Q2 2021 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the inter Pluses Q2.2021 results conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Friday August 6.2021, I would now like to turn the conference over to drew Mirror. Please go ahead.
Thanks, operator, and good morning, everyone. Thank you for joining the call.
Before 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 the U S. GAAP all of 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, Wade Hutchings, Senior VP, and Chief operating Officer, Jodi, Jenson Labrie, Senior VP, and Chief Financial Officer, Shaina, <unk>, VP finance and Garth doll VP of 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.
Our second quarter results reflect the increased scale of our business following our acquisitions along with strong operational momentum.
We achieved record quarterly production of over 115000 Boe per day in the second quarter, 26% higher than the prior quarter.
We expect another meaningful sequential increase the production in the third quarter, which will be the first quarter debt fully reflects our 2 Bakken acquisitions, which closed in the first and second quarters of the year.
The second quarter was our most active period of the year in terms of drilling and completions activity and the execution of our capital plan remains on track.
We moved the midpoint of our annual production guidance higher by 500 BOE per day, following strong execution and outperformance year to date and we continue to operate within our capital spending guidance of $360 million to $400 million.
Our free cash flow profiles of continuing to move higher driven by the improved commodity prices since the start of the year, our increased production outlook and our disciplined capital allocation.
We now expect to generate over $450 million in free cash flow in 2021 based on forward strip commodity prices.
For the remainder of this year, we will continue to prioritize directing the majority of this free cash flow for debt reduction.
We have highlighted a 400 million dollar debt reduction target, which aligns with our net debt funds flow ratio target of 1 times or less and a $50 <unk> oil price environment.
At current commodity prices, we anticipate achieving this target by mid next year.
With the step change in our cash flow generation, driven by our significantly higher production base.
And the line of sight, hitting our long term debt targets, we elected to increase the dividend for the second time this year consistent with our approach of sustainable dividend increases.
The board also approved a renewal of our normal course issuer bid.
Under our framework, we expect to allocate approximately 90% of our free cash flow after dividends debt reduction, while we progress our deleveraging plans.
The remaining 10% we will continue to evaluate the incremental shareholder returns including through.
Further potential dividend increases and share repurchases.
Looking ahead as we achieve our long term debt target, we expect the and are positioned to meaningfully increase our allocation of free cash flow to shareholder returns.
I will leave it there and turn the call over to Wade for his comments.
Thanks, Ian and good morning, everyone.
Our operational performance. This year continues to be solid we completed and brought 23 wells on production in the Bakken in the second quarter and our completions efficiency is averaging approximately 13 stages per day up from $9 of house last year.
Our drilling performance has also been strong we set a company record in the second quarter drilling a 2 mile lateral section in 48 hours.
On the back of this performance, we updated our 2021 well cost estimates in the Bakken 2 of U S $5.7 million.
Compared to our previous estimate of U S $6.1 million.
This represents a significant reduction in our cost structure over the last couple of years were down 10% compared to last year and 25% compared to 2019.
As Ian noted, we achieved record quarterly production in the second quarter, which was driven by higher volumes in the Bakken following the closing of our acquisitions and our active completions program.
Total Williston basin production was over 72000 Boe per day in the quarter, 53% higher than first quarter production.
In the second quarter, we completed our first pod of wells that were acquired in connection with the brewing acquisition.
This was an 8 well pad in Fort Berthold adjacent to our legacy acreage.
The wells are tracking expectations with peak 30 day rates of approximately 19.100 Boe per day on average per well based on the 6 of the 8 wells that have had more than 30 days online.
We anticipate the third quarter to be another record production quarter for inter plus we expect to see strong Bakken production gross following another quarter of active completion operations and the full production impact of the assets, we acquired from Hess, which closed in mid Q2.
I'll now pass the call to Jodi.
Thanks Wade.
Our second quarter adjusted funds flow was $184 million with capital spending of $130 million and resulting in free cash flow of $54 million.
Our realized Bakken oil price differential averaged $2.76 per barrel of U S of low double UTI in the second quarter.
The demand is strong and there continues to be significant available pipeline capacity in the basin supporting pricing.
The effective August 1st we have increased our committed capacity to deliver crude oil from North Dakota U S. Gulf Coast by the Dakota access pipeline as part of its broader system expansion.
The pipeline's capacity was recently expanded from 570000 barrels per day to 750000 barrels per day based on comments from the pipeline operator.
<unk> now has approximately 10000 barrels per day of firm transportation on dapple.
Based on our year to date realizations in the Bakken and improved outlook for differentials given the apples expansion, we've narrowed our annual differential guidance to $2.35 U S per barrel below wpri from $3 from 25 cents per barrel previously.
Okay.
Turning to the Marcellus.
Realized Marcellus natural gas price differential was <unk> 89 cents U S <unk> below Nymex in the quarter.
Can the weaker than the prior quarter due to a combination of normal seasonality, we see in the U S northeast markets and unplanned regional pipeline maintenance.
