Q3 2021 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the inter plus Q3 2021 results conference call.
At this time all lines are in listen only mode and 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.
As a reminder, this call is being recorded today Friday November 5th 2021, and I would now like to turn the conference over to Mr. Drew Mair manager of Investor Relations. 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 our third quarter 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, Wade Hutchings, Senior VP, and Chief operating Officer, Jodi, Jenson Labrie, Senior VP and Chief Financial Officer, Shaina Murray here, our VP finance and Garth doll VP marketing.
Following our discussion we will open up the call for questions that I will turn it over to Ian.
Good morning, Paul.
We achieved a another company production record in the third quarter with volumes of over 123000 Boe per day.
7% higher than the prior quarter.
36% higher than the prior year period.
This momentum is expected to continue in the fourth quarter with production set to increase to between 124500 to 128500 Boe per day.
We've moved the midpoint of our annual 2021 production guidance higher by 750 <unk> per day due to outperformance in North Dakota and the Marcellus.
This is despite having sold volumes in connection with our noncore Williston basin divestment.
On November 2nd and further underscores the operational momentum we are seeing.
Our spending plans remain on track and we have tightened up our 2021 capital guidance to $380 million.
The midpoint of our prior range.
Our free cash flow profile continues to grow.
Driven by increasing commodity prices are higher production outlook and our disciplined capital allocation.
We now expect to generate approximately $540 million.
Free cash flow in 2021 based on forward commodity prices.
This increased free cash flow generation.
Combined with the $115 million U S proceeds related to our noncore sale has accelerated the timetable to achieving our $400 million net debt reduction target.
We now expect to achieve this target here in the fourth quarter.
As a result, we are accelerating our plans to increase our cash returns to shareholders sooner than anticipated by way of an expanded share repurchase program and a dividend increase.
We are immediately commencing a $200 million share buyback program.
Our target today is to fully execute this program by the end of the first quarter 2022, if not sooner.
This represents approximately 50% of forecast free cash flow over this period based on the forward strip.
We continue to see a disconnect between our current market valuation and the intrinsic value of our business based on our view of mid cycle commodity prices.
As a result, we believe share repurchases offer an attractive capital allocation opportunities.
We also announced an 8% dividend increase our third dividend increase year to date.
In aggregate this represents a 37% increase on an annualized basis from our dividend level started the year.
Turning to 2022, our preliminary outlook is consistent with the five year plan, we announced earlier this year.
Approximately $500 million in capital spending.
He is expected to generate strong economic returns and meaningful free cash flow, while delivering 3% to 5% liquids production growth.
Inclusive of our 2021 acquisitions and recent divestment the absolute year over year liquids production growth is closer to 7%.
But normalized for the timing impacts of the acquisitions the organic growth of source seed associated with 2022 budget is in line with our stated 3% to 5%.
Based on strip prices, we see our free cash flow growing at close to 20% year over year and 2022.
Factoring in our planned share buyback program, but that number was higher on a per share basis.
Now before I turn the call today to discuss operations I want to reiterate one final point.
We are committed to returning a significant portion of free cash flow to shareholders.
The $200 million buyback and dividend increase are just the most recent examples of our commitment to return meaningful amounts of our free cash flow to our shareholders.
Although this strategy is becoming more common in the industry. It has been a hallmark of our capital market strategy since the inception of the company.
Since 2018, we have returned over $370 million to shareholders through a combination of dividends and buybacks.
A time far less attractive commodity prices.
Combining those returns with the buyback we announced today will bring us.
Close to 20% of the value of our market cap, which will be returned to shareholders.
As I said earlier, we are commencing the buyback immediately and expect it to be completed relatively early next year.
Once this plan is executed we will continue to look for opportunities to further increase returns to shareholders as we move into next year.
Further visibility to the commodity price environment inflation expectations and overall market conditions.
A portion of free cash flow that we do not allocate to shareholder returns will be used to fortify the balance sheet. We continue to believe that have top quartile balance sheet strength is a strategic asset volte.
