Enerplus Corporation (NYSE:ERF)
UBS Global Oil & Gas Conference Call
May 23, 2013, 11:35 am ET
Eric G. Le Dain - SVP, Strategic Planning, Reserves & Marketing
Eric G. Le Dain
Good morning, thanks very much for attending this morning and hope to tell you where Enerplus Corporation stands today. As normal there will be forward-looking statements made today. There are risks both known and unknown, uncertainties and other factors that could lead to different results and than I may present today.
When you look at Enerplus over the last three years, we have made a significant transition. We weren’t satisfied three years ago with where we stood in terms of our forward growth prospects, our capital efficiencies, our general cost base of our asset group and we weren’t to satisfied with the lack of focus of our asset base, too diverse, too spread out not enough inherent opportunity. So we made a lot of change in the last three years and certainly for the last two years, we have spent our fund flow significantly in implementing that change. And in part there was a significant item as we added key top tier assets to our portfolio and that we needed to develop that production base where these assets to become free cash flow positive and we needed to develop that production base where we would retain the land of these new assets.
And if you look at our strategy today it’s an extension of where we come from in the last few years, we are going to deliver profitable growth and income and maintain that to our investors. We are going to continue in our top tier growth plays and develop the incremental positions we built; we will continue to focus on capital management, cost management and improvement in capital efficiency and we will control both operating and capital cost and you will see some of that as I speak to this morning. And finally this has been a tenant of the company for decades now. We will manage and maintain our financial flexibility.
Just to the corporate profile enterprise value about $4 billion, we have even our guidance for 2013 have specified 82,000 to 85,000 BOE a day production annual average with exits in the 84,000 to 88,000 and we are targeting generally a 50-50 oil-gas ratio. Capital this year is $685 million in contrast to last year’s $850 million.
Our assets are really divided in four key focused areas. In the United States, it’s the Bakken, in Montana and North Dakota and the Marcellus and Pennsylvania, West Virginia. In Canada its our water flood low decline properties across from Saskatchewan through Alberta and our deep gas plays, which comprise the oil rich Montney, Duvernay and other similar more historical deep gas assets that we control. We delivered growth. In the last year we grew at 9% our production and most significantly we grew our oil production by 20% last year. Our NGL, our liquid side stayed about constant year-over-year, small growth.
We delivered reserves growth, 7% growth in 2012, now at 346 million barrel oil equivalent, what's interesting there on that chart is the growth in crude oil, 55% now of our reserve base and 12% overall to 192 million barrel oil equivalent for crude and that crude growth driven largely by North Dakota has been predominantly light oil.
Our costs have come down over these years in terms of F&D. We realized 2421s past year and remember that's roughly two-thirds oil, one-third gas. We didn't have, we weren't adding gas reserves to bring down that average. We replaced 194% of our production last year and we replaced close to 300% of our oil production last year. When you look at our A&D activity we actually got down to just around $23 and I'm including FDC and all of these numbers.
One interesting things and all looking at those F&Ds when you look at our recycle as a corporation remember that our recycle as a company is based on a 50-50 oil gas weighting, so our net back is highly influenced in particular in 2012 by the gas price. So then when you look at the company bringing on as we did oil two-thirds being oil which usually is at a higher F&D you can see why that recycle reported recycle of say 1.1 is distorted. The reality is, our oil adds have been competitive, gas adds competitive, but we are a 50-50 oil-gas company on the net back side.
Fund flow growth, we grew fund flow by 12% again that oil production increase was significant, but remember this was in a period of roughly we were actually more gas last year and a period when gas priced dropped significantly we still grew our funds flow. And we maintained our balance sheet through this period coming out of 2012. We see ourselves growing funds flow again, this current year, supported in part by our strong hedging position, and some recovery in natural gas price and continued strength in our liquids positions.
