Q4 2021 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the inter plus Q4 and year end 2021 results conference call.
At this time all lines are in a 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, I would like to remind everybody that this call is being recorded today February the 25th.
2022, and I would now like to turn the conference over to Mr. Drew Mair manager of Investor Relations. Please go ahead Sir.
Thank you 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 our fourth quarter news release.
Our financials have been prepared in accordance with U S. GAAP as a reminder, we have changed the reporting of our production volumes through a net after deduction of royalty basis and our financial figures are now reported in U S 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.
Following our discussion we'll open up the call for questions and with that I will turn it over to Ian.
Thank you drew good morning all.
2021 was a transformational year for <unk>.
Our strong financial position coming out of the downturn gave us an early mover advantage to acquire high margin production and expand our resource base at exceptional value.
But before I move on I'd like to take a minute to thank our staff for their dedication throughout the pandemic, we have accomplished a lot with delivered solid results.
There's one area I'd like to specifically call attention to it and Thats our safety performance.
We came through 2021 without a single lost time injury.
We consider this an outstanding accomplishment.
Extremely proud of our organization for continuing to prioritize the safety of our colleagues, particularly in such a busy.
And transitional year.
Now moving on to.
The Bakken acquisitions, we completed last year helped to drive company record production and free cash flow and significant value creation during the year.
Consistent with our capital allocation framework, we prioritize free cash flow growth, resulting in over $400 million of free cash flow generated in 2021.
Having to utilize the balance sheet in connection with our acquisitions, we focused on reducing leverage over the course of the year and made solid progress.
Ending 2021 with less than one turn on our net debt to adjusted funds flow ratio, having repaid $273 million of debt since our peak level in the second quarter.
We also delivered meaningful cash returns to our shareholders in 2021, we increased our dividend, 37% and repurchased over $120 million of our stock leading to total cash return of over $150 million.
Importantly.
We made further advances on all of our key ESG initiatives last year.
Relative to emissions, we achieved our 20% methane emissions intensity reduction target one year ahead of schedule and made further progress towards our target of a 50% reduction in greenhouse gas emissions intensity by 2030.
In a separate news release today, we also reported our year end reserves, which grew substantially last year.
Under U S Reserve standards, our proved reserves grew by over 160% with reserves additions that replaced our 2021 production by over seven times.
<unk> growth in resource captured 2021 have extended our high quality drilling inventory in North Dakota to over a decade.
Enhancing the sustainability of our long term outlook.
While 2021 was an exceptional year for our company.
Set up for 2022 is also compelling.
Our Bakken focused capital program is designed to efficiently deliver organic high margin production growth of 3% to 5%.
Which when combined with the acquisition and divestment impacts last year resulted in total production growth of approximately 6%.
This plan is expected to deliver free cash flow growth of over 20% compared to 2021, assuming $75 WTS.
At $85 <unk>, our free cash flow is projected to grow by 50% compared to last year.
Factoring in our planned share buyback program that will number moves higher on a per share basis.
This translates into an attractive free cash flow yield of between 18% and 22%.
On WTO prices of $75 and $85 respectively.
With this significant free cash outlook, we plan to continue to prioritize debt reduction and shareholder returns.
Previously, we had talked about a leverage ratio target targets, which is at or below one times net debt to adjusted funds flow, assuming a $50 deck.
While we've called this the target is really more of a maximum leverage ratio over the long term.
Doesn't mean, we aren't willing to use leverage and go above this level to take advantage of strategic opportunities as we so clearly demonstrated last year.
What it does do is provide a reference point that all things considered debt repayment levels will be directionally higher until we are under that level.
Over the longer term, we will continue to prioritize low leverage and reducing debt during periods of high commodity prices.
We simply believe that maintaining a strong balance sheet is critical to enhancing sustainability throughout the cycle and offers strategic advantages.
With this in mind, we plan to continue to allocate a portion of free cash flow to the balance sheet in 2022, and we will continue to do so as we move under our maximum target of one times.
