Q1 2022 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the <unk> plus Q1 2022 results conference call. At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session, but any time. During this call you require assistance. Please press star zero for the operator. This call is being recorded on May six.
2022.
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 first quarter news release.
Those have been prepared in accordance with U S. GAAP. Our production volumes are reported on a net after deduction of royalty basis, and our financial figures are in U S dollars unless otherwise specified.
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 marketing <unk>.
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, Thank you for joining us today.
I'll start with the key takeaways from our first quarter release.
We remain well positioned relative to our 2022 plan.
To deliver robust free cash flow growth and meaningful cash returns to shareholders.
We expect to generate approximately $675 million in annual free cash flow in 2022.
Assuming rest of your prices of $85, West, Texas and $5 Nymex.
Based on current strip prices, our free cash flow estimate increases to approximately $900 million.
Consistent with our multi year track record, we plan to allocate a substantial portion of free cash flow to shareholder returns.
We are committed to returning a minimum of $350 million or 50% of annual 2022 free cash flow whichever is greater.
Through dividends and share repurchases.
In connection with this plan our board has approved a 30% increase to our quarterly dividend.
Active with the June payment.
And an increase to our share repurchase program.
Based on current market conditions, we expect to repurchase the remaining authorization under our normal course issuer bid by the end of July .
And renew the NCI in August for another 10% of shares outstanding.
Our framework for share repurchases continues to be based on our evaluation of the company's intrinsic value.
Using our mid cycle price view.
Third to our trading value.
Using this approach we continue to see compelling value in our business, which we believe is not being reflected in the market value of our equity.
The remaining 50% of our 2022 free cash flow not allocated to shareholder returns will be prioritized for reinforcing the balance sheet, which has consistently been a highly strategic asset for the company.
Moving on to operations the execution of our capital program remains on track.
Strong operating performance.
And continued optimization of our program is supporting a higher production forecast compared to our initial guidance. As a result, we have increased our annual guidance by 500 Boe per day at the midpoint.
On the capital cost side, we are seeing upward pressure driven by the inflationary environment as well as higher levels of non operated activity.
Due to these factors, we have revised our 2022 capital spending forecast higher by $20 million.
We're 5% again based on the midpoint guidance.
Importantly, we have secured services equipment and supplies, we need to execute our operating plan efficiently.
With no plans to increase activity levels or chase higher less efficient growth.
We are committed to maintaining capital discipline and will continue to focus on cost control.
Drawing execution to help mitigate and offset inflation, where we can.
Of course, higher oil and gas and natural gas prices are also driving much higher earnings and free cash flow.
I will leave it there and now I'll turn the call to wait for an operational update.
Thanks, Ian and good morning, everyone.
I'll start with a review of our operating results and then provide some visibility to the outlook for the rest of the year.
In the first quarter total production was just over 92000 barrels of oil equivalent per day.
As is typical for an a plus the first quarter production was lower compared to the fourth quarter of 2021 due to the timing of our completions program in North Dakota, we.
We brought our last 2021 pad online in early November and our first pad. This year started producing at the end of March. So we went over a quarter without bringing any wells online.
As Ian mentioned operationally the year has started out strong and on plan.
Despite the fact that we face some additional challenges in the form of severe weather in North Dakota.
Though we consider winter impacts in our base plan. These recent snow storms were well above the scale and impact we plan for an.
On balance we estimate that we lost about 1000 Boe per day of annual average production due to recent storms.
Today, the vast majority of our production has been restored and we expect to be producing at full capacity over the next couple of weeks.
Despite these temporary weather related impacts our strong operating performance and optimized development plan has more than offset the production downtime from the storms.
As a result, we are tracking ahead of our original production forecast and have increased our annual guidance range to <unk> 96 to 101000 Boe per day.
We are currently running two drilling rigs and have an active completion program ongoing and tell our Onstream program finishes in the fourth quarter.
The second quarter will likely be our busiest in terms of wells brought on production, where we expect to bring online 18 to 21 net operated wells.
Given the weather impacts in April 2nd quarter volumes are expected to be roughly flat to Q1, and then we expect strong growth into Q3.
Like our competitors. We are also seeing upward cost pressure due to the impacts of inflation and supply chain tightness.
Frankly, we've been struck by the differences in messaging about inflation.
Earning season between service companies in the E&ps.
We believe we're very well positioned to mitigate many of the impacts of inflation on our 2022 program through our early approach to contracting last year strategic partnerships and the technology driven efficiency gains we continue to experience.
Nevertheless, we have experienced some inflationary pressures largely in consumables, which is impacting our drilling and completion costs in the Bakken.
We now expect our Bakken well cost to average $6 5 million per well up from our previous estimate of $6 million.
