Enerplus Corporation (NYSE:ERF)
Annual General Meeting Conference Call
May 10, 2013 12:10 pm ET
Douglas R. Martin – Chairman
Gordon J. Kerr – President and Chief Executive Officer
Ian C. Dundas – Executive Vice-President and Chief Operating Officer
Douglas R. Martin
At this time, I would just like to acknowledge the efforts of our retired President and Chief Executive Officer, Gord Kerr. Gord has been an executive of Enerplus or its predecessor companies for more than 34 years, rising to become its President and CEO in 2001. I became a Chairman at that time and have enjoyed a number of wonderful years working with Gord as he has made the transition form Executive to President and CEO. Gord has been a great strategic leader.
He has guided Enerplus through many attractive transactions, which made it one of the largest income trusts in the country. Through this process, he recognized an aid for good corporate governance and was a guiding hand in amalgamating many entities into what is now Enerplus.
Enerplus became a leader in the industry and Gord has been an important figure in that evolution. He was appointed Chairman of the Canadian Resources of Petroleum Producers and served our industry well through his Chairmanship. When the Federal Government introduced legislation to eliminate income trusts, which was known as the SIFT tax, Gord co-lead an industry delegation in an attempt to stop this legislation. It’s less ultimately a futile campaign, but that led then to Gord playing an instrumental role in lobbying against the Alberta government against the efforts of their ill-advised changes to the royalty scheme.
When it became clear that income trust would not be able to operate in the oil patch, Gord led Enerplus to a transition from an income trust into an exploration and Production Company, and I think you’re starting to see the results of that today in our first quarter announcement in our last quarter of 2012.
The Company’s enviable positions in the North Dakota, Bakken and the Marcellus and Pennsylvania are a direct result of this transition. Through Gord’s past leadership Enerplus is well-positioned to provide superior future growth and profitability for the Company. Gord, the shareholders, your employees, fellow directors, and I thank you for your many contributions to the Company’s success. Good wishes and best of luck in your future endeavors.
As previously announced, Ian Dundas, our Executive Vice-President and COO will succeed Gord as President and CEO effective July 1 of this year. Ian’s appointment is a result of previous succession planning work and the Board is confident that Enerplus will continue to flourish under his leadership.
At this time, I’d like to ask Gordon to come to the podium for a few remarks.
Gordon J. Kerr
Well Doug, I first of all thank you, thank you for those kind words. I should grab my water here. And especially, I want to thank you for letting me write them.
Ladies and gentlemen, over the last few years we have worked hard to make some significant changes happened here at Enerplus. And certainly, it has been a challenging environment in which to implement these changes, given the volatility in the markets, and the continued distress associated with debts and deficits that are being faced or not faced around the world.
But, despite this challenging environment we have made a very meaningful progress on the changes that we set out to make. It is not been easy. We had some tough decisions to make. Certainly, cutting the dividend last year was painful. And, we got smacked in the market last year when we released our third quarter results and missed expectations in a very nervous market, U.S. fiscal cliff, European debt crisis, slowing China growth. Negative news was not well received with that background. But, we finished the year and we were able to put some very good numbers upon the Board.
And with the release of our first quarter results this year, you are continuing to see the impact of the changes we have been implemented over the last few years. We shed non-core assets for good value and then increased focus in our asset portfolio and we’ve added to core positions at good prices that offer us further value upside. We’ve positioned into longer-term growth assets that offer the potential for significant scale and scope and profitability for the future. We’ve continued to add value by investing in our core mature assets, our oil properties under water flood management. And we have continued to build our organization with talented people in both Canada and the U.S., and we have kept our balance sheet in good shape.
In just a moment, I’ll turn the podium over to Ian who will speak more to these points in the path forward. But before I do, just a few additional comments I’d like to make. In addition to the changes that I’ve just mentioned, there is one more element of Enerplus I’m very proud of and that’s the culture. The culture we have built in this organization, we have put words to it, we have discussed it, and we have taken action in support of it. It speaks to integrity, speaks to conducting our business in a safe and responsible way, it speaks to treating people with dignity and respect, it speaks to trust and openness of sharing ideas and knowledge.