We also plan to continue to return significant capital to our shareholders through dividends and share purchases share repurchases. We continue to believe that our intrinsic value based on mid cycle commodity price assumptions is not adequately reflected in our current trading value.
As a result, we plan to continue our aggressive approach to share repurchases and expect to fully utilize the remaining authorization of our normal course issuer bid to repurchase stock over the next five months.
At our current share price this represents approximately.
$100 million increase to our repurchase program and upon completion, we will have repurchased 10% of our shares outstanding since initiating the program last August .
We also highlighted and updates to our five year plan.
Last year, we provided an outlook through 2025 based on a $50 to $55 <unk> price environment.
We have now extended the outlook through 2026 and updated it to reflect the higher current commodity price and inflationary environment.
Our updated outlook projects annual capital spending of $400 million to $450 million with <unk> per year.
With cumulative free cash flow estimated at $2 $2 billion over the five years with production expected to grow by 3% to 5% annually.
And lastly, we recently announced plans to initiate a sales process for our remaining Canadian assets.
These assets had an exceptionally well maintained and operated there's simply no longer attract capital in our portfolio.
As a result, we made the decision to market the assets. If successful we would expect it to prioritize any divestment proceeds towards debt reduction and enhancing cash returns to shareholders.
We would also assess our ability to redeploy a modest amount into our higher return Bakken development program.
With that I will leave it and turn it over to Wade.
Thanks, Ian and good morning, everyone.
Beginning with production our total volumes in the fourth quarter averaged 103000 Boe per day, which was just under the high end of our guidance range and 48% higher than production in the fourth quarter of 2020.
The solid production performance relative to our guidance was driven by strong rates from our fourth quarter Bakken and Marcellus on streams.
In the Bakken our fourth quarter completions program consisted of an eight well pad with peak 30 day average rate of 2900 Boe per day on a per well basis in the Marcellus we participated in bringing 20 wells on production in the fourth quarter with peak 30 day average rates of 27 million cubic feet per day.
On a per well basis.
Overall in 2021, our total production averaged 92000 Boe per day on capital spending of $302 million.
Looking back at the guidance, we released in April 2021, when we announced our second Bakken acquisition. Our total production came in at the top end of the range and capital spending came in right at the midpoint of the range.
I think that speaks to how successfully our teams integrated the new assets and businesses. We acquired in 2021 and as Ian noted our safety performance was outstanding with not a single lost time injury in the year. This is exceptional performance, particularly in a year, where we added so many new assets and people to the company.
Moving on to 2022 I expect this operating momentum to continue the well cost efficiencies captured in the Bakken with costs down 10% year over year in 2021 combined with our early procurement in which we have secured pricing for approximately 75% of our 2020.
Two North Dakota development program of <unk>.
That's well positioned to efficiently execute the program.
These actions will also continue to help offset some of the inflationary pressures we're seeing.
To execute our 2022 plan, we've added a second drilling rig in the Bakken, which we plan to operate for about a half year. So overall, we're looking at about a rig and a half and 2022.
Our capital program will be focused around.
And Dunn County acreage and Additionally, we have approximately.
$80 million earmarked for non operated activity in North Dakota, primarily in the Dunn County area.
Turning to operating expenses, we are seeing cost pressure here and expect this line item to be higher year over year. This is primarily driven by three main categories first.
Inflationary pressures, particularly where we have contracts with price escalation clauses linked to CPI.
With our continued improvement on gas capture we are seeing higher sales gas volumes, and therefore higher gas processing fees.
Fortunately. However, this also comes with the benefit of increased gas revenue.
And lastly, higher well service spend driven by the largest suite of wells, we now operate.
Lastly, we continued to deliver strong results relative to our ESG initiatives in 2021 based on preliminary estimates our scope, one and two GHT emissions intensity improved by approximately 25% in 2021 versus our 2019 baseline.
