program, and we're seeing recount fall and producers scale that capital. It Deb answer I can read you asked this or maybe you implied it.
But I think you said curtailment in there.
So we did doesn't imply curtailment.
And so we havent been into position in the Marcellus, where anyone's curtailed any meaningful volume for.
Since Atlantic Sunrise, I guess, a good good strong two years.
Producers will react differently, depending upon their cost structures.
We're in a position where.
Low cost high productivity.
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's how we've been thinking things to play out, but it's 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 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.