As a result, we have widened our annual Marcellus natural gas price differential guidance to 65 U S per mcf below Nymex from 55.
<unk> per Mcf previously.
We expect differentials to remain relatively weak in the third quarter, and then strengthened through the fourth quarter as regional demand increases heading into winter.
We recorded a current tax expense of $4.2 million in the second quarter, primarily consisting of U S. Federal tax as a result of higher income expected in the U S from 2021.
For the full year, we expect the income tax expense of between 5 and 7 million U S.
Turning to our free cash flow outlook, we expect free cash flow generation to materially increase in the second half of the year.
On a full year basis, we estimate that we will generate over $450 million based on current commodity prices.
With the $117 million in free cash flow generated during the first half of 2021 that points to over $330 million in the second half of the year.
Priority number 1 for this free cash flow is the balance sheet as.
As we work toward reducing our current net debt at June 30th by $400 million.
Although we are prioritizing debt reduction we remain in a strong financial position today and this gives us the flexibility to enhance our return of capital to shareholders in the near term.
We announced the 15% dividend increase today, and we also announced that we would allocate 10% of our free cash flow after dividends to incremental shareholder return opportunities. While we are progressing on our deleveraging plans.
This could come in the form of additional dividend increases and share repurchases and as Ian mentioned, our board has approved the renewal of our normal course issuer bid for up to 10% of our outstanding shares.
Finally, as an update to the 5 year plan that we introduced in April we have updated 2021 to reflect the year to date commodity prices and forward strip for the balance of the tier.
The remaining years 2022 to 2025 continue to be based on a flat $50 to $55 <unk> oil price.
With this update our cumulative free cash flow estimate over the 5 year period increased to $1.5 billion to $2 billion.
I will leave it there and we'll turn the call over to the operator and open it up the cash.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by 1 on your Touchtone phone, you'll hear of 3 tone prop acknowledging your request and your questions will be pulled in the order they are received.
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Your first question comes from Greg Pardy from RBC capital markets. Greg. Please go ahead, yes.
Yes, thanks, good morning.
Maybe just the first question might be for Wade in and from everything you're saying in terms of the reduction in D&C costs. It really sounds like it's just <unk>.
Increased efficiency like last time, but I'm wondering if you've made any changes to either of the well construction or how you are completing these wells just curious there.
Sure happy to address that.
The wells that we drilled and completed in the first.
And second quarters of this year really follow the the design that we've had for the last several years. So theres no no material change there.
When we look at the rate of change from last year that.
Kind of dropped from 6321.
We're projecting this year the to be at 5.7 we're seeing about half of that on the drilling side and half on the completion side.
Most of that is from just.
Improved efficiencies on multiple stages multiple aspects of drilling and completions I would note that there is an important part of that on the drilling side that's come from.
Essentially of new contract with the existing Super spec rig that we the we've been using for the last several years and so we're benefiting from kind of.
The change in the market rates for that as of earlier in this year relative to several years ago, when we signed up.
So we're certainly pleased we've actually saw improvements in our completion efficiency and drilling efficiency out of faster pace than we were even anticipating.
Okay terrific thanks for that.
And then maybe just shifting to the cash taxes I'm wondering if there's a rule of thumb. We can use maybe this is more about 2022, Jody but I'm wondering is there like a percentage of pretax we should think about the choice of cash tax next year.
Yes, I think maybe if you just want a rule of thumb you could think of call. It 1% of net operating income in the U S that.
That would be.
In the ballpark.
Okay, Great and last question from me is.
Ian I mean strategically other things being equal.
Would you prefer to consolidate further in the Bakken oil.
Or is the company, maybe approaching the size, where you're thinking more of a basin diversity and I'm thinking oil and liquids basin diversity more so than the Marcellus.
Good morning, Greg.
Well with everything being equal more block it clearly fits the bill.
We've got an established footprint.
We see value of scale, we think the setup in the Bakken is is really pretty encouraging.
Costs are in the control.
Rentals are are tightening.
No.
Yes that would that would.
Clearly be the the focus areas today.
Okay terrific, thanks very much.
Thanks, Greg.
Your next question comes from Patrick O'rourke from ATB Capital Patrick. Please go ahead.
Oh, Hey, good morning, guys.
Just wondering now that you've had your hands on the steering wheel for call. It a quarter here with the new assets I'm wondering if you can give us your view on kind of where the Bakken base decline of sitting obviously it seems like you have some comfort with it in order to.
The increase the lower end of the production guide for the year and then wondering how with 1 of the well costs are now appears that you're offsetting any sort of inflationary pressures.
With efficiencies.
You mentioned with the last question here, where you would see the maintenance capital level out.
Out of corporate level right now.
Yeah morning, Patrick.
So to decline.
Consistent with what we had forecast.
Corporately low thirties.
The.
And I guess I guess that was part and parcel will bring up the bottom of the guidance.
A lot of things that move there, though obviously relative to the timing of on streams in the downtime and everything else.
