Nov 8, 2013
Executives
Jo-Anne Caza - Vice President, Corporate and Investor Relations Ian Dundas - President, Chief Executive Officer, Chief Operating Officer, Director Rob Waters - Chief Financial Officer, Senior Vice President Ray Daniels - Senior Vice President - Operations
Analysts
Patrick Bryden - Scotia Bank Cristina Lopez - Macquarie Dirk Lever - AltaCorp Capital Gordon Tait - BMO Capital Markets
Operator
Good morning. My name is Sarah, and I will be your conference operator today.
At this time, I would like to welcome everyone to the Enerplus Corporation 2013 third quarter results conference call. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).
Thank you. I would now like to turn the call over to our host Ms.
Jo-Anne Caza, Vice President, Corporate and Investor Relations. You may begin your conference.
Jo-Anne Caza
Thank you, operator. Good morning, everyone.
Thanks for calling in. Ian Dundas, our President and CEO will start us off this morning and joining Ian on the call today is Ray Daniels, our Senior Vice President of Operations, Eric Le Dain, our Senior Vice President, Corporate Development and Commercial and Rob Waters, our Senior Vice President and Chief Financial Officer.
Before we get started, please note that this call will contain forward-looking information. Listeners should understand the risks and limitations of this type of information and review our advisory on forward-looking information found at the end of our news release issued this morning and included within our MD&A and financial statements filed on SEDAR and EDGAR, and available on our website at enerplus.com.
Our financial statements were also prepared in accordance with International Financial Reporting Standards. All financial figures referenced are in Canadian dollars unless otherwise specified and all conversions of natural gas to barrels of oil equivalent are done on a 6-to-1 energy equivalent conversion ratio, which does not represent the current value equivalent.
Following our review, we will open up the phone lines and answer any questions you may have and we will also have a replay of the call available later today on our website. Over to you, Ian.
Ian Dundas
Good morning, everyone. I am pleased today we announced another strong quarter today with cash flow and production exceeding expectations.
As importantly, we continue to demonstrate strong capital deployments. It was also an active period of A&D.
We remain committed to building out our core projects that saw the top-off acquisition in the Marcellus this morning as well as our decision to exit our undeveloped Montney land position. Turning to some specifics now.
Production side, volumes were strong, up 8% than the same period last year at around 88,000 BOE a day, notably we achieved record production in Fort Berthold. We averaged about 18,000 BOE a day.
That was up close to 20% from Q2 and was a key part of driving our liquids volumes to 48% of our total corporate volumes. We remained extremely focused on capital discipline and you can see that in our capital efficiencies.
Spending was almost flat to the second quarter at CAD146 million with 70% of that directed to oil. Through first three quarters, we spent less than 70% of our full year capital program, but are delivering ahead of our budget.
Improved oil realizations and strong oil production drilled another solid quarter of funds flow at CAD196 million, which is up 45% from Q3 last year. That combination of improving capital efficiencies and strong funds flow drove our adjusted payout ratio down to 97% in the quarter.
It's about a 103% for the year. Of course, this is calculated before the proceeds from our investments.
Again, it's a big change from where we were last year, when we were significantly spending cash flow. Turning to portfolio management.
Our portfolio management strategy remains unchanged. We continue to consolidate interest in our four core areas and look for opportunities to move non-core assets out.
On the acquisition front, we did purchase some additional interest in the Wilrich this quarter, but the most significant acquisition was a top-up of additional working interest in our core non-operated Marcellus properties. We believe this is a strategic acquisition.
We are adding to an existing core position in a proven top tier play. It's additional working interest and assets that we currently own.
There's a decent amount of existing production, but we also significant upside. We acquired store 17,000 net acres producing just over CAD40 million a day of gas for CAD153 million.
We see the majority of the current value in Bradford and Susquehanna counties where we are drilling wells in the 10 to 13 Bcf range. Now, we are not out with the 2014 guidance yet, but directionally I would expect activity levels in the Marcellus to be relatively similar next year compared to this year.
