Q1 2021 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and walk on CD.
Quarter 2021 results conference call.
All lines.
Following the presentation, we will conduct a question and answer session. If any January day Sculpey required immediate assistance. Please press star zero for the operator. This girl is really good on Friday may 7th 2021.
I'd now like to turn the conference over to Mr. Drew Mair. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining the call.
For we get started please take note of the advisory is 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.
<unk> senior VP, and Chief Financial Officer, Wade Hutchings, Senior VP, and Chief operating Officer, Shaina, <unk>, VP finance and Garth doll VP marketing.
Following our discussion we will open up the call for questions with that I will turn it over to Ian.
Thank you drew good morning all.
I'll begin with some comments on our first quarter results and then move on to talk more about our recent acquisitions in the Bakken and our five year outlook.
Production was just under 92000 Boe per day on the quarter, which was 6% higher than the previous quarter due to increased Marcellus volumes and about a three week contribution from the <unk> acquisition.
We commenced completion operations in the Bakken towards the end of the quarter.
Which in combination with the production acquired through our acquisitions will drive a material increase to our second quarter production.
Wade will provide more details when he speaks.
We generated over $60 million in free cash flow during the first quarter.
Based on current commodity prices, we expect it to generate free cash flow in each of the remaining three quarters with more substantial amounts expected during the second half of the year.
Moving on to our Bakken acquisitions, which are now closed.
The combination of these deals has meaningfully increased our operational footprint in North Dakota.
Standard our development runway.
Andy is helping to drive a step change in the free cash flow profile of the business.
Here is the high level summary of what we added between the two transactions.
230000, net acres, increasing our land position by four times.
340, net identified economic drilling locations with the potential for an increase to this number.
Our exploitation efforts.
30000 Boe per day of high margin and relatively low decline production.
And the operational benefits of more scale.
Including increased operational flexibility across a broader asset base and an ability to further enhance our drilling and completion efficiencies.
We were also able to add this increased scale, while keeping our total net general and administrative costs flat.
Integration of the assets is on track.
And we're focused on ensuring safe and consistent execution as we incorporate these new positions into our operations.
When we announced the Dunn County acquisition on April we also provided a five year outlook underpinned by the following capital allocation principles.
Maintaining low financial leverage.
We believe the cyclicality of our sector does not lend itself to high debt levels. We continue to target a long term net debt to adjusted funds flow ratio of less than one times.
We increased debt levels in connection with the acquisitions, but with the incremental cash flow, we see a clear path to quickly deleveraging.
We estimate that we will be at or below one three times by the end of this year based on a $55 <unk> oil price today.
Today's higher prices hold we will be ahead that estimate.
Second principle, we highlighted was our commitment to generating free cash flow.
We are focused on sustainably growing free cash flow by investing in the highest return projects on our portfolio.
Third is our focus on returning capital to shareholders.
To grow our shareholder returns supported by an increasing cash flow base.
None of these principles are new to enter plus this is how we've been operating for many years as we believe our track record demonstrates.
Assuming a $50 to $55 price for West, Texas, We see one two to $1 $8 billion from cumulative free cash flow through 2025, while delivering an annual liquids growth rate of approximately 3% to 5%.
Consistent with our focus on growing our shareholder returns, we announced a 10% dividend increase supported by our expanding cash flow generating capabilities.
Given the robust outlook for our business, including our expectations of meaningfully reducing debt. This year, we will continue to evaluate the potential for increasing our return of capital to shareholders. This year in the context of this capital allocation framework.
I will pause there and turn the call over to Wade.
Thank you Ian and good everyone.
As Ian noted we started our completions program in North Dakota towards the end of the quarter. We brought three wells on the six well pad on production right at the end of the quarter with the remaining three wells online in April we have since completed a nine well pad to date in the second quarter.
The second and third quarters will be our most active this year and we expect to bring 32 gross 26 net operated wells online over this period our.
Our execution has been solid with completions performance on both pads, having averaged approximately 13 stages per day, representing an improvement of over 30% compared to our 2020 average performance. This acceleration is one of the reasons that we increased our 2021 production guidance when we announced the dawn.
<unk> acquisition in April.
