Q2 2020 Enerplus Corp Earnings Call

Good morning, ladies and gentlemen, and welcome to the Enerplus Q2, 2020 results conference call. At this time all lines are in listen only mode. Following the presentation, we'll conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for the operator.

This call is being recorded on Friday August seven 2020, I would now like to turn the conference over to 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 had been prepared in accordance with U.S. GAAP. All discussion of production volumes today are on a gross company working interest basis, and all financial figures, our Canadian dollars unless otherwise specified.

I'm here this morning, which he had done das or President and Chief Executive Officer, Jodi, Jenson, Labree Senior VP and Chief Financial Officer wait Hutchings, Senior VP, and Chief operating Officer, Sheena, Morihiro, VP Finance and guard Dol VP marketing.

Our discussion we will open it up for questions.

I'll turn the call Liberty.

Thank you journey.

Thanks to all of you for joining us today.

This is obviously going to your unlike any other we have experienced but I'm probably.

Stepped up in the face of this challenging times.

Well last six months to put a spotlight <unk>.

Portions of maintaining flexibility strong execution on a solid financial foundation.

This crisis will accelerate the bifurcation in our industry between those companies that are well position.

Flexibility to manage through this period without destroying shareholder value.

And those that do not.

We see enerplus being in the first.

The strength of our balance sheet.

He position commodity hedges on our disciplined operational execution continues to support a strong sustainable business going forward.

First house 2020.

Quickly and took decisive steps to protect our financial strength and preserve shareholder value and the peak sharply falling oil prices.

We hit the brakes to suspend drilling and completion operations in North Dakota at the start of the second quarter.

No sense to us to continue this activity with oil prices falling so precipitously and no certainty as to when they would recover.

As we entered me what's the weakness in the oil markets are teams began curtailing volumes rather than risk negative margins.

We ended up there tailing approximately 25% of our corporate liquids volumes and as the market continue to crews in June we began story curtailed volumes.

Brings us to today.

Curtailments behind us more stability in the old we have reinstated our 2020 guidance.

Glad to produce 80000 to 90000 BOE per day in 2020, with 49000 50000 barrels per day of liquids.

We've also maintained capital budget.

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Although much of the remaining activity in second half of your relates to non operated drilling and completion.

All three drilling and completions in the Marcellus and North Dakota. We're also planning to complete for additional operated Ducs in the fourth quarter.

We will talk more about these plans, but I would add to the operational efficiencies we've delivered in the first topic this year.

Our plans for the second though that's put us on solid footing for 2021 and beyond.

I'll also add to this plan is expected to generate free cash flow this year.

Collusive funding the dividend.

So with our strong liquidity position.

Cash flow.

Stabilize production and DUC inventory, we have flexibility to quickly respond to changing market conditions.

In short we remain well positioned.

Now I'll turn the call over to wait.

Eight yawner operations.

Thanks, Ian and good morning, everyone. As you mentioned, we're certainly managing volatile operating bar.

However, amidst all the changes people the team delivered solid operational results in the second quarter.

Although we have limited operating capital activity in the quarter, our execution right up to the suspension of our program was very strong as we indicated in our last earnings call drilling cycle times and completion operations in North Dakota up considerably outperformed our worked through the first six months of 2020.

The cost savings from this outperformance have allowed us to pour more completions within our capital guidance glass.

I'm optimistic that we can pick up where we saw when capital activity starts.

We also saw fully managed production levels throughout quarter safely shutting soaring wells, so were curtailed due to low prices and ensuring the continuity of our operations.

All of this drove second quarter production of over 87000, Yeah, we use per day, including what was just over 48000 barrels per day.

In our Q1 release, we estimated that we would corcino approximately 25% of our liquids volumes.

And that we didn't anticipate for kindling beyond this level in June.

Our estimate for me was about right now does oil price its strength is that it is it.

We started restoring curtailed volumes.

That didnt happen all at once that some wells required workover crews for things like a pump sales.

But that's core to you today and I think we're pretty much talk to a normal run.

In terms of rest of your activity as Ian mentioned in addition to non operated activity. We've layered in for additional operated DUC completions, which are targeted to flow back late in the fourth quarter.

Current strip in the low Fortys ports. This activity and these plans also helped drive a more efficient operational program over the next 18 months.

Also still leaves us with a material DUC inventory entering 2021.

You know released this morning, we also provided an estimate of our maintenance capital in 2021.

Our annual 2020 liquids production guidance implies second half volumes of approximately 48000 barrels per day.

