Q2 2022 Enerplus Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to enter plus Q2 2022 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 in August 2022.
I would now like to turn the call over to drew Mair manager of Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. Thank you for joining the call.
When we get started please take note of the advisories located at the end of our second quarter news release.
Financials have been prepared in accordance with U S. GAAP. Our production volumes are reported on a net after deduction of royalty basis in our financial figures are in U S dollars unless otherwise specified I'll.
I'm here this morning, with Ian Dundas, our President and Chief Executive Officer, Wade Hutchings, Senior VP and senior Chief operating officer.
Jodi Jenson Labrie, senior VP, and Chief Financial Officer, Shaina, <unk> VP finance.
Garth doll VP marketing following our discussion we will open up the call for questions.
I will turn it over to Ian Thank you drew good morning, everyone.
Our second quarter results and updated.
22 outlook reflects strong operating momentum.
And disciplined capital allocation for.
For the second consecutive quarter, we are increasing our annual volume guidance well.
Well performance.
And efficient execution.
We believe this outperformance is particularly evident considering the impacts to our production from the severe weather in the Bakken we spoke to last quarter.
And the recently announced sale of assets in Canada.
Combined these events have impacted our annual production by almost 2000 Boe per day.
Yes, we have increased our production guidance by 500 beauty <unk> since our initial 2022 guide.
Released in February .
This has set us up for a very robust second half of the year, where we expect significant production and cash flow growth.
We also continue to operate within our capital guidance range of $400 million to $440 million.
As our approach to procurement.
Our focus on cost control.
Execution are helping to mitigate many of the inflationary pressures we are experiencing.
We generated over $325 million of free cash flow through the first six months of the year, which we expected to increase by an incremental $475 million in the back half of the year based upon rest of year prices of $90.
650 Nymex gas.
Given the free cash flow look and our solid financial position.
<unk> increased our cash returns to shareholders to at least 60% of <unk>.
Free cash flow commencing in the second half of 2022.
Continuing through 2023.
We have also increased our absolute minimum return commitment in 2000 $22 million to $425 million up from $350 million previously.
At today's corporate valuation.
Minimum commitment represents a competitive free cash flow yield sorry, cash return yield of approximately 15%.
Moving onto divestments last week, we announced the sale of a portion of our Canadian assets for total consideration of 140 million Canadian dollars.
We continue to advance opportunities to invest our remaining Canadian assets in Alberta and Saskatchewan.
Lastly, we have updated our five year outlook to better reflect the higher commodity price and inflationary environment as well as to exclude our Canadian asset base due to the ongoing divestment process.
Previously our five year outlook was based on $70.
High prices and $3 Nymex, we are increasing our commodity price assumptions to $80 and $4.
Under these are some updated assumptions or annual capital spending from 2023 through 2026.
Is forecast at approximately $500 million.
And our cumulative free cash flow between 2022, and 2026 is estimated at approximately $3 billion.
Five year free cash flow forecast is equal to our current market valuation.
So I will leave it there and turn it over to wait for an operational update.
Thank you Ian and good morning, everyone.
I'll start with a review of our second quarter operating results before moving onto our outlook for the rest of the year total second quarter production was just over 94000 barrels of oil equivalent per day, including about 57000 barrels per day of liquids.
Although we experienced some downtime early in the quarter due to severe weather, we exited the quarter with strong volumes following an active period of completion activity and strong well performance.
During the quarter, we brought 24 gross operated wells on production across four pads in North Dakota.
Our team continues to customize the development of each pad in terms of landing zone spacing offsets to existing producing wells completion design artificial lift and slow back.
This optimization combined with our high quality locations are contributing to the outperformance we're seeing from our 2022 wells.
These wells have averaged approximately 2300 Boe per day per well on a peak consecutive 30 day basis.
This outperformance is supporting the increases we have continued to make to our production guidance. So far this year.
We now expect total annual production to be 97500 to 101500 BOE per day up 1000 Boe per day at the midpoint.