The integration of brew in which we closed on March 10th is also going very well production has been resilient supported by our efforts to quickly restore inactive wells requiring workovers. We are on track to have most of these wells are turned to production by the end of May.
I'm also happy to report that the new operators that have joined US as part of this acquisition are demonstrating excellent commitment to our safety culture.
Now I'd like to share a few perspectives on the new acreage that we've acquired with.
With the brewing acquisition, we acquired 30000 net acres on FTIR adjacent to our existing operations and another 67000 net acres in Williams County.
Both areas, we've identified about 100 net drilling locations.
As I've noted previously the Williams locations. We've identified are only focused on the eastern portion of the acreage position or about one third of the total Williams acreage overtime, we will look at testing the western Williams acreage, but our near and medium term plans will be focused on FTIR and eastern Williams.
But the Dunn County acquisition, we acquired 79000 net acres to the south and southwest of our FTIR position. We've highlighted 110 net drilling locations from this acquisition, which are clearly tier one supported by robust recent vintage industry activity and results we.
We've also noted an additional 120 net locations, which we believe are economic today, but offer the potential for more compelling returns as we test more modern completions on the acreage.
Lastly, the drilling locations that we've identified are only in the middle Bakken formation.
There are recent offset productive three forks wells in the area that offer additional upside on our new acres.
We're starting to see tangible synergies from these acquisitions as Ian.
Ian noted we've added 30000 Boe per day, and hundreds of leases, while effectively keeping our absolute G&A flat to our historic run rate and lower on a unit cost basis.
We've also leveraged our larger operating scale to support the extension of a rig contract at advantage rates. This is helping to drive the continued D&C cost efficiencies, we highlighted in our press release.
We're now targeting a U S $6 $1 million total well costs this year, a 20% reduction compared to 2019.
I will now pass the call to Jodi.
Thanks Wade.
Starting with our oil price realizations on the Bakken differential averaged $3 12.
<unk> per barrel below <unk> in the first quarter.
Refining demand is strong and based on production continues to be lower than pre pandemic levels. The combination of which is supporting strong pricing for Bakken crude.
We continue to expect our full year Bakken differential to be approximately $3 25 U S per barrel below double UTI and that is assuming the continued operation of the Dakota access pipeline.
We realized strong natural gas liquids pricing during the first quarter driven by the cold weather event in February which was centered over key NGL pricing had been both the Midwest and Texas.
Our realized Marcellus differential with 15 cents U S per mcf below Nymex in the quarter benefiting from the strength in regional pricing with the onset of colder weather.
Marcellus pricing on the second quarter is expected to be weaker due to normal seasonality, which has been exacerbated by maintenance on the Transco Leidy line during may.
We continue to expect our full year differential in the Marcellus at <unk> 55 per Mcf.
Below Nymex.
This assumes weaker pricing in the second and third quarters with prices strengthening through the fourth quarter.
Okay.
We provided on unit cost guidance for 2021, with our first quarter press release.
This included operating expense guidance of $8 25 per Boe.
4% higher than 2020 due to our increased liquids production weighting, which we expect to increase from 56% from 2020% to 62% in 2021.
Cash G&A expenses are expected to be $1 25 per Boe in 2021, 7% lower than 2020, primarily driven by higher volumes from 2021, following our acquisition.
Moving on to the balance sheet.
Separately announced last week, we increased and extended our senior unsecured bank credit facility to 900 million maturing in October 2025, with no changes to our existing price grid or covenant package.
We also transitioned this facility to a sustainably link credit facility, which incorporate ESG linked incentive pricing term based on our performance relative to our three two or three ESG targets.
We view this as continued progress towards integrating our ESG initiatives across our business and believe it will enhance our access to credit markets and support our cost of capital in the future.
We continue to have significant liquidity available through our Upsized credit facility after.
After closing our Denton County acquisition on April 30, we had approximately $750 million of Undrawn capacity.
Based on current commodity prices, we expect to generate substantial levels of free cash flow in 2021, which will result in deleveraging quickly throughout the year. We are on track to achieve our target leverage ratio of less than one times net debt to adjusted funds flow by 2022.
Given this outlook and the increased scale of our business, we elected to increase the dividend effective with the June payment.
Concurrently with the dividend increase we are transitioning from our monthly dividend to a quarterly dividend.