So the success, we're having in reducing emissions intensity is our improvement in methane emissions and flare management in 2021 to reduce methane emissions, we initiated wide scale deployment of air driven pneumatic controllers and began installing vapor recovery units to reduce tank commissions.
With respect to flaring, we have further optimized operational practices and improved our planning processes to reduce flaring during initial production.
These efforts have led to a material reduction in our emissions intensity and we're working hard to deepen this success in 2022.
I'll leave it there and now pass the call to Jodi.
Thanks Lee.
Our earnings momentum continued in the fourth quarter, reaching 71 cents per share an increase of 87% from the prior quarter.
Our fourth quarter adjusted funds flow was $258 million with capital spending of $81 million, resulting in free cash flow at $177 million.
Our realized Bakken oil price differential improved 88 cents per barrel below <unk> in the fourth quarter.
As a result of strong refining demand and significant available pipeline capacity in the basin and continue to support pricing.
Our Marcellus natural gas price was $1 70 per Mcf below Nymex in the fourth quarter.
This is wider than our expectations and reflected the increased volatility in the Nymex <unk> benchmark pricing and weaker local market.
Moving on to expenses on a full year basis, our operating costs were $8 69.
Bow, which was in line with our guidance.
As noted last quarter, our operating costs in 2021, reflecting increased workover activity.
Which contributed to our strong production results.
It was also as well as higher water handling charges due to contracts with price escalators linked to WPS.
Our cash G&A cost averaged $1 14 per BOE in 2021, 10% lower than in 2020 as the higher volumes, we added in 2021.
To start unit costs.
Turning to the balance sheet, we remain in a strong financial position and expect the de levering to continue through 2022.
We ended 2021 with net debt of $640 million and a net debt to adjusted funds flow ratio of <unk> nine times.
In addition, we continue to have excellent liquidity and our undrawn on our $900 million Bank credit facility.
Moving on to our free cash flow priorities as Ian noted we plan to continue to reinforce the balance sheet and further enhance our cash returns to shareholders.
With respect to our return of capital plans in yesterday's release, we announced an increase to our share repurchase program equating to roughly an additional $100 million U S. Based on our current share price, which is incremental to our previously announced $200 million Canadian dollars repurchase program.
As a reminder, we anticipate completing our $200 million program by the end of the first quarter and the addition of $100 million. You asked reflects remaining authorization under our normal course issuer bid based on our current share price and market conditions.
We expect to complete the purchases between now through July and renew that and CIB in August for another 12 months.
I'll leave it there and I'll turn the call over to the operator and open it up for questions.
Thank you ladies.
Ladies and gentlemen, we will now begin the question and answer session.
I would like to ask a question. Please press star followed by the one on your telephone keypad.
If you would like to withdraw your question. Please press the star followed by the <unk>.
And as a reminder, if you are using a speaker phone. Please lift the handset before you press net's.
One moment. Please for your first question.
Your first question comes from Ray Kwan.
<unk> capital markets. Please go ahead.
Good morning, everyone and thanks for taking my questions I guess, the first question I'll ask it.
It's just around I guess, the general cost inflation question, just particularly around your operating cost assumptions for this year and the five year outlook.
Do you feel most of those cost assumptions are appropriately baked in and like I guess ways to mitigate that over the future years here and then in addition to that just be helpful to understand cost inflation on the on the on the capital side as well too.
I do have a follow up question after those too.
Good morning, Greg.
At over two eight.
Maybe just a high level, it's clearly a transitional environment.
Are they appropriately baked in we've done our best.
We're now partway through the year and we've given ranges to help deal with some of that but.
Why don't I turn it over to Wade to give you maybe a little more detail on how we've been thinking about this and what we're experiencing.
Thanks, Good morning Ray.
Let me start with capital.
So on capital.
We actually began working on this last year last year, we saw another really good.
Performance on driving total well costs down we were down another 10% year over year in 2021, we ended the year, averaging $5 7 million for total well costs.
But we can see.
