Q4 2020 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the <unk> Corporation Q4, and year end 'twenty 'twenty results conference call.
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Have a listen only mode.
Following the presentation, we will conduct a question and answer session. If at any time. During this call would require immediate assistance. Please press star zero for the operator.
This call is being recorded on February 19, 2021, I would now like to turn the conference over to Mr. Drew Mair. Please go ahead.
All lines. Thank you operator, and good morning, everyone and thank you 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 have 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 are in Canadian dollars unless otherwise specified.
I'm here this morning, with Ian Dundas, our President and Chief Executive Officer, Jodi, Jenson Labrie, Senior VP, and Chief Financial Officer, Wade Hutchings, Senior VP, and Chief operating Officer, Shaina, Morihiro, VP finance and Garth doll VP marketing.
Following our discussion we will open up the call for questions with that I will turn it.
Yeah.
Well, thank you drew.
Everybody.
So our friends in the U S you're dealing with some rough weather hope.
I hope everyone's states and on warm thank.
Thank you for joining us today.
This morning, we announced our fourth quarter and full year 2020 results.
And I'll start by described.
Over to you some of the highlights from last year before talking about our plans for 'twenty 'twenty, one and the brewing acquisition.
Clearly 2020, with a complicated and challenging year and I want to thank our staff and our strategic partners for all of their support.
Dedication.
Their commitment to ensuring.
Driving safe reliable operations in the face of the pandemic has been nothing short of exceptional.
On the most important takeaway from 2020 was that we were able to maintain our financial strength and preserve shareholder value.
Well, turning the challenges of 2020 and to an opportunity to emerge as an even stronger.
Shrinks that are positioned company.
We did this by taking action to adopt to sharply lower commodity prices.
Including adjusting our operational plans and maintaining a focus on reducing our cost structures.
While continuing to deliver strong operational performance.
Solid financial results and continued ESG.
<unk> improvements.
As a result, we entered 2021 and are positioned to execute on the brutal on opportunity.
Operationally the brewing assets fit well.
On the Bakken with a material position on Fort Berthold area directly adjacent to our acreage.
We're able to acquire the company at a valuation that we believe was attractive both on an absolute and relative basis.
And underpinned by brewing existing production.
The transaction will be immediately accretive to shareholders with robust accretion to adjusted funds flow per share and free cash flow per.
Sure.
We highlight that we expect the pro forma business to generate more than $300 million on free cash flow. This year based on a 10 month contribution from brewing.
And assuming $55 West, Texas oil and $3 Nymex natural gas prices.
It was also important to us.
We financed the acquisition appropriately ensuring that we remain.
We remain in a position of strength with a solid balance sheet and excellent liquidity.
We expect it to be Undrawn on our U S $600 million bank facility when the transaction closes in early March.
And if.
Crude oil pricing holds we anticipate taking our balance sheet to approximately one times by year end.
The Gorilla acquisition comes with 24000 BOE per day per day of current production.
10 net.
Drilled uncompleted wells.
And about 100 net drilling core locations.
We also see potential upside beyond these locations Wade will speak more about the inventory and upside in his remarks.
We do expect.
Realized tangible synergies with the acquisition.
We are not adding any G&A.
And there will be clear benefits for more running.
On a larger.
More efficient capital and operating plan.
We plan to report out on these efficiencies as we begin to realize them.
Our pro forma 2021 capital budget remains at between $335 million to $385 million.
<unk> reflects our maintenance capital plan.
We are committed to a plan, which generates free cash flow, which we are well positioned to deliver following the brewing acquisition and with the improving commodity price environment.
First call on that free cash flow will be balance sheet.
We're also focused on opportunities to provide incremental return on capital to shareholders.
Beyond our current dividend as well.
Make progress on our balance sheet objectives.
Lastly, I'll wrap up with a few ESG columns we've.
We've made strong progress further integrating and enhancing our ESG strategies into our business and.
In delivering on our targets over the last.
Yes.
In 2020, we exceeded both our emissions intensity.
And freshwater use reduction targets.
And we delivered the best safety performance in our company's history.
These along with our other ESG initiatives will continue to be priorities in 2021 and.
And we believe this.
12 months this will create value for our stakeholders.
Our board is deeply engaged on this topic, we're committed to continuing to pursue excellence here.
Now I will turn the call over to Wade.