With our April and May dividend already paid or declared the change to quarterly payments commencing in June will result in an incremental $5 $6 million on dividends paid in the second quarter.
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 answer session.
Do you have any questions. Please press star followed by one on you touched on zone.
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Your first question comes from Ray Kwan with BMO. Please go ahead.
Yes. Thank you thanks for taking my questions.
Three questions.
The first one I was just going to ask is it around the dividend.
I guess, the 10% increase was a nice surprise, but can you talk about go forward. How you think about that in terms of potential increases increases in how that's going to be tied to or what that's going to be tied to it.
There is.
Obviously U S players or your peers are doing special dividends or whatnot.
How do you guys think about that as well too.
Good morning Ray.
So I guess this is going to evolve, but it will evolve in the context of this framework.
<unk>.
With our largest near term priority to continuing to focus on that.
When we think about the dividend I would say the the overarching principle is we want it to be sustainable.
And <unk>.
Brazilians.
So we.
We didn't think it was.
<unk> call, we thought it was actually quite a balanced decision too.
Start to change the dividend now.
And there will be something that we'll be evaluating as we move through the year clearly to your question about spec.
A special or some sort of structured dividend.
I guess, we're open minded.
People may recall.
15 years ago that was part of the construct we added on a plus.
We didn't buy it at the time that.
We thought it was necessarily maximizing cost of capital, but there are some good companies out there trying to now so we'll be evaluating that but.
I'll come back to the fundamentals, we want a sustainable.
Dividend on.
While it is growing it's better and it'll be a function of this capital allocation framework.
Didn't necessarily think we were going to be adjusting it now, but the deals have gone well to close are integrated well and obviously pricing is pretty strong and we highlighted that.
We see a pretty robust next five years in front of US where index and a robust 2021, so it's a balance decision to start with.
With the change today.
Yes that makes sense I guess following on to your kind of the five year plan here.
Can you talk about.
You have kind of stayed at 3% to 5% growth.
Over the next five years here per year, but.
But can you talk about like the cadence around whether like what drives kind of a 5% growth versus the 3% growth.
A little bit of a rounding error sometimes.
No.
Yes.
Again, I'll come back to that capital allocation framework right and we were really careful to say we're not <unk>.
Getting an absolute growth level.
We see.
Our growing business is much more attractive on that is not growing but it needs to be on outcome of the financial characteristics of the business and so the principles balance sheet generate free cash flow return capital to shareholders.
Those are all things, we're going to do that we have done for a long time and then in a $50 to 55 world.
We see an ability to do all of those things and grow the business.
So the difference between three to five I don't know if theres any particular magic to that number I think the message we were trying to put on top of it as opposed to just saying growth was we would anticipate lower growth levels for our company and this is obviously a broad theme in the industry and maybe.
Ali we've had.
But again, it's been 15 years of interval is talking about a balanced approach to growth in income and right. Now we think that sort of low to mid single digit growth rate is one that makes sense.
If we really want to get granular here and maybe what's happens over a coffee some time, but you can see subtle differences in decline rate.
Chart to go past.
<unk>, let's say and you start to see declining Ching its way up.
That happens less in the.
Hub five level so.
I'm not sort of we're not trying from people like the absolute firm Roth capital on it but.
Think about.
In environments, where we have an ability to grow more than that prioritizing free cash flow generation.
I think that would be the outcome and then on these.
Higher price environments.
Obviously, there's a lot of that cash that has potential kick around.
Hope that helps you out.
It does yes, 100%.
My my last.
And this is more of an operational type on the second question is probably more for Wade.
<unk>, but.
I guess, just wondering I mean, I just want to confirm is or are you going to be drilling on the new lands. This year and can you talk about maybe expand on kind of the.
Upside locations are delineating kind of the upside locations to add more inventory.
Yes, that's a great. It's a great question, yes, what do we have weighted talk about that in <unk>.
I'll spend a moment or two giving some context because it is.
For those who followed the company for a long time.
Yes.
Been a big change to the portfolio.
US strategically significant change in the portfolio and it's not just free cash flow generation.
Inventory its opportunity set and it's a lot broader than just the economic wells, we've highlighted so wage on maybe.
Take us through some of that.
Yes happy to.
Thanks for the question Ray good morning.
