Q4 2022 Enerplus Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the <unk> Q4 year end 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.
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This call is being recorded on Friday February 24th 2023.
I'd now like to turn the conference over to drew Mair. 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 advisory is located at the end of our fourth quarter and year end news release.
Our financials have been prepared in accordance with U S. GAAP. Our production volumes are reported on a net after deduction of royalty basis.
Financial figures are 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 and Garth doll VP marketing.
Following our discussion we will open up the call for questions.
Turn it over to Ian.
Good morning, everyone.
Our positive operational and financial performance continued through the fourth quarter of 2022 <unk>.
Production in the quarter average just under 107000 BOE per day, an increase of 4% compared to the same period in 2021.
Capital spending of $86 million in the quarter helped to support another quarter of strong free cash flow generation of $230 million.
Overall, we believe 2022 was an outstanding year for our company.
We executed our operating plan efficiently delivering volume growth ahead of expectations, while maintaining a focus on cost control and capital discipline.
Which helps to dampen the impact.
Of the inflation that we're all experiencing.
Total production increased 9% year over year.
This increases to 17% on a per share basis as a result of our significant share repurchase activity during the year.
And while we were clearly impacted by cost to inflation.
Strong planning procurement and execution sheltered us from the worst effects of it and ultimately we were able to operate within our original 2022 capital spending guidance range.
The combination of production outperformance.
Cost control and strong oil and gas pricing environment in 2022 drove a robust free cash flow profile.
We generated free cash flow of just under $800 million during the year.
This allowed us to reduce net debt by 65% and returned over $450 million to shareholders through dividends and share repurchases.
We increased our quarterly dividend by 67% last year and reduced our share count by 11% over the course of the year.
Importantly, we also made further advances on our key ESG initiatives.
Yes.
Key highlights in 2022 include an 80% reduction in our three year average lost time injury frequency.
A reduction in annual methane emission intensity by 9% and a reduction in total greenhouse gas emissions intensity by 16%.
In a separate news release yesterday, we also reported our year end reserves.
Our U S Reserve standards, we replaced 112% of our 2022 production through net proved reserve additions.
And under Canadian standards, we replaced 139% of production through gross proved plus probable reserve additions.
Under each reporting standard we added reserves at competitive costs.
For example, our net Onstream PDP, finding and development costs came in at $8 27 per Boe.
Reinforcing our view that our deeper resource based in North Dakota, We will continue to support a resilient long term outlook for Airbus.
Turning to 2023.
Consistent with our multi year look we have a Bakken focused capital program.
Designed to generate attractive free cash flow and efficiently.
<unk> deliver 3% to 5% liquids production growth.
Our capital program will be very straightforward with spending of 500 million to $550 million, 95% of which will be allocated to the Bakken.
Our liquids production guidance is <unk> 57 to 61000 barrels per day. This is in line with our 3% to 5% growth rate.
Divestment adjusted for the sale of our Canadian assets at the end of last year.
Similar to 2022, we expect this growth rate to be enhanced on a per share basis, as we continued to execute our share repurchase program.
With natural gas prices currently under pressure, we anticipate significantly reduced spending in our Marcellus gas asset.
This is expected to result in approximately 8% lower Marcellus natural gas volumes in 2023 compared to last year.
Overall, our total production guidance for this year is 93000 to 98000 Boe per day.
We expect it to continue to generate competitive free cash flow this year.
At an $80 West, Texas price and $3 50, Nymex price deck, we project about $475 million in free cash flow.
Which maps to a current free cash flow yield of approximately 14%.
Priorities for free cash flow will continue to be focused on returning capital to shareholders and reinforcing the balance sheet.
As we previously indicated we plan to return at least 60% of 2023 free cash flow to shareholders.
Based on current market conditions, we intend to continue to prioritize share repurchases for the majority of our return of capital plans given our view that the intrinsic value of our business is not adequately reflected in our share price.
As we assess the market to date, we also anticipate accelerating a portion of our second half weighted free cash flow profile into our share repurchase program. During the first half of 2023.
