Q1 2020 Earnings Call

Ladies and gentlemen, and walked into the enterprise human 2020 results costs costs.

This time aligned simply mode.

Education, we will conduct question and answer flashy.

Anytime during this kind of a car assistance. Please press start jeopardy operator.

As far as being recorded on Friday May 2020.

<unk> piece go ahead.

Thank you operate on good morning, everyone. Thanks for joining the call today.

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

Financial Sipping prepared in accordance with U.S. gap.

All discussion or production volumes fairly gross company working interest basis, and all financial figures in Canadian dollars unless otherwise specified.

I'm joined the sorting virtually at least with Ian done Das, our President and Chief Executive Officer.

Jody Johnson, Labree senior V.P., and Chief Financial Officer, wait Hutchings, Senior P.P., and Chief operating Officer, Shana Maury here at E.P. Finance <unk> marketing.

In our discussion we will open up the call if the question.

What's that <unk> I will turn it over to you.

Thank you drew.

Thanks to all the joining us the day.

We will make some remarks in today's call about our first quarter results.

Given the new World, we find ourselves and I believe it's also appropriate that we provide context into how we are thinking well this environment and the actions enter plus is taking to respond to it.

Personally as evidenced by our results released this morning are underlying business is running well operationally despite the challenges related to coded 19.

It's very difficult times people and I'm proud him and I'm humbled to say or people have arisen to the challenges we knew they would.

There had been changes to how we work day to day in both the office and field or people remain focused on delivering strong safety and operational performance crossed the business.

The downturn began to unfold we moved quickly.

Steps to protect our financial strength.

And preserve shareholder value in the face of sharply falling oil prices.

Suspended all operated drilling and completion activity several weeks ago, which resulted in a 45% reduction in capital spending compared to our original 2020 plan.

Although it is possible we saw bottom in oil price in April.

The risk of stating the obvious you believe the next breed will continue to be exceptionally challenging for the industry.

The demand destruction Cutovers 19.

A significantly oversupplied oil market.

Storage level testing the limits on oil prices collapsing to incentivize production shot.

As a result, this oil price a weakness.

Now that we started to curtail production in April and you shut in more production and me.

It is this uncertainty around the world market fundamentals and the significant near term volatility we expect it caused us to withdraw or 2020 guidance.

Currently our production decisions are effectively be made in real time, depending on the liquidity and prices in the physical market crude oil.

Although we believe markets will balance and pricing will improve the trajectory.

Timeline.

And even if potentially new baseline level for will demand are highly uncertain, creating a wide spreading outcomes.

And the one hand.

There is a plausible scenario.

Where demand begins to recover reasonably quickly writing too close to three colgate consumption levels within the next year.

Followed by continued demand growth 2021.

This demand scenario combined with significant under investment.

<unk> element lost supplied you shut ins and continued <unk> hold back would result in the drawdown global crude oil majorities potentially.

Quickly, which you crazy far more supportive pricing.

On the other extreme we could see it much lower demand response potentially do you do a slower opening up a connally's endorse structural changes and consumption behavior.

This scenario would likely resolving sustained production cuts into <unk> prices for significantly longer.

<unk> oil storage levels would be persistently near capacity.

So do we think about these two bookends.

Large divergence impossible outcomes and what the uncertainty in assessing the likelihood of my the scenario at this moment.

We plan to remain nimble and responses to market conditions sharing we are laser focused on preserving financial strength.

Shareholder value.

Fortunately, we insert we entered this downturn in and advantaged musician compared to our peers given a are high quality assets.

And strong balance sheet.

However, you look through the current market turmoil I do believe there will be positive strategic implications for the industry coming out of this downturn.

Prior to the crisis the market was already transitioning to a more balanced model.

<unk> prioritizing generating pulled cycle returns instead of a myopic focus on top line production gross.

I think we will see this shift accelerate as investors demand that reckless growth.