We preserved our financial strength as I said earlier, sitting at 1.7 at the end of 2012. In doing so, because remember I spoke and you would all know, we did extend our funds flow and we did it consciously; well, some of the cost escalation, in North Dakota you would argue were unconscious; that’s something industry faced and there was a 30% cost escalation in that whole neighborhood. Marcellus was significantly better, but we knew what we're doing because we needed to make this transition and we're now reaping the benefits of that pain we went through.
So as managed our balance sheet last year, we raised equity. We put in place term debt at very good levels. We did painfully reduced, make the decisions to reduce the dividend at mid-year, a very difficult decision. We implemented a stock dividend program, similar to a DRIP, conversion of dividends to equity positions and we made non-core asset sales of over 400 million to support the balance sheet. And that non-core asset sale component will continue as we look forward in to 2013. Again, this on the background of 50-50 oil-gas company where gas price dropped significantly.
Our debt stands at about 1.1 billion at March 31st, and around 300 on the revolver, around 700 million term debt and we put in place a $1 billion bank debt facility. So we have roughly 700 million uncalled on that facility. 2013 unchanging in terms of where we are going and consistency with our strategy; we will continue to improve our capital efficiencies, both on an annual average and (inaudible) basis. We are reducing and we are seeing the impact of reduced drilling and completion costs and we are starting to realize the benefit of not having to spend as much on facilities as we have the last number of years; so in a number of our areas including our water floods, we rebuilt a number of our facilities, batteries such that just added to our capital over those years. We will continue to develop and grow production and fold our Canadian water floods and our Marcellus and we will move forward on the appraisal of our Duvernay, Montney and Wilrich assets. And Wilrich really is at the point of transition to a development play at this the stage. And we will continue with this focus improvement.
However, when would have you looked at our reserve, our NPV base say three years ago, it would have taken significant number of assets to add up to 80% of our NPV position of our 2P reserves at year-end 2012, year-end 2012 it’s 10 assets that make up 80%. The focus has been significant, but we are not done, we want to continue to grow this and increase this focus because it leads to this continued capital efficiency improvement. So we will sell more non-core assets. Sustainability wise, we are looking at an [APO] in this coming year in the 125% range significant change from roughly 250% last year.
And that again it is a reflection of this improved sustainability. First quarter 2013, as you will see in our results were on-track, roughly 87,000 BOE a day of production that the fund flow stays at 1.7, payout in that 125% range, operating cost on target, G&A were high in the quarter for various one-time events, but on the year it will be on target. We continue to maintain our guidance as originally projected in late 2012.
Turning the cash flow production, we are hedging and have been for a number of years focused to ensure a minimum level of cash flow protection, that’s our key driver in our hedging program. When you look at the crude versus gas contribution to funds flow, our crude production at roughly 50-50 is contributing about 80% of our funds flow that is our key focused as we look at maintaining the minimum level of funds flow; put in place for crude hedges and that’s what we have done this year we’re roughly two-thirds hedged at over a $100 and then about 33% on the gas side, but it is that crude contribution significant.
In 2014, at the end of the quarter we are at 15% on the crude side and we continue to manage that and add to those positions. On the gas side, we are currently at around 25% and we are not driven to push that up, I mean, again we are dealing with that 4:1, 5:1 type ratio and we do view the various potential for gas price to go up higher; we think there is a funding reduction coming through on the gas side and we like all of you probably in the room, we watch our production level daily and it stays high there is no question, the Marcellus is a remarkable area and we are seeing and benefiting from those results on
Marcellus wells performance. But we do see a cutback in capital allocated to no question gas, but even on the oil side and therefore associated gas. So we are more bullish on gas price, but we will maintain a minimum level of production of our funds flow which is fundamental again to maintaining that financial flexibility to what we want to do go forward.
Our product composition in 2013 should be around 50-50. We are little higher on Q1 on the gas production side; Marcellus production was significant, I think we are up roughly 50% quarter-over-quarter versus fourth quarter in terms of our Marcellus production. If you look at that this chart kind of reflects the transition we've dealt within the last three years. We now get 40% of our production from the US, 24% on the oil side, 16% gas and in Canada 22% oil, 4% NGLs for that total 50%.
