Q1 2021 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and walk and Judy.
For each quarter.
Results Conference call.
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And the mode. Following the presentation, we will conduct a question and answer session.
And any January day, Sculpsure quite immediate assistance. Please press star zero for the operator. This score is really good on Friday may 7th 2021.
And I'd 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 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.
All right.
And 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, <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, and the quarter, which was 6% higher than the previous quarter due to increased Marcellus volumes and about a three week contribution from the brew and acquisition.
We commenced completion operations and 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 way.
Wade will provide more details when he speaks.
We generated over $60 million and free cash flow during the first quarter.
Based on current commodity prices, we expect it to generate free cash flow and 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 and North Dakota.
Standard our development runway and.
And he is helping to drive a step change and 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 expectation 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 in 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 and 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 for higher prices hold we will be ahead of 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 and the highest return projects and our portfolio.
Third is our focus on returning capital to shareholders.
And to grow our shareholder returns and supported by and 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 and.
Cumulative free cash flow through 2025, while delivering and 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 and the context of this capital allocation framework.
I will pause there and turn the call over to Wade.
Thank you Ian and good everyone.
Ian noted we started our completions program in North Dakota towards the end of the quarter, we brought three wells and a 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 and the second quarter.
The second and third quarters will be our most active this year and we expect to bring 32 growth 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 <unk>.
<unk> acquisition in April.
The integration of brew and 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 brew and acquisition, we acquired 30000 net acres on FTIR adjacent to our existing operations and another 67000 net acres and Williams County.
Both areas, we've identified about 100 net drilling locations.
As I've noted previously the Williams and locations. We have identified are only focused on the eastern portion of the acreage position or about one third of the total Williams acreage and 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 and 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 and the middle Bakken formation.
There are recent offset productive three forks wells and the area that offer additional upside on our new acres.
We're starting to see tangible synergies from these acquisitions as 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.
And 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'll now pass the call to Jodi.
Thanks Wade.
Starting with our oil price realizations and the Bakken differential averaged $3 and 12.
<unk> per barrel below <unk> and the first quarter.
Refining demand is strong and base and 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 and 25.
<unk> 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 and NGL pricing has been both for Midwest and Texas.
Our realized Marcellus differential was 15 cents U S per mcf below Nymex in the quarter benefiting from the strength and regional pricing with the onset of colder weather.
Marcellus pricing and 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 and the Marcellus at <unk> 55 per Mcf.
And below Nymex.
This assumes weaker pricing and the second and third quarters with price strengthening three in the fourth quarter.
Okay.
We provided and unit cost guidance for 2021, with our first quarter press release.
This included operating expense guidance at $8 and 25 per Boe.
And just 4% higher than 2020 due.
Due to our increased liquids production weighting, which we expect to increase from 56% and 2020% to 62% and 2021.
Cash G&A expenses are expected to be $1 25 per Boe and 2021, 7% lower than 2020, primarily driven by higher volumes and 2021 following our acquisition.
Moving onto the balance sheet.
Separately announced last week, we increased and extended our senior unsecured bank credit facility to 900 million U S. 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 and 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 and 2021, which will result, and 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 dividends already paid or declared the change to quarterly payments commencing and Jim will result, and an incremental $5 $6 million and dividends paid and 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 to question and answer session should you have any questions. Please press star followed by one on your Touchstone 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 I have three.
Three questions.
The first one I was just going to ask and is in and 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 and 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.
And so I guess this is going to evolve, but it will evolve and the context of this framework.
Your line.
With our largest near term priority to continuing to focus on debt.
And when we think about the dividend I'd say the overarching principle is we want it to be sustainable.
And.
Resilient.
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 it will be something that we'll be evaluating as we move through the year clearly to your.
Question about.
Special or some sort of structure dividend I guess, we're open minded.
People may recall.
15 years ago that was part of the construct we added enter plus.
We didn't fly to the time that we thought it was necessary and maximizing cost of capital, but there are some good companies out there trying to now so we'll be evaluating that but I.
And I'll come back to the fundamentals, we want and sustainable.
Dividend.
One day is growing it's better and it will 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 that closed and integrated well and obviously pricing is pretty strong and we highlighted that.
And we see a pretty robust next five years in front of us.
For index and a robust 2021, so it's a balanced decision to start with.
And 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.
And you've kind of stayed at 3% to 5% growth.
Over the next five years here per year.
But can you talk about like the cadence around weather, but 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.
Targeting and absolute growth level.
We see.
Our growing business is much more attractive one that is not growing but it needs to be and 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 and 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 and the industry and maybe.
And Ali we've had.
But again, it's been 15 years of interval is talking about a balanced approach to growth and income and right. Now we think that sort of low to mid single digit growth rate is one that makes sense.
If we really wanted to get granular here and maybe what's happens over a coffee some time, but you can see subtle differences and decline rate.
Start to go past.