The components, most exposed to most exposed to inflation, our diesel and steel, which combined represent over 80% of the expected well cost increase.
Diesel costs will continue to be a function of the oil price environment as the year progresses, and we now have more certainty on steel costs in 2022, having recently secured the remaining casing requirements for the program.
The strong commodity price environment and as Al has also led to higher levels of non operated activity in our portfolio, which is another reason, we move capital spending guidance higher.
In summary, we are committed to maintaining capital discipline and because of our strong execution, we've been able to increase our production guidance. Despite the impacts of one of the worst April weather events, we have seen in our North Dakota operations.
Touching briefly on activity in our non operated Marcellus position, we participated in 25 wells, which were brought on production during the quarter with an average working interest of 6%.
<unk> performance continues to be solid with initial 30 day production rates of approximately 30 million cubic feet per day per well.
I'll leave it there and now pass the call to Jodi.
Thanks Lee.
Let's start with our pricing realization.
In the Bakken our realized first quarter oil price differential was <unk> 35 per barrel below double UTI.
This is an improvement of almost $3 compared to the first quarter last year.
The continued strength in Bakken oil prices is being driven by an improving supply and demand balance significant excess pipeline capacity in the region and strong prices for crude oil delivered to the U S Gulf Coast.
Currently we are seeing Bakken oil prices trading about WPS and.
And as a result, we now expect our 2022 realized Bakken oil prices to be at par with WTS.
Marcellus pricing was also strong during the first quarter, reflecting seasonal demand, including our exposure to the Transco zone, six non New York market, which averaged $1 42 per mcf above Nymex during the quarter.
And as a result, our first quarter Marcellus differential was one cent per mcf above Nymex.
We expect Marcellus differentials to widen for the remainder of 2022 due to the seasonal impact on natural gas prices in the region and have therefore left our full year 2022 guidance of <unk> 75 per Mcf below Nymex unchanged.
Operating costs were just above $10 per Boe in the first quarter.
As noted during our last earnings call operating expenses in 2022 are expected to be higher than 2021 due to the increased oil weighting of our production inflationary impacts and higher well service activity.
With some additional costs incurred recently in response to restoring operations. Following the winter storms. We've moved the bottom end of our operating expense guidance range up 3% and it now is sitting at $9 75 to $10 50 per Boe.
Although we are seeing inflationary cost pressures our margins remain solid.
<unk> hedges, our first quarter net back more than doubled compared to the same period in 2021 significantly outpacing the move in commodity.
Moving down to the bottom line, our first quarter adjusted net income was $146 million and adjusted funds flow was $262 million with.
With capital spending of $99 million in the quarter, we generated free cash flow of $163 million.
We will continue to prioritize returning capital to shareholders and strategically reinforcing the balance sheet with our free cash flow.
As Ian covered earlier, the board approved an increase to our return of capital plan for 2022.
Which is a minimum of $350 million.
Our 50% of free cash flow whichever is greater and so our intention is to return this capital through dividends and share repurchases.
Lastly, as a result of the higher commodity price environment for both oil and natural gas. We are updating our 2022 current tax guidance to $20 million to $30 million or 2% to 3% of adjusted funds flow before tax from $10 million previously.
I'll leave it there and I'll turn the call over to the operator and open it up for questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by one on your Touchtone phone, you'll hear three ton prompt acknowledging your request and your questions will be pulled in the order. They are received should you wish to decline from the cooling process. Please press star followed by two and if anything the speaker.
Phone please lift your handset before pressing any Keith one moment for your first question.
Your first question comes from Patrick <unk> with <unk> capital markets. Please go ahead.
Hey, guys. Good morning, and thank you for taking my question.
Just curious to hear you've obviously made an adjustment to.
Account for inflation in 2022.
You've got the number out there $400 million to $450 million in the long term plan beyond that just wondering what sort of your outlook or what sort of considerations you are taking into account on the inflationary side and what you can offset.
By way of efficiencies sort of as we get out into the 2023, and then beyond that medium and longer term with this five year plan you have in place.
Good morning, Scott.
Maybe I'll just make a high level comment and then hand it over to <unk>.
Aid.
I guess you got two drivers there.
You got controllable and uncontrollable.
Controllable side, we've got procurement strategy and we've got execution.
And so.
We.
We got in front of 2022 quite quite early through procurement.
That allowed us to secure quality equipment quality service providers maintain operational continuity and we continue to execute really well. So I think we're doing all we can on that front and it's showing up in.
Our numbers this year.
We don't like talking about weather very much but it was it was.
Quite the impressive weather event, and we haven't missed a stride as we think into the future.