We estimate that we could keep this level of production essentially flat in 2021 with approximately 300 million capital.

Importantly, this is not just a mile close its focus on China capital efficient 2021.

But includes resuming drilling operations in 2021 to leave us well positioned for 2022.

To be clear this is not the 2021 plan and we're not issuing 2021 guidance, but it is meant to provide an indication of how we could sustain our production levels going forward and how the benefits of the moderating base decline.

And the operational execution, we've demonstrated how capital efficiency.

The key takeaways, we have a lot of maneuverability, because we think about 2021 and beyond.

I'll leave it there and turn it over to Jody poor financial update.

Inks Wade.

I think our results through the first half of the year demonstrates that we continued to be disciplined stewards of capital and have the financial flexibility to adapt to a turbulent market.

Key among those advantages our balance sheet strength.

We made scheduled principal repayments of $82 million on our senior notes during the second quarter using cash on hand.

Ended the quarter with her 600 million U.S. dollar bank credit facility essentially undrawn.

Our leverage ratios remain strong.

We ended the quarter with had net debt to adjusted funds so ratio of one time.

We generated $30 million, a free cash flow for the quarter and expect to generate additional free cash flow through the second half of 2020, which further supports our financial strength.

Our earnings in the quarter were impacted by non cash impairments to our property plant and equipment, along with her goodwill and totaled $630 million.

The property plant and equipment impairment was driven by the decline in the trailing 12 month average prices for oil and natural gas as defined under us GAAP.

Good will impairment was the result of the ongoing deterioration in macroeconomic conditions and low commodity prices due to the kobe's 19 pandemic.

Moving onto our oil realizations in the Bakken.

Or differential remained relatively strong in the second quarter. Despite the physical market weakness we saw at times.

It was largely due to our decision to curtailed volumes to protect against selling into weak pricing along with our diversified marketing approach, which consists of a combination of in basin monthly spot and index fails term physical sales with fixed differential pricing versus W. Ti Brent.

Well its sales at the U.S. Gulf Coast delivered by a firm capacity on the Dakota access pipeline.

Now with respect to decode access pipeline, we were disappointed with the district Court's order on July six required in the pipeline to cease operations.

However on Wednesday, a court of appeals granted the pipeline owners request for a state over the lower court order that required to pipeline to cease operation.

So as it stands today there is no outstanding Court order in place requiring Dakota access pipeline to shutdown. However, the legal process is continuing.

Based on that and assuming that pipeline continues to flow. This year, we expect her Bakken differential will average $5 per barrel solo W.G.I. in 2020.

As we look at the Bacon dynamics in a scenario, where Dakota access is not operational and depending on basin production levels. Our analysis suggests some 400000 barrels per day would need to move on rail.

Within the context of current rail volumes of approximately two to 300000 barrels per day.

So we're talking about one to 200000 barrels a day of incremental rail capacity required, which we believe can be added in relatively short order.

It remains a lot of rail infrastructure in the Bakken during 2014, we saw the basin move over 800000 barrels per day at times.

Well not necessarily and he dropped issue. This would result in water pricing in the Bakken based off real economic.

We think this sets up a spot differential of approximately six to $8 per barrel below W. <unk>.

In terms of impact enterprise.

If we were to assume that the pipeline could not operate for all of 2021.

We estimate the wider Bakken differential would impact our corporate.

By approximately 80 cents per Boe.

Lastly, turning to our commodity hedges, we've layered in some new hedges in 2021 to further mitigate risk.

We have added 6000 barrels per day three ways W.P.I. callers at 32 by 45 50 for the first half of next year.

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

Thank you.

Ladies and gentlemen, we will they'll begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone you will hear a three told proper acknowledging a request and your questions will be pulled in the order. They received a should you wish to decline from the pulling process. Please press star.

Followed by two if you are using a speaker phone. Please look for handset Apple for pressing any Q1 moment for your first question.

Okay. So your first question comes from Neil Dingmann of Truth Security Neil. Please go ahead.

Why don't you.

My question for you all is you've been pretty cautious in your planning and it's made a lot of sense I'm just wondering as you're looking at 21 I know you don't have guidance. There will a you know kind of waiting on a dapple decision or waiting on some sort of seasonality would that would would dapple well that influenced your plans or is it at this point, it's just trying to better.

To move on and Youre, you're worried about all that sort of plays out.

Good morning, Neil.

That's a good question I wouldn't expect.

Doubtful will be the single biggest driver on our 2021 plan.

[laughter].