Five, let's say and you start to see declining ching its way up and.
That happens less and the.
Sub five level so.
I'm not sort of we're not trying to tell people that are just like the absolute for raw cap on it but think about.
And in environments, where we have and ability to grow more than that price.
<unk> free cash flow generation.
I think that would be the outcome and then and these.
Higher price environments.
Obviously, theres a lot of that cash that has potential kick round.
I hope that helps you out.
It does yes, 100%.
My last question and this is more of and operational type of and the second question. So its probably more for Wade and <unk>.
Julian but.
I guess, just wondering I mean I just want to confirm are you 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.
What do we have weighted talk about that and maybe.
And we'll spend a moment or two giving some context because it is.
And for those who followed the company for a long time.
There has been a big change to the portfolio.
Strategically significant change and 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 and highlighted so Wade John and maybe.
And through some of that.
Yes happy to.
For the question Ray good morning, so.
So I think the first thing I'll touch on is what's happening this year.
And.
As we indicated when we announced brew and they had 10 ducks.
Ducks 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 and acres that we got in Fort Berthold itself.
Those other.
Kind of core areas of Eastern Williams County, and core little nice area and 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.
And the optimization as you move out into the five year plan. So.
The broad answer your question is Youll see all of these core areas that we bought from both brewing and then that we bought from house and Dunn County factor pretty prominently in in our five year plan.
Now beyond that in terms of the upside.
<unk> the 230000, new acres and 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 justify the purchase of those two assets and then and then clearly goes beyond the inventory.
We.
Built our five year plan on and really even goes beyond the inventory.
That we've talked about and.
And 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 and we're actually quite keen to test the.
The first one I would note is starting with the brewing acquisition and 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 Brew and 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 and Williams county, so that'll be that'll be a feature.
And kind of a core part for eastern third of Williams, but it's also likely going to be pretty critical to unlock additional inventory and 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 and both the Murphy Creek area and in the southern portions of little nice.
So if you look at page 10 of the last.
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 and those areas.
Fortunately for us, it's actually a very active area and so we're watching quite a bit of an 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.
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 and that area. It's a little more complex than say and the core of the basin and Fort Berthold and so really careful.
And subsurface geologic characterization is going to be a key to unlocking three forks upside there now.
And so the question of when are we going to test that.
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.
And im quite confident and what Youll see is.
A very systematic and kind of balanced risk approach to continue to test more and more of that upside.
As we move for 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.
Okay.
Yeah, I guess looking forward to 2022, so I'll just jump off because I've been talking to Mike, but everyone and 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.
Yes, good morning, and thank you everybody.
I guess couple of questions for me as well and we've seen.
And our 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 sorry for this high centered concept and.
It really was like there was just nothing that it happened and then we got a deal done and then another one happened and then we got another day and 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 and the market. So they are out there there are there are deals happening or.
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.
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.
I'll 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 lighter slate and 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 and a meaningful and so we.
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.
And then it becomes value and operational fit and integration and balancing all of those things so.
Two deals and our affair.
<unk> quarter is a fair amount.
And there's no announcement tomorrow I can tell you.
But we've put ourselves in 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 and.
So I guess, we'll see where value shakes out and.
And 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.
And so the challenge we had all AD was.
Didn't make a lot of sense to be a seller of anything and.
That's why we weren't and where 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 the moment and 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.
For the non core assets so.
We will be nimble and stay on the balls of our feet on that.
Okay, and maybe on the brewing assets actually I know you mentioned previously that about <unk>.
Asset effectively came with a 100 wells that were shut in over 2020 or thereabouts.
You mentioned earlier that you are actively running.
Production on some other shut in wells could you just can you comment at all on like where the production rate is of the brewing assets versus the 24000 and Boe's a day and it was purchased I guess.
Yes, I think if you run a little bit of math.
And 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.
And I think it was actually just and wades script it wasn't in the release.
We did a pretty good job getting all of those wells that were shut down and I.
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.
It's also going really well and according to plan and again, a little a little bit ahead of where we would have been.
Got it Okay and then maybe last question for me here and you've highlighted.
And ray touched on it for 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 apples offline for any type of.
Duration and and can you just remind us on.
Contingency plans if that were to go offline here.
So we.
We highlighted three to five.
And the outcome of the plan that we will follow in a $50 to 55 world.
And today, we're in a 64 I suppose so that will goes off tomorrow.
And we're in a 64 world.
No change whatsoever.
No change whatsoever.
One of the keys, one of the keys to that is our view that there is just.
And Paul 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.
Not see that impacting that plan.
And that kind price environment I suppose if you're in 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 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 this other large at these levels.
Okay. Thank you that's it for me.
Thanks, Jamie I appreciate it.
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Well. Thank you operator, thanks, everyone for joining.
Great your time today and others.
Safe weekend. Thank you.
Ladies and gentlemen, this concludes your conference call for today.
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