Q3 2020 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Enerplus Corporation Q3, 2020 results conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require assistance. Please press star zero for the operator. This call is being recorded on Friday November six two.
2020, I'd now like to turn the conference over to drew Mair. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining the call before we get started please take note of the advisories located at the end of todays news release, our financials have been prepared in accordance with the U.S. GAAP all discussion of production volumes today already gross company working interest basis, and all financial figures are in Canadian dollars unless other.
Oh I specified.
I'm here this morning, with the Indian Das or President and Chief Executive Officer, Jodi, Jenson Labrie, Senior VP, and Chief Financial Officer, Wade Hutchings, Senior VP, and Chief operating Officer, Shane up Morihiro, VP finance and Garth dollar VP marketing.
Following our discussion we will open up the call for questions with that I will turn it over to you.
Thanks drew.
And thanks to all of you for joining us today.
I'll begin by covering a few of the highlights from our third quarter results and then spend some time talking about our outlook for the rest of the year as well as some preliminary thoughts as we prepare for 2021.
Where I began I would like to just take a moment, thank our staff and our strategic partners both in the field and at the corporate level for all their support and dedication during this very complicated time display.
Despite this environment, we all find ourselves in Enerplus continues to execute its business plan in a safe.
Why are mentally.
Onto a matter I. Thank you all.
Well it was a relatively quiet quarter in terms of capital activity. Our teams are continuing to respond to the environment through enhancing our operational efficiencies driving down per unit cost and maximizing margins but.
Additionally, our solid execution. This year has helped drive production outperformance in the Bakken with our current forecast well above our previous guidance. This.
This strong performance translated into several key highlights in the third quarter, including generating $48 million in free cash flow.
Visibility to continuing free cash flow in the fourth quarter.
Increasing the midpoint of our annual production guidance by 1500 Boe per day.
Using our capital spending outlook to $295 million from $300 million previously and reducing our cash cost guidance by combined 45 cents per year, we further supporting our margins.
Looking at the upcoming fourth quarter, we expect our liquids production to average between 47000 to 49000 barrels per day.
Lines in the third quarter due to the limited capital activity. This year in response to the oil price weakness.
Turning to 2021.
The same principles that have historically guided our strategy remain foundational today.
Namely maintaining balance sheet strength.
Returns based capital allocation.
Locus shareholder returns.
Based upon our current commodity prices.
Our preliminary outlook for next year sees us stabilizing production.
Blincyto generating free cash flow.
Specifically, we would expect to execute a maintenance capital plan, which would keep our production largely flat to the midpoint of our expected fourth quarter Twentytwenty volumes.
Approximately 86000 Boe per day.
Including 40000 barrels per day of liquids.
Importantly, our capital plans to say to sustain our base production are supported by robust economic returns.
Current prices.
The capital spending associated with this plan is approximately $300 million and includes drilling capital that would set us up for a similar maintenance capital estimate in 2022.
This capital plan is expected to be fully funded including the dividend at around $40 WCS.
And obviously at higher prices, we see incremental free cash flow, which we will prioritize to further strengthen our balance sheet return cash to our shareholders.
We do not see a price signal to grow production currently.
We would need to see Wi Fi prices somewhere in the high Fortys to Fiftys before we would consider some level of growth.
That said, we are constructive on the outlook for oil prices implications for supply given the lack of investment is important to bear in mind.
Today demand is driving uncertainty, but the market will come back into balance. We believe it is just a question of timing.
And in a higher price environment, we anticipate meaningful free cash flow generation.
It's 50 dollar West, Texas environment, we would have significant optionality to further enhance the balance sheet.
Cash returns to shareholders and pursue additional growth opportunities.
As you look across the landscape a new paradigm has taken hold.
Were unsustainable strategies of pursuing excessive and uneconomic production growth are no longer being supported.
It is our belief that this change will mature and that we are dealing with it truly new dynamic.
There's no question that a growing business is better than one that is treading water or shrinking but.
But sustainable growth.
He is an outcome of full cycle economic returns and needs to be managed thoughtfully to support longer term business sustainability.
This means that at even higher commodity prices, we expect the sector to grow at more moderate rates.
Right sizing the generation of free cash flow and more financial resilience.
We will provide more formalized guidance for 2021 later this year or early next year.
But in summary, we need we remain well positioned to navigate volatility.
We believe that we offer high quality low risk exposure to a potential price recovery and reasonable returns in the current market.
Now I'll turn the call over to Jody, who will update you on some financial highlights Jodi.
Thanks Ian.
Starting with cash generation, our adjusted funds flow for the third quarter was $83 million, which fully funded our capital spending requirements and generated $48 million of free cash flow.
Our earnings in the quarter were impacted by noncash impairments to our property plant and equipment totaling $257 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 generally accepted accounting principles.
Enerplus continues to have significant liquidity consisting of $85 million of cash on hand, and 600 million U.S. of Undrawn capacity on our bank credit facility at the end of September.
Our net debt to adjusted funds flow ratio continues to be 1.0 times at September Thirtyth, which has not changed from June thirtyth.