In terms of the cadence of our remaining completions activity in North Dakota, we anticipate bringing eight operated wells online in the third quarter and five online in the fourth quarter.
Additionally, we have some non operated completions in the forecast for the second half of the year.
Our program is expected to set up a strong second half volumes as highlighted in our news release, we expect to deliver approximately 15% sequential liquids production growth in the third quarter.
Touching on inflation, we have continued to experience upward cost pressure due to the impacts of inflation and supply chain tightness.
The impact is primarily being felt in our capital program How's.
However, we remain well positioned to mitigate impacts of inflation.
On the 2022 program through our early approach to contracting last year strategic partnerships and the technology driven efficiency gains we continue to experience.
As a result, we are continuing to operate within our $400 million to $440 million capital spending range.
Touching briefly on activity in our non operated Marcellus position.
We participated in 22 wells, which were brought on production during the quarter with an average working interest of 7%.
Well performance continues to be solid with peak consecutive 30 day production rates of approximately 24 million cubic feet per day per well.
Leave it there and now pass the call to Jodi.
Thanks, Greg.
I'll start with our realized prices during the second quarter.
In the Bakken, we realized sales price premium to WTO high at 85 cents per barrel.
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.
With Bakken oil prices continuing to trade at a premium to <unk>. We now expect our annual 2022 realized Bakken oil prices to average $1 per barrel above <unk>.
On the natural gas side, our realized Marcellus price was 59.
Mcf below Nymex in the quarter.
We continue to expect differentials to widen for the remainder of 2022 due to the seasonal impact on natural gas prices in the region and have left our full year 2022 guidance of 75 cents per Mcf below Nymex unchanged.
Operating costs were $9 74 per Boe in the second quarter, we anticipate.
Operating costs will trend higher in the third quarter, largely due to anticipated increases in wealth service activity and artificial lift system replacements, along with an increased liquids waiting.
However, on a full year basis, we have tightened our operating cost guidance to $10 per Boe.
From a previous range of $9 75.
At $10 50 per Boe.
This includes the impact of our previously announced Canadian asset divestment, which is expected to close at the end of the third quarter and as a result, we.
Expect lower overall operating expenses in the fourth quarter.
We recorded current tax expense of $12 million in the second quarter and based on the current commodity price environment. We continue to expect 2022 cash taxes at 2% to 3% of our adjusted funds flow before tax.
Have you gone to the bottom line, our second quarter adjusted net income was $172 million and adjusted funds flow was $297 million.
With capital spending of $133 million in the quarter, we generated free cash flow at $165 million.
We plan to continue to prioritize returning capital to our shareholders along with reinforcing the balance sheet, our free cash flow.
Under our updated return of capital framework, we are committed to returning a minimum of 60% of free cash flow beginning in the second half of 2022 and at least $425 million to shareholders. This year whichever is greater.
Through July we have returned $179 million through dividends and share repurchases.
Leaving a minimum remaining return of $246 million between now and year end.
This amount could be higher.
If WCS averaged $100 for the rest of the year. This remaining return in the second half of the year would increase to approximately $300 million.
We have also extended our commitment to returning at least 60% of our free cash flow into 2023 as well.
Over the last 12 months, we bought back 10% of our public float under our normal course issuer bid by spending $285 million and repurchasing approximately 26 million shares at an average price of $11 14 per share and.
And we announced our plan to renew the bid for another 10% of the public float on its expiry in August .
Our view remains that our current share price is discounted compared to our transit intrinsic value and under strip pricing, we would anticipate using both our normal course issuer bid.
And a substantial issuer bid over the next 12 months to fulfill our return of capital commitment to shareholders.
In addition to the share buyback program. We have also increased our quarterly dividend by 16% effective with the September payment.
This is our second dividend raise this year and represents an increase of over 50% from the start of the year.
The remaining free cash flow not allocated to shareholder returns will be prioritized for strategically reinforcing the balance sheet, resulting in approximately <unk> three times net debt to funds flow by the end of this year.
I will leave it there and turn the call over to the operator and open it up for questions.
Thank you.
