Q3 2020 Enerplus Corp Earnings Call

Okay.

Increasing the midpoint of our annual production guidance by 1500 Boe per day.

Reducing our capital spending outlook to $295 million from $300 million previously Andrew.

And reducing our cash cost guidance by a combined 45 cents per vili further supporting our margins.

Looking at the upcoming fourth quarter, we expect our liquids production to average between 47000 to 49000 barrels per day.

Declines 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 no.

Namely maintaining balance sheet strength.

Returns based capital allocation and a focus on shareholder returns.

Based upon our current commodity price view, our preliminary outlook for next year sees us stabilizing production with line of sight to generating free cash flow.

Specifically, we would expect to execute a maintenance capital Pratt plan, which would keep our production largely flat to the midpoint of our expected fourth quarter 2020 volumes of approximately 86000 Boe per day in.

Including 40000 barrels per day of liquids.

Importantly, our capital plans to say to sustain our base production are supported by robust economic returns.

At current prices.

The capital spending associated with UBS. 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.

Turn 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 the 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.

And 50 dollar West, Texas environment, we would have significant optionality to further enhance the balance sheet priest 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 endure and that we are dealing with a 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.

As 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 prioritizing the generation of free cash flow and more financial resilience.

We will provide more formalized guidance or 2021 later this year or early next year, but in summary, we may we remain well positioned to navigate volatility.

We believe that we offer high quality low risk exposure to potential price recovery and reasonable returns in the current market.

Now I will turn the call over to Jody, who will update you on some financial highlights Jodi.

Thanks, Dan.

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 have free cash flow.

Our earnings in the quarter were impacted by noncash impairment to our property plant and equipment totaling $257 million.

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 U.S. generally accepted accounting principles.

Enerplus continues to have significant liquidity consisting of $85 million of cash on hand, and 600 million U.S. have 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 and 37, 10th U.S. per barrel below Wi Fi in the third quarter.

How about a dollar per barrel wider compared to the prior quarter largely due to the uncertainty falling a district court's order in early July for the Dakota access pipeline cease operation.

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 I realized Bakken differential at $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 to average 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 differential to 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 a strong outlook for natural gas prices next year.

[noise], 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 as you noted we've seen cash costs continue to trend down across the board and have lowered our 2020 guidance for operating cost transportation and DNA by a total of 45 cents per Boe <unk>.

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 four he won 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 over.

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 up tick 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 costs. This year have averaged U.S. $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 a can continuing trend of improved drilling and completion cycle times they.

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.

Andrea 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 U.S.G. comments safety.

Safety performance year to date has been exceptional in fact, the last 15 months have seen our best safety performance ever as a company I.

I would 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 he asked you report, we anticipate 2020, corporate GHG emissions intensity to be 20% to 25% lower year over year. This.

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 there.

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 U.S.G. 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 ton prompt acknowledging your request and your questions will be pulled any order. They are received should you wish to decline from the pulling process. Please press star followed by two if using a speaker phone. Please lift your handset before.

Pressing any keys.

One moment for your first question.

There seem to be no questions at this time.

Okay, well. Thank you operator, no. 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 third Pell today on their questions can.

Can you just touched on briefly in your opinion.

And you mentioned the dynamic of companies trying to.

Or existing in a new paradigm and 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 I guess when you. When you talk about completing wells into a very weak commodity price sub $40 today with a wide differential what's the strategic rationale for continuing to keep production.

And flatten and what would you need to do that could change that.

Good morning, Jerry Thank you for the question, it's great Yeah.

So the.

For us its economics and its affordability, we that really.

Drives decision, making and we at the at the Kearl poor market and partially supported by our hedge book we see.

<unk> robust go forward economics from our our DUC inventory and highly affordable the 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.

Well, so how low would things go you know where those conditions would change if you're much under where do you get the free cash flow isn't there.

Does that matter very much probably not so much in the margins because you still have the economics for this one program Yeah, I think as 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 I think you start to really.

Think about it again.

Great. Thank you. Thanks, so much best of luck yeah. Thanks futures.

Your next question comes from Greg Pardy with RBC capital markets. Please go ahead, yes.

Yeah. Thanks, Good morning, you know and we could we couldn't let you guys go that easily so [laughter] [laughter].

[laughter] like <unk> Cup a couple of questions I guess the first one is the you know I know nothing so fully baked at this point, but in the context of a 300 million dollar 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 you know.

Mostly non off I got it but just curious as to what the spending might be I guess.

Yeah 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 Wade you want to give Greg a little bit of color on.

What we see there.

Yeah happy to good morning, Greg you know of course. This is all preliminary at the moment, but you know this year. We've had you know roughly 15% of the capital pointed out the Marcellus and 2021, we wouldn't see that materially change might be up just a little bit.

And so you know to your broader question you know 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 you look at somewhere in the order of.

You know fortyish million dollars of capital a net capital on our part that typically drives enough activity to keep our our net production roughly flat.

Okay trend that's 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 the questioning around the landscape for acquisitions and just what all about looks like just any any thoughts there.

And again, the focus I guess would really be the Bakken.

[laughter] Yeah, no not a lot is happening directly in Bakken there has been.

Quite a quite a change in some of the participants in the Bakken a series of restructurings that have.

That have occurred there public.

Publicly and privately.

If you step back yeah.

Yeah, we're we're starting to see sort.

Certainly a lot of conversations.

M&A broadly and you know I think that's 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, you know that.

For scale in for.

I guess for relevancy.

They are powerful forces and you know I guess minerals perspective, we see the benefits and yeah.

Well considered a well executed transactions.

I'm pretty simple principles, though I think are critical to mean keeping keeping focus.

Maintaining a strong balance sheet.

Real and logical operating and corporate synergies.

Maintaining a 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.

There's there's been a bit of a questionable building scale for the sake of scale generally hasn't been as successful strategy, even though we do see benefit in the right kind of scale.

So you know what.

What I anticipate things opening up in North Dakota, I I would you know.

The volatility has been [laughter] pretty profound.

Which yeah makes it harder for things to come to fruition below the uncertainty around to Apple is you know Tony dynamic into the market out there, but yeah I 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 <unk> capital markets. Please go ahead.

Oh, Hey, guys. Good morning, I know you just touched on the uncertainty around topic 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 <unk>. Maybe if you can quantify again for us what the risks could be and what the upside.

Would be in 2021, there with respect to differentials in the Bakken.

Thanks, Patrick appreciate the question I think good Joe do you want to start this.

Yeah sure good morning.

So yeah as you mentioned were not directly involved in the the dapple Pro SAS had the legal process that I can't really comment on that and timelines and that sort of thing.

But 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 there's going to be the ability to use pipe.

To clear the base and 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 six to eight.

Dollar range for the Bakken production.

Okay. Thank you.

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Okay, well. Thank you to everyone that joined the call today appreciate your interest and have a great day and great weekend. Thanks.

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