Enerplus Corporation (NYSE:ERF) Q2 2016 Earnings Conference Call August 5, 2016 11:00 AM ET
Drew Mair - Manager, IR
Ian Dundas - President & CEO
Jodi Jenson Labrie - Senior Vice President and Chief Financial Officer
Ray Daniels - Senior Vice President, Operations
Eric Le Dain - Senior Vice President, Corporate Development Commercial
Adam Gill - CIBC
Gregg Party - RBC
Good morning. My name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Enerplus Corporation 2016 Second Quarter Results Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Mr. Drew Mair, Manager of Investor Relations, please begin.
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. These advisories describe the forward-looking information, non-GAAP information, and oil and gas terms referenced today, as well as the risk factors and assumptions relevant to this discussion. Our financials have been prepared in accordance with U.S. GAAP. All discussion of production volumes today are on a gross company working interest basis, and all financial figures are in Canadian dollars unless otherwise specified.
I am here this morning with Ian Dundas, our President and Chief Executive Officer; Jodi Jenson Labrie, Senior Vice President and Chief Financial Officer; Ray Daniels, Senior Vice President, Operations; and Eric Le Dain, Senior Vice President, Corporate Development Commercial. Following our discussion, we will open up the call for questions.
With that, I will now turn the call over to Ian.
Good morning, everyone. We have been focused on positioning Enerplus to deliver profitable growth in a lower commodity price environment. And with our second quarter results, we have continued to demonstrate strong cost performance that is improving our margins. This morning's result highlighted violated a strengthened balance sheet including a 45% reduction in debt, net of cash since the end of 2015. Strong operational performance leading to an increase in the midpoint of our 2016 annual average production guidance range to 93,000 BOE per day.
Our continued emphasis on cost control with operating cost per BOE for the first half of 2016 that are 12% lower than the corresponding period last year. The continued execution of our divestment program which has moved higher cost, lower margin assets out of our portfolio and strengthened our balance sheet. And to the combination of reduced operating costs, lower G&A and interest expenses and narrow differentials that are all driving strong margin improvement. We also highlighted a $15 million increase to our 2016 capital spending, effectively reinvesting a portion of our cost savings back into the business as we position to re-establish growth. This incremental spending will be directed toward additional completion activity in Fort Berthold in the fourth quarter, as well as additional facilities work to jumpstart our 2017 capital program.
Even at today's lower prices, these completions represent highly economic activity. We have talked previously about Q4 volumes of approximately 88,000 BOE per day, these additional completions are expected to increase that number to about 89,000 BOE per day. There are also some additional strategic benefits from the increased capital related to completions design and well spacing which Ray will touch on later. Although this is only a modest increase in activity, it will better position Enerplus for 2017. We remain focused on spending within cash flow. And when we think about 2017, the benefits of our lower cost structures resulting higher margins will position us to deliver growth through the year under the current sub $50 per barrel 2017 straight price.
With that I will turn the call over to Jodi to comment on our financial highlights.
Jodi Jenson Labrie
Sure, thanks. As Ian indicated, the two key financial takeaways are an improved balance sheet and improvement to margin as we continue to drive costs lower. We have made significant progress in strengthening our balance sheet through the combination of $281 million in non-core divestments and raising $220 million in net proceeds through our equity financing in May. In addition, we repurchased a total of $267 million of our senior notes at various prices between 90% of par and par, resulting in a gain of $19 million year-to-date.
As a result, our total debt net of cash was $674 million at the end of June, down 45% since and the end of 2015. Our outstanding debt at June 30 was comprised solely of our U.S. senior note offset by $49 million in cash. As well our $800 million bank credit facility was undrawn at the end of the quarter providing us with additional financial flexibility. Operationally, we had a strong second quarter and generated $76 million in funds growth. This was up 82% compared to the previous quarter and was driven by higher oil prices, our ongoing cost reduction initiative and narrowing commodity price differentials.
We've made good progress across the board on reducing our cash cost and improving our margin during 2016. When we compare our operating transportation G&A and interest expense to the same quarter in 2015, we've reduced our cost structure by $1.68 per BOE. The majority of this reduction is related to our cash operating costs which were $7.20 per BEO in the quarter. The decrease was the result of further cost savings including lower supply chain costs, optimizing repair and maintenance activity and declining labor expense. We also divested of some higher operating cost assets over the period.