Lastly, we updated our five year outlook to include 2027 and better reflect the ongoing inflationary environment.
The plan is focused on the Bakken.
It is designed to deliver attractive free cash flow and sustainable growth.
It is underpinned by a deep high quality drilling inventory.
The updated plan projects annual capital spending.
500.
The $550 million.
3% to 5% annual liquids production growth.
And then average reinvestment rate of approximately 50% based on long term commodity prices of $80 and $4.
I will leave it there now and turn the call over to Wade for an operational update.
Thanks Ian.
Everyone.
Beginning with North Dakota during the fourth quarter, we drilled 10 wells and brought five wells on production, our strong well performance in 2022, and a resilient base production helps drive fourth quarter, North Dakota production, 8% higher than the fourth quarter of 2021, despite severe weather impacting fourth quarter 2022.
Volumes.
In our non operated Marcellus position, we participated in three net wells that came on production during the fourth quarter capping off an active year of drilling and completions activity fourth quarter 2022, Marcellus natural gas production was 12% higher than the fourth quarter of 2021.
Reflecting on 2022 and it was an exceptional year operationally marked by our continued focus on safety impressive well results efficiency gains and cost control.
Moving onto 2023, I expect our operating momentum to continue while inflation will continue to be a headwind our planning and procurement of left us well positioned to efficiently execute our program, which is expected to translate into strong financial returns for the business.
Our drilling and completions planned in North Dakota to straightforward two full time rigs and pressure pumping crew for nine to 12 months. The program will be focused primarily around RFP IR in Dunn County acreage and plan to drill between 55 and 60 gross operated wells and bring 45 to 55 gross <unk>.
Operator wells on production with an average working interest of 87%.
We also plan on executing a small number of re frac opportunities this year, which relates to a suite of older vintage wells, we acquired in Dunn County, which we believe are under stimulated.
Turning to well costs, while we're continuing to drive improvements to our drilling and completion cycle times.
We expect well cost to average about $7 8 million in 2023 up 10% compared to our 2022 average.
This increase is largely driven by higher steel and consumable costs.
Operating expenses are also continuing to experience some cost pressure year over year. This is being driven by a few key drivers.
General cost escalation, particularly where we have contracts with price escalation clauses linked to CPI.
Higher gas processing volumes, and therefore gas processing costs due to improved capture rates and.
And lastly, higher well service activity driven by several factors.
Lastly, we've updated our drilling inventory estimates for January one 2023, which benefits from the continued subsurface review of the data in count and Williams County assets.
As well as additional activity from offset operators in these areas.
We peg our core and extended core drilling inventory at 655 net locations.
Relative to our plan to bring approximately 15 net operated and non operated wells online this year.
This inventory continues to offer significant running room.
I'll leave it there and now pass the call to Jodi.
Thanks, Great.
Our strong earnings and cash flow momentum continued in the fourth quarter closing out a solid financial year.
Adjusted net income per share was <unk> 78 on a diluted basis in the fourth quarter, an increase of 56% from the same period in 2021.
Defense low with $315 million in the quarter up 22% over 2021.
The capital spending of $86 million, our fourth quarter free cash flow was $230 million, which we allocated towards the balance sheet and returning capital to shareholders.
We returned $181 million to shareholders in the fourth quarter, including $12 million in dividends and $169 million or nine 8 million shares repurchased.
We reduced net debt by 170 million or over 40% during the quarter and ended the year with net debt of $222 million or 0.2 times net debt.
Our debt reduction during the quarter was achieved through proceeds from our Canadian asset sale as well as a portion of our free cash flow generated.
Turning to 2023, we expect Bakken oil prices to continue to trade at premium to <unk>.
Bakken crude continues to be strongly bid and the premium pricing are supported by significant excess pipeline capacity in the region and strong prices for crude oil deliberate U S Gulf coast.
We expect our realized Bakken oil price to average 75 cents per barrel <unk> and 2023.