Composition wise as I said earlier we’re roughly two-thirds light oil. Our Canadian medium and heavy which come into play certainly in some of our key water flood areas has fairly stable; grew slightly last year, but it is that two-thirds light that is significant. On a subject of differentials which are always of importance to oil and gas produced both north and south of the border. We originally forecast quite a negative or wider differential certainly on the heavy side and even on the light. As it’s come out and certainly in first quarter we were right on the heavy side; I think it was around the minus 31 or so on and we forecast around minus 30 in our updated forecast, but we did better on the light side. Our North Dakota averaged -- with North Dakota and Montana averaged about minus $6.22 I think in that range and we see that continuing right up through April, May and bit unclear where June goes, could lie in a bit more, but we see again in support of funds flow some opportunities for those two remain narrow.
I talked earlier about the non-core assets. We will continue this divestment. In fact, we have 1,300 BOE a day in the market today. The process TD Bank is supporting us on, largely oil, non-operated assets, [Susquehanna] largely. We just sold 600 BOE a day for $58 million to subsequent to the end of first quarter and we will continue as we did last year and we are looking at a number of things this year to supplement an increase our core areas, working interest positions.
And perhaps the best example and it really is a textbook example and I can't say that we are this brilliant all the time, but if you look at this comparison what we did here is we sold the non-core asset in Manitoba, oil asset and then we increased our working interest by acquiring incremental sleeping giant Montana assets going from 70% working interest to 90%. If you look at the metrics, they are you couldn't have written them better. They look at suspiciously good, but we effectively sold them at a much higher value than what we bought out.
And to be fair partly that's the reality of increasing working interest in existing position you already held 70%, but this is the kind of thing we continue to do to continue to expand and consolidate our core areas, to again increase this focus so that when we're focusing on cost cutting on management of the asset, it's over a bigger base.
Market sentiment, no question on Enerplus Corporation is improving. We have significant quantity of buys, holds, or sells on stock right now. Without question in our view, Enerplus is being under valued and under valued relative to certainly the peer group where we think we stand in terms of our transition and where we are today.
I mentioned earlier that the transition of bad debt, free cash flow hit when you are building new asset positions, whether it's incremental land and deep basin in Canada and you are spending on delineation activities or you are building water flood -- pardon me North Dakota Bakken positions and development in Marcellus, well, we were, we spent a lot of money getting those things in place. This year, by the end of this year we will probably be free cash flow neutral on our North Dakota and our Marcellus isn’t far behind.
A remarkable transition, remarkable position where we stand today and as we look at the moving forward. Our institutional ownership is increasing and certainly as I say there, the average target price now sits in the analyst community just over 17.50. So why Enerplus? Financial strength, continued debt of funds flow at reasonable position that give us the flexibility to make movements on the acquisition side. Improving sustainability, where as we have said on our forecast, we are looking an APO of 125%, we did that in first quarter.
Our costs are improving. We have said before our costs in North Dakota look like they will down 10% to 15% versus what we have budgeted and we see our Marcellus costs improving as well on the non-operated side with our partners. We are delivering production growth and reserve growth and in the right areas in terms of oil focus. And we have now build this asset base for growth, but on top a very significant competitive advantage in terms of this low decline foundation asset base we hold in our water floods, 12% decline, given overall corporate decline of 24% is what we are projecting for the end of this year.
We have a compelling dividend around 7% today and intend is to maintain that and there is no question we have an attractive valuation even with the movement in our share price over the last two weeks relative to our payers and general industry. As natural gas price improves that there could be incremental upside, but again we are not managing ourselves, hoping for a natural gas price improvement.
And that’s all I had. Questions?
(Inaudible) production outlook with your existing assets?