You do have broad inflationary impacts that we won't be able to mitigate entirely and those are going to be a function of the market.
And we'll price and gas price is going to be a big piece of that.
So as.
As we think about our multi year outlook.
Yes, it's probably not.
We wouldn't have the confidence to make a long term inflationary call I think it's hard I think if we stay if we settled into a 70 or $80 world would be very different than if we stay at $100 World.
I can tell you scope of our program our balance sheet a track record our relationship with service providers I think are all going to put us in pretty good stead to.
Outperformed relative basis weight is there any more detail.
The offer.
Yes, sure happy to good morning, Patrick Thanks for the question.
Maybe I'll start off on the execution front and do you have a few more thoughts.
Today, we have two rigs in the field and one frac crew and.
We've actually been working with.
These group of contractors now for well over a year and the level of efficiencies that were.
Achieving with these crews in this equipment as well.
Really.
On just a steady well by well improvement pace. So if you just ignore the inflationary impacts and just look at execution from an efficiency perspective, we're pleased with where we're at we're actually really starting to hit our stride. This year and so I'm fairly confident we're going to keep that multi year track record that.
We've demonstrated.
Well by well year by year and improvements in Pes, which ultimately does translate as well into lower cost on a on an inflation normalized basis, So that's going really well.
Without going into every detail of what we're working on one of the things. We're very focused on is offsetting some of these consumables that to <unk> point are really sometimes out of our control. So for instance, looking for ways to offset diesel use.
And a lot of our operations.
To drive that part of the cost inflation.
A bit lower in terms of total impact.
Maybe a comment just to build on what Ian noted around procurement. The same types of things, we did last year to proactively secure services equipment and supplies for the <unk> 'twenty.
2022 program, we're now in the middle of doing it again for next year's program and so I think that will service well again, we clearly are benefited today by that work.
Even though as we've noted we saw upward pressure on some of these consumables.
A lot of other parts of our cost structure have remained.
Fairly tight.
Wade.
I think people might be bid interested.
Maybe you could expand a little bit upon.
Diesel and how we're thinking about that and maybe this is a really good example of where our ESG goals.
Are intersecting with improved profitability thinking specifically about the drilling rig.
And fuel.
Yes happy to so one of the.
Fairly significant LNG trends, that's going on in the industry today is the types and nature of engines being used on both drilling rigs and pressure pumping crews. So.
I'll actually start on the Frac side.
We're using a set of engines that allows us to.
Use some degree of CMG.
Place of diesel and so today.
We're probably in the 30% range.
<unk>, so but that clearly is saving us money today, given the spread between <unk> prices.
And diesel prices.
The bigger shift we're about to make his conversion of engines on our drilling rig where we're moving to.
Dual fuel engines and even.
<unk>.
Fairly.
Leading edge environmental package that allows.
Sure.
Better power management of the of the engines on the rigs.
So in addition to being able to displace we're thinking upwards of half or more of the diesel use on a rig.
Also be able to optimize the engines.
There are some environmental package comes with a set of batteries that helps you.
Better balance the load between the engines and so all of those things to <unk> point help us reduce emissions through reduced diesel use but they also of course draw.
Drive down our cost given the given the spread today.
And then one last point I'll make is in the longer cycle. This.
This will help us around emissions, because we'll be able to actually.
Capture some of the gas that we can send down a pipeline compressor and then use it again in our operations. So it's an exciting area for us.
To continue to push on and expect more updates from us in the future.
So I guess the broad takeaway that means that youre very comfortable still with that 400 to 450 level in the five year plan.
No no that wouldn't be the.
We're trying to make I think.
The two takeaways I think we are going to perform well.
Relative to others and then.
Think that.
The biggest call you've got to make your tell us where the commodity is.
I think you have to tell us with commodities.
And then the $100 oil world.
I don't think our $4 54 to $4 50 is the $4 50 is probably not a good number I think we would exceed the outside.
Outside of that.
How much past $4 50 of them going into that.
Im not sure and I think 100 looks a lot different than 75% or $80 as well.
That $4 to $4 50 was based on a $70 deck and I think thats a pretty good number to think about in that context.
Okay. That's fair I would assume the cash flow paces that inflation anyways.
Maybe just a quick philosophical question.
Maybe just a quick philosophical question in terms of capital structure and return of capital management I know Ian.
From past experience. It seems like you love philosophical question. So I'm just I'm wondering here, even looking at our numbers with where our cash flow is going here.
With a 58% return of capital structure that you have you're hurdling very close or very quickly towards being in a net positive cash position and I'm. Just wondering we've seen a few companies recently come out they've set long term nominal debt targets that are above zero.
And being able to.