Our expectation for our Marcellus natural gas price differential between 375 cents per Mcf below Nymex, which is consistent with 2022.
As we noted operating expenses are expected to increase year over year due to inflation increased gas processing volumes and higher well service activity.
<unk> 2023 operating expense guidance is $10.75 per Boe.
At $11 75 per Boe.
Our cash tax guidance in 2023, it's 5% to 6% of adjusted funds flow before tax based on the commodity price environment at $80 per barrel <unk> and $3 50.
For Mcf Nymex.
Lastly, as an update on our normal course issuer bid or in CIB, we have repurchased one 4 million shares year to date.
Six 5 million shares remaining under our current authorization.
As a reminder, we can renew our in CIB in August for another 10% about scanning shares at that time.
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 the question and answer session.
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Please for your first question.
Your first question comes from Greg Pardy of RBC capital markets. Please go ahead, yes.
Yes, thanks, good morning, and thanks for the rundown.
Really theres just one question I'd have for you and that is if you look at your.
Just all the messaging around the.
Shareholder returns and given pretty limited runway on the CIB.
What's the appetite for.
To do an seb here.
In the near term.
Thanks, Greg Jodi Julien envelope.
Thanks, Good morning, Greg good.
We believe today and.
He gives us lots of flexibility to buy back shares and as I mentioned, we were able to renew it again in August for another 10%, but we do view the <unk> as a tool.
That we can utilize.
In the future.
Hey.
No opportunity or strategically to buyback even larger portion of our shares.
Okay, and maybe just a follow up then is just that.
How is how are you thinking I know you are saying at least 60% of free cash flow. So it gives you some latitude we have seen.
Different companies pursuing different strategies, but in some cases, there is net debt floors and the net debt floors that are unlocking.
Payout ratio is closer to maybe $80 to 100% or so given the balance sheets for about $250 million of net debt I mean, youre going to be debt free here pretty soon.
At some point, we expect that 60% to increase the payout.
It could yes, we've chosen the very specific language of at least 60% sort of deal with that issue Greg as we think about it now.
And again I use the word sustainability of what we're looking for a sustainable plan that makes sense in the fullness of time and so.
Today that 60% number allows us to buy what we think is returning a meaningful amount of capital and we think that that yield if you will.
The competitive and it allows us to continue to pay down debt.
No.
Our price deck.
We feel like the strip this year, that's pretty steep backwardation that sits in there right gas has come off.
So.
We would model.
Under strip getting debt free towards the end of the year.
As I think about it from a gating perspective.
Really comfortable getting to zero that zero net debt.
And so that this plan that that 60% kind of level, but also to comes together.
This year.
If we get to that level.
There could be intervening events.
I guess the acquisition activity or something along those lines is a good example of that but if we get to that level, then I think you've got.
A pretty strong likelihood that there would be could be opportunity for returns to increase at that point.
There'll be I think a lot of people if pricing stays side I think the industry is going to be in a state where.
Many companies are going to be zero debt position I think than maybe.
Really interesting thing will be the optionality around all of that because there's going to be lots of opportunities to a lot of interesting things increasing returns.
The shares are performing really well, maybe there's a bit of cash that gets built.
Don't know how all that plays out at this point, but I think this is this is the year, where we're going to be approaching that towards the end of the year and come back to your original question could returns go up.
They could go up.
Okay understood thanks for that.
Thank you once again, ladies and gentlemen, if you do have a question. Please press star one at this time. The next question comes from Patrick O'rourke.
Capital. Please go ahead.
Good morning, guys I was going to ask about the dividend and the parameters for growth year, but actually just want to unpack very quickly a comment that <unk> made with respect to.
Potential for intervening events and acquisition activity I'm, just kind of curious how youre looking at the M&A market right now I know you serve.
Thoughtfully run through.
What your ideal targets would be or what the parameters for that are but I'm. Just wondering about your sense in terms of bid ask spreads and what you think might be out there that would be attractive.
Hey, good morning, Patrick.
So.