Ladies and gentlemen, we will now begin question and answer session should you have a question. Please press star followed by the number one on your Touchtone phone.
You will see your three tube pump technology request that questions will be pulled in the order. They are received should you wish to decline from the polling process. Please press star then the number two.
If you're using a speaker phone please lift the handset before.
Pressing any keys.
One moment here for your first question.
Your first question today comes from Patrick O'rourke with L. TBE Getz. Please go ahead.
Yes.
Hey, good morning, guys.
At <unk> capital.
Just a quick question on the current dichotomy here between buybacks and dividends in terms of your return of capital.
Obviously, you've clearly gravitated towards buybacks.
Joe just mentioned the potential for an IP.
As you look at these and you've exhausted the buyback in <unk>.
2022, essentially youll exhausted in 2023.
Maybe using that might be and what the parameters are that are but is there any potential I think thats been asked this in the past.
To see special dividends issued especially in light of.
Some of the positive performance, we've seen from your peers when they've done so.
How are you.
I'll turn that over to Jodi to address there's a few things in that.
Good morning, Patrick.
Maybe just stepping back let me think about the return of capital.
Components of it being dividends and buybacks.
We really considered both.
Parameters, obviously, the base dividend, we want that to be sustainable.
Want that to be continuing to be a growing base dividend within the context of our total return of capital.
We see the biggest part of it or the bulk of it being potentially between a variable or a special dividend.
As we've mentioned the buyback.
And just.
With our share prices, where we see them trading at these levels, which is significantly below the intrinsic value of our shares.
We think the best value or the best ability to return capital to shareholders would be through buybacks.
Have those options available to us as you mentioned, we do have the option to do a substantial issuer bid as well as.
Renewing MTB for another 10% here in August .
Obviously if.
Parameters change.
And we will continue to look towards the potential to have a variable or special dividend.
Share price increase.
In the future and we believe we are value data.
At a value where it makes sense.
Okay. Thank you and maybe just shifting gears slightly to the operational front the bump guidance, it's pretty impressive here.
Especially in light that it looks like it's driven mainly by <unk>.
And on the back of the outage and the asset sale and capital staying flat year, albeit I think inflationary considerations came previously.
Just wondering if we could get into or get some more color on what's really driving the outperformance versus your prior expectations are you still sort of augmenting the completion process and well design here.
Is it a better understanding of the geology.
We're hitting on a sweet spot in terms of the assets that you've acquired.
Or is it just in.
In general the Conservative nature of your planning gave you a little bit.
Broadway here.
Thanks.
So.
So we've raised twice this year.
Q1 raise was performance oriented.
Largely related to managing downtime as we've been pretty light capital quarter effectively no on streams that influences.
We managed through the storm.
We were we Didnt escape that managed through the store.
But what's going on this quarter right, we talked about it a little bit I'll turn it over in the second one this is well performance.
This is not a function of sandbagging numbers and hitting average or surety results, we've been pretty transparent with the actual performance every quarter every year, we've updated our deck. This morning, and you can sort of see how the 2022 wells collectively are.
Forming <unk>.
Versus.
Earlier vintages.
So far early time, we're pretty stope, so what we'll do is yes.
Yes.
Maybe get a little bit into what's going on there.
L level because it is it has.
It's been a good quarter for sure.
Sure Thanks, Ian and I appreciate the question Patrick.
I'm actually going to make a quick comment or two on our base performance and the acquired assets and then I will dive into well performance. So as Ian noted part of our outperformance. This year has simply been good uptime and thats been across both of our.
Existing legacy wells plus the wells that we purchased last year.
And even on the capital program I'll just note.
One of the four pads that we brought on this year came from that acquired.
Set of assets from last year.
So turning to well performance I think it's helpful. Maybe just zoom out and look at the whole basin for a moment and reflect on the Bakken has actually had.
Very strong well performance over its history, there's been lots of peers.
Periods, where step changes have been made in well performance and I think importantly in contrast to some other basins as most operators moved into full development mode.
Of course, there have been learnings and adjustments but.