I want to take this opportunity to express my appreciation to our shareholders, my fellow directors and particularly, our Chairman for their support over my career. And finally, I want to thank my fellow executives and the staff of Enerplus. Ladies and gentlemen, you have a very talented group working extremely hard to bring you value from your investment in Enerplus.
And so now I’m going to turn it over to Ian, who I’m very pleased will be succeeding me in the role of President and CEO. Ian, over to you.
Ian C. Dundas
Good morning. Appreciate your time today. Draw your attention to our advisory, we are making some forward-looking remarks and always it’s a riveting read. As Gord said, this is an interesting time for our company. For the last several years, we have clearly been a company in transition with a single goal to improve the sustainability of our business, so that we could deliver profitable growth and income to our investors.
We’ve been focused on improving our operating performance, improving our capital efficiencies, driving our costs. We’ve been focusing our efforts and focusing our portfolio, and we believe we have made significant progress in that transition. Our production is growing, our cost structures are improving, we have positioned ourselves in some of the Top Tier plays in North America and despite the collapse in gas markets, we maintained our financial strength.
But despite the progress we’ve made, it was clearly a difficult time for our investors and 2012 was a particularly challenging year for people. We started the year with a large capital program that was designed to demonstrate growth in our core plays, it was influenced by our desire to manage our lease expiries, particularly in the Marcellus and we also needed to advance on delineation in some of our early stage plays. And then gas rates collapsed oil realization sale and costs were slow to come down and as Gord said, the market was very concerned about our funding shortfall.
And, as you are painfully aware, we had to make these difficult but necessary decision to cut our dividend. But, when we look back on the year with that backdrop, we see tangible progress in goals that we set for ourselves and making progress against them. We saw significant growth in our production and our cash flow and reserves. The sustainability of the business was dramatically improved as we reduced our funding shortfall. We continued to focus our asset base, selling lower interested assets, and consolidating interest in core properties at [accretive metrics] and our financial position remained strong. The market is now starting to recognize the process we made. We’ve outperformed of late to interrupt our furloughs of about 20%, and we’re seeing little more progress this morning after our quarter result was announced.
So, some more specifics for you, we saw impressive production growth last year. Corporately we grew our volumes by 9%, but the real story embedded within that was gas was relatively flat and we grew our oil volumes by 20%. And we also hit a key target for ourselves by taking our total corporate production to about 50% of oil and liquids weighting, a vast majority of that weighted to oil. We saw similar growth on the reserves front. We replaced almost 200% of our production, but again more growth in oil where we saw close to 300% reserve replacement, which resulted in 12% growth to our corporate oil volumes.
The trend of cost improvement also continued, despite some of the inflationary challenges that we faced in North Dakota; our F&D costs were just over $24 a barrel including future development costs, which were very competitive given that two thirds of these additions were light oil.
And a final point on last years operational performance, even though gas prices fell by more than 50% we were able to organically grow our cash flow by double digit numbers. This is a direct result of our focus on light oil drilling and largely impacted by our Bakken play in North Dakota. We also expect to see additional growth this year with higher volumes, strong oil hedging, and now we’re seeing a bit of a bump up in the gas price.
Conservative balance sheet management has been a central feature of our strategy. We took many steps last year to maintain our financial strength in the face of falling prices and a large program. We raised equity, we extended term on our debt, we sold non-core assets, it’s a very attractive metrics and then we made the difficult call again on the dividend, when many in fact most producers saw pressure on their balance sheet, we only increased our absolute debt level modestly and we maintain the same debt-to-capital level that we started the year with.
So, when we look forward 2013 goals, we are very focused on sustaining the improved operational performance that we have posted over the last few quarters. We plan to continue to market non-core assets. Its part of our plan to enhance our operational focus and it comes with the added benefit of further strengthening our financial position.
We are going to continue focus on our core areas, the Bakken, the Marcellus in the U.S., our water flood programs in Canada and this emerging opportunity we have in the deep basin. We are also highly focused on re-establishing our credibility in the market. We’re well positioned to achieve our guidance. We’re maintaining our financial discipline with a combination of falling costs and cash flow growing we see the key elements of sustaining our dividend and delivering growth to our investors.