Third we got some feedback going on there I don't think it'll be the single biggest driver of our plans.

Jodi highlighted we would anticipate some widening to differential based on rail, but we're talking.

Total dollars. So I think it in a in a $35 world those dollars matter in a 40 to 45 dollar world or less toxins <unk> is going to be as bigger driver as anything on that and I think you know the longer this thing plays out in the.

Sub $50 barrel.

For decline is sorting itself for us in basin. So.

You sleep DAPL operational.

Eminently would be a positive outcome for us and we think would be.

I'm really important thing strategically for the industry and and hopeful for business I don't think it's the single biggest driver there.

Okay.

Very good and then just on M&A was questioning you know you guys continue to have one of the stronger balance sheets out there and you know again I guess my question is.

You know to see deals do you want to see maybe a for sale or you know I guess, maybe just give us just overall and I'd like to say, hey, I used to seeing anything out there, but more your thoughts about that and what would cause you to maybe becomes a little more active.

That market. Thanks.

Yeah, I mean I think.

As you think it wasn't let's just talk about North Dakota, its not a bad proxy for a fair number basins. The really haven't been many deals of any size in the last several years a bit bid ask is been too wide. That's just in the reality.

One point quite quite a few players out there's a lot of PE made some moves three years ago and since then it's been pretty quiet.

It feels a little bit landscape might be shifting a little bit out there there's been though a lot of restructurings lot of companies that had been active aren't there any longer P seems to be on the sidelines.

And I'd say it looks like maybe a better competitive dynamic if you're a structural buyer out there.

So that feels interesting the rubber is gonna hit the road in terms of where prices are for us it starts to get too.

We've been really clear like we're in really good position right. Now you know if our goal is this to hold production flat. We've got 15 years of inventory in the Bakken to do that.

Larry on the DJ So we have lots of opportunity to.

With the base business, so for us, adding to the portfolio it needs to make sense for our shareholders and.

We're enerplus trades right now and so there's just been a disconnect between valuation to public companies certainly the smaller guys and where sellers expectations have been I would think there'll be a reckoning in that and assets will start declared place. It makes sense. So the it's gonna be interesting see how this unfold over the next six months to a year.

And for US if if you can see value and sometimes it would be very interested in them and yes.

The key will then be just making sure we keep our balance sheet strong as you highlighted was committed this in a really really good place and.

So if you look at her plan. This year, if you look at strip more Russia can generate some decent free cash flow I'm still production flat for the back half of the here.

I agree love your perspective, and I think you're spot on things like.

Your next question comes from Adam Gil of a capital Adam. Please go ahead.

Thank you all good morning, everyone. Two questions for me first off in regards to the 300 million to maintain flat liquids volumes in 2021, how much that budget use your mark for the Marcellus and how many docs decide and vision in the Balkan at year end 2021.

Oh, Thanks, Adam you would assume a similar kind of spend profile in the Marcellus there'd be some rounding there I think you've got granular, maybe a little bit higher but relatively flat.

But not a little bit higher in the Marcellus and then.

I think will probably stay away from an exact number relative to docs, but I guess at what I would highlight.

Yeah, we we've done the word myopic in his in his comments on this it's not pure exhaustion right. So we do start drilling and so we would mall, we wouldn't model that you'd start drilling at some point mid to later in the year Ducs get pulled down we've generally run that DUC count of 10 to 15.

Somewhere in there so yeah, we'd be pulling them down more than maybe a bit more than we normally wouldn't but it does allow us to start to drill again I'm, so that 2022 looks reasonable.

Thank you secondly, a you know gas prices have had been rallying here a at least in the a in the near Bugs.

What gas price could you.

Could you see that some Marcellus <unk> spending expand compared to words, it's been the lifestyle posture.

Well, you probably have as much insight into that is we do.

We look at the activity of our operators broadly it's been pretty consistent and you know I I wouldn't I imagine, there's a big shift in spending.

Yes.

We get a three handle.

There.

I would think most most of those companies had been talking about prioritizing free cash flow and flat to modest growth. So I wouldn't think you're gonna see a big spending ship.

The lessons of productivity out there and how unbelievable Billy.

Robust those wells have been because I think we understand that pretty well right. Now. So you know you and you look so the big public couple of years up there they've been.

Quite vocal with their desire to moderate gross and box like free cash flow returned to shareholders pay down debt and all sorts of things. So I wouldn't think you'd be see a big shift until your well costs to threes and even then I think.

I would think that if its winter related and we just heard and.