Volatility will continue.
To maintain our resilience through the cycle.
Price shocks.
With that I will leave it there.
Turn the call to it.
Thanks, Ian and good morning, everyone.
Our operational performance. This year continues to be solid and as reflected by our increased production guidance and disciplined capital execution.
We brought 16 operated wells on production in the Bakken in the third quarter and have maintained our strong completions efficiency continuing to average approximately 13 stages per day over 30% faster than our 2020 performance.
In terms of Bakken well costs, we continue to track to an average expected 2021 total cost of U S $5 7 million. Despite some inflationary pressures that are starting to emerge in the supply chain specific to steel and diesel costs.
With respect to remaining 2021 completions activity, we're bringing on an eight well pad on production in the fourth quarter in North Dakota, which along with strong volumes in the Marcellus is expected to drive Q4 production to over 126000 Boe per day based on our guidance midpoint.
Third quarter operating expenses were higher than forecast, which was a function of two factors. The biggest of which was a temporary increase in well service activity, resulting from our decision to accelerate the restoration of down the wells.
This activity became increasingly economic as oil prices moved substantially higher through the summer.
The other factor was an increase in water handling costs, largely due to contracts with price escalators linked to <unk>.
While the higher water handling charges will persist in the current double UTI price environment, we are back down to a more normalized pace of well workover activity and workover rigs and as a result, we expect operating costs to come down in the fourth quarter to approximately $8 80 per Boe.
Moving onto 2022, our preliminary capital budget of approximately $500 million will be largely focused on North Dakota, where we plan to add a second rig or about half of the year.
During the past six months, we have secured pricing for approximately 75% of our 2022, North Dakota development program, providing protection against inflationary pressures.
Key items, we have secured include drilling rigs pressure pumping sand and the majority of cases.
Notwithstanding this we do expect to see some impacts from inflation and have budgeted for a 5% to 7% increase in total North Dakota, well costs in 2022, assuming the current strength of WTO continues.
In terms of our 2022 development focus we plan to be active on the acreage we acquired in our transactions earlier. This year. So in addition to Fort Berthold Indian Reservation operations will also be focused on the lightly drilled acreage to the south at little knife and Murphy Creek.
Today, we see over a decade of tier one drilling inventory ahead of us in North Dakota.
However, we think there is an opportunity to extend this further by bringing modern stimulation well designed to other parts of our acreage footprint, specifically in southern Little knife Murphy Creek and Central Williams.
The southern acreage in Dunn County was not a focus for the previous operator. So there are very few wells in these units and they are generally of an older vintage <unk>.
Several recent wells from offset operators have strong production results and we see the potential to extend the core of the play to these areas.
I'll now pass the call to Jodi.
Thanks, Greg.
Our third quarter adjusted funds flow with $256 million with capital spending of 80 million.
<unk> and free cash flow for the quarter of $176 million.
Our realized Bakken oil price differential improved to $2 nine per barrel below WTO high in the third quarter.
Refining demand was strong and there continues to be significant available pipeline capacity in the basin supporting pricing.
Following Dakota access pipeline expansion in August to 750000 barrels per day, we see approximately 400000 barrels per day spare capacity in the basin and we believe it will remain overpaid for a number of years.
Given the improved pricing year to date and ongoing market strength, we have narrowed our 2021 differential guidance in the Bakken to $2 U S per barrel below <unk>.
Spot differentials have continued to strengthen in the fourth quarter and we expect this pricing dynamic to continue into 2022 with potential for sub $2 Bakken differential to WPS.
Our Marcellus natural gas pricing also improved quarter over quarter with a realized differential of 45 U S per mcf below Nymex due to increased natural gas demand and lower storage levels.
Strong pricing as expected through the winter season, and we have tightened our 2021 full year Marcellus differential to <unk> 55.
<unk> per Mcf below Nymex.
