Q1 2020 Earnings Call

Ladies and gentlemen, and walked into the enterprise human 2020 <unk>.

This time aligned simply mode.

Education, we will conduct question and answer flashy.

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Practise jeopardy operator.

As far as being recorded on Friday May 2020.

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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 and according to 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 for 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 then I believe it's also appropriate that we provide context into how we are thinking well this environment and the actions enter clock 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 secluded 19.

It's very difficult times of people and I'm proud him and I'm humbled to say or people have risen 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 a 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 construction crew covert 19 as left a significantly oversupplied oil market.

Storage level testing the limits on all prices collapsing.

Sent by its production shot.

As a result, this oil price a weakness.

We announced that we started to curtail production in April and he was shut in more production and me.

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

Currently our production decisions are effectively be made in real time.

Sitting on the liquidity and prices in the physical market crude oil.

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

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

And the one hand, there is a plausible scenario.

Demand begins to recover reasonably quickly writing too close to three Colgate consumption levels within the next year.

And by continued demand growth 2021.

This demand scenario.

Mind with significant under investment.

Potential for some element of lost supplied you shut ins and continued <unk> OPEC would result in the drawdown global crude oil inventories potentially quite 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 economies endorse structural changes and consumption behavior.

This scenario would likely result in 16 production cuts into <unk> prices for significantly longer.

As oil storage levels would be persistently near capacity.

So what we think about these two bookends.

The 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.

We are laser focused on preserving financial strength.

Shareholder value.

Fortunately, we insert we entered this downturn in an advantage transition compared to our peers given a are high quality assets.

And strong balance sheet.

However, as we look to the current market turmoil I do believe there will be positive strategic implications for the industry clean 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 excellarate as investors demand that reckless growth.

Take a back seat two or more Sistine 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 tiny consolidation make it 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 of capital.

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

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

So in summary, here's what I hope you'll take away from Mike.

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

There's a seat <unk> uncertainty regarding the shape and timetable recovering oil prices as we've navigate particularly challenging time industry.

Enerplus will be disciplined.

And responses to the ball calm market conditions, what the 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 <unk> <unk>.

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

However, I didn't read into April demands are creating 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.

Differential spare may treated as wide as $15 you asked per barrel below W.T.I. last month, but had sent in print plate spot barrels for me recently trading at a positive differential to W.T.I.

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

But if there's a backdrop, we expect you to have 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 the 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 to 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 downplaying.

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 reduced 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.

Turning to natural gas in the Marcella I realize differential in the first quarter with 38 cents <unk> per M.C.S., although 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 declined an associate 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.

<unk>, which we plan 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>.

<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 of $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 to reducing our cash G.N.A. expenses and 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 trying to 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 helps forecast.

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

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

So all in our total well cost the average approximately 6.8 million U.S. dollars. Your 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 in 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 for me, 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 Marcella, we continue to see some exceptional well performance across our 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 over 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 or corporate production guidance due to the potential <unk> stemming from low oil crisis. 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 mention we have made good progress lowering our operating costs as noted in the press release, we expect our Union operating expenses average 825 per <unk> compared to our original 2020 guidance at 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 let's 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 actually five testing any keys.

Yeah.

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

Well you know, but 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.

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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 to get in for a lot more getting as you move into the low and mid thirties and you know you get to 40, all will and it's compelling activity you know for those completions and Unfortunately, we've got a pretty nice.

Backloaded 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 market.

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 one of 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 so modest improvements I'm starting to see now, but we'll we'll assess that as we move through this.

Okay, and then just <unk> you in from a high level mean is in in this kind of environment. I mean, there's it's 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.

About the cash conservation I'm, just wondering you know not as simple lemonade 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 the <unk> <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 he looked at the board Mark with some recovery, we look look alright, <unk> nothing's very fun on well is turning it $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 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 <unk>.

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 negative 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.

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Ladies and gentlemen, as heavy 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 busy morning, what's called like the 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. Please disconnect joins.