Some inflation are already beginning to impact our cost last year on diesel and steel.
And we are very mindful of locking in our program for 2022, and so last year was locked in are.
Essentially pressure pumping.
Services drilling services.
Got all of the sand that we needed for the 2022 program actually secured about two thirds of the casing and then numerous other.
Key service components for R. R.
Capital program so.
Today, we estimate that we've locked in prices for about 75% of our total capital spend.
In 2022.
With that though we still are projecting a slight increase in our average well cost for 2022, we think we'll average right around $6 million.
In the year. So you could think of that as projecting around a 5% to 7% inflation, but it clearly would have been much higher than that if we wouldn't have proactively secured some of the services for the capital program.
Let me address your long term question now for actually both capital and operating costs in our five year guide. We obviously have the 2022 inflation baked in there, but we have also assumed some additional inflation potentially hitting us in the out years and so we still like that five year.
It is reasonable to Es point, we've done our best to project, what what inflation might be over not only the short, but the medium term.
Let me turn to operating costs now clearly you can see that our.
Our operating costs are up year over year.
And inflation is one of the key drivers there I'll just reiterate a couple of points and then I'll come back and talk about inflation. So.
In the operating cost bucket for US you also see our our gas processing costs and we continue to make good progress on <unk>.
Gas capture.
And driving down.
Flaring driving down <unk> emissions and so the reality is as we do that we see higher expenses.
Fortunately, though today those are all more than offset by increased revenue. So.
That's a good thing for US. We also are seeing some additional costs across this kind of a more diverse set of wells we operate.
And then back to inflationary pressures and the operating costs World last year. We noted that we were seeing some heska.
Escalated costs due to contracts that were linked to double UTI. Some of that pressure continues of course this year, but we also had a series of contracts that.
Had a change in costs at the start of this year because.
They have price escalators linked to the consumer price index and so in our operating cost guidance for the year Youre, probably seeing something on the order of 6% inflation as well baked into those numbers for this year.
And as.
As I noted we've got that.
We've got a bit of inflation baked into the out years in that area as well in terms of mitigating actions. We just continue to work really hard with our contract partners. We did that last year to lock in.
Pricing and lock in services and then for them.
Gave them a clear line of sight to work this year, we've done that on several opex categories as well as all of those.
Capital cost categories I notice.
Yes, that's great color I guess.
My second question is this.
The typical token question I'll ask is just around M&A and I know you touched on this but.
Just love to get your takes on kind of the current M&A market and obviously you're on the sell side in terms of like how are you thinking about the Canadian assets as well as just wondering how youre thinking on the buy side, particularly around potential consolidation in North Dakota here.
Okay.
Yes.
Thanks again for that rig.
Yeah.
It's been a couple of years of talking about volatility.
And it's still it continues to play out like it really it really does and as you stand back.
There's no question there are broad themes in play around continued consolidation drivers rationalization high grading portfolios and those things are all at play.
<unk>.
I guess I would tell you it feels like more of a balanced market probably than we've had before.
A lot of new money coming in looking to buy.
Were thinking about selling but the volatility I think is probably the single biggest driver of that has impacted the ability for transactions to happen. So that's broad market themes.
I think those mostly play out in the various basins that we're interested in.
So.
Yes, I mean today, you said, we're sort of a seller I think we we always think that we're both.
And strategically it to vote.
Building scale around the core looking for value looking for synergistic opportunity consolidation opportunity and then.
Moving assets don't compete out.
So yeah.
Yes, I don't know where else you would want to go on that.
Included more constructive.
But there hasn't been a lot of data points really anywhere.
One is that you have seen get over the goal line in the last little while.
They certainly look at meaningfully higher valuations than occurred a year ago.
You contrast, what we were able to get done about a year ago too.
The market today and.
Everything is worth two to three X what it would have been at that environment.
Maybe a final point on how we're thinking about everything right now.
We're pretty clear with the Canadian assets quality, but just smaller.
So we think there is potentially an opportunity to move those.