As a result of our cost performance to date, offset to some extent by our expectations for seasonally higher cost in the second half of the year, we are reducing our operating costs guidance to $7.90 for BOE from $8.50 per BOE. We are also seeing reduction in both our G&A and interest expense which were down a combined $11 million in the second quarter compared to the same period last year. Consequently, we are also reducing our G&A guidance to $1.95 per BOE from $2 per BOE as we continue to see additional savings resulting from lower stock levels.
Moving to commodity prices, compared to the previous quarter we saw 47% increase in our realized oil price to CAD46.48 per barrel, as a result of both improved benchmark prices and narrowing differentials. In Canada our light and heavy crude oil differential narrowed by 16% and 7% respectively, largely due to the wildfires in Northern Alberta. In U.S. our Bakken differential improved slightly averaging $8.23 per barrel below WTI. Our realized gas price of CAD1.49 per Mcf in the second quarter which was 16% lower than the previous quarter due to the decline in benchmark NYMEX and eco prices of 7% and 41% respectively.
Unlike the ECO basis differential, our Marcellus differential improved 16% quarter over quarter averaging $0.76 per Mcf below NYMEX. This was a 45% improvement compared to the second quarter of 2015, although recently as NYMEX has strength and Marcellus basis differential has begun to widen again.
Turning to hedging, we continue to have good support from a risk management program of $21.6 million in cash gains during the quarter from our crude oil and natural gas hedges. We also added additional floor protection on both our oil and natural gas production. Currently, we are hedged on approximately 39% of our forecast net oil production for the rest of 2016 and 2017. For natural gas, we are hedged on approximately 29% of forecasted net volumes for the rest of this year and 20% of forecast net volumes in 2017.
We reported a net loss of $169 million or $0.77 per share in the second quarter which was due to non-cash items including $149 million asset impairment charge in a $105 million deferred tax asset valuation allowance. These charges are the result of the continued decline in a 12 month trailing average commodity prices.
With that, I'll now turn the call over to Ray to discuss our operations.
Thanks, Jodi. Capital activity in the quarter was largely focused in North Dakota where we continue to run one drilling rig. We spent $30 million in the quarter in North Dakota drilling 4.6 net wells and bringing 7.2 net wells on-stream. The average initial 30-day production rig of our operated wells in the quarter was approximately 1,450 barrels of oil equivalent per day. There were a couple of wells that we brought on-stream at the start of the quarter that are exceeding expectations. To frame a strong performance for you these wells averaged over 1,200 barrels of oil equivalent per day and 1,500 barrels of oil equivalent per day in their third month of production.
We also continue to improve our drilling completion and cost which averaged $7.8 million in the quarter than about 8% from Q1. These savings were due to improved drilling team, continued optimization of our completion design and reduced water management cost. These costs represent a reduction of 26% from our 2015 average drill complete and costs.
Ian talked about the additional $50 million we added to our capital guidance. This additional spending will all be directed to North Dakota. We will complete the incremental wells and preorder facilities equipment for the 2017 program. the cost for the economics for these completions are strong but an average rate of return for the program at about 50% at $40 per barrel and over 100% at $50 per barrel of WTI. In addition to position to establish growth there are also strategic benefits from these incremental completion as we will be testing tighter well spacing at 500 feet and evaluating modified completion designs. This is all in the continuing to optimize development planning and well performance as we expect to move to a larger program in 2017. I will also add that with the cost savings that we have realized driving higher cash flow we continue to expect the 2016 capital spending and dividends to be fully funded to internally generated cash flow come commodity prices.
Coming briefly to the Marcellus and a Canadian water floods. In the Marcellus we spent $9 million in the quarter resulting in 0.3 net well stroke and 1.8 net wells brought on stream. Despite a limited spending production was up slightly in the quarter at a 195 million cubic feet a day due to some very strong well performance. Of the selling gross on stream wells that we participated in during the quarter the average initial 30 day production rate was approximately 15.8 million cubic feet per day is wells were generally longer laterals with an average length of 6400 feet.
There's no change in our forecast spending in the Marcellus where we expect full year spending to be approximately $20 million. Capital spending in the Canadian water flood was approximately $7 million in the quarter and was primarily focused on flood optimization activity in South East Saskatchewan. Overall enterprise is performing at the high level operationally and we continue to deliver strong operational and capital efficiency and so with that I will turn the call over to the operator and We will open up for questions.
[Operator Instructions] For your first question comes from the line of Patrick [ph]. Your line is open.