Take a back seat two or more sustained returns focus business model.

With lower leverage levels lower operational volatility.

More performance based executive compensation structures and enhance free cash flow.

He outcomes.

These principles and in central how we run our business.

We also believe that this crisis will probably after the catalyst for accelerated consolidate consolidation in our industry. There are simply too many companies.

G.N.A.

Relevance for investors.

Although the timing consolidation may take longer some wish we believe the dies cast in the trend will continue to accelerate.

Oh this transition we believe opportunities will exist for a limited number of companies to re Steve strong market supports you stay focused on being good stewards capital.

Delivering thoughtful E.S.G. strategy and critically generally being real and sustained returns.

Well, our focus today squarely on preserving our financial strength strength and protecting value.

As the market conditions improve we believe we will be well position to take advantage of potential strategic opportunities that could create further value for our shareholders.

Don't summer, Here's what I hope, you'll take away from Michael.

We delivered another strong operational quarter and our workforce remains highly engaged.

There's a seat next weekend uncertainty regarding shape and timetable recovering oil prices as we navigate particularly challenging time industry.

Enerplus will be disciplined.

Responses to the ball calm market conditions with a focus on protecting value for shareholders.

We will also preserve our strong financial footing as this environment plays out.

<unk> turn the called over to Jody to speak to some of our financial Islands.

Great. Thank you.

I'll start with our well realize isn't even the block him.

<unk> oil differential first quarter, let's $5 I'm 26, since you asked her barrow below W.T.I. consistent with our original full year 2020 outlook of $5 you ask her barrel.

However, I didn't read into April demands are crude and products fell sharply into the <unk>.

Inventory began to build across the U.S.

This created a very weak markups occurred as well as our finest significantly lower <unk> I'm traders scrambled to find enough storage for the access as well.

This pushed physical prices for all grade, including the box substantially lower.

With North American storage currently close to capacity physical market and spot Aachen differentials remain extremely volatiles.

Differentials for May treated as wide as $15 you asked per barrel below W.T.I. last month, but had since imprints wet spot barrels for me recently trading at a positive differential to W.T.I.

We're also seeing encouraging finds that liquidity returning to the market again with differentials trading substantially tighter than where May index prices were set.

With this as a backdrop, we expect you failed to be at least the same are potentially a bit better than me.

We continue to be member and have Easter seals decision on whether we can realize prices of our cash costs, regardless of our financial hedges.

So not only has a production we chose to keep on line. During this time met specific <unk> to ensure profitability. He continued you realize ongoing benefit from our strong financial hedge position on top of that.

We have financial had you have 24800 barrels per day on average for the rest of 2022 or a combination of swaps put spread on three way colors as well as approximately 13000 barrels per day, a fixed is it called differential fails agreement for the remainder of 2020, which provide additional down.

Applied protection from wider differential.

It's obviously difficult to predict what point congestion in the physical l. market.

But ultimately what the production shot in and reduce capital spending in the basement. We are constructed <unk> and expect them to come back tomorrow normalized levels and range between three to $5 U.S. per barrel below W.T.I. over the medium to long term.

Drinking natural gas in the Marcella I realize differential in the first quarter with 38 cents <unk> <unk> Hello NYNEX.

This reflects the weak demand during the past winter, which was one of the warmest on record.

Our full year 2020 outlook for our Marcellus differential remains unchanged at 45 cents U.S. per M.C.S. below nine Max.

The overall outlook for natural gas continues to improve based on growing concern over potential decline in associated gas production and U.S. crude oil production falls.

We are conditioned to capitalize on that and would expect to realize stronger free cash flow from our Marseilles asset if the gas market continues along this path in the months ahead.

Moving to our balance sheet, we ended the quarter with liquidity of approximately 700 million U.S. dollars based on our cash position, possibly 100 million under under on 600 million dollar Bank credit facility.

The only debt we habits standing it's 467 U.S. dollars.