To somebody else's hands, and then on the North Dakota side.
We changed our stars in a meaningful way a year ago relative to the scope of the business and the inventory of the business.
Which you spent some time talking about and so.
The bar for North Dakota acquisition and consolidation.
It is maybe higher than it was because anything we do needs to compete with a deeper more resilient more robust portfolio.
But.
We went from a subscale business in North Dakota to a business that feels more scaled up.
And I think.
There are probably opportunities out there to make our business, even better, but we'll be disciplined in that and we will as always manage value expectations and keep shareholder interests that before or anything that we think about it.
That's great. Thanks, everyone.
Thanks Brent.
Your next question comes from Jeremy Mccrea of Raymond James. Please go ahead.
Yes, hi, guys.
A follow up question to raise.
Supposedly you sell Canadian the Canadian assets, you sell your Marcellus portfolio, you really to be debt free.
<unk>.
What's the.
The long term goal then is to just wait for an opportunity in the Bakken to show up or do you start to go more aggressive on the buybacks.
Essentially increased spending like at what pricing.
<unk> do you actually think about spending more to develop some of the Bakken assets and then I just have a follow up question out there.
Good morning, Jeremy.
Long term goal is to.
How large shareholders.
Outsized returns.
And so how does M&A factor and peso portfolio management is a really really really important part of that and with all things in life timing seems to be.
Play an important role.
Sure.
And those decisions.
So.
We have a portfolio today that we believe can deliver outsized returns.
We believe that a managed approach to organic growth is.
A really important part of delivering those returns on a sustained basis and so that's a five year plan.
How does M&A complement that.
We have choices on the Canadian assets, which is to produce those out.
We think there is an opportunity to enhance shareholder returns by monetizing those assets for value.
Presumably into the hands of somebody else, who is going to prioritize higher capital spending in connection with that do you think that would be accretive activity for our shareholders.
Could.
We buy something in North Dakota to enhance.
<unk> that's possible.
Many of the things that we would think of it we see synergistic opportunity there.
On the capital side, that's pretty easy to see.
It's also.
You cannot you can imagine it on the operating cost side, although that's a little bit a little bit harder.
And so then to your question of <unk>.
Balance sheet and capital structure in connection with that.
Our long term principles hasnt changed for a long time.
Which is strong balance sheet and returning capital to shareholders.
And so what we have right now in front of US is a bit of a unique thing is youre highlighting we've been able to use the balance sheet strategically and now we're delevering pretty rapidly and so we really like this near term plan.
In the near term plan is to continue to push our debt down.
And as we think about all the tools available to us to return capital to shareholders.
Which by the way.
Is complementary hopefully that the share price going up.
Which is obviously been the big returns will come in the last couple of years.
We see a lot of value in the stock right now basically if it cycles.
So whats next if we're in a get to a zero debt position.
Let's start by answering question, where is the share price.
Share prices, where it is now in all conditions are the same we will be buying a lot of stock and that the share prices double and we move through that intrinsic value maybe there is different opportunities relative.
Relative to.
Dividends and capital structure.
But let's be really clear that the big ticket items. The big ticket items are figuring ways to grow organically or inorganically and the acquisition stuff that we've done recently has been incredibly successful in capturing that opportunity now we're looking to monetize that and everything else, we're doing that will be complementary to that so.
I mean, that's a long winded answer there some generic stuff in there but.
It's a high level strategic question, so I'm happy to take a follow on there if there's more you want to drill down.
And I know, it's kind of difficult.
Question that sometimes answered it there.
But.
Maybe I'll kind of flip it.
Go really specific is there any one or two things that youre seeing from industry.
Is that.
Like a new approach to drilling technology and Frac designs.
That you are looking to implement for this year that could probably have maybe an outside.
Change to your type of type curves, where you have cost that youre seeing.
A single thing that would have an outsized impact this year.
I think I'll turn that to Wade I'll tell you I don't have something on my radar that says we've got a sea change.