Provide a line of sight to say return of capital philosophy is that approached 100% and I'm just wondering from an enterprise perspective.
Appreciating that all asset basis, or a little bit different how do you. How do you think about that balance sheet management, what the ultimate rate level of leverage is.
And where has the potential to even further accelerate the return of capital.
Well the good news, we put out this release this morning, and we had 15 minutes of having that six month outlook.
So as we think past there.
The principles that we're dealing with are all consistent resilient business.
<unk> total returns to people combination of growth.
And <unk>.
Cash in their pocket so in terms of ultimate debt I guess your question.
Would we take it to zero, we really havent crossed that bridge yet.
Look for this year will reduce debt and it will provide double digit returns with the buyback and the dividend.
And have a wonderful place relative to leverage we still have just under $600 million of net debt the balance sheet. So we still will have debt at the end of the year and if you just step back we think reducing debt in periods of high commodity prices.
De risks.
The business.
And puts us in an advantaged position when we hit the next downturn relative to building cash that's not our objective.
So I guess the outlet is we're going to continue to look to increase returns as that debt is lower.
Okay, great. Thank you guys.
Thanks, Bob.
Your next question comes from Eric Natal with nine point partners. Please go ahead.
Good morning, guys I just wanted to follow on on <unk> question on return of capital framework going forward.
You guys are buying back stock coupon by 10, you've you've told the street, you're going to buy another 10.
A great Investor day to switch some concerns that some people had on inventory as you clearly show that is not a problem, but there is still a massive disconnect between share price and.
Intrinsic value so with the asset sale.
In the next couple of months, we've got your debt free bike end of Q1.
Would it be reasonable to think that.
You clearly don't need to Delever.
You are debt free by the end of Q1, So would you entertain the idea of doing a special with the proceeds given we've got Youre trading at one five times cash flow, which is ridiculous.
Yes.
Eric.
I wanted to ask probably assumes the 100 stays flat but.
No. We're certainly open mind to that so.
On the divestment side.
So assuming success, which you've done we've said.
Proceeds go to returns and.
Primarily to paying down debt and returns.
Maybe with a little bit of reallocation.
So then what's the outlook for that.
It's either share buyback.
Or is dividend increase and.
We think both of them makes sense, we're leaning a little bit more into share buyback now because we agree with you we see the disconnect in the valuation.
We think they are both outlets so I think thats a.
Your premise.
I think its valid and that would be that would be our plan.
So you are constrained by the pace of the <unk>. So just going back to you again.
Special will be on the table or something you would consider.
Yes, so so far we have so far we haven't been.
<unk> been constrained by the NCI would be it's been a pretty valuable tool actually so I think if people are concerned that we will be constrained by our willingness to put cash out the door.
Because of the structural nature of the inside that.
That concerns misplaced.
We will absolutely consider either special dividends.
Or.
One off buybacks.
Okay, and then looking to next next year, if we can.
Third a dream and current oil prices persist again, we've got to hit 40% plus free cash flow yield to your debt free so.
You've said you want to moderate up for both growth and yield, but we've had other companies like <unk> to make a 100, what do you think is reasonable going forward for expectation on.
Investors share for the free cash going forward, because 75% reasonable and a debt free state.
I think that.
I mean is there because you know.
<unk> been very consistent with principles, we've been very consistent with our actions I think we have a longer track record doing returning capital to shareholders than almost any other company out there. So we're very committed to this strategically.
Haven't.
And then completely.
Script has been the formula.
For a few reasons things change but.
But.
The second reason when you look into the market do you see different approaches you can't see.
Any particular approach that is compellingly.
Causing one company tell performed and I think partly that's because things do evolve and so whats the right percentage I think you need to tell on the oil price and then you need to tell the cost structures.
And then we will know what comes out of that because the thing that is more important than anything is that we have a sustainable resilient business. So when people talk about 100% payout of free cash flow.
I think about 2007, a little bit there.
Hundred percent doesn't quite feel like the right number for a lot of companies you need to replenish resource and those sorts of things that we're in a wonderful place relative to the acquisitions that we executed a year ago. We've replenished inventory, we have a very sustainable long term business, but 100 person.
I don't know about that.
So for us the 75% a good number.
That feels pretty good.
Again tell me where cost structures are going to be tell me.
Where commodities are going to be and we want to ensure that this business sustains.
Got it okay. Thank you.
Ladies and gentlemen, as a reminder, if you do have any questions. Please press star one.
There are no further questions at this time. Please proceed.
Well. Thank you everybody I know, it's a busy day lots of reporting going on there I appreciate everyone's attention. This morning.
Enjoy your weekend, thank you very much.
Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines have a great day.
Okay.