467, nine U.S. dollars related to our senior notes, which amortize over the next five years on a relatively flat maturity profile between 80 to 100 million U.S. entertainment each year.

And 2020, we had $82 million.

Maturing, which we planned to repay using cash on hand.

We were able to accelerate our remaining alternative minimum tax refund of $21 million.

As a result changes made by the U.S. government through the <unk>.

The <unk> provide financial relief for businesses and preserve jobs in response to the coded pandemic in the U.S.

Previously we expected to receive the respond over the next two years. However, we now expect to receive the additional cash during the second quarter of 2020.

[noise] are commodity hedges provided cascades at $33 million in the first quarter.

Based on recent strip prices, we expect hedging gains for the remaining three quarters of 2020 to be approximately $115 million.

Overall, we expect are adjusted fun slow to be approximately balanced with capital spending in dividends for the rest of 2020 based on recent W.T.I. forward prices.

We have taken further steps to protect your balance sheet through reducing our cash G.N.A. expensive isn't operating costs, we have reduced cash compensation for our board of directors executive and employees and have reduced operating costs are efficiency and service cost reduction.

Finally, we chose not to renew our normal course, if she were bad in March upon expiry. However, we plan to renew it in due course as commodity prices and market conditions improves.

I'll leave it there I'm turn the call over to Wade.

Thank you Jody good morning, everyone.

Our operational execution was very solid in the first quarter and lift continued right through our suspension of drilling conclusions activity in mid April.

In our press release. This morning, we highlighted the strong performance, we delivered year today on our capital program in the Boston.

On average hurt 2020 drilling results are more than a day and a half a head on cycle times compared to last year's average on the completion side, we were running at an average of five days per well to frock, which is also ahead of forecasts.

It's worth noting on these results were achieved during winter operations.

We weren't expecting to see this kind of improvement in so we ran into spring summer.

So all in our total well cost the average approximately 6.8 million U.S. dollars, you're the date and we were well positioned to drive that down further during the summer months.

I'm optimistic that we can pick up where we left off when capital activity starts again, giving us a headstart on driving further capital efficiency.

We provided April production in this morning's pressrelease, despite some curtailments production with stronger than we had forecast.

With the weakness in the physical crude oil market from May we have begun to curtail additional volumes currently we estimate approximately 25% of our liquid volumes or curtailed. This number does not account for recently completed high working interest southern well, Pat which we chose not to produce into these low oil prices.

Based on prevailing market conditions, we do not anticipate curtailing production beyond these levels through the rest of the second quarter.

Good news is that we have a significant amount of operational flexibility to reduce and bring back volumes online relatively quickly.

Moving onto the Marcellus, we continue to see some exceptional well performance across her acreage driven by longer laterals incompletions optimization.

We had an interest in 10 gross wells that were brought on production and the first quarter and these out an average P. 30 day production rate per well, that's 33 million cubic feet per day.

This includes two hours with P. 30 day rates in the 40 to 50 million cubic feet per day ranch.

Although we have withdrawn heart corporate production guidance due to the potential <unk> stemming from low oil prices. We have provided an outlet for our Marcello soil, which we expect will average between 185 to 200 million cubic feet per day for the rest of the year.

It was Jodie mentioned, we have made good progress lowering our operating costs as noted in the press release, we expect our Union operating expenses average 825, <unk> compared to our original 2020 guidance 850 <unk>.

This reduction as a result of efficiencies, we've driven across our processes.

Vendor service cost reduction step further project deferrals and prioritization.

Lastly, let me turn back to the sentiments expressed about our key.

Frankly, we can't say enough to think all of our employees and contract partners for the resilience. They have shown so far during this crisis.

Very importantly, our safety and environmental performance is done excellent. So far this year in our team has adapted very successfully to remote perk.

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

Thank you.

Ladies and gentlemen, and we will now beginning the question and answer session should have a question. Please press the star followed by the one on your Touchtone phone.