Moving on to our oil realizations in the Bakken, our differential averaged $5.37 U.S. per barrel below Wi Fi in the third quarter.
On a dollar per barrel wider compared to the prior quarter largely due to the uncertainty following a district court's order in early July for the Dakota access pipeline cease operations.
In early August the Appeals court granted the pipeline owners request for a stay over the district Court's order.
As a result, there is no outstanding court order in place requiring the pipeline shutdown at this time and the legal process is ongoing within both the district court as well as the Appeals court.
We continue to forecast a realized Bakken differential of $5 U.S. per barrel below W.P.I. for 2020.
Now turning to the Marcellus.
Regional natural gas prices were particularly weak during the third quarter, especially in September and October and continuing into the early part of November.
This is the result of nearly full regional storage combined with low demand during the shoulder season.
As a result, our realized Marcellus sales price differential widened averaged 72 cents U.S. per mcf below Nymex during the quarter.
We have seen price related protect production curtailments in the Marcellus due to continuing price weakness and expect some level of curtailments to continue here in the fourth quarter until cash prices strengthen.
Given the wide third quarter Marcellus basis, and current ongoing weakness, we're adjusting our full year 2020 guidance for Marcellus price differentials. The 60 cents U.S. per Mcf below Nymex from 45 cents U.S. per Mcf previously.
We do however remain constructive on natural gas prices heading into winter and our Marcellus position provides a valuable and underappreciated option on the strong outlook for natural gas prices next year.
Assuming a normal winter season, we expect to see a differential to Nymex in the minus 40 cents per Mcf range for 2021.
Moving onto our expenses.
Noted, we've seen cash costs continue to trend down across the board and have lowered our 2020 guidance for operating cost transportation and Genie by a total of 45 cents per Boe.
Further supporting our resiliency in this low price environment.
We have added to our commodity hedging position in 2021, and currently have 10000 barrels per day of W.P.I. three way collars at approximately 32 by 41 by $51 U.S. per barrel for the first half of next year.
We have also swapped 40 million cubic feet per day of natural gas for the summer 2021 gas season, which is April through October at just under $3 U.S. per Mcf.
And with that I will turn it over to Wade.
Thanks, Jody and good morning, everyone. We had limited capital activity during the third quarter with no operated drilling or completions in North Dakota. However, the teams did an excellent job safely restoring our previously curtailed volumes and protecting the integrity of our production through work.
Our activities.
Having to restore curtailed production early in the quarter, our third quarter liquids volumes were up 9% from the second quarter.
In terms of rest of year activity from an operator perspective, we are completing four ducs in the fourth quarter in North Dakota. In addition to this we expect a slight uptick in non operated activity in both North Dakota and the Marcellus.
As we have previously highlighted we've seen a step change in our well cost performance. This year in North Dakota, our latest view as the total well cost. This year have averaged us $6.4 million, which is a very meaningful U.S. $1.2 million structural reduction to our 2019 average.
These capital cost reductions have been driven by solid planning and execution, which when coupled with technology application has driven it can continuing trend of improved drilling and completion cycle times the.
The improvements we've delivered on our well costs have helped support our reduced capital spending guidance. This year now at $295 million.
Turning briefly to 2021, our preliminary operating plan will once again be largely focused on the Bakken, where we expect to enter the year with a 29 gross 23 net well DUC inventory.
Our maintenance capital outlook would see us completing ducs.
And re initiating drilling during the year to provide an inventory of wells to complete in 2022.
We will remain mindful of commodity prices and have the flexibility to adjust our capital plans next year as needed.
Lastly, I will wrap up with a few SG comments safety performance year to date has been exceptional in fact, the last 15 months have seen our best safety performance ever as a company.
We'd like to thank our employees and partners for their focus and efforts to operate safely amidst the uncertainty of 2020.
As noted in our recent SG report, we anticipate 2020, corporate GHG emissions intensity to be 20% to 25% lower year over year.
This has been driven by a step change in our North Dakota, flaring intensity, resulting from both improved operational planning and lower basins completions activity.
The report also highlights our efforts to reduce use of fresh water in our stimulation activities and we project to finish the year using a bit more than 20% produced water per stimulation in North Dakota ahead of our published target.
Our strategy continues to deepen and has become an integrated element of our operations planning only.
I'll leave it there and we'll turn the call over to the operator and open it 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 one on your Touchtone phone you will hear three Tom prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star followed by two if using a speaker phone. Please lift your handset before.
Pressing any.
One moment for your first question.
There seem to be no questions at this time.
Okay, well, thanks, operator, Oh, it does look like a few have popped in now.
Your first question comes from Jared at Olin with South Dakota Investment Office. Please go ahead.
Hey, guys. Thanks for the.
Well today and the questions.
Can you just touched on briefly anymore.
You mentioned the dynamic of companies trying to.
Our existing in a new paradigm.
You are focused on a flat production next year, but what price signal would you need to have in order to have a declining production.
When you when you talk about completing wells into a very weak commodity price sub $40 today with a light differential.
What's the strategic rationale for continuing to.
Keep production flat and.
What would you need to do to change that.