Acquisition activity.
It's something that we have always maintained to keep ability to do and an interest in doing.
If we saw something that would be accretive to the shareholders to make the business better make portfolio better.
Pretty generic statement, but it's true.
As we look at it as.
As we look at our portfolio there are no holes in our portfolio, we've got a deeper inventory than we've ever had noncore stuff that's gone.
And we see a really good runway in front of us.
We also have some exceptional financial capacity the capacity to be able to add to that.
If we see opportunities that make us better and that are accretive.
So I guess, maybe the bars reasonably high to do something.
But we maintain a lens into the market to your question of bid ask spreads and those sorts of things.
Volatility is never.
A friend two successful transactions.
So if you look back over the last couple of years, there actually hasn't been as much as we would've been typically seen and I think that ties to volatility a.
A little bit of capital markets volatility a lot to pricing volatility so oil, it's actually been sort of stable ish for a little while now.
And it sort of stays in that 70 to 80 kind of world.
I could imagine some activity happening I mean, there's clearly a lot of conversations a lot of people are testing the waters, a few processes that get out there.
So we really haven't seen a heck of a lot of stuff come together, but.
I would guess bid ask starts to narrow.
One of the things that will be very interesting is it oil assets to trade in the context of the strip.
And with that backwardation that I think a lot of us.
Struggle with that longer term price signals, we don't see how that really connects to our view of supply demand fundamentals.
So I would guess.
We're going to start to see some oil and gas some oil stuff start to happen over the course of the year gas a bit different now so.
So you saw.
It was tough I think for buyers to get gas deals done in the last couple of years last year and a half with prices so strong.
<unk>.
Taken it in the year and I think Theres a lot more interest on the buy side just wanted to do something.
Well sellers would be interested in doing that I don't know so again back to the volatility question I think gas is going to be interesting to see a gas trades when the prompt is so low.
I don't know if that helps you Aldo.
No. That's very helpful. And then I'll just circle back to the original question I was going to oppose here I know you went through some of the return of capital with Greg a moment ago getting the zero debt.
And potential to exceed the 60%.
Target return for investors here.
Yes.
I'm wondering with respect to the dividend, how you think about sort of the cadence and sizing of growth you've got sort of 3% to 5% target liquids growth youre buying back 10% of your float like how would you think about keeping the dividend right sized in this environment.
The dividend is important.
Growing stable base dividends important.
When we step back and think about the mathematics of our business.
That share buyback is.
The math is compelling.
Compounds and we see and you saw it last year, we really leaned into it and we think that it's a really good decision for our shareholders.
<unk>.
Dividend in these kind of conditions. It will go up over time, but we just see more value in the buyback based on the valuation of the company and where it sits at this moment.
Others have taken different approaches to that.
When we look into the market pricing.
Pricing signals.
I guess broadly we.
See the dividend is offering a superior advantage to our shareholders now.
So it will stay there.
We want it to grow over time.
You recall in <unk> comments, she referenced about that we are open to alternatives.
Specials and variables and all those sorts of things will be responsive to the market, but at this moment, we see modest.
Growing dividend as a part of the capital structure and return proposition.
But it doesn't dominate our thinking based on where we see the valuation of the stock.
Thanks, very much Jim.
Thanks Mark.
Thank you. The next question comes from Jamie Kubik of CIBC. Please go ahead.
Yes, good morning, and thanks for taking my question.
Plus had a slide and its presentation last year that.
Highlighted the improvements in well performance it was enjoying in the Bakken.
In 2022 compared to.
Prior to the jaws I'm just curious if you would expect to see.
Continued improvement in your 2023 vintage wells based on where you are targeting.
Drilling this year and I guess second to that is how does your guidance incorporate the improved performance that you've enjoyed thanks.
Wade do you want to take that yeah. Thanks for the question Jami.
No.
The continued improvement in.
Efficiency in our drilling and completions and even facility programs.
Scott announced Tibet last year with all of the inflationary pressures that we in the industry we're seeing.