You will have a say, Tom Tom technology, and request and questions are taken and the or whatever seat.

If you are using the speaker phone. Please let the has subjects by pressing any keys.

Yeah.

The first question comes from <unk>. Please go ahead.

Well you know my first question guys is around your return requirements I'm just funny. All took some you know major steps incurred not only curtailing, but spending even see it I'm. Just wondering could you talk about how you think about marching requirements to potentially bring you to those sites back.

<unk> <unk> <unk> I guess in terms of.

Capital.

The next capital will be completion activity.

If you anchored on minimum return thresholds you could probably start spending money today in the mid twenties, I guess, that's not really where almost there's things start eating a lot more getting as you move into the low and mid thirties and you know you get for you all will and it's compelling activity you know for those completions and Unfortunately, we've got a pretty nice.

Hello to duck sitting there in North Dakota. So yeah. If you looked at afford market that says later in the year early next year and then you know, we'll we'll be assessing.

Conditions at that time relative to the decision not to flow most recent pad.

<unk> is that is that activity was completed your own we were thinking what sales, we're looking into a more aren't yet.

Three four weeks ago in the teens, so that made no sense whatsoever, you know <unk> mid twenties, you've got a lot of margin that sits there. So you certainly could bring it on and make some money.

Well, obviously, it's a lot more fun with a little bit more margin sitting there and I guess, we'll we'll we'll assess that on a real time basis, you'd managing operational issues, just with the reality of liquidity in the marketplace as Jodie said.

Liquidity is coming back into the system, but it is highly volatile and so yeah.

<unk> <unk> likely being on probably sooner rather than later, if we continue to see sort of modest improvements are starting to see now, but we'll we'll assess that as we move through this.

Okay, and then just last week in from a high level mean is in in this kind of environment. I mean is it still just cash conservation. Then you you you guys can you know even prior to this I I would you know classify as being one of the more conservative I'm. Just wondering I don't know that we've seen distressed deals yet, but I guess why I was asked.

That's a cash conservation I'm, just wondering you know not as simple emanate question, but if you see some interesting opportunities.

I'm, just wondering sorta externally versus organically I mean, you know would it take materially higher prices to do anything on both those crimes or is it just really the right opportunity based on on margins here. Thank you.

[noise] Yeah. It's a good question Neil <unk>, I think <unk> <unk>, it's a multi dimensional.

Equation when solving for here anything we do needs to keep us financially strong and you know you looked at the board Mark with some recovery we look.

I mean look alright, yeah, nothing nothing very fun on well is turning at $12 that <unk> the market will respond and there'd be some recovery here. So we certainly have to look at that that yeah. One of these big getting it ends is also going to be just value you have not seen distressing deals yet I haven't seen that happen, although it's certainly.

Feels like it is inevitable and coming to us.

Too many balance sheets out there that you just can't imagine your way through it without restructuring. So I think that's going to continue you and then I would have that will come sort of.

Raises for.

Assets and companies that makes sense and there's some equilibrium in there. So it hasn't happened yet I think it's inevitable I think.

Ancients isn't always a virtue, but right now we just haven't seen that mark and open up yet good aspirin has been two significant that <unk> rapidly. These decisions are getting taken out of company hands noted equity had some <unk> you will find some meat equilibrium in a marketplace and again I just think.

We're we're really well positioned to be able to take advantage of that when when and if that starts to open up.

[noise]. Thanks I appreciate your comments.

Thanks.

Yeah.

Ladies and gentlemen, actually mine does she do you have any questions. Please press star followed by one.

Yeah.

Oh no further questions you May proceed.

Right well, thank you around for calling in the Disney morning, What's called Lucky thing going on right. Now we certainly appreciate everyone's time and hope everyone has a good safe day and rest and we are starting weekend. Thank you have a good bye.

Ladies and gentlemen, this includes a conference call for today, we thank you for participating and we are set you pieces can actually.