Good morning, Jerry Thank you for the question it's great. So.
For us its economics, and its affordability and that really.
Drives decision, making.
At the at the current forward market part.
Partially supported by our hedge book, we see.
Robust Gulfport economics from our our DUC inventory.
And highly affordable.
I guess the good news from a market perspective. It also sets up a free cash flow dynamic as well, so I think thats pretty easy in our in our opinion.
So how low would things go where those conditions would change if you're much of the 40 of the free cash flow was there.
That matter very much probably not so much in the margins because you still have economics that are supporting programs I think if you start getting into the mid Thirtys you start questioning whether you're just being wasteful perhaps.
So I think as you start calling sort of meaningfully below 40 mid thirtys.
Thank you start to really think about it again.
Great. Thank you. Thanks, so much best of luck, yes, Thank you cheers.
Your next question comes from Greg Pardy with RBC capital markets. Please go ahead.
Thanks, Good morning, and weaker we couldn't let you guys go that easily so [laughter].
[laughter] Cup.
Chuck a couple of questions I guess the first one is I know nothing so fully baked at this point, but in the context of a $300 million capital program.
For next year, how much how much of that would likely go to the Marcellus and maybe can you talk a bit about just how much you need to spend there I mean, I know a lot of it's mostly non off I guess that but just curious as to what the spending might be I guess.
Yes ill turn that over to Wade to give you a little bit of color. It. It is all non operated with a couple of partners dominating at one in particular, we do want to you Greg a little bit of color on.
What we see there.
Yeah happy to good morning, Greg.
Of course this is all preliminary at the moment, but.
This year, we've had roughly 15% of the capital pointed out the Marcellus in 2021, we wouldn't see that materially change might be up just a little bit and so you know to your broader question. When we look at kind of what it takes to sustain.
Kind of production or.
Kind of at a flat level you know, we typically look at.
A similar pace of activity that we've we've seen even this year, but you know if.
If you look at somewhere in the order of.
You know fortyish million dollars of capital.
Net capital on our part that typically drives enough activity to keep our our net production roughly flat okay.
Okay trend Thats 40 Canadian.
Correct, Okay. Okay terrific. Thank you for that.
Second is is is another broader question, but.
Just with everything occurring I mean, weve not unusual for you to get a question you had around the landscape for acquisitions and just what all of that looks like just any any thoughts there.
And again, the focus I guess would really be the Bakken.
Yeah, not a lot has happened directly in the Bakken.
There has been.
Kuwait.
Quite a change in some of the participants in the Bakken series, the restructurings that have.
That have occurred there.
Publicly and privately.
You could step back.
We're starting to see certain.
Certainly a lot of conversations.
M&A broadly and I.
I think thats a I.
I think thats a necessity.
I think it's going to continue I think its going to continue throughout the U.S. and I think it's going to continue in Canada.
Right for scale and for.
I guess for relevancy.
They are powerful forces and I guess minerals perspective, we see the benefits and.
Well considered well.
Well executed transactions.
The simple principles, though I think are critical to mean keeping keeping focus.
Getting strong balance sheet.
Real and logical operating and corporate synergies.
Maintaining the shareholder centric perspective, with sensible and accretive outcomes for all shareholders and I think if you put all that together and you end up with the resulting business is more sustainable with strong governance I think those kind of things are are going to be supported.
Theres been a bit of a questionable building scale for the sake of scale generally hasn't been a successful strategy, even though we do see benefit in the right kind of scale.
So ill.
What I anticipate things opening up in North Dakota I would.
The volatility has been.
Pretty profound.
Which.
Yes that makes it harder for things to come to fruition the bit of the uncertainty around DAPL is sort of the dynamic into the market out there but.
I I think the pace of activity is going to continue and I think it's just going to be a trend that when you're talking about for a long time.
Thanks very much.
Thanks, Greg.
Your next question comes from Patrick O'rourke.
With ATP capital markets. Please go ahead.
Hey, guys. Good morning, I know you just touched on the uncertainty around top I was wondering if you could give us an update kind of where that process stands what the time frames are I know you're not fully exposed to the pipeline, but what maybe if you can quantify again for us what the risks could be and what the upside could.
Be in 2021 there.
Expect to differentials in the Bakken.
Thanks, Patrick appreciate the question I think Joe do you want to start this.
Yeah sure good morning.
So yeah as you mentioned were not directly involved in the the Apple process or the legal process. So we can't really comment on that and timelines and that sort of thing.
But Tom you know what it means for US is you know if dapple continues to operate we can see differentials in the basin in that $3 ish range.
We see supply declining.
And so theres going to be the.
The ability to use pipe to clear the basin. If dapple does end up getting shut down we have quantified that so in the context of a full year shutdown that would equate to about 80 cents on a per BOE corporate netback that it would cost us and differentials could be in that.
To $8 range for the Bakken production.
Okay. Thank you.
Ladies and gentlemen, as a reminder, should you have any questions. Please press star one.
There are no further questions at this time. Please proceed.
Okay, well. Thank you to everyone that joined the call today I appreciate your interest and great to integrate weekend. Thanks.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.