Obviously, our spending will be a bit higher, because of our increased working interest. At this point, we would expect to spend maybe CAD40 million more in the Marcellus next year, because of that acquisition, but this deal will be almost self-funding when we think about the increased cash flow of the company's assets.
Now, obviously a big issue is the pricing differential and the reason supply growth has created a transportation bottleneck and put quite significant pressure on fuel prices. Now, we do believe that the market will rebound as infrastructure builds out, but we will likely experience wide pricing differentials for the next few years.
Now, as we evaluated this transaction, we factored in wider differentials over the next several years and the returns were still very attractive, given the relatively low purchase price, the large amount of production and the quality of the inventory. With our existing contracts, we received Dominion Point South on nine year pricing.
When we blend in the acquisition, we expect differentials could range from CAD0.50 to CAD1 on our total Marcellus volumes next year. We expect good money on this deal over the near-term and the returns could be quite exceptional as the system balances out over the next few years.
The final point I would make on the transaction is that we can still see a quite low risk transaction given that we, again, are already an owner in virtually all of these well bores. This morning, we also announced the sale of our undeveloped land position in the Montney.
We have signed an agreement for the sale of our Julienne prospect in Northeast BC. We are selling 33,000 net acres for CAD130 million.
We have no production or reserves or contingent reserves associated with this property. As a point of reference, we have invested about CAD50 million in this property since we acquired it.
It equates to a sales metric of just under CAD4,000 per acre. Now this is a good asset.
It's focused. It has a running room.
The only issue is that the liquids content is lower than we were targeting. As such, we don't see the economics being strong enough to compete for capital with our remaining portfolio.
We are now targeting proceeds from dispositions of yields that we have signed up this year, CAD430 million selling production of about 2,500 BOE a day. Turning to balance sheet.
Our financial position remains very strong. Trailing 12 months debt-to-funds flow ratio fell to 1.2 times at the end of Q3.
That's compared to 1.9 times for the same period last year. This is before the sale of the non-core production we announced for CAD105 million on October 22 and the sale of the Montney position I just discussed.
Now even with the higher spend profile in the fourth quarter, we would expect to be largely undrawn on our CAD1 billion bank revolver as we move to year-end. I will turn to operations now and give you some highlights on the quarter.
Starting with the Bakken. U.S.
oil now represents over 50% of our corporate crude volumes. As I discussed earlier Fort Berthold production grew approximately 3,000 BOE a day to a record 18,000 BOE a day in the quarter.
As we have been discussing over the last quarter or two, our completion design has been evolving. We are moving to bigger fracs and more stages and the more profit.
We believe we are seeing a step change in initial productivity. Our two most recent wells completed under this new approach are showing quite good promise.
The Pinto Bakken long well, it's a Bakken long well, delivered a 30 day IP of 41,000 barrels. Our Mustang long well, which is a Three Forks well, delivered a 30 day IP of 35,000 barrels.
These are top decile wells in the basin. The Bakken well rivals our best performance ever on a Bakken well and the Mustang is the best Three Forks well we have brought on so far.
Our cost performance also continues to improve. Drilling has been running about CAD4.3 million per wells done on the last three pads.
This is down 10% from the start of the year. On the completion side, the average cost per stage of completion is about CAD200,000.
Now this is 15% under where we were at the start of the year. Now on most recent wells, we are increasing stages.
The Pinto and the Mustang that I discussed, those are 40 stage wells with about 1,000 pound of sand per foot costing those wells without completion design are about CAD12 million. This is a bit higher than we were in Q2 but with the increased productivity we think we are seeing, we think we will be paid out on that extra CAD0.5 million within a month.
We look over the last quarter. We are moving to further test downspacing opportunities and lower Three Forks bench productivity.