Further to wade's comments on operating expenses.
Although we increased 2021 operating expense guidance, our total cash costs remain approximately the same.
The reduction in cash G&A guidance combined with the improved Bakken and Marcellus differential guidance as effectively offset the impact to our annual cash flow from higher operating expenses.
Now turning to the balance sheet, we remain in a strong financial position and expect the delevering to continue with meaningful free cash flow forecast in the fourth quarter of 2021.
Our net debt to adjusted funds flow ratio is expected to be under one times by year end.
Lastly, we recently added 12500 barrels per day of incremental oil hedges for the first half of 2022.
Using three way collars with average U S dollar WTO strike prices of approximately 58 by 75 by 88.
These structures provide protection at 75 dollar wpri, while allowing participation up to $88 <unk>, helping to protect the free cash flow generation associated with a return of capital plans as outlined by Ian at the beginning of the call.
I'll leave it there and we'll turn the turn it over to the operator to have the question period.
Thank you.
Ladies and gentlemen, we will now conduct a question and answer session.
You would like to ask a question. Please press star followed by one on your Touchtone phone. If you would like to withdraw your question. Please press star two please.
Please standby for your first question.
Okay.
Your first question comes from Jeffrey Lamb Bouchon of Tudor Pickering Holt. Please go ahead.
Good morning, Thanks for taking my questions.
Hey, Joe My first one is just on free cash allocation. Once you achieve your balance sheet objectives, such as you all pointed out earlier should happen here in the fourth quarter. We certainly appreciate the buyback over the next few quarters and what that means relative to free cash flow across that same timeframe, but is there any additional color you can give us on how you'd like the balance sheets.
Look longer term, maybe towards giving us a sense of how the free cash flow allocation framework in terms of debt versus capital returns mix could evolve over time, especially as we think about you all exiting the year at under one one times on leverage.
Yes, thanks for that Jeff.
So I guess I'll start by saying.
It's strategically important to us and it's.
All the cool kids are doing it now, but we've been doing this for a long time and so.
He is an important part of our our framework.
As it stands today I guess, we've been very explicit visibility to what happens over the next couple of quarters, which is a continuation to pay down debt.
About 50% free cash flow with the majority.
<unk> shareholders with majority of that.
Going to the buybacks.
As we move forward.
Assuming the outlook remains.
Supporter, which certainly how does that feel now.
I think youre going to continue to see very similar themes.
We are when we think about delivery mechanism to shareholders.
Stable growing base dividend.
It's highly resilient that makes a lot of sense to us. So I think there's room to continue to go there.
Yes.
I think the thing that maybe stayed away from a little bit exactly what percentage of free cash flow gets allocated and we will evolve evaluate that as we move forward as we think about value in the stock today, we really do think that share buyback.
Has a very strong role to play.
Highly accretive in <unk>.
Capital allocation choice I.
I guess, we are open minded to.
Specials and variables in those sorts of things that are starting to get a little bit of traction in the market and we will evaluate that as we go through looking for what we think is the best way to continue to deliver returns to shareholders and maintain a sustainable business.
Great I appreciate that and then just as a follow up I wanted to ask one on portfolio management. I think this was not highlighted as a potential use of free cash flow over the near term, but just given that theres been some bolt on activity to the Bakken in the recent past just wondering if additional activity like that is maybe further down the road at this point and then Conversely.
I'd be curious to hear your thoughts on if the commodity price environment has maybe opened up some doors to keep selling down some of the noncore positions.
Yes. Thank you so.
Relative to bolt ons or acquisitions.
I think folks who.
<unk> been following us over the last year, who appreciate we really made significant changes to the portfolio through the Bakken acquisitions that we were able to.
T execute.
Somewhere in the trough.
They have.
Effectively doubled our inventory plus additional optionality that sits there that we alluded to in his comments so.
The bar to bring additional inventory the bar for acquisitions, those sorts of things it's higher than it once was.
