Q2 2020 Enerplus Corp Earnings Call

Obviously been a year. Unlike any other we have experienced but I'm proud of our organization has stepped up in the face of this challenging time.

The last six months to put a spotlight on risk management and the importance of maintaining flexibility strong execution and a solid financial foundation.

This crisis will accelerate the bifurcation that our industry between those companies that are well positioned with flexibility to manage through this period without destroying shareholder value.

And those that do not.

We see enerplus being in the first camp.

The strength of our balance sheet, our liquidity position, our commodity hedges and our disciplined operational execution continues to support a strong annual business going forward.

Thank you first half of 2020, we moved quickly and took decisive steps to protect our financial strength and preserve shareholder value in the face of sharply falling oil prices.

We hit the brakes to suspend our drilling and completion operations in North Dakota at the start of the second quarter. It makes 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 with the weakness in the oil market. Our teams began curtailing volumes rather than risk negative margins.

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

That brings us to today.

Tailwinds behind us and more stability in the oil price, we have reinstated our 2020 guidance.

We plan to produce 88000 to 90000 Boe per day in 2020.

With 49000 50000 barrels per day of liquids.

We've also maintained capital budget at $300 million.

Although much of the remaining activity in the second half of the year relates to non operated drilling and completion or non operated 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 but the operational efficiencies. We've delivered in the first half of this year and our plans for the second half have 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 inclusive of funding the dividend.

So with our strong liquidity position.

Cash flow outlook.

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

In short, we remain well positioned to.

Now I'll turn the call over to Wade, who will update you on our operations.

Thanks, Dan Good morning, everyone.

As Ian mentioned, we're certainly managing in a volatile operating environment.

However, amidst all the change in upheaval the team delivered solid operational results in the second quarter.

Although we have limited operated 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 considerably outperformed our forecast through the first six months of 2020.

[music].

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

Im optimistic that we can pick up where we left off when capital activity starts again.

We also thoughtfully managed production levels throughout the quarter safely shutting in restoring wells now were curtailment due to low prices and ensuring the continuity of our operations.

All of this drove second quarter production of over 87000 Boe per day, including liquid of just over 48000 barrels per day.

Our Q1 release, we estimated that we would curtail approximately 25% of our liquids volumes in.

And that we Didnt anticipate curtailing beyond this level in June.

Our estimate for me was about right and as oil prices strengthen that it is in June we started restoring curtailed volumes.

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

Sales.

But fast forward to today I think we're pretty much back to a normal run rate.

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

The current strip in the low Fortys supports this activity in these plans also helped drive a more efficient operational program over the next 18 months.

And also still leaves us with a material DUC inventory entering 2021.

In our release. This morning, we also provided an estimate of our maintenance capital in 2021.

Our annual 2020 liquids production guidance imply 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 of capital.

Importantly, this is not just a myopic frozen focus on on a capital efficient 2021.

That includes resuming drilling operations in 2021 to leave us well position for 2022.

To be clear this is not the 2021 plan and we're not issuing 220 on guidance, but it is meant to provide an indication of how we could sustain our production levels going forward and how the benefits of a moderating base decline rate and the operational execution. We've demonstrated have helped capital efficient.

Yes.

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

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

Thanks Wade.

I think our results to the first half of the year demonstrates that we continued to be disciplined stewards of capital and had 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 you out 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 remained strong.

We ended the quarter with a net debt to adjusted funds flow ratio of one time.

We generated $30 million of 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 our 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 and macroeconomic condition and low commodity prices due to the Kobe 19 pandemic.

Moving onto our oil realizations in the Bakken.

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

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 down term physical sales with fixed differential pricing versus how the T.I. in Brent.

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

Now with respect to the decode active pipeline, we were disappointed with the district court's harder on July six requiring the pipeline to cease operation.

However on Wednesday, the court of Appeals granted the pipeline owners request for it stay over the lower court order that required the pipeline to cease operation.

So as it stands today there is no outstanding court order in place or acquiring 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 followed that BTI in 2020.

As we look at the basin 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.

This is 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 time.