Thanks, Ian and good morning, everyone.
Like other producers.
This folk 'twenty 'twenty capital and operating plan change dramatically from our initial expectations.
But despite all the changes there was a solid year from an operational perspective on.
Our execution started strong and by the time, we suspended our D&C activity in April we had achieved record performance for our company in terms.
Zara and completion cycle times.
Which translated into significant capital efficiency improvements.
As we re initiated some capital activity in the fourth quarter completing four previously drilled wells, we were able to further improve upon our completion efficiency with our last pad averaging 15 stages.
A drilling.
On average in 2020, we were able to reduce our total well costs in the Bakken to U S $6 3 million, which represents a U S $1 3 million per well improvement year over year.
Turning to 'twenty 'twenty, one we expect to keep this operational.
<unk> on momentum going and believe we can continue to improve this well cost performance.
We plan to provide more detailed guidance once the brewing acquisition closes.
Pro forma budget that we've outlined assumes that we layer and Bruins 10, net drilled uncompleted well inventory into our completions.
<unk> per day program this year.
We are on track to commence completion activity in North Dakota at the start of March and also plan to Reinitiate drilling activity there starting in the spring with one rig.
Another area. We're focused on is restoring production from a subset of Bruins wells, which require.
<unk> brokers.
Many of these wells were shut in during the low oil price environment last summer or simply went down in the normal course, and with current pricing providing robust workover economics, we will be accelerating their returned to production.
As Ian noted we have identified about 100 net.
Work on drilling locations across Bruins Fort Berthold and Williams acreage as we think about upside to this number if primary primarily relates to the Williams acreage.
For context, the Williams locations. We've identified are only focused on the east eastern portion of their land position or about.
Net third of their Williams acreage. These locations are also predominantly middle Bakken focused with less development envisioned in the three forks.
As you move further west in Williams County, the hydrocarbon system D grades on the wells aren't as productive. So today, we're not including that Western Williams landed.
Land and our forward plans or drilling inventory, but if we have continued success, reducing well costs potentially also supported by higher commodity prices there could be a time, when we would revisit that acreage for development.
I would note that the Williams acreage does offer the potential for lower cost structures in Fort Berthold given.
When the shallow nature of the reservoir and lower ancillary cost due to being off the reservation.
Further to <unk> comments on synergies, while the brewing acquisition doesn't dramatically increase our scale. It will support a more efficient capital and operating plan rather than laying down our drilling rig later in the year, we will likely keep it operating.
We will also bring more wells on production with our Frac partner, allowing us to maintain momentum and helped drive costs lower.
We also expect to see benefits to operating costs for the combined operations and we will report out on these as we make progress.
Turning to our year end reserves.
Operating reduced levels of capital activity 2020 was not a year, where we saw significant reserve additions.
Notwithstanding this our overall performance was on track.
Fluting economic revisions due to the reduced price forecast, we replaced 89% of production Corporately and 119% of production.
With the North Dakota on a proved plus probable basis, our F&D numbers were quite strong supported by the success, we've had reducing our well costs are proved F&D was $6 seven $8 <unk> per Boe.
Or excuse me $6 seven Canadian per BOE and proved.
<unk> probable F&D was $6 50 per Boe.
I'll leave it there and pass the call to Jodi.
Thanks Wade.
The combination of quickly reducing capital activity and our considerable success driving cost savings generated free cash flow in 2020, despite the low oil.
<unk> price environment for most of the year.
Our adjusted funds flow for 2020, with $358 million, which fully funded our capital spending requirements and generated $67 million of free cash flow.
In the fourth quarter, we recognized a $311 million non.
Oil property plant and equipment impairment due to the lower commodity price environment and the use of constant at 12 month trailing prices to test for impairment in accordance with the Securities and Exchange Commission requirement.
This impacted our earnings leading to a fourth quarter net loss of $204 million.
Non cash moving on to our oil realizations in the Bakken our differential averaged $4.82 U S per barrel below W. T. I in the fourth quarter, our full year Bakken differential averaged just under $5 U S per barrel.
With the decline of in basin production in the Bakken during 2020.
And more stability in oil prices, we're seeing a more constructive market for Bakken crude with current spot differentials trading tighter than $3 U S per barrel below W. T I D.
This strength is supporting our 2021 differential guidance of $3.25 you asked per barrel, which assumes the Dakota.
