Enerplus Corporation (NYSE:ERF) Q1 2023 Earnings Call Transcript May 5, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Enerplus Q1 2023 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. [Operator Instructions] This call is being recorded on May 5, 2023. I would now like to turn the conference over to Drew Mair, Senior Manager of Investor Relations. 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 our first quarter news release. Our financials have been prepared in accordance with US GAAP. Our production volumes are reported on a net after deduction of royalty basis and our financial figures are in US dollars unless otherwise specified. I am here this morning with Ian Dundas, our President and Chief Executive Officer; Wade Hutchings, Senior VP and Chief Operating Officer; Shaina Morihira, VP, Finance; and Garth Doll, VP, Marketing. Following our discussion, we will open up the call for questions. With that, I will turn it over to Ian.

Ian Dundas: Thank you, Drew. Good morning all. As we come out of our first quarter, operating performance continues to be on track, and we remain well positioned to efficiently execute our 2023 plan, which is expected to deliver robust free cash flow, attractive growth and meaningful cash returns to our stockholders. 2023 capital spending and production guidance are unchanged. Production in the first quarter was resilient, averaging approximately 97,700 BOE per day. This was up 6% compared to the same period last year, despite having sold over 6,000 BOE a day in the fourth quarter in connection with the sale of our Canadian operations. Operational momentum is building, as we progress through the second quarter, where we have a very active completions program.

Wade will provide more details on the operational plan when he speaks. We generated $260 million in adjusted fund flow in the quarter on capital spending of $139 million, resulting in free cash flow of approximately $120 million. We returned $67 million to our shareholders in the quarter, including repurchasing 3.5 million shares for $55 million. Since reactivating our share repurchase program in 2021, we have now reduced our shares outstanding by 16%. Our repurchase activity has and continues to be underpinned by our view that the intrinsic value of our business is not adequately reflected in our share price. And therefore, the buyback continues to be accretive to shareholder value. Furthermore, the reduction in our share count is quite meaningfully enhancing our per share growth metrics.

Adjusted net income per share and production per share increased by 8% and 19%, respectively in the first quarter of 2023, compared to the first quarter of 2022. As previously indicated, we are committed to returning at least 60% of 2023 free cash flow to shareholders. Over the next three months, up through the end of July, we plan to repurchase the remaining 3.3 million shares under our NCIB authorization and then renew our repurchase authorization for another 10% of shares outstanding in August. In addition to our plans to return capital to our shareholders, we are also continuing to strengthen our balance sheet and our financial flexibility. We reduced net debt by 32% and from December 31, 2022 to March 31, 2023 and ended the quarter with net debt of approximately $150 million.

In summary, the outlook remains strong. We expect to deliver another year of solid execution and well performance from our Bakken development program and with our capital spending weighted approximately 60% to the first half of the year, we anticipate meaningful oil growth and a robust free cash flow profile in the second half of 2023. Beyond 2023, our deep high rate of return drilling inventory will continue to support attractive return on capital and growth project prospects for years to come. I’ll leave it there and pass the call to Wade for an operational update.

Wade Hutchings: Thank you, Ian, and good morning, everyone. North Dakota production averaged just under 67,000 BOE per day in the quarter, which was 8% lower than Q4. As is typical for us, first quarter production declined sequentially due to the planned timing of our completions program in North Dakota. We brought our last 2022 pad online in mid-October, and our first half this year started producing mid-February. As Ian mentioned, operationally, the year is off to a good start. Base production is tracking ahead of plan and our drilling and completions program is running efficiently. We brought a four-well pad on production during the first quarter in the Murphy Creek area and early time performance is meeting expectations.

I would note that, as we continue to drive improvements in gas capture and emissions management, particularly in areas where gas takeaway is constrained, we have been adapting our practices to ensure more molecules are captured and sold by curtailing initial production when needed. This pad falls into that category with initial rates constrained to some degree. This approach of curtailing rates to manage emissions isn’t new for us, but it is becoming increasingly important as we deliver on our emissions reduction plan. Overall, these early results support our positive view of the economic returns and development potential in the Murby Creek area. Looking ahead, we have an active completions program underway with the second and third quarters being our busiest periods.

But the second quarter anticipated to be our highest period in terms of capital spending. We expect to bring approximately 20 net operated wells online in the second quarter in North Dakota, which should set up strong volumes in the second half of the year. In addition to a pad and FBIR, our second quarter onstreams will include our first two pads in the Little Knife area. The first of which is a seven-well pad that is currently being tied in. We look forward to demonstrating the potential in Little Knife where we are highly confident, we have a significant amount of Tier 1 inventory. We also plan to bring our first set of re-fracs on during the second quarter, which will be a good data point to help us frame what this opportunity set could look like in our portfolio.

Today, we don’t include these in our decade-plus drilling inventory, but if successful, we see the potential for approximately 60 additional value-accretive well refracs that could be added. For context, these refrac candidates are producing wells we acquired in 2021 in Dunn County, which were completed several years prior to that. These wells have relatively low recoveries, and we think there is a potential meaningfully increase that with a modern re-stimulation. Turning to cost structures. Broadly speaking, inflation year-to-date has tracked our expectations and we’re seeing some early signs of the market tightness beginning to ease and stabilize. Although, we’re not expecting to see substantial cost deflation in 2023, we have seen OCTG prices soften as we have secured inventory so far this year.

Declines are being driven by lower input costs, stronger supply and a flattening rig count. This could be a tailwind to cost structures in 2024. Lastly, I’ll touch on activity in our non-operated Marcellus position. Our first quarter Marcellus natural gas production was 180 million cubic feet per day, which was approximately flat to the prior quarter. We continue to expect limited capital activity in our Marcellus position in 2023 with just 3% of our overall capital budget being directed to the Marcellus this year. As a result, we expect our Marcellus volumes to decline as we move throughout the year. In closing, I’ll reiterate Ian’s comments about our strong position. Our unwavering focus on safe, clean and efficient operations, along with disciplined cost control is supporting robust margins and significant free cash flow generation.

I’ll leave it there. We’ll turn the call over to the operator and open it up for questions.

Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from the line of Greg Pardy from RBC Capital Markets. Your line is open.

Operator: Your next question comes from the line of Jeoffrey Lambujon from TPH. Your line is now open.

Operator: [Operator Instructions] Your next question comes from the line of Travis Wood from National Bank Financial. Your line is now open.

A – Ian Dundas: Sure.

Operator: Your next question comes from the line of Patrick O’Rourke from ATB Capital Markets. Your line is now open.

A – Ian Dundas: Patrick. We’re not embarrassed, but we’re pretty proud. Yes, the DJ is — it’s a great little asset. It’s got strong economics — a little is sort of the key work for us. And so we’ve declared that asset strategically encore. So what does that mean? I mean I guess that’s code for open minded to parting ways with it. But we see a lot of value in the asset beyond just the producing 1,000 BOE a day level that it’s at. And so in a market like this, which I’ll characterize as volatile from an M&A perspective and sometimes difficult to transact, we made a decision that the best answer for that asset at this minute is to drill a few wells and unlock value that way at this moment in time. So relative to the timing on those wells and those sort of things, we’ll hand it off to Wade to talk about sort of where we are in that program.

A – Ian Dundas: Thanks, Pat.

Operator: [Operator Instructions] There are no further questions at this time. Please continue.

Ian Dundas: All right. Well, thank you very much for your attention. Again, it’s a busy reporting day for a lot of folks. We’ll let you get back to your day jobs and appreciate your support. Have a great safe weekend. Thank you.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.