Well not necessarily an aircraft issue. This would result in water pricing in the Bakken based off rail economics. We think this sets out the spot differential of approximately six to $8 U.S. per barrel below W. CCI.

In terms of impact to 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 netback by approximately 80 cents per Boe eat.

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 of three way WPC 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 open up for questions.

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

Star.

Followed by two if you are using a speaker phone. Please look the handset before pressing any keys one moment for your first question.

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

Putting up and my question for you. All is you know you've been pretty cautious and you're 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.

Well, Hey, you know kind of waiting on a dapple decision or waiting on some sort of seasonality where that would would dapple well that influenced your plans or is it at this point. It's just timing you know better to move on and Youre, you're worried about how that sort of plays out later.

Good morning, Neil.

[noise] that's a good question.

I wouldn't expect.

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

You know is.

[laughter].

Certainly doesn't feedback going on there I don't think it'll be the single biggest driver of our plans I feel as Jody highlighted we would anticipate some widening differential based on rail, but we're talking in the order a couple of dollars. So I think it in a in a 35 dollar world those.

Dollars matter and a 40 to 45 dollar world or less impactful for T.I.s going to be as big a driver as anything on that.

And I think you know the longer this thing plays out in the.

Sub $50 barrel the more decline is sorting that so for us in basin.

So obviously DAPL operational.

Permanently would be a positive outcome for us and we think would be really important thing strategically for the industry and hopeful for our business I don't think it's the single biggest driver there.

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 I guess, maybe just give us just overall and I'd like to say hey are used to seeing anything out there, but more your thoughts about that and what would cause you to maybe become a little more active in that market. Thanks.

Yeah, I mean, I think as you think it wasn't let's just talk about North Dakota.

Not a bad proxy for a fair number basins, the really haven't been many deals of any size in the last several years bid ask has been to wise. That's just in the reality at the one point.

<unk> quite a few players out there is a lot a PE who made can moves to three years ago and since then it's been pretty quiet.

It it feels a little bit the landscape might be shifting a little bit out there. There's been a lot of restructurings a 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 for asset start to get too.

We've been really clear like we're in really good position right now.

If our goal is to hold production flat, we've got 15 years of inventory in the Bakken to do that without layering on the DJ So we'd love to opportunity to.

The base business, so for us so adding to the portfolio it needs to make sense for our shareholders and we were 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 it's gonna be assuming Seattle. This unfold over the next six months to a year and for US. If we if you can see value in sort of assets would be very interested in them and you know the 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 our plan. This year. If you look at strip more Russia can generate some decent free cash flow and still hold production flat for the back half the year.

Agree love your perspective, and I think you're spot on thanks, Mike.

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

Thank you all good morning, everyone I've two questions for me first off in regards to the 300 million to maintain flat liquids volumes in 2021, how much that budget is your mark for the Marcellus and how many docs does that and vision in the Bakken at year end 2021.

Yes.

Thanks, Adam It would assume us 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.

That's 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, what I would highlight them.

Yeah, we we've done the word myopic in is.

In his comments on this it's not pure exhaustion right. So we do start drilling and so we would mall, we would 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.

And 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 mugs, what gas price could you could you see that some Marcellus <unk> spending expand compared to where it's it's been the last the last year.

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

You know when we look at the activity of our operators broadly.

In pretty consistent and you know.

I wouldn't imagine there's a big shift in spending.

Yeah.

We get a three handle Oh, there I would think most most of those companies have been talking about prioritizing free cash flow and flat to modest growth. So I wouldn't think you're going to see a big spending shift.

It goes 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.

And you look so the big public operators, if they're they've been.

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

Thanks again.

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

Yes, thanks, good morning [noise].

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

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

[noise] <unk> that is that 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 if we we've looked quite carefully and have done this before that securing financial exposure to rail contracts I guess is the best way to talk about it.

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

No again, yeah, I could just a little more color I mean this is this more in you're looking for but obviously when that shut down sudden went up when that first order.

Was issued.

But some through operational uncertainty for August as you could imagine and so our teams did a lot of work too.