Hey guys. Good morning. Good quarter again, just a couple of quick questions here. First of all just from a high level in terms of asset acquisition opportunities you know in the in the past Maybe there's been a tone of potential in the money but there seems to be a loosening of assets in the Balkan right now. Is this somewhere where you would be focusing your attention at this point in time?
Sorry, Patrick. I think if you think about portfolio strategy, a lot of things have to line up there. Operational strategy is high on that list and is obviously we drill some of the best wells in North Dakota and some of that a lot of that what we do. And so asset in North Dakota would fit really well geographically with our skill sets. We're also pretty focused on the quality on the difference between tier one and tier two and three makes all the difference so there hasn’t been a lot of quality.
Think one of the big challenges going on in the market right now is pretty big that ask disconnect when you look at this price and you look at what expectations are so we are always thinking about things and the trickier part over The last six months has been probably thinking what your finance has been pretty protective of our equity and have seen a value in a stock that wasn't being reflected or certain scenes, some of that being reflected now. Also, very focused on balance sheet. It’s a lot of work to reestablish a very strong financial position and we are protective of that as well.
So the bottom could make sense but it has got to be right asset with the right running room and great economics.
Okay excellent and then in terms of well economics here in and productive result obviously You guys have both on the cost and the IP front made terrific progress over the last few years but the 1450 BUE a day was down a touch from prior quarters. Although you did mention that the second and third month were showing some strong results. Just wondering are you seeing sort of an attenuation in the decline profile or what's kind of driving these results here?
Well you know we're trying to give people a really strong flavor of the economics and we’re not hanging on the type curves of the best well we had, you know so we bundled them and we still talk about our high end curves of 1.2 million barrels and gas on top of that and our low end at 900,000 barrels. We've always had a couple wells that have been outperforming those kind of curves so nothing going on. Yeah those wells are. Very consistent with high end type curves.
The ones really highlighted are the ones hanging in a little better than type curve so I could say there is no read through based on the results.
Okay and then any further commentary on kind of the Three Forks or versus the Balkan and how the economics are evolving there?
So, I guess for those who are because maybe as close as you know as a general rule Three Forks is a little bit worse than Balkan across the basin. But then depending where you are one of the best wells in the whole basin is a second bench well we have. So there are some spectacular Three Forks there. I would say you were obviously in a lower spend environment right now. There’s less activity even so there's less going on Relative to sort of the questions.
There is not much walk-in versus Three Forks in our acreage block. They are really down spacing. In our recent Investor’s day highlighted in growing inventory which talking about down spacing or base case scenario for another plus of round four wells per zone. So in most of our acreage block we've got two zones and sometimes we have three so and that goes from eight to twelve wells effectively.
Ray talked about one of the reasons we're doing with these completions at the end of the year is to give us some data around five hundred plus spacing so basically double that density. So, I would say it’s really not as much a Three Forks Balkan distinction is and now that said there are a few places in the acreage block where we don’t have a lot of data for some of the deeper zones and so there's nothing going at this second relative to that but that is one of our activity next year.
Okay. Thanks a lot guys.
Your next question comes from the line of Gregg Party with RBC. Your line is open.
Thanks. Maybe just to follow up a little bit on what's going on in North Dakota? You mentioned two mile actual van and I think in the release. Is that the coming Basically the fair way for you guys in terms of lateral length there or do you think that there is more optimization that you can do and the 7.8 million in terms of D.C. and so on. I wish I could ask around stability but do you think there's any further downside in that number as you just get better at showing these wells?
So we've drilled lateral links I guess Three different kinds we drilled a couple three miles We drilled some, one milers referencing you'll look at the planned configuration most of it for two mile wells and we generally think two miles The most optimal economics. So we're sort of transitioning to that are some places where you know we're doing some land work to turn one milers into twos use but I think two mile laterals is I think what we will do. But on the cost side Ray talked last quarter about some of the changes and he said we see 60% of those capital cost savings as sustainable. The best example of that is drilling times. A year and a half ago 25 days rig release, starting your budgeting 17 and we've got to come down to 13 so that clearly sustainable and is going to get better. You know we haven't reached technical limits on that although some of the low hanging fruit is gone.
So the drive is to continue improving drive costs. I think there's a fair number, fair amount of inefficiency in the system right now we're running a single rate limited pad drilling and all the those efficiencies we don’t have yet so as we move to a bigger program next year we will be able to get some of those efficiencies. And it will be partially offset by some cost pressures if we start to see pick-up in activity.