<unk> pipeline continues to operate.
Turning to the Marcellus regional natural gas prices were particularly weak between September through November in 2020, due to nearly full regional storage combined with low demand due to mild weather.
As a result, our realized Marcellus sales price differential.
Accent.
So over a dollar U S per mcf below Nymex during the fourth quarter driving our full year 2020, Marcellus differential to <unk> 65 cents per U S per Mcf below Nymex.
We expect our average 2021 Marcellus differential to improve to 55 U.
U S per Mcf.
Widened on Nymex.
This is an annual average estimate and includes normal seasonality, where we expect robust pricing and differentials during the winter months with more moderate pricing and differentials during the warmer months.
Moving on to the balance sheet, we ended the year in a strong position with significant.
I facility, consisting of $114 million of cash on our hand on hand, and 600 million U S of Undrawn capacity on our bank credit facility.
Subsequent to year end and in connection with the brewing acquisition, we raised $132 million in gross proceeds from our equity offering and entered into.
Our new three year senior unsecured 400 million dollar U S term facility to be fully drawn down on the closing date of the acquisition.
This term facility includes financial and other covenants.
Long with pricing consistent with our existing credit facility.
If current pricing holds.
Liquidity back to take our net debt to adjusted funds flow ratio to approximately one times by year end in line with our long term leverage target.
Lastly, we have added to our commodity hedging position. We now have approximately 21500 barrels per day hedged in 2021, primarily.
We agree through three way collars at average Wpa prices of approximately $34 50 by 44 by $54 U S per barrel.
As we previously disclosed upon closing of the brewing acquisition, we will assume their hedge positions and record them on our balance sheet at fair value as part of.
<unk> price in.
In 2021, Bruin has 9000 barrels per day swapped at $42 U S. W. Ti.
The realized and unrealized gains and losses on the balloon hedges will be recorded in our financial statements on a go forward basis, which will reflect the changes in WTS prices from the day.
The purchase lows.
I'll leave it there and we'll turn the call over to the operator and open it up for questions.
Yes.
Thank you ladies and gentlemen, we now begin the question and answer session should you have a question. Please press the star followed by the one on your Touchtone phone.
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One moment please before your first question.
The first question comes from Patrick work with HEB capital. Please go ahead.
Yes.
Oh, Hey, guys good morning.
Just a couple of quick questions on the nuance of the Reserve report I know there was a little bit of a technical revision there.
It looks like maybe perhaps some barrels shifted from two P. M to one P is as is normal but I'm wondering with regard to the rest of the Technicolor.
Technical revision what the.
Or was there I know about $183 million came out of FTC is that.
Wells coming out of the reserve report or does that FTC reduction being more driven by.
Well cost improvements that you've made and those being seen a structural.
Good morning, Patrick.
Good morning.
Driver.
Sure Good morning, Patrick Thanks for the questions.
On the FTC question the.
By far the biggest driver of those FTC changes as our lower.
Forward well cost projections given the success we've had.
Over the last year in.
Non of handling those costs as you saw in the release, we reduced costs year over year by 17%.
$1 3 million in the U S and so as you as you bake that in the long term FTE.
FTC.
It ends up making a pretty big impact.
Think to go back to your point on.
Reduce probable tech revisions.
The key driver that Youre seeing there is as our confidence grows in our one P assignment, what you see as shifts from reserves from probable into proved and so even though the overall <unk> number doesn't change.
On the probable number does change it actually shows a negative or.
Even though the total hasn't changed.
Okay.
Okay, Great and then just a quick question I know Jodi talked.
Address the brewing our hedge book.
Assumption would be that you came into that.
With eyes wide open and price that into the deal on.
I'm, just curious on potentially the longer and more absurd and their hedge book on the five by 75 color. If you guys see.
And you need to have that sort of protection in 2023, or if you would think about unwinding.
On to.
Maybe preserve potential upside beyond 75 Bucks.
Hey, Patrick.
So.
Of course.
None of that was news and that was all.
It was all disclosed in the initial acquisition announcements when we sort of talked about the pro forma.
That book.
As to that.
Little strange call or you're talking about let's just put that in the bucket of.
Immaterial there was some nuances that.
The company has that company had to put it on as they emerge from bankruptcy.
So yes, we will.
The hedge will think about that one in isolation, but.
