Enerplus Corporation
Q4 2020 Earnings Call Transcript

Published: 19 Feb 2021

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Enerplus Corporation Q4 and Year-End 2020 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. This call is being recorded on February 19th, 2021. I would now like to turn the conference over to Mr. Drew Mair. Please go ahead.

[Drew Mair:]

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 today’s news release. Our financials have been prepared in accordance with US GAAP. All discussion of production volumes today are on a growth company working interest basis, and all financial figures are in Canadian dollars, unless otherwise specified.

[Ian Dundas:]

Well, thank you, Drew. Good morning, everybody. To our friends in the US who are dealing with some rough weather. Hope everyone is safe and warm. Thank you for joining us today. This morning we announced our fourth quarter and full year 2020 results. And I’ll start by describing some of the highlights from last year before talking about our plans for 2021 and the Bruin acquisition. Clearly 2020 was a complicated and challenging year. And I want to thank our staff and our strategic partners for all their support and dedication. Their commitment to ensuring safe, reliable operations in the face of the pandemic has been nothing short of exceptional. One of the most important takeaways from 2020 was that, we were able to maintain our financial strength and preserve shareholder value, while turning the challenges of 2020 into an opportunity to emerge as an even stronger, better positioned company. We did this by taking action to adopt it to sharply lower commodity prices, including adjusting our operational plans and maintaining focus on reducing our cost structures, while continuing to deliver strong operational performance, solid financial results and continued ESG improvements. As a result, we entered 2021 in a position to execute on the Bruin opportunity. Operationally, the Bruin assets fit well. All in the Bakken with a material position in the Fort Berthold area, directly adjacent to our acreage. We’re able to acquire the company at a valuation that we believe was attractive, both on an absolute and a relative basis, and underpinned by Bruin’s existing production. The transaction will be immediately accretive to shareholders with robust accretion to adjusted funds flow per share and free cash flow per share. We highlight that we expect the pro forma business to generate more than CAD 300 million in free cash flow this year, based on a 10-month contribution from Bruin and assuming CAD 55 West Texas oil and CAD 3 NYMEX natural gas prices. It was also important to us that we financed the acquisition appropriately, ensuring that we remain in a position of strength with a solid balance sheet and excellent liquidity.

[Wade Hutchings:]

Thanks, Ian. And good morning, everyone. Like other producers, our 2020 capital and operating plan changed dramatically from our initial expectations. But despite all the changes, it was a solid year from an operational perspective. Our execution started strong and by the time we suspended our D&C activity in April, we had achieved record performance for our company in terms of drilling and completion cycle times, which translated into significant capital efficiency improvements. As we reinitiated some capital activity in the fourth quarter, completing for previously drilled wells, we were able to further improve upon our completion efficiency, with our last pad averaging 15 stages per day. On average in 2020, we were able to reduce our total well costs in the Bakken to a $6.3 million, which represents a $1.3 million per well improvement year-over-year.

[Jodi Jenson Labrie:]

Thanks, Wade. The combination of quickly reducing capital activity and our considerable success driving cost savings generated free cash flow in 2020 despite the low oil price environment for most of the year. Our adjusted funds flow for 2020 was CAD 358 million, which fully funded our capital spending requirements and generated CAD 67 million of free cash flow. In the fourth quarter, we recognized a CAD 311 million non-cash property plant and equipment impairment due to the lower commodity price environment, and the use of constant 12-month trailing prices to test for impairment in accordance with the Securities and Exchange Commission requirements. This impacted our earnings, leading to a fourth quarter net loss of CAD 204 million. Moving on to our oil realizations in the Bakken. Our differential averaged $4.82 per barrel below WTI in the fourth quarter. Our full year Bakken differential averaged just under $5 per barrel. With the decline of in-basin production in the Bakken during 2020 and more stability in oil prices, we’re seeing a more constructive market for Bakken crude with current spot differentials trading tighter than $3 per barrel below WTI. This strength is supporting our 2021 differential guidance of $3.25 per barrel, which assumes the Dakota Access Pipeline continues to operate. Turning to the Marcellus, regional natural gas prices were particularly weak between September through November in 2020 due to nearly full regional storage combined with low demand due to mild weather. As a result, our realized Marcellus sales price differential widened to over $1 per MCF below NYMEX during the fourth quarter, driving our full year 2020 Marcellus differential to $0.65 per MCF below NYMEX. We expect our average 2021 Marcellus differential to improve to $0.55 per MCF below NYMEX. This is an annual average estimate and includes normal seasonality where we expect robust pricing and differentials during the winter months with more moderate pricing and differentials during the warmer months.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question comes from Patrick O’Rourke with ATB Capital. Please go ahead.

[Patrick O’Rourke:]

Hey, guys. Good morning. Just a couple of quick questions on the nuance of the reserve report. I know there was a little bit of a technical revision there. It looks like maybe perhaps some barrels shifted from 2P to 1P as is normal, but I’m wondering, you know, with regard to the rest of the technical revision, what the driver was there, I know, about CAD 183 million came out of FDC. Is that wells coming out of the reserve report? Or is that FDC reduction being more driven by, you know, the well cost improvements that you’ve made and those being seen as structural?

[Ian Dundas:]

Good morning, Patrick. Wade, do you want to handle it?

[Wade Hutchings:]

Sure. Good morning, Patrick. Thanks for the questions. On the FDC question, by far the biggest driver of those FDC change is our lower forward well cost projections, given the success we’ve had over the last year in reducing those costs. As you saw in the release, we reduced costs year-over-year by 17%, $1.3 million. And so, as you bake that in the long-term, FDC, it ends up making a pretty big impact.