Okay, that’s helpful and then just to be clear you're just going to lean on some of the documentary or in terms of the completions you're talking about or is this actually going to lead to some back shelling i.e. more wells you're going to be drilling. Doesn’t sound like if you are not changing the number of rigs you got to play.
So our guidance change just to change our Q4 spend for the facilities were three ducks. Strategically we are moving to a hire trend scenario in 2017. And that will likely involve a key operating next year there's even a chance that could happen this year although we're not planning for it. We're to keep the very focused on reestablishing growth and conditions to that our affordability and economics. So even under a sub fifty world where ability looks really pretty good the balance sheet is very strong this collective change in cost and improve margin is really changing the picture for our company and so things are certainly lining up to spend more money next year we haven't settled on exactly what that looks like but I think it's a basin area and you can go back to our children and just really think about that it was running a couple rigs down there for 2017 call the preliminary luck.
In the last thing is just understand I mean you boosted your spending program or the budget at least by $15 million but you know you're typically spending under what we expected at least during the for the first half. So should I mean have you in essence already kind of commenced significantly higher activity or is there still a chance that you will come in at that $200 million level for the year.
Well that be great if we hit $200 but we're trying to give real clear guidance. One of the big reasons that we've been lower year-to-date is because things have been heaper and we were $8.5 million dollars in Q1 on these wells and were $7.8 million now. So I guess we can do things cheaper than $7.8 million it was a little bit of money but things are getting tighter. Today we don't have any incredible ideas of what it's going to become $6 million this year so I think that's pretty good number that 2015. And you know we can be a little more efficient will never lifted a pretty good number but.
Okay. Thanks very much.
Gregg, maybe one of the things you know we really don't get into an audit of this on the quarter-to-quarter basis but we had a little bit of an uptick a little benefit from FX you know who would have that office over the course of the year. So you know that was our numbers around that. But joining to 215 is a good number to think about.
Your next question comes from my line of Jason [ph] with Credit Suisse. Your line is open.
Oh thanks. Ian maybe you could characterize the level of focus in the organization around repositioning for organic growth versus adding new inventory through acquisition. Maybe you know color it is your own organic opportunity evolving enough to lower the urgency around or push out the need for acquisition?
Morning Jason. We see and again I'll come back to the characterization. We see a deep inventory in the company and that has the ability to drive significant intrinsic value and recognize and so very focused on unlocking that inventory balance sheet strength was an important part of that because we're really good position to be able to grow organically or a very reasonable period of time and I think that is that is what these assets are understood. Performance is strong and consistent on the balance sheet there. So I think that is what was is there an opportunity to shareholder value through acquisition? Clearly the reason we are in a position as a company is we did that several times in the past and one of the challenges I said earlier when Patrick asked the question, it was difficult to think about the practical reality of how you pay for those opportunities when we were focused on balance sheets. And we were complaining about a share price that we didn’t think reflected the value. Those things are starting to come into line. So are the conditions lining up where it’s more practical? Possible? Potentially, but they come back to: we still see opportunity in the stock, we still see in inventory, and we don’t need to do anything that, in a market where everyone would like to talk about acquisitions, we all like to think about them, but not a lot’s happening. And that’s been really significant.
So we’ve got people thinking about it, but equally thinking about divestments. Part of the storyline the last three years has been simplifying and focusing our business by selling things that we didn’t see fit our portfolio strategy, and we’ve made huge progress on that. We still see opportunities to tighten that up a little bit, too. So we’re focusing on both sides of the ledger and it’s all designed to make ourselves better and more focused and add value today and in the future
Yes, I think I asked because the valuation still seems to reflect some level of pushback upon inventory, whereas pushback around operating performance, flow results, balance sheets, historical metrics, they don’t - there’s a lot of ability to push back on that but there’s still a discount in the stock, so that’s why I’m sort of pushing on this point around inventory to try to flush it out in terms of whether that’s something that is reasonable to be reflected in the valuation or not.
Well, I have a bias on this. I don’t think it is. I don’t think our inventory has been fully appreciated by the market. I think people are starting to appreciate it. And so we're not going to go do something that is dilutive to our shareholders to buy some future inventory, we're not going to do that. Do other companies have deeper inventories than ours? You can see that out there. You can see that out there. And so, would a deeper inventory help? It might, depending on how you paid for it. And depending on what that inventory was. So I come back to we can grow this company at close to 10% a year, if oil inches its way up a little bit, and oil stays in that top 50 range, we will still grow the company. We don’t think our valuation reflects that. And we’re seeing that in the stock now.