Generate some backwardation in the market people would look straight to that not change their plans I guess, we'll see but that's what I guess.

Thanks you.

Your next question comes from Greg Pardy of RBC capital markets. Greg. Please go ahead.

Thanks, Good morning [noise].

So notwithstanding the stay on dapple I mean, I've I've got to believe your marketing group is already probably looked into.

Securing crude by rail almost like an option. If you needed to is that is that like a fair comment.

That is it fair comment yeah, I mean, our folks are really active in that art.

Historically, yeah, we we don't contract railcars and those sorts of things that we deal with people who have got those cars under contract.

But the I guess the substandard nature of your question is we we.

Look quite carefully and I've done this before that's occurring financial exposure to rail contracts I guess is the best way to talk about it.

Okay. Okay, no I mean, I'd I would have been surprised you said no. We've done nothing because we think the optimistic case, Bruce a cruise itself out, but that's helpful. The though.

And again.

Just a little more color I mean, this is when you're looking for but you obviously when that shut down sudden went up when the first order.

It was issued.

Some through operational uncertainty for August as you could imagine and so our teams did a lot of work to I'd say restructure and give us an operational literally flexibility around what would happen in August. So yeah. We I think this is one where we can sit back and go this mix.

Sort of no sense to us that we'd be talking about this but we are in legal process and there's uncertainty around that process and so we're going to manage our business and flexibility to mid mitigate any impact, which which includes think you'd want to go people into thinking about rail and those sorts of.

Okay, Yeah, no they make sense.

And with Wordy, where we stand today. This may not give her question, but could you envision spending less than 300 million Bucks with what you see in a world today next year.

Oh I think it's a fair question.

Tell me the oil price I'll tell you what we'll do.

Wallace Nsaids a futures world.

I think in a futures world could be spent could you spend less.

Well it'd be wonderful, if we could and wage team are able to execute this program more efficiently so that'd be great.

You know I think the.

The the model that we've put out there was a model that we have confidence in costs that you know weve been able to demonstrate and those sorts of things and our goal is to continue to get better on those so can we be more efficient than up for sure we can be.

Why would we stop spending altogether at 40 World I don't think that makes a lot of sense, we see really strong economics, and the completions and those sorts of things. So yeah and there will be we will be response of the same principles. We've always had will play out economics economics economics affordability affordability affordability yeah yeah.

Some of that so.

Okay. Okay.

Hi, Good no sorry go ahead, please no here's a.

Topping up of beside the point question, so with the level of Capex, you're spending this year I mean would you envision any issue in terms of you know, replacing all of your production on a proven basis or is it just too soon to say at this at this point here.

Oh that on a pre IDE approval, because we know you got a ton of inventory write on a on a two p. basis, but I'd, just and it's going to become probably a broader industry question at some point just given how much spending levels. It has trailed back so it's not like a resource question. It's more just sort of thinking about your on a on a.

Given the drilling activity then you know as it is it a year, where you can actually add you know or convert all boats into proven or does that just simply not matter. This year because of the drastic and just as we've gone through.

I think a lot of fundamental things are going to matter less to people. This year, there's going to be so much noise in the system.

You've also got a lot of reserves that are at risk for price related impacts as well you've got people looking at their UTI wedges are under the wedges and wondering if they booked too many reserves relative to the future activity levels. So there's going to be a lot of noise out there.

Yeah. We've tried to approach this from a really balanced perspective throughout the years, you know not having too much future development capital on the books on having too many locations on the books, you know that that implied 20% growth rates ramping up so I'm like I think the overarching in just a question is going to be a lot of noise.

I think there's going to be a lot of noise and then.

That will settle out over the next year or so and you know people you got to sustain your business [laughter], which it means sustaining you're producing reserves and again you price signals to support that so we look at it and I think in the Fortys likes Okay for US I think it's all a heck of lot better than for.

Most people.

Many as you start to transition mid Fortys integral fifties suddenly things look pretty resilient again, but I think there I think there will lots I think lots companies are going up a lot has a lot of reserve noise. This year that would be my guess.

Okay and I do appreciate the conservatism you guys have always employed in.

Reserve booking and so of course, that's helpful. The no. Okay. Thanks very much.

Thanks.

Your next question comes from Patrick O'rourke of E.

TV capital Patrick Please go ahead.

Hey, good morning, guys I'm I know you probably touched on the capital efficiencies and a few things here over and over again, but just looking at kinda corporate slide deck, and where the Breakevens I've come down to.