There hasnt been as many big kind of missteps. If you will in terms of seeing how that reservoir would perform.
In development mode, and I think youre seeing that even.
Play through in our results this year.
So.
Speaking specifically to what we have been doing.
Given the.
The layout of our assets today.
The aspect that almost every new pad that we are.
<unk> already has some existing producing wells.
In the unit or near the unit.
We take a very customized approach to the design for every unit.
Taking into account everything we know about.
The subsurface geology of the reservoir conditions and everything we know about all of the offsetting.
Producing wells et cetera.
So what that ends up resulting in is a very customized program where we.
We'll optimize the.
A number of wells, we put it in the middle Bakken and three forks, where their landed how many how their space, how theyre spaced relative to existing producers.
How we think about the actual frac design in terms of.
Subtle changes in proppant loading.
And then also integrating that with how we will flow those wells back and then put them on the initial artificial lift.
So.
We feel like we're actually seeing really good results from that approach and clearly the results this year.
Have been really quite strong in some places have exceeded our expectations.
And we think that is a direct result of this very customized.
Pad by pad unit by unit development approach.
Maybe I'll, just maybe I'll just add.
It's early time right. So we're we're giving you 30 day rates and we've got a little longer on some of these wells.
Yes.
You can't find many examples of a.
Quality 30 day rate in the Bakken that turns into a bad well unlike.
Unlike an IP 24 or something like that.
So we feel good.
We're not in a position today, where we're saying hey take this and extrapolated against another 650 wells.
These wells were all we haven't seen decline yet those sorts of things, but its positive its outperformance.
A few of these pads are in areas, where we would expect better than an average type curve and we don't have an average type curve right. We've got 16 different subset to disappear, but we have seen outperformance in areas.
Is that because we are in a statistical play generally doesn't disappoint, that's maybe part of it.
And.
The explanation.
We think its paying off so far.
I will tell that.
Strong start to the year.
Okay.
Okay. Thank you very much.
Yes.
Your next question today will be coming from Geek, Greg Pardy with RBC capital markets. Please go ahead.
Yes. Thanks, good morning, Thanks for the rundown I mean, great operating color.
Question is on guidance probably more around.
Pricing and then just stuff like cash taxes, but I know Judy you mentioned two.
2% to 3% of pretax ASF so for this year.
Where does the company now kind of sit from.
Current tax position, particularly as we look into 'twenty three.
Yes, Thanks, Greg.
Yes, like as you mentioned, we are expecting at these commodity price levels, both oil and gas we would expect to use them.
Majority of our operating losses in the U S. During this year. So if these prices hold.
I think 2% to 3% is still a good number.
To use for this year, but we would see that moving towards 10% to 12% of adjusted funds flow before tax next year again.
Under the current <unk>.
Prices for both oil and gas.
Okay. Thanks for that and then.
When it's good detail on the Sweet Bakken oil prices have been really really favorable for variety of reasons, what about Ngls. Because this is still 15, 16% or so of your production and it obviously has not participated anywhere near what we've seen in terms of oil prices, how should we think that those prices going ahead.
Yes, that's for sure in Q2, we did see some weakness in the NGL pricing that was primarily driven by weaker propane and butane prices.
And has it.
Become a smaller portion of <unk>.
Up 42% of our mix in the Bakken is propane with 24% of butane.
Going forward I think in this range.
I think is a good way to think about it.
As a percentage of <unk>.
Okay, so probably not so not unlike what we saw in the second quarter sort of in the mid 30% range or so on the Ngls.
Yes, I think that would be a good number.
Okay terrific, thanks very much.
Thanks, Greg Thanks.
Thanks.
Operator are there any more questions.
Yes.
They have lost the operator, it looks like it looks like.
We don't have any more questions on the line.
Right.
Sorry about that it wasn't going through I was talking here.
The next question is from Jamie Kubik with CIBC. Please go ahead.
Yes, good morning, and thanks for taking my question.
Just around the shareholder return framework you did increase your plan to return 60% of free cash to shareholders from 50%.