The maintenance capital.
We don't have a firm number out there, but we pointed to $500 million next year sets of 3% to 5% gross.
Sort of back off that growth in year round 400, I think it's a good round number to think about.
And just maybe it's the net sort of comment.
Our ability to offset the inflationary costs I think we're actually doing a very good job on it.
There is a bit of pressure in the market and you are hearing this other producers talk about it as well as deal like and so you really got under the Hood and you look really closely at year to day, well performance, we'd be a bit ahead of that number that we're putting out there. So we have built in.
We've anticipated some modestly higher cost of of course of the year and then that gets you to that $5.7 and the big picture here as we continue to do a really good job, Brian Gladden efficiencies.
Sort of eating into and in fact year to date more of the.
Eating into any inflationary pressures we're seeing.
Okay, Great and then Ian you're always very thoughtful on your approach to the commodity so I'd like to hear your view on this youre using our bandwidth.
50 to 55 right now from your kind of 5 year plan.
And just wondering what you would have to see in the market out there to shift that to something a little bit higher and incorporate that in your business planning and the way you're allocating capital.
Yes, I don't get called thoughtful very often so thanks, that's a good way to start today.
I think there's a few things here.
Absolutely it inherent in all of this is <unk>.
How are we to sustainability and thinking about volatility. So we're just not that smart and there are a lot of things that are out there that can move those prices around a little bit. So we're using what we think are mid cycle prices to guide our business and as we think about.
The higher price environments.
We will take advantage of some of that through hedging strategies.
And the like so what would what would if we had a strong strong view of a higher market.
Would that influence the activity behaviors I don't know that it would.
Honestly.
Some of the things we do we have a very strong view on the market and this the forward market is not there to be able to mitigate some of the asking him that would mute any activities. We have as you think about things like as we realized right now we are realizing higher prices meaningfully higher prices than that.
But our forecast is not money in the bank. So we are.
Cognizant of action.
Actual results versus forecast so.
Yes.
I don't I don't think there's anything sort of fundamentally I'll share that we would do dramatically different and in fact, if I can.
And the stronger.
You can easily create a stronger price forecast intend to use the device I think it's very plausible.
I think it's actually potentially likely.
With that probably comes out of inflationary assumptions of making it now so we will be balanced on this.
Our goal is to be able to make money in all cycles and that means conservative balance sheet management, focusing on returns using risk management tools to take price risk out of the equation is we're spending dollars and so that's what sort of guided us for years and there is going to continue to guide us in the future, but I think bill said it feels pretty good right now.
If you told me we were averaging above 55, I wouldn't I wouldn't bet against debt against that over the next couple of years because of <unk>.
We'll see.
Okay. Thank you thanks.
Thanks Pat.
Your next question comes from Cody Kwong from Stifle Cody. Please go ahead.
Hi, guys. Thanks for taking my call I've got a question for probably for.
For Ian when you guys were talking about your free cash flow priority being 90% debt of 10%.
Turn of capital until you get to your your debt threshold that you want how does that change once you meet the target and if you could maybe expand upon that whether it's through just.
In theory, or if you had some actual numbers that you had in your mind.
Yes.
Thanks for that question I think we will we will stay away from numbers here.
The cut the concepts that we've laid out.
90% of debt.
Once once we're through that level.
Which you could be within a year, possibly.
The signal that we've sent as we see higher returns to shareholders.
We haven't put a pin in what exactly that looks like.
In part because of do you want to look at the environment Youre going at the moment and how competing priorities exist, but we do think we've got a really attractive plan. The grows the company and puts us in a great position to delever and to continue to provide capital to shareholders.
As of the tools that we've highlighted.
The things that we think are important.
Growing.
Rock solid sustainable base dividend.
We think is something that will be really attractive to shareholders.
Which means it needs to sustain price volatility as well. So when you were on the path to continuing to move that forward and we also think share buyback plays a role.
And we think it particularly played the role when you look at the valuation of our company and we see significant intrinsic value.
We plan on unlocking and share buybacks. Please the nice rule and that it also helps helps support the sustainability of the base dividend and keep your capital structure strong.
So I guess those of the principles that are guiding us there.
The others out there who saw the variable dividend the specials and low things and will remain attuned to the market.
Those sorts of things, but right now think sustainable growing base.
Dividend share.
Share buybacks, particularly when we see the valuation that we're seeing right now and then think once we get our debt targets.
More coming for shareholders and then we will work to provide more visibility as we get closer to that as to what more of looks like.
Okay. Thank you very much.
Thank you.
Ladies and gentlemen, as a reminder, should you have a question. Please press star followed by 1.
Okay. There are no further questions at this time I'll turn it back to Ian for closing remarks.
Well. Thank you everybody I appreciate you dialing in today enjoy the last little bit of <unk>.
Summer for those Canadians, who are watching the gold medal soccer.
The match.
I won't say anything about it.
Enjoy the rest of your day.
Thank you Roger.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.
The job well good responses.