Really don't have any holes in the portfolio now.
Well, obviously, we remain opportunistic in the balance sheet strength is exceptional.
I think that is the core business for people thinking about whether you can accretively add value of those areas, but the bar is higher than it once was to your question about.
I guess the the.
Market.
And ideally sell noncore.
I guess I would highlight this divestment. We just executed is a good example of that so if you look at the acquisitions we executed.
The front half of the year.
Just want to put them on a cash flow metric, we effectively bought it.
Three times based on a 60 deck.
Was it 60 at the time, but just to normalize it and we just sold.
Assets that are more mature with higher cost structures at five times based on a $60 and that happened over not much more than a quarter and a half it was really quite astounding how fast the market is moved.
Since then though with the increased strength in oil and maybe a bit of volatility there actually hasn't been a lot of deals. So I think the market is actually.
Struggling a little bit with the volatility.
Bid ask spread it doesn't usually close in those periods of volatility.
Maybe the <unk>.
Take away, though to your question do I think there might be better opportunity to realize process proceeds from noncore I would think so.
We've come from what has been felt like a generational buying opportunity, which we are able to take advantage of and now it feels like there will be opportunity to monetize noncore, but I guess, we'll have to see.
Where the market goes two weeks of stability right just help a little bit of stability.
Alright I appreciate it thank you very much.
Thanks, Jeff.
Your next question comes from Erin Bykowski TD Securities. Please go ahead.
Hi, Thanks, good morning.
Sure.
I was hoping you could talk a little bit about the parameters you look at when making a decision to buy your shares I understand you've gone down that route I'd be curious sort of.
What framework can you think about when you.
Think about them being undervalued or are you looking at them on an app type basis is that like a two P. Knab is there upside to that to be NAV, what sort of pricing assumptions.
And Tony when you can start buying your shares I'm just kind of curious.
We're going.
You're making process, yes, I think.
That's fair.
I would expect that.
That will that will come under increasing focus is that.
Quantum of buybacks across the space increases.
I guess for us it's relatively straightforward.
Based on our view of intrinsic value of the stock relative to trade.
And.
As you know that is a multi step process you have to think about commodity prices and cost structures and those sorts of things.
We build it up PDP and we build it by wedge in all all of those things are quiet discount rates. So.
I guess I won't give you.
Exactly the amount on it but we've given some insights into it.
It's based on our price view and are on our midpoint price.
Look at the stock now versus the strip.
Compelling compelling value, we don't think we actually have to lean into the strip to feel comfortable with returns that we're thinking about our mid cycle pricing in that 55 to $65 range. So lets call it 60%.
<unk> and we see we see returns strongly supported in that.
With that framework.
Independent of the capital markets drivers, which we think are supportive and all those sorts of things.
Just on a pure capital allocation basis, we think is great.
Great idea and.
You didn't ask this question, but I'll I'll use the opportunity.
So the reasons that we don't have it.
<unk> listed formula in the market right now.
Is <unk>.
<unk> was $25 a share instantaneously I am not sure it would be $200 million of the share buyback I'm not sure about that and so things evolve and things change.
Now it feels like a very.
Very clear decision that we should execute an aggressive buyback representing 7% of our stock based on valuation.
Perfect. Thank you.
Thanks Erin.
Your next question comes from Travis Wood of National Bank. Please go ahead.
Yes, thanks, good morning.
Question is bit of a follow on around.
The free cash, but more so I wanted to get a sense of how you think about debt levels and not obviously in this market as respect to kind of a max number but.
Could you see that I mean, we see it pretty easily in this type of commodity price environment and the free cash generation heading significantly lower.
Do you think it's optimal to drive that to zero.
You think there is a cap stack that you can leverage on and maybe that ties into the sustainability linked lending as well.
But just kind of wanted your thoughts on debt gross debt or net debt on types of levels.
At this kind of free cash generation point.
Yes, Thanks Travis.
And so.
Those will probably remember we had said it.