We’ll start with first quarter, as you know we released our first quarter results today. And the momentum we established in the first quarter has continued strongly into this year. Production is up. We announced quarterly production of just over 87,000 Boe a day, that’s against an annual guidance of 82,000 to 85,000. Fund flow was also in line with estimates. Capital, G&A and op-cost are all tracking our full year guidance.
Again a highlight for moment the change to our funding shortfall. Last year our adjusted payout averaged 250%. The combination of increasing cash flow, cost improvements, lower dividend has improved our shortfall this quarter to just over 126% EPO in the first quarter. And as I said, we see potential for further improvement on that number with cost improvements strengthen our production and gas expense balancing off for now. It’s a significant and impactful change to the sustainability of our business from last year.
Turning to our assets, we have a high quality portfolio. Four focus areas, as I said two in the U.S.; Bakken and the Marcellus represents now 40% of our corporate production within in the U.S. since ‘05, but it really hasn’t been a strong focus area until the last several years, we have a meaningful growth, this production growth has come virtually all through our organic drilling efforts.
In Canada, the Waterfloods are a key part of the business and then it’s emerging opportunity in the Deep Basin. That said, we are 50% weighted to oil and liquids, and two-thirds of light oil, and a critical component that highlights our decline rate, it’s really central to the sustainability of the business and we stand out as having a very competitive corporate decline at about 24% annually.
Little more color on our core areas; I’ll start in the U.S.; Fort Berthold, this is a Bakken and three-fourths development we have, remains one of our biggest programs this year. The key takeaways I’d leave with you is that production growth continues and we’re seeing improvement on the cost side. We hit record production of over 14,500 barrels a day in the first quarter.
On cost side, cost stayed about 10% lower than we had budgeted for. We are clearly targeting to improve that as we move through the year and this is going to be quite significant for us even if we were only to sustain the improvement we’ve had so far, 10% improvement on a program that was half of our corporate program, so it’s quite impactful to the company. We see continued growth in production, quite impactful to the company. We see continued growth in production and reserves. On the production side; we are planning to take this asset to about 18,000 BOE a day by the back of the year.
Turning to Marcellus, the corporate production in the first quarter obviously exceeded Street expectations. That’s largely due to quite significant out-performance in the Marcellus. We saw a production growth of 40% from the fourth quarter, which is obviously ahead of our initial plans. As I said, on our conference call this morning, we are really pleased with the well performance we are seeing, which is really driving this production out-performance right now.
Although, the pace of spend was a little bit lower than we had anticipated, we only spent $13 million in the Marcellus in the first quarter. The strong well results are serving us very well. To help – we framed this for you, we would have 24 wells, we have a large number of wells participating in, but we have 24 wells where we are seeing production in excess of 10 million cubic feet a day. About third of those wells have been online for about a year. It’s quite impressive.
The majority of these really, really large wells would be in Bradford and Susquehanna counties and we have about 15,000 net acres in that area. The timing on the production build last year was a bit challenged. Gord talked about the third quarter and that was to a large extent, a function of a slower build in the Marcellus largely due to infrastructure limitations that producers were facing in the area. It’s been far more prolific than any events originally anticipated and that has created challenges in pipelines and access. Infrastructure is now starting to catch up to the drilling, but there’s still a backlog of wells that we’re slowly chipping away at, that are drilled but not on-stream right now.
Again, a large opportunity for the company here right now at the 79 million cubic feet a day that would represent about a third of our corporate gas volumes, and unlike some of the pricing challenges we’re seeing in Alberta, we would be sitting on a $2.50 type net back right now from these gas volumes.
Let’s move to Canada, the focus for last several years on development has been drilling and EUR enhancement opportunities on our waterflood portfolio. It’s about 25% of our total production, it’s been a strong free cash flow contributor, but we’ve also seen growth from this part of the portfolio. Last year growth was about 8% and that would be reinvesting call it two thirds of our capital. Again, the upside is from horizontal drilling, water flood optimization, but also enhanced oil recovery. It’s an important part of our portfolio. Not only we’re seeing very strong drilling results with attractive economics, there is very low decline. This part of the portfolio would decline at about 12% per year.