We did drive a improvement in our drilling cycle times and the.
<unk> CFR fracture stimulation program.
And we continue to optimize the facility design as we even additional emissions controls and.
Optimize those facilities for the kind of development were doing so.
We're actually quite pleased with that and that actually was one one of several components that helped us mitigate.
The impacts of both the inflationary environment last year.
We would expect that same trend to continue this year we have.
Incremental technologies that we continue to test that we are finding some success with in terms of shaving incremental time also for drilling and completion activity times, which ultimately translates into both a bit of cost savings, but also a more efficient program, where we see the.
The production come on sooner so.
I would say the guide for 2023.
It has a fairly basic assumption.
Around.
Seen about a 10% increase year over year and well costs.
Most of that increase is inflationary pressures that frankly, we were seeing near the end of last year early this year.
But it is offset by a few.
Additional things.
Round differences in small differences in scope and continued into the anticipated.
<unk> gains so I'd say, it's all baked in there.
We always feel like we've got a bit of a chance to outperform that.
We apply these new ideas, but the team continues to come up with I think a really important point.
For last year's program was also the the actual well performance that came from that drilling and completions program, where we saw.
Really good.
Well performance beyond what we expected from the pads, we brought on last year as we've noted those pads and on average we're really high quality relative to the.
Average.
For previous years.
But beyond that we saw even better performance than we thought this year's program looks really solid I would say it looks a lot more like.
Maybe that previous three or four year average of.
Well quality.
But with that said, we think that the optimizations, we were doing last year impacted well performance a bit incrementally and we're continuing to use those same optimizations in our program. This year and so again, we we always have a bit of optimism around can we continue to improve.
The overall capital efficiency of the program that we're executing.
Okay that answers that thank you very much.
Welcome.
Thank you.
There are no further questions at this time, please continue with closing remarks.
Looks like we might have one more question operator.
I apologize. The next question is a follow up from Greg Pardy. Please go ahead.
Sorry, I did think I'd just sneak that went in.
Wade you talked about just a small number of re fracs and I'm just curious.
What do those costs <unk> got planned and then if theyre successful what kind of incremental production would you expect to see from those like maybe on a per well or per pad basis.
Yes. Thanks, Thanks for the question Greg.
Let me zoom out for a minute.
As we.
Deepened our subsurface analysis of the assets that we bought in Dunn County.
About two years ago, what we recognize is that there are several areas in those producing units.
Sure.
Were stimulated.
Many years ago some oldest.
10 years ago, and so in our view there are places that are under stimulated and so it looks like there is additional.
For resource that could be recovered from those producing wells so.
So we're going to test that concept this year.
Right now we're planning on two paths of re completions.
Yes, that's roughly about seven or eight wells.
On a gross basis.
Okay.
In terms of the cost.
I would note for you is.
The stimulation itself is not too different than a stimulation of a new well, but there are a few additional costs required to get the well, perhaps get it cleaned out get it ready to be stimulated so they do cost a little bit more than.
Just the completion phase.
Of course, the facilities and everything were already there.
In terms of incremental production, we don't have an edge.
External guide on that at the moment, we actually have a bit of a range of what we think might happen with each of those wells and so we really view. This year is a bit of a test case.
Assuming this year goes fairly well, we would expect to see.
This kind of a re completion program be a regular part of our annual program for years to come.
So there is a moderately good number of additional candidates that go beyond this year's program.
Okay. Thanks for that and then Youll update us over the course of the year maybe on progress.
Certainly.
Okay. Thank you very much.
Extract that today, yes, I wouldn't expect it to be immediate programs spread out kind of mid to end of the year, but yes.
You would get an update.
Okay understood. Thanks again.
Thank you.
There are no further questions at this time, please continue with closing remarks.
Alright.
Color. There appreciate everyone's time on this busy reporting week, if you're on the western part of the continent.
We share your pain and fear on the east enjoyed the warmth. This this is coming at you hopefully.
Everyone have a great weekend, thank you very much.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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Sure.
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