We think about that moving higher as your as your debt levels get closer to zero or or do you look to preserve additional dry powder for.
Central M&A and inventory replenishment.
Can you talk about those items.
Let's make this the CFO Joe.
Why don't you take that sure. Thanks, Jamie.
Yes, so obviously, we have debt remaining on our balance sheet just around.
$550 million in Q2, so with current debt on the balance sheet, we think 60% moving to that 60% or at least 60% returns. It makes a lot of sense.
Obviously, as we continue to pay down debt.
We look into the future that could be could be possible kind of in the <unk>.
2023 time frame.
We would expect that this number would be moving higher from 60%.
Thank you.
Wouldn't expect it to go to a 100%.
We're in a really strong place.
Some of the deepest inventory in the Bakken.
And so we just want to make sure. We our focus remains on ensuring we have a sustainable business over the long term.
Okay, and then maybe with the remaining asset sales from Canada remaining production will be sold out of Canada.
If you if you succeed in disposing of that before the end of the year could that be.
No.
Catalyst, possibly to move the shareholder returns higher how should we think about.
That impacting how you think about shareholder returns.
Good morning, Jamie.
Yeah.
The framework we have today.
And this will evolve depending upon when things happen, but for your pure lens of.
This year timing, if we are to exit this year.
I think it is going to look similar.
Debt repayments, we would we would forecast the remaining debt with its enhanced.
Sure.
Account program. So we still see that this year, so that plus enhancement.
Shareholder returns is how we've thought about it.
We have said.
Lending when the transaction security.
Portion of capital or proceeds.
Go into the ground.
To enhance returns.
For next year.
As that happens later in the year practically there is no real ability to do that and then we will think about how that influences.
The 2023 program.
Okay. Thanks for taking my questions.
Yes.
Should you have a question. Please press star then the number one.
The next question today is going to be a follow up from Patrick O'brien with television markets. Please go ahead.
Hey, sorry, guys I wasn't trying to be back in the queue. There that was an accident, but since I'm on the line and just building on Jamie's question, just curious with the balance of the potential asset sale here in Canada.
You did you did have is there any different strategy will we see do you anticipate that that would be one sort of chunk or do you sort of see multiple transactions going forward.
Is it tactical route or electrical work Patrick.
Yes.
From day one.
We have said and the reason we announced so long ago was.
Even though we were.
Obviously, a single transaction would have been preferable from an execution perspective.
We wanted to maintain the flexibility to do multiple deals that we thought we could extract better value out of that.
A decision we've made so what is the next one looked like.
What could the next one looked like let's say the next one.
It could be multiple transactions.
It's probably a little more natural when you actually look at the assets and the nature of those assets you could see.
Single buyers getting their head around it quite quite easily.
On operating focus perspective, but.
We don't want to be pinned down.
This is not liquidity drivers that are chasing this.
Just continuing to focus the business.
Maximize value when we execute like these are.
The remaining assets tight like we used to build businesses around these things low decline.
Footprint in southeast.
First good margin good free cash flow profile.
And in a different market. This would have been done a long time ago. They are high quality.
Any pushback on that it's just about the volatility in the marketplace and.
Sure.
Our goal to ensure we attract reason.
A reasonable value for these things they are free cash alone.
And a lot. These days so we'll see how it goes.
Probably if you made the bet that would have been for a long time ago. It was more likely to do multiple deals to get those lawsuits, Canada. You made me better now with the remaining it's more likely a single deal, but it could be different.
Okay, great and for the record I have been dealing with the burden of minutes mispronunciation of that name.
Basically my entire life.
Many people have given up and just refer to me as patio answering or patio furniture.
Okay.
Sure.
Well on that note, we don't have any more questions that will be leaving us.
Operator, any more questions on the line.
There are no further questions on the line at this moment you can please proceed.
Perfect well, we'll leave it there I appreciate everyone's attention today and your interest and I hope you enjoy the.
<unk> been a summer here looking.
Looking forward to seeing everyone on the call. Thank you.