And big part of the future is going to be enhanced oil recovery on these fields. Right now, we have two pilots, polymer pilots: one at Giltedge, one at Medicine Hat. Medicine Hat, we’ve had some very, very good success. This is a field that was on steep decline without much of a future in front of it. We implemented a water flood, a stabilized production and now we started to drill and combined with a polymer efforts. We’re seeing production, we’ve actually grown production close to two times with again about two third reinvestment of cash flow ratio. So it’s a very important part of our business.
Finally, final slide on our core projects is our deep gas portfolio. We have just under 200,000 net acres, a very high working interest undeveloped land, respective for Monteny, Duvernay, and the Wilrich. The Wilrich is an area that we’ve been spending a bit of money and it’s called early stage appraisal over the last year, we’ve drilled five horizontal wells. On a call today, we’ve talked about two wells that we drilled in the first quarter of this year that we’ve had some very good success. One well is tracking our type curve, which is about 5.5 Bcf type well, but we’ve tested a well late that came on is 35 million cubic feet of gas a day. We brought that well to production about three weeks ago and it’s averaged about 17 million cubic feet of shale gas a day. It’s really exciting for us.
We have over 50,000 net acres mostly 100% land, see the potential for more than 100 wells. And I also spoke about the position we have in the Duverney and the Montney; those are earlier stage opportunities. They have a tremendous scope and scale potential in front of them. This year though we are relatively modest appraisal program in front of us and in fact that we’ve considered and we’ve been talking about bringing a partner were a potential sell down of some of these assets to help manage risk and bring some capital to accelerate the opportunity we have in front of us.
Hedging, hedging is strategically important for our company. It helps us to manage volatility cash flows and reduce the risk of the business. In that regard, we have a strong hedge book on this year particularly on oil, given how significant cash flow from oil sales is right now. We have about two thirds of our oil volumes hedged this year, just over $100 a barrel and 15% for next year. We’ve also taken advantage of the rally in gas to increase our price production for natural gas volumes. We’ve booked 30% of gas hedged for this year and 25% for next year. I think when you look 2014, we’re cautiously bullish on gas, we do believe gas has come off the floor, but we believe it has been prudent to continue to take at least some price protection in terms of our gas plants.
Focus on the portfolio; we are committed to continuing the focus our portfolio. It’s a key part of our strategy to continue to improve our operational performance. And the sale of non-core assets is an important part of that plan, but it is a tough market. There are many sellers, many of whom are financially distressed and so we need to be strategically opportunistic. The good news is, we have a very strong balance sheet that provides us the financial flexibility to do that, and we also have a great track record of closing transactions involved on our market conditions.
Just after the end of the quarter, we closed the sale about 600 Boe a day, non-operated oily-ish assets, received just under $60 million for that. I think are really attractive metrics. We have another 1300 Boe a day of similar properties in the market right now. They are all awaited almost all non-operated. If we can get value, we will sell. It’s difficult to call the timing on that. I’d say it’s quite likely we felt some question is how much will we get done and how that unfolds?
Now it’s not just about selling though it’s about improving the portfolio, we are also focused on increasing working interest in core projects, where we see that opportunity and where we have an ability to do that on a basis that’s got attractive value. We highlight this; these are two transactions that we closed at the back of last year that are a good example of this. These are two properties of very similar size, almost looks like we set it up that way, but it just sort of happened, both 1,600 barrels of production both oil, long life assets, similar netbacks, similar decline. The asset we sold was an asset though that was at a lower working interests, and higher water cuts, quite high cost structures, and it just wasn’t part of our future.
We never arrive from the top of the hopper for us and that lower working interest was part of that. We sold that asset for $220 million. The asset we bought was an asset that was far later in its life. We were at 70% working interest. We took it over 90% working interest. And this asset has a future that forms part of our plans. There is a large number of oil in place. We’ve recovered a relatively small amount of that, and so that provides a significant opportunity.