If we're dealing with a $75 per cap is a problem of I'll call. It a quality problem.
To be dealing with.
Yes.
If you step back and think about that hedge book, we have we're pretty comfortable let's give it a really meaningful downside protection and then.
<unk> structured it to preserve pretty significant upside through the through the.
The unhedged volumes, obviously and then the three ways that we've been using and then obviously as we move on into 'twenty 'twenty two the hedge book is more modest again.
Yeah, Yeah, very fair I think if anybody needs a $5 put.
We have strength for a full year on might need to look for a new job at some point here, but thank you for that.
You never know.
Okay. Thank you.
Yeah.
Thank you.
We have a following question from Greg with RBC capital markets. Please go ahead.
Yes, thanks, good morning.
Just a couple maybe just to go back to the reserve report a little bit and.
Just well performance and so forth. So obviously on the weighted mentioned.
Reserve replacement is really a function of spending levels, obviously over the course of last year could you maybe just comment on.
For him on well performance I know the costs are continuing to go on the right direction.
But any any thoughts there would be helpful.
Sure happy to address that Greg.
At a high level I would say well performance continues to track our expectations.
To dive a little bit more into those reserve replace.
On our numbers in North Dakota.
The 69% reserve replacement.
Does move up to 119% if you take out the price driven economic revisions.
On the key drivers overall for our reserve replacement in 2020 and North Dakota.
Placement really on a product of a bit of lower capital investment in 2020, obviously, but then also appreciate that our long range plans.
Have shifted to a bit of a lower growth model. Then we may have previously had and so that also impacts the number of new.
The reserves you can add into the system.
It was not driven at all by well performance as I noted.
The results from the last couple of years and specifically, even the 2020 results have tracked right right close to our type curves.
Okay terrific and maybe you could go up now.
Now to 15 to 20000 feet.
Realized Bruins closing in March.
Your balance sheet.
<unk> best in class and you guys are very careful in how you go about doing things, but I guess a question for Ian is now that you've got increased scale and increase free cash flow and so forth are there further consolidation acquisition opportunities that you.
I would see.
Either in the Bakken or the Permian or or would you actually even include Canada in that mix. So.
I know that's a granular question, but I'm just trying to get my head around how youre thinking about the business going forward.
Good morning, Greg.
Yeah.
Yes, I might sound a bit redundant here.
We're just executing on we've just executed on.
Transaction that day.
I think makes a lot of sense to us and then we've had some positive feedback will.
Just continuing to consolidate.
And our main.
Areas of focus.
Yes.
So.
Would we continue to want to do those sorts of things.
We shouldn't and lined up.
Clearly.
That could be very smart business and so yes, there is other opportunities out there.
We are not the big dog in that based on where you don't have a dominant position.
Physician, so we see opportunity there I guess, we will see how that market unfolds.
We've only had two cash transactions in North Dakota in the last couple of years really.
So we'll see if this is the start of a trend.
And to your.
Call it about.
The balance sheet.
Really important to us.
To maintain debt balance sheet strength, which is one of the reasons, we put a bit of equity out the door.
For all of the strategic benefits that can come from having a strong balance sheet, including the ability to continue to look for opportunistic acquisition.
Opportunities.
To your other part of your question.
How would we think about things outside of North Dakota.
I think we've been consistent.
We view the core of the company as being North Dakota building around that.
Makes sense.
There are other opportunities out there yes.
I think you have to keep your your eyes open to other opportunities.
Whenever.
Youre starting to speculate on that People's ears, perk up and wonder what it looks like so I don't know what it looks like because right now we're talking about Boston consolidations, but someday, perhaps we do we do.
Do pay attention to North America carefully again, most of the things that we see are in the U S, which is where most of our focus is.
But there are some interesting opportunities in Canada as well.
But again I come back to what.
The focus area today, largely is in our backyard and we see opportunities there, including oil with just execute on.
Happy to add more if you want to.
On <unk>.
More color on that.
No I think that does it.
Thanks to growth.
Thanks, Greg.
Thank you.
As a reminder, ladies and gentlemen should you have a question. Please press star followed by the one on you touched on zone.
There are no future questions. At this time you May proceed.
Alright.
So we'll leave it there thank you.
Everyone joining us on this Friday morning, and there's a good safe weekend take care bye.
Okay.