[Patrick O’Rourke:]

Okay, great. And then just a quick question, Jodi talked, you know, addressed the Bruin hedge book, you know, my assumption would be that you came into that with eyes wide open and priced that into the deal. I’m just curious on, you know, potentially the longer more absurd end of their hedge book on the 5 by 75 collar, if you guys see, you know, any need to have that sort of protection in 2020 three-year, if you would think about unwinding that to maybe preserve, you know, potential upside beyond CAD 75.

[Ian Dundas:]

Hey, Patrick. So eyes wide open, of course, none of that was news, and it was all disclosed in the initial acquisition announcements, when we start talking about the pro forma hedge books, you know, as to that little strange collar you’re talking about. Let’s just I’d put that in the bucket of immaterial, there were some nuances that company had to put it on as they emerge from bankruptcy. And so yeah, we’ll, you know, we’ll think about that one in isolation. But, you know, if we’re dealing with a CAD 75 cap is a problem I’ll call it a quality problem to be dealing with. So I think if you step back and think about that hedge book we have, you know, we’re pretty comfortable. It’s given us, you know, really meaningful downside protection and then we’ve structured it to preserve pretty significant upside through the unhedged volumes, obviously, and then the three ways that we’ve been using, and then obviously, as we move on into 2022, where the hedge book is even more modest again.

[Patrick O’Rourke:]

Yeah, yeah, very fair. I think if anybody needs a CAD 5 put for a full year, I might need to look for a new job at some point here, but thank you for that.

[Ian Dundas:]

. Okay, thank you.

[Operator:]

Thank you. We have a following question from Greg with RBC Capital Markets. Please go ahead.

[Greg Pardy:]

Yeah, thanks. Good morning. Just a couple, maybe just to go back to the reserve report a little bit and just well performance and so forth. So obviously, I mean, Wade had mentioned reserve replacement really a function of spending levels obviously over the course of last year. Could you maybe just comment on well performance, I know the costs are continuing to go in the right direction? But any thoughts there would be helpful.

[Wade Hutchings:]

Sure, happy to address that, Greg. You know, at a high level, I would say, well performance continues to track our expectations. To dive a little bit more into those reserve replacement numbers in North Dakota, you know, the 69% reserve replacement does move up to 119% if you take out the price-driven economic revisions. You know, and the key drivers overall for our reserve replacement in 2020 in North Dakota, really are a product of a bit of lower capital investment in 2020, obviously, but then also appreciate that our long range plans have shifted to a bit of a lower growth model than we may have previously had. And so that also impacts the number of new 2P reserves you can add into the system. It was not driven at all by well performance, as I noted, you know, the results from the last couple of years and specifically even the 2020 results have tracked right close to our type curves.

[Greg Pardy:]

Okay, terrific. And maybe to go up now to 15,000, 20,000 feet. You know, I realized Bruin is closing in March, but your balance sheet, I mean, remains best-in-class, and you guys are very careful in how you go about doing things. But I guess a question for Ian is, is now that you’ve got increased scale and increased free cash flow and so forth, are there further consolidation acquisition opportunities that you would see, you know, either in the Bakken or the Permian or you know, would you actually even include Canada in that mix? So I know that’s a granular question, but I’m just trying to get my head around how you’re thinking about the business going forward.

[Ian Dundas:]

Good morning, Greg. You know, I might sound a bit redundant here. You know, we’re just executing or just executed on a transaction that I think makes a lot of sense to us. And we’ve had some positive feedback, we’re just continuing to consolidate in our main area of focus. So would we continue to want to do those sorts of things if valuation lined up? Clearly, you know, that could be a pretty smart business. And so, yeah, there’s other opportunities out there, you know, we are not the big dog in that basin, we don’t have a dominant position. So we see opportunity there, I guess we’ll see how that market unfolds. You know, we’ve only had two cash transactions in North Dakota in the last couple of years, really. So we’ll see if this is the start of the trend. And to your, you know, you call it about balance sheet, it was really important to us to maintain that balance sheet strength, which is you know, one of the reasons we put a bit of equity out the door for all of the strategic benefits that can come from having a strong balance sheet, including the ability to continue to look for opportunistic acquisition opportunities. To your – the other part of your question, you know how would we think about things outside of North Dakota? I think we’d be consistent. We view the core of the company as being North Dakota and building around that makes sense. You know, are there other opportunities out there? Yeah, I think you have to keep your eyes open to other opportunities. You know, whenever you’re starting to speculate on that, people’s ears perk up and wonder what it looks like. So I don’t know what it looks like. Because right now, we’re talking about Bakken consolidation. But someday, perhaps, you know, we do pay attention to North America carefully. Again, you know, most of the things that we see are in the US, which is say, where most of our focuses, but and there are some interesting opportunities in Canada as well. But, you know, again, to come back to what, you know, the focus area today largely is in our backyard and we see opportunities there and including the one we just executed on. I’m happy to add more, if you want to more color on that.

[Greg Pardy:]

No, I don’t. I think that does it. Yeah. Thanks to both.

[Ian Dundas:]

Thanks, Greg.

[Operator:]

Thank you. There are no future questions at this time. You may proceed.

[Drew Mair:]

All right, so we’ll leave it there. Thank you for everyone joining us on this Friday morning. And have a good, safe weekend. Take care. Cheers.