Particularly exciting part about this whole thing is we’re able to bank about a $100 million in this process, sold for $220 and bought for $120. Serious factors allowed that to happen, but we were in a position where we were able to take advantage of that opportunity and improve our portfolio, improve our financial strength and move our business forward. It’s great business. Would do more of it if we have the opportunity but these things, you can’t plan on them.
Market sentiment, although it was a pretty tough year in some respects, we feel the sentiment is starting to change for us. If you look at analysts who cover the company, I think we have 15 of them. Two-thirds were buys as of yesterday, I don’t see any of that getting worse, when we pick-up a little more after the quarter, and seeing some nice comments this morning coming out as people looked at the quarter and are starting to see a pattern of improvement in our performance.
It might take some time, but I really think that we have turned the corner on this and we’re starting to see people starting to echo that. So I’ll conclude before we take questions, as I said before, it is an interesting time I think to be thinking about the company, we’ve made real tangible progress in changing the future outlook for Enerplus.
The funding shortfall is dramatically lower, our operational performance is improving, we’re seeing lower costs, production is growing, we’ve retooled the portfolio and through that process and our really tough market, we’ve kept our balance sheet strong and this is sitting on the back of what we think is a really compelling valuation.
And so on a final note, on the call this morning I want to thank Gord and I started by saying, I hadn’t had enough coffee. On behalf of Gord, I would like to, well, I guess, I can’t thank Gord on behalf of Gord, so we’ll see if I can do this one right. On behalf of management the staff, the executive and myself personally want to echo Doug’s comments, you’ve been a wartime CEO in many respects, it’s been a tough market, but I really think your steady hand on the tiller was really important as we navigated through some choppy waters and I think we’re now in a position we see a very bright and exciting future for the company.
So, thank you, and I guess we will take questions if there are any.
Hi, I’m [Bill Manolic], shareholder. In the Marcellus, you have proved in probable reserves booked, I imagine, do you see the performance now being better than what you’ve got booked so far?
Gordon J. Kerr
Yes, so let me answer this in few ways. We talk about a resource estimate in the Marcellus and so we have what we call contingent resource, best estimate contingent resources at the fine term, and we have the 1.5 trillion cubic feet of gas that is potentially recoverable. We’ve only booked reserves for a small part of that just over 200 Bcf.
And so there is – obviously there is a big future that is not booked. And when we look at individual well performance, I mean there is some variability that happens there. But generally speaking, we’re seeing out performance in most of the areas and then that will have an impact in terms of future bookings over time. So it’s quite encouraging what we’re seeing right now.
It’s still early, because there is a lot of drilling and questions as to how many wells you are going put in a spacing unit and what the productivity of those future wells would be are still questions for us. But it’s quite encouraging and that was a critical reason why we made the decisions to spend money in dry gas last year, because we didn’t spend that money. We wouldn’t have that opportunity in front of us. We would have lost the land. And now we’ve effectively worked our way through the majority of those land expirations. You’re welcome.
Good morning. (inaudible) I’m a shareholder. Do you have any thoughts on the differences between doing business in Canada and the U.S.?
Douglas R. Martin
Yeah, many. How long do we have? No, it’s not a thing in Canada, U.S. thing; it’s a jurisdictional thing as well. And so, you have to start this in, one of the things Gord said from day one when we talked to going into the U.S. was, he had a long history in the U.S., let’s be aware of differences when we go into these areas. And so we were aware of those issues as a company going into it and it’s everything, there is jurisdictional differences which have regulatory issues. And so you got to be aware of all of that, but it’s the old business and Canadians and Americans are more similar than different.
And so for us, we’ve just – we’ve stayed on top of those issues. We wanted to ensure we had local people on the ground who were close and living there and dealing with things directly. And so, we’ve had I think quite a bit of a success managing our ways through it. But a lot of it I think started from a recognition that you’ve got to be aware of differences going into it. Does that answer your question? Okay, we’ll be here all day.
Gordon J. Kerr
All right. Well, Doug said it. I said my piece no, and I’m actually as I said earlier very pleased of being taken over as the President and CEO and I really truly believe that company is on the upswing here. And so it’s a promising future and again I just thank everybody for their support to me personally, to the executive team and the continued success. So, yeah, forget. Thank you.
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