I think the first thing I'll touch on is what's happening this year. So as we indicated when we announced brewing they had 10.
<unk> and inventory from 2020, roughly half of those were in the Williams County area and we will be.
Leading those docs, bringing them online later this year, so that'll be an important kind of first inner plus tests.
Williams County.
In terms of the new inventory on acres that we got in Fort Berthold itself.
Those other.
Core areas of Eastern Williams County, and that core little nice area in Dunn County.
All of those new areas are going to compete for near term capital with our kind of existing legacy FTIR inventory. So expect that 2022 will be a balance of spending between those areas and then youll see that kind of integration.
The optimization as you move out into the five year plan. So.
The broad answer your question is you'll see all of these core areas that we bought from both brewing and then that we bought from house in Dunn County facts are pretty prominently in in our five year plan.
Now beyond that in terms of the upside.
<unk> the 230000, new acres that we've added to the portfolio. They really have brought several new interesting opportunities for resource expansion.
And those clearly go beyond kind of the core inventory we relied on to.
To justify the purchase of those two assets and then and then <unk>.
Clearly goes beyond the inventory that.
And that we.
Built our five year plan on and really even goes beyond the inventory.
That we've talked about in our 10 year kind of.
Inventory life, underpinning that kind of 3% to 5% outlook.
So let me give you just a little bit of color on where we see the upside so.
There are several specific areas that we're actually quite keen to test.
The first one I would note is starting with the brewing acquisition in Williams County, we do see additional Bakken upside on the two thirds of the 67000 acres that we didn't model core inventory on.
As we noted at the at the Brewing release, we think stimulation design and Williams County is going to be critical generally speaking, we saw a little bit more intense completion relative to say the fort Berthold area be more effective in Williams county, so that'll be that'll be a feature.
Kind of the core part the eastern third of Williams, but it's also likely going to be pretty critical to unlock additional inventory in Williams as you move further to the west.
In Dunn County.
As we've indicated in our release, we do see quite a bit of additional middle Bakken upside in both the Murphy Creek area and in the southern portions of little nice.
So if you look at page 10 of the last.
On Investor deck, Youll see those 120 mid Bakken upside Wells day noted there clearly they're actually economic today.
Not quite as competitive as the core inventory we've counted but we actually are excited to see what kind of a full modern.
Stimulation design will do to the middle Bakken in those areas.
Fortunately for us, it's actually a very active area and so we're watching quite a bit of on industry activity in Dunn County, some of which directly offsets our acreage and so that non op and industry activity is going to help accelerate our learnings.
And even our own testing of that upside.
And then lastly in Dunn County, we noted that there's a lot of additional three forks upside beyond what was a very small number that we included in our core assumptions now for the three forks in that area. It's a little more complex than say in the core of the basin in Fort Berthold and so really careful.
Subsurface geologic characterization is going to be a key to unlocking three forks upside there now.
So the question of when are we going to test.
As you might imagine we're already working our 'twenty two budget, it's actually quite mature at the moment and we have very firm plans in place to begin to test specific parts of the upside I just noted starting next year.
And then beyond that I would.
Im quite confident on what Youll see is.
A very systematic kind a balanced risk approach to continue to test more and more of that upside.
As we move forward beyond 'twenty two so certainly as Ian noted, it's really brought a diversity of inventory options.
Diversity of capital allocation options, even within the Williston basin for us. So we're actually quite excited to begin to test and unlock some of that.
Yeah, I guess looking forward to 2022, so I'll just jump off because I've been talking to Mike, but everyone. I. Appreciate you answering my questions. Thank you.
Thanks Ross.
Thank you. Your next question comes from Jamie Kubik with CIBC, Jamie. Please go ahead.
Good morning, and thank you everybody.
I guess couple of questions from me as well I mean, we've seen.
Plus.
Start off 2021 quite acquisitive.
Are you seeing further opportunities in the Bakken I guess and maybe can you outline how you are.
Thinking about further M&A at current levels.
Good morning, Jamie.
Yes, it was a busy Q1 for sure.
So are we seeing things.
I mean the market.
For a while it side of this high centered concept.
It really was there was just nothing that it happened and then we got the deal done and then another one happened and then we got another day. So there's been a bit of activity and there is no question that is causing potential sellers to think about.