Eric G. Le Dain
Well, on for 2013, we are projecting as I said earlier between 82,000 and 85,000. Q1 was at 87,000 BOE a day. We see ourselves able to grow and continue to grow through 2014, 2015, but we are not going to be going 20%, 25% a year and it will be more and moderate growth and it will be growth that sustained and managed on a profitability basis and in a accordance with managing balance sheet that gives us the flexibility to buy. There is 3,000 barrels a day of assets on the market today and some of that just Canada or total or just Canada. That is an opportunity. There are companies struggling as you would know with that, so we managed ourselves to be able to take advantages of some of that opportunity. Is that clear enough?
Gas price, you said you are close to being cash flow neutral?
Eric G. Le Dain
Are you still putting money in the Marcellus and what is the breakeven gas price you require in the Marcellus?
Eric G. Le Dain
First yes, we are putting money into the Marcellus this year somewhere in the $80 million type level, $80 million to $90 million. Last year we were in the $155 million, the year before I think we believe a little higher than that. Breakeven depending as you would know you got Susquehanna, Bradford, to some extent Sullivan and you have got EURs up there that are in the -- often in the 8 to 10 and 10 plus Bcf, their breakeven is probably below $3.
When you get into the 8 to 10 say Bcf range, let's say Bcf you are probably around the $3 to $3.25 Mcf range and then when you are down in the 6 Bcf range, it’s higher, it’s economic. Our net back from our Marcellus production is I think in first quarter is somewhere around 250 in Mcf and our production that (inaudible) is done where we've been drilling in the Susquehanna and Bradford and Sullivan, even to some extent east (inaudible) has been, we've seen very good results in terms of deliverability.
And then in terms of you talked about the (inaudible).
Eric G. Le Dain
What are you looking for on the Duvernay? What would be good based on your results?
Eric G. Le Dain
Yeah, its good question, so we have a significant acreage there, currently just over 80,000. We continue to look to add to that 80,000 over 80,000 acres. We know we drilled a vertical well and we know we are in the liquids window and I think for industry it’s a little bit of a capital cost question on the Duvernay and initial early costs have been high and we are forecasting that and ours even as high as $15 million a well, but we do believe that in time that will target new towards more of the 12 range. But I would say what industry wants out of that area is you need, you want to be seeing about in excess of 50 barrels per million cubic feet liquids load pre-condensate.
Last question, when you refer to the number of packages on the market, I assume that when you look at some of those packages the opportunity you see is relative to your current asset base.
Eric G. Le Dain
And so what would you trade up for relative to your current asset base, what would be attractive to you?
Eric G. Le Dain
Yeah, again, I'm not going to say anything that's revolutionary by any means. We are only looking at things that will make us better, that will improve our capital efficiency, that can compete with our existing asset base. Our hurdle rates are decently strong, but it is the ability to compete whereas we allocate capital because we are allocating based on a number of factors but a fundamental one is IRR, PIR, the actual return breakeven supply cost.
Secondly we are looking at things that will contribute to improving our focus, consolidations, aggregation of positions, there's not going to be that many of within that 300,000 barrels a day that will suit us, but there can be some and you've got to remember a lot of those assets are assets that people are selling because possibly they are non-core, possibly they just need the balance sheet support, but occasionally you will see in some of those non-core positions the ability to where you are the core holder of that to add, the sleeping giant was a beautiful example of that, going from 70% to 90% gives us, reducing one partner gives us more flexibility as we look down the road at EUR opportunities in that asset base.
Eric G. Le Dain
No, at this stage, we will probably still be about two-third Bakken, one-third Three Forks drilling. We're going to be testing a little bit of our spacing assumptions. We still feel good about our two and two within a 1280. With [TSU] we probably have two Bakken, equivalent of two Bakken longs and two Three Forks longs. We've done some work on that. Testing, it will do some more. We're not planning in this current period to test incremental.
Eric G. Le Dain
Thank you very much.
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