$38. Just wondering you know how terrible that isn't something that you know it does appear that the 2020 drill program, you're seeing a bit more consistency in terms of the results versus prior years wondering if that if that's a.

Take away, though that you couldn't agree with there and then.

I know you've touched on.

Mid forties, and how the business looks there, but you started to deploy capital in June at a time when a the you know spot was high Thirtys Carnival is just below 40 is it is it safe to say that you know that's kind of the price where you know you're comfortable I'm going out these things.

Then you know enough mid high Fortys can we anticipate potentially some growth or is it more free cash flow accumulation strategy going forward.

Yeah, if you a few things there so why don't I.

I'll turn the resiliency, though capital efficiency that over to wait at that moment.

Yeah I think.

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Variability, yeah, we'll see a dramatic difference.

Year to year I know there is some difference in that but almost everything we saw last year was really close to our type curves and our expectations and those sorts of things, but yeah, we'll talk about.

Costs resiliency in how we see that now and into next year relative to your question about deployment and growth I think so a couple of things going on here. We've got these 33 docs and the economics for the 30 redux or <unk>.

Actually robust with current costs and in under a $40 deck. So there's there's nothing stopping us there relative like economics look wonderful and so.

Tweaking up our capital now I think makes all the sense in the world economically and then as we think about it in the context of the broader market for our model sorry.

Yeah. It also facilitate some powerful free cash flow, so we're not going flat busting through our.

Free cash flow perspective at this moment as you think about wrote.

I think were where things get pretty interesting as you move your way through 40.

You start to move your way through or do you touched 50, I think you really have choices there because.

In addition to the Ducks being economic your full cycle looks like at all there. So you don't really loved thinking about drilling a new well right now to get a $40 $40 50 that looks pretty good and then.

I think we'll find a way through that you're going to really think with resiliency the model because you're likely to 50 and you don't love It at 45.

The tells you something about it you know we look at the market right now and there is a fragility to it on some levels.

Inventories are high.

Demand is improving but it's still somewhat tenuous yeah, I think as you continue to move out through 2020 with this level of global spend.

The fragility is going to turn into a potential really resilient really resilient powerful price response sometime to over the course of the year. So I think it's going to be easier to be more bullish a little further out once we deal with these inventory levels. So long long speech today's costs.

Think free cash flow flat production in the Fortys as you move through 50 lots of choices around growth and I think for lots of folks you know, it's going to be a more balanced model that is I think a combination of some girls with free cash flow I'm, just going to be the new world order, which is going selling a lot.

Well, we've lived for quite awhile.

Oh wait doing a chat a little bit on capital efficiency this year and cost and though we are sort of thinking about that next year with all that's going on.

Yeah happy too.

So I think maybe just to address your your one comment catalog capital deployed in June.

I think the fully true incremental investment we made.

Last month or two has really been workover capital deploying some oh workover rigs to restore some of the wells that we had shut in that needed a bit of Workover spend and then obviously what we've talked about today is the next bottom deploying incremental capital comes later this year, it's a for.

Additional operated ducks.

Now to the broader capital efficiency question I'll talk about cost first and then performance second so.

I think on the cost side, we have just been really pleased with the cost performance on the.

Capital side this year.

We talked about so seeing our capital costs come down quicker than we planned right now we've averaged year to date on our new wells 6.7 million total well cost that's about 700000 lower than we had planned for in our budget, So again pretty encouraging results.

The run rate near the end of that program was at an even lower points and 6.7 million. So we feel like that's a pretty sustainable level, most all of that feels pretty structural in nature.

Certainly doesn't look out pricing out there in the market today, it actually looks even constructive to helping us drive even more continuous improvement into that cost profile. So even though we're obviously in a mature stage development, we still continue to see areas, where we can take capital costs. So system.

And then to your comments on maybe a bit more consistent well performance. This year I think what you're seeing is simply the reflection.

It seems kind of deep understanding of our acreage.

So each odd gets its own kind of custom design in terms of spacing and even to a degree completion.

Parameters and so we'll continue to optimize that but we feel pretty confident that we've got our our development model, a pretty well dialed in and so I would expect things would continue to perform pretty consistently in the future on the well performance.

Yeah.

Okay. Thanks, guys.

Okay.

Question comes from Mike Dunn of Stifle Mike. Please go ahead.

Well Thanks, my questions have already been answered.

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Okay. So there appears to be no further questions you may proceed.

Perfect. Thank you everybody appreciate everyone joining us this morning and enjoy the rest your day. Thank you bye.

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