Putting.
Product or deals on the market. So they are out there there are there are deals happening.
I think that will happen.
How do we think both of them.
Current levels I guess, you sort of do you mean like pricing levels are like.
Yes, I mean I guess on.
On a couple of fronts like are you are you thinking about.
Additional opportunities coming around your acreage there and would you look to dispose of anything perhaps.
Start with the use of proceeds so a two part I guess.
So yes.
We've been pretty focused on assets that the operational plan, where we saw lightest they've been making money.
And we're really excited about the two things we've done this year and.
A really important part of this was making money for our shareholders on a full cycle basis without.
Changing the credit profile in a meaningful way so we leaned into the balance sheet, a little bit and we've got some goals to de lever, but that's upon us pretty rapidly. So I think we're in a position where we could do something else.
And then it becomes value on operational fit and integration and balancing all of those things so.
Two deals in it.
<unk> quarter is a fair amount.
There is no announcement tomorrow I can tell you.
But we've put ourselves on a really good position to continue to move forward.
I think scale continuing to build scale as a positive thing you got to do it the right way though.
So I guess, we'll see where value shakes out.
I guess what that looks like.
Relative to divestments.
I think we've been pretty clear over the years.
Anything outside of the Bakken and we would look for opportunities.
To maximize value.
So the challenge we had all AD was.
Didn't make a lot of sense to be a seller of anything and thats why we weren't in oil.
Buyers so as the market strengthens, which I think it will I think youre going to see metrics I think people will look back on brewing is.
Quite an attractive price.
At a moment in the market I think that's actually how the head.
Can't get to work as well so I would think youre going to continue to see valuations moving forward and that probably does provide an opportunity to maybe unlock a little bit of value here and there.
For the non core assets so.
We will be nimble and stay on the balls of our feet on that.
Okay, maybe on the brewing assets actually I know you mentioned previously that value.
Asset effectively came with a 100 wells that were shut in over 2020 or thereabouts.
You mentioned earlier that you are actively restoring.
Production on some of those shut in wells can you just can you comment at all on like where the production rate is of the brewing assets versus the 24000 Boe's a day that was purchased I guess.
Yes, I think if you run a little bit of math.
We highlighted the contribution to the quarter, which implies it was a little bit above that level.
So we're a little bit ahead of the game.
But.
Within within the range of what we are planning for part of that was.
I think it was actually just didn't wades script it wasn't in the release.
We did a pretty good job getting on those wells that were shut down and.
I think our ops manager she would tell you that we're getting everything done that we hope to get done by this time, maybe a little bit in front of that so that's been part of it.
Sell through going really well on according plan again, a little a little bit ahead of where we would have been.
Got it Okay and then maybe last question from me here on <unk> highlighted.
Ray touched on at the 3% to 5% liquids growth from 2022 to 2025 and you're.
Previous plan is set for us, but I guess, how should we think about that target changing if the apple is offline for any type of.
Duration and can you just remind us on.
Contingency plans if that were to go offline here.
So we.
We highlighted three to five.
On the outcome of the plan that we will follow in a $50 to 55.
And today, we're in a 64 I suppose so.
That will goes off tomorrow.
And we're in the 64 world No change whatsoever.
No change whatsoever.
One of the keys.
One of the keys to that is our view that there is ample.
Ample rail capacity. So we think it would be a really strange thing to happen and there would be negative economic consequence, and we will have less cash flow than we otherwise would have but our business is still very resilient. So I do not see that impacting that plan.
In that kind of price environment I suppose if youre on a 50 world and it's wider at the margins a little bit maybe but it's still pretty resilient. So.
And in the next year and.
In the next six to eight months the lion's share of our on streams are actually just completing ducks.
Rates of return that are hard to calculate the so large at these levels.
Okay. Thank you that's just from me.
Thanks, Jamie appreciate it.
Thank you, ladies and gentlemen, as a final reminder, should you have any questions. Please press star one.
It appears there are no further questions at this time you May proceed.
Well. Thank you operator, thanks, everyone for joining.
Appreciate your time today.
Safe weekend. Thank you.
Ladies and gentlemen, this concludes your conference call for today.
Thank you for participating and ask you. Please disconnect your lines.