But there's lots of interesting things going on that are both.
Both incremental and could be more impactful over time.
But why don't I hand, it over to Wade to talk about.
Knowledge <unk> operating practice some of the things we're doing at some of the themes that are out there.
Thank you.
I also wouldn't say that it's just one thing.
It rarely has been one thing if you look at our track record over the last several years of driving capital and other cost efficiencies.
It literally has been dozens of things every year that have added together that has driven the continued improvement you see in our capital efficiency and other.
Other other cost optimization.
I think the things we saw that have been really beneficial on the operating side is.
The deployment of incremental technologies, and our drilling and completions business that has helped us be.
More efficient. So these are things that have helped us improve well connection times.
On the stimulation side and continue to shave minutes off of different operations on the drilling side. So.
We're not out of the we're not we haven't run out of those kinds of operational technology. So you'll keep youll see us continue to deploy those.
On a broader sense throughout the company, we continue to deploy.
Automation and digital technologies to just make us more efficient I mean, we continue to do.
More work with.
Less labor than we've done in the past and we still see a large number of opportunities that we're going to continue to deploy.
Wait maybe maybe just.
Bill maybe an anecdote on VR use.
So it's not something that is dramatically moved.
F&B or low, but it has made a pretty significant move to emissions, maybe just a little bit of context for folks on the line Jeremy.
Yes, I think there.
We are motivated to continue to find technologies to reduce our emissions profile.
But at the end of the day, we also want to recover as much hydrocarbon as we can from the system.
And sell it and so the big success, we had last year was deploying VR use on our new pads and so we've done that on both the high pressure and low pressure systems.
And that facility design and it really made a big impact on our ability to.
Limit our emissions Reg recover more gas sell more gas.
<unk>.
And.
Ultimately manage the ability to continue to flow oil in areas, where we may have some emissions limits. So.
That's probably one of the deeper areas of focus for US is this whole emissions management technology suite.
And I think the thing that we are quite pleased by is almost every one of those technologies that we've tested and deployed.
Not only reduce emissions, but they've actually been constructive to profitability.
Okay.
That's good to hear guys.
Your next question comes from Jeff Lamb Boucher.
Pickering. Please go ahead.
Good morning, everyone and thanks for taking my question.
I've just got one here following up on some of your free cash flow allocation commentary around returns in particular I see the disclosure around your plans for capital returns has gotten clear with each update in yesterday's release confirming plants utilize what's left in the NCI V authorization, stating the intend to renew it in August I Wonder if you could just maybe frame how you think about utilized.
That once we get there if there's a way to think about that in terms of a component of cash flow or free cash flow that sees its way to shareholders. Like it has historically in terms of magnitude or if the long term leverage targets you talked about would be the best guidepost at this point in thinking about free cash flow allocation.
Yes, good morning, Jeff Jody do you want to take up.
Sure Good morning, Jeff.
Yes, we've we've outlined our plan.
It is consistent with previous years as well, we talked about our five year track record of returning over 60% of our free cash flow to shareholders.
At this time, we provided.
Guidance regarding what our plans are over the next six months.
And that equates to a similar level of recurring free cash flow to shareholders as well. So I think at this point in time.
We expect to be able to buyback debt remaining shares outstanding under MPV over the next five months.
And then we will look at it.
Depending on where our share prices are at at that time.
We will look at further returns to shareholders.
August .
Okay. Thank you.
Once again, ladies and gentlemen, if you would like to ask a question. Please press star one now.
There are no more questions from the phone lines I will turn the conference back to Mr. Ian Dundas for closing remarks.
Well I'll just say thank you for everyone. It's been a busy year and it's it's.
Also a busy day for folks relative to reporting so we appreciate your time.
This call is a little bit longer today.
So enjoy the rest of your day.
I appreciate your interest.
Ladies and gentlemen. This concludes your conference call for this morning, we'd like to thank you for participating and ask that you. Please disconnect your lines.
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