I'd say restructure and give us some operational delivery 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 flexible.

Early to mid.

Mid mitigate any impact, which which includes thinking what delivery points thinking about rail and those sorts of.

Okay, Yeah, no they make sense and with where it is where we stand today. This may not be fair question, but could you envision spending less than 300 million box with what you're seeing a world today next year.

I think it's a fair question tell me the oil price I'll tell you what we'll do.

Well, let me say, it's 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 weights team, we're able to execute this program more efficiently so that'd be great.

I think the.

The the model that we've put out there was a model that we have confidence and costs that we've 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 that for sure we can be.

[music].

Why would we stopped spending altogether at a 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. It will will be we will do response of the same principles. We've always had will play out economics economics economics affordability affordability affordability, and then look really out.

Some of that so.

Okay. Okay.

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

Topping up assigned to play question.

So with the level of Capex, you're spending this year I mean would you envision any issue in terms of 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 gotta tenant inventory write on a on a two days it's been on 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 is is it a year, where you can actually add in our convert hobbles into proven or because that is simply not matter. This year because of the drastic conditions, 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. 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 beauty.

Wedges their undeveloped 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 weve tried to approach. This from a really balanced perspective throughout the years, you know not having too much future development capital on the books.

Two locations on the books, you know that that implied 20% growth rates ramping up so I.

I think the overarching industry question is going to be a lot of noise I think there's going be a lot of noise and then.

That will settle out over the next year, So and you know people you got to sustain your business [laughter], which it means sustaining you're producing reserves and in the price signals a support that so we look at it and I think in the in the Fortys.

Like Okay for us I think its own heck of lot better than for most people.

Many as you start to transition mid fortys into the low Fiftys certainly things are pretty resilient again, but I think there I think there will lots I think lots companies are gonna have a lot has a lot of reserve noise. This year that would be my guess.

Okay, Okay and I do appreciate the conservatism you guys have always employed and and reserve bookings. So far so that's helpful. The no. Okay. Thanks very much.

Thanks.

Your next question comes from Patrick O'rourke of eight 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 FIDAC and where the Breakevens I've come down to a $38. Just wondering you know how terrible that isn't something that you know it does appear that the 2020 drilled pro.

Hi, Graham you're seeing a bit more consistency in terms of the result.

Versus prior years wondering if that if that Ah Ah you know I take away that that you could agreement 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 curve was 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 in the 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 what what her life altering the resiliency of capital sufficiency and that over to wait at that moment.

<unk> I think.

<unk>.

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 and 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 30.

Redux and the economics for the 30 Redux are.

Sexually 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. It because it also facilitate some powerful free cash flow. So we're not going when a black busting through our.

Free cash flow perspective at this moment.

As you think about ropes, I think where where things get pretty interesting as you move your way through 40.

Start to move your way through or do you touched 50, I think you really have choices there because the in addition to the ducks being economic your full cycle looks like others. 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 our way through that you're going to really think with the resiliency of the model because you like it 50, and you don't love It at 45.

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

I 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 it's going to be a more balanced model.

That is I think a combination of some growth with free cash flow.

It is going to be the new world order, which is going selling a lot like how we've lived for quite awhile.

A way doing a chat a little bit on capital efficiency. This year and cost and now 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 Pat or capital deployed in June.

I think the only true incremental investment we made in the last month or two has really been on Workover capital.

Flooring, some oh workover rigs to restore some of the wells, where we had shut in that needed a bit of Workover spend and then obviously we've talked about today is the next spot to deploying incremental capital comes late comes here.

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 off a capital side. This year, we've talked about.

Seen our capital costs come down quicker than we had planned right now we've averaged year to date on our new wells 6.7 million total well costs.

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.

Sure.

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 of 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 a reflection of seems kind of deep understanding of our acreage. So each pad 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 pretty well dialed in and so I would expect things would continue to perform pretty consistently in the future.

We're on the well performance.

Okay. Thanks, guys.

Your next question comes from Mike Dunn of Stifle Mike. Please go ahead.

Oh, Thanks, my questions have already been answered.

Okay, ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one.

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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