I guess a target can you target on that.
We would hit and then accelerate returns that was one time.
That cash flow based on a 50 deck.
And as we announced we see getting there.
Next month.
And so we know.
And we have now highlighted.
The excess cash beyond the share buyback and the dividend Kris.
We'll go to the balance sheet right now.
Implicitly we are I guess moving past that debt target.
We have not set an explicit target.
We do see value.
To strengthen the balance sheet.
And although it's not a goal.
I could see.
Taking the balance sheet to zero.
We continue to generate extraordinary cash flow and we don't see a compelling alternative three.
Appointment.
I'm not saying, that's the goal and I understand that.
What the textbooks would tell us the railroad efficiency capital structure there.
I don't know how important those are in.
When you put those in the context of the volatility that we've been experiencing.
But this will be something we'll be talking to our board over time.
I think it is.
Absent additional divestments, it's not a next quarter type thing.
And I do see us.
A long as we still have debt on the balance sheet allocating some capital towards that I think is the derisking and value, creating event and I can see that playing out.
Many many different ways.
We wouldn't have been able to execute on the $800 million of acquisitions.
We have now effectively doubled our money if we didn't have exceptional balance sheet strength.
But I do see that question in a conversation continuing over time as.
As these if these commodities continue to hold and the cash flows show up the way that Theyre looking right now.
Okay.
That's great color. Thanks, Ian.
And this might be for Jodi or Wade I might have missed it I think they might've touched on it but just some color as we on Opex as we step into 2022, I mean, obviously I think before you've got it looks to be significantly better after some transient items.
In Q3.
But how can we think about that opex in two into next year and do you still see some some opportunity that there is some inflationary pressure on on the 2021 kind of average number.
Thanks, Charles I think maybe you hand, it over to Wade.
And you can sort of talk us through that.
Yeah happy to good morning Travis.
Okay.
Let me give you a little context for Q3, and then try to address your question on 'twenty two so as we indicated in the press release in the script we see.
C. A key part of that higher Q3 Opex is temporary.
Essentially what we had.
Occur was.
As you recall, we inherited a fair number of shut in wells and the Bruin transaction and as we cleared that backlog in the early summertime. We also experienced more wells needing workover than normal in the middle to late summer.
Given the really robust pricing environment, we chose to add workover rigs to restore those valuable volumes.
By late September we had returned to a more typical pace of workover activity and a more typical rig count and so that's why you see the lower.
Opex guide for Q4 based on that trend now the <unk>.
Reality is some of that increase in Q3 was a bit inflationary simply tied to WTO price, where some of our watering water handling contracts.
A bit of a link to WTO price. So clearly some of that if we can stay at these levels will continue into 2022 now.
Now we of course Havent as you noted put out any official opex guidance for 'twenty, two and so that will come.
In January when we put out a more robust budget guide, but clearly to your question, we're watching lots of of inflationary pressures.
Either emerge or strengthen into next year on the capital side of the business. We've been very proactive over the last six months, we've we've actually locked in about three quarters of our total well cost and so we feel like we're protected there we've done a few things like that.
On the Opex side for instance, we have our Workover rig.
Day rates locked in so we've been proactive on several items in the Opex.
Arena, but as you can appreciate there's a lot of moving pieces on Opex. So we would expect some inflation in that operating cost environment.
Yeah.
The the guide we've given for Q4 is probably a reasonable starting point to think about.
Where the future is headed.
Okay. Much appreciate that way. Thanks, thanks, very much and Thats all.
Ladies and gentlemen, if you would like to ask a question.
Minder two please press star followed by the one on your Touchtone phone.
There are no further questions at this time I will turn the conference back over to Mr. Mayer. Please go ahead Sir.
Thanks, operator, and thank you to everyone that joined the call today.
Great rest of your day and weekend.
Bye.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and as such please disconnect your lines.
Okay.
[music] we finished.
Yes.
[music] 19th.