We’re seeing that investors are coming to are starting to recognize that. For many people, they were focused on balance sheet. That has now cleared the system and the stocks perform pretty well. I think there’s another piece to this as well. We're not the simplest story in the world; we’re not all that complicated but we're not the simplest. We've got two hundred million a day of Marcellus volume that traditionally hasn't, certainly hasn't been helping us very much on cash flow. Hasn’t been hurting us but hasn't been helping us. You know with gas prices strained in a reasonable differential picture there, that’s starting to come in to focus for investors. So I think the math - I really believe that the fundamental question, the fundamental thing for us in the last year has been - and the math has not been crisp. The balance sheet wasn't as strong as we would have liked and the net back wasn't as strong as we would have liked. A lot of that has been Marcellus differentials and pricing. Those things are all now coming into focus and you can see that in the net back and the math has changed very dramatically. Obviously the balance sheet picture looks completely different. So I think we're very well positioned to grow organically. But most good company's keep their eye on that M&A market for opportunities that are good for their shareholders and do the same thing.
Yes, thank, fair enough.
[Operator Instructions] Your next question comes from the line of Adam Gill with CIBC. Your line is open.
Hi guys. Just two quick questions. One, on the 1,000 BOE a day impact from the additional spending in Q4. Do you have an idea how this is going to impact Q1 production? And then the second question is just related to our Marcellus differentials. They were pretty tight in Q2, widening a bit in the third quarter here. Do you think the benchmark pricing in the Marcellus is a good idea where to trend your pricing or have you done some things to kind of mitigate some of the additional pricing differential pressure that we're seeing in Q3 here?
I’ll deal with the production number question and I'll turn it over to Eric to talk about pricing in Pennsylvania. So we try not to get overly precise with an exit number because timing can move that around a lot. But directionally a thousand barrels flush production in the quarter will contribute to the next quarter at a lesser level, although as we’ve already highlighted we’ve got a couple wells that have really hung in well, really quite well. So it's additive to Q1. Or maybe to approach it a slightly different way. You know we're we've given people that exit number for a few reasons. And we did this at analyst's day and I keep coming back to that but there were some very important things in that, relative to our inventory and relative to getting to this investment work and letting people understand when growth happens again.
So we see sort of bottoming out Q4, Q1 pretty flattish. That’s sort of the dynamic. And then starting to build as we move through the year. That’s what we said in the call. If you sort of get more granular than that, as we talk about spending money, we're talking about spending money in oil. So we will start to see oil volume start to grow. We're not spending any money in Canadian gas and so we see that continuing to decline and then the Marcellus story is relatively flat we would guess over the course of the year until pricing continues to strengthen up and we would see spending start to increase maybe Q4 for a little bit into Q1 to Q2 as people gain confidence in the gas market out there. So relative to the Marcellus pricing question Eric will give you some color on that.
Eric Le Dain
So the question was on the Marcellus, are the LIDE and TGP [ph] zone for spot market prices reflective of what our portfolio realized. I actually saw in Q2 that they're not exactly reflective. We do have around 50% of priced off of other markets and actually in the summer time, we remain very positive on that Transco non-New York north market, but in the summer, it is a wider differential; actually you realize a lower net back than into the pure spot regional production market. So we can see that happening and having some influence the first month of so of this third quarter, and then those downstream markets that we attach begin performing again. So it’s not a perfect reflection, I’d say, but it still provides a good directional indicator, if you just look at the LIDE, realized spot for the quarter.
Okay, great. Thanks, guys.
As there are no further questions, I will turn the call to Ian Dundas, President and CEO; for closing remarks.
Well, thank you everyone. We really appreciate your time today. As I reflect on the questions we’ve been asked today, I’m going to make a comment. I do think, I refer people back to our investor day material. There was a lot of stuff that came out there that really helped frame how we feel about our strategy, how we think about growth in an improving market, how we think about inventory in North Dakota. There’s a lot of stuff sitting there, and I think you can sort of see the connection between that and our quarterly results: our cost performance continues to improve; we see a meaningful percentage of that as being sustainable so I think we are very well positioned to begin to reestablish growth while still maintaining commitment to our financial strategy, which is keeping a strong balance sheet and living within our cash flow.
That concludes today's conference call. You may now disconnect.
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