So I guess the summary on Fort Berthold, Bakken productivity seems to be getting better. First bench on Three Forks looks good across most of our acreage close the Bakken actually in the northern portions.
There is a growing industry data set that downspacing beyond four wells per DSU is a real opportunity for us. Then finally in terms of the lower benches, the Three Forks, we think there is an opportunity there and they will be productive, but we think for Enerplus it's going to be a more limited opportunity isolated to areas in the northern portion of block, but we will be testing that through the back half of this year, last quarter this year.
Turning to Canada in the Deep Basin, as we said earlier, we acquired a bit of additional acreage in the Minehead area, 5,000 acres targeting the Wilrich. We now have about 60,000 net acres in the Wilrich play.
We are now moving to development stage in the Wilrich. We started a single rig program, we have two wells planned in Q4 and that drilling will continue into next year.
In the Duvernay, we remain in appraisal mode, but I will say we are cautiously optimistic. In the quarter, we drilled two vertical wells.
We are now moving to drill two horizontal wells. One of those will be a reentry.
The [key] of the results of those vertical wells were planned to tie these in 2014, hopefully before breakup. Based upon core analysis, to fund those vertical wells we are targeting areas where we would expect pre-condensate yields between 75 barrels and 150 barrels per million cubic feet of gas.
Finally, I will talk about the Marcellus. Production in the Marcellus averaged 83 million cubic feet a day in the third quarter.
In Susquehanna County, we are seeing very strong well performance. Wells drilled to-date in 2013 posted 30-day IPs of approximately 12 million a day.
Costs are also falling in the Marcellus. To refresh your memory, we budgeted CAD8.7 million of well as we came into this year.
Current cost running about CAD7 million, 20% lower than our initial budget expectations. Economics remained very attractive for the best parts of play, so all of our capital will be targeted to areas this year where we see between 10 Bcf and 13 Bcf wells.
To wrap it up, four good quarters in a row for us now. Our focus on capital discipline is driving improvement in our operating performance.
We continue to execute on our portfolio strategy building out on our four core positions and moving non-core assets out. We have a strong portfolio, a strong balance sheet and a growing track record of strong operational performance.
I believe Enerplus is well positioned to deliver sustainable, profitable growth with an affordable dividend to our shareholders. With that, I will turn it over the operator and we are available for your questions.
Operator
(Operator Instructions) Your first question comes from Patrick Bryden, Scotia Bank. Your line is now open.
Patrick Bryden - Scotia Bank
Good morning, everyone. Thanks.
Just a few quick questions for me. When we look at the Marcellus, and sounds like a consolidation of working interest, I am not sure if you are able to provide any context on the motivation of the seller and if they still remain a net partner with you as you as you move ahead with them.
Ian Dundas
Good morning, Patrick. I can't comment on the motivation of the seller.
I guess a key question people would be interested in is our operators, our primary operator out there has been cheap oil and gas. They have been our partner since the early since the early days of this opportunity and they remain our partner and key operator.
Patrick Bryden - Scotia Bank
Okay. Great.
Thank you. Then we turn our attention to the Duvernay, I am just curious if you can characterize for us the initial well cost you would expecting in the reentry in the second follow-up?
Then maybe in contrast if we were to see a commercial evolution here, what would think that could migrate to?
Ian Dundas
Let's start with the second part first. The second part first, we haven't drilled a horizontal well yet although we are doing that as we speak, but our belief is that well cost will transition to CAD12 million, which involves an assumption around that drilling.
We think that's pretty reasonable. Lenders are talking about lower than that, but 12 is a reasonable number to think about from a planning perspective.
Early wells, probably a bit more than that, you are going to quorum a bit of [size] run is a really important thing to do. So a bit more than 12 is a good way to think at the frontend.
Patrick Bryden - Scotia Bank
Okay. Great, and then just moving down to North Dakota.
If we look at the growth trajectory that you have been on, which has been excellent, thinking about infrastructure and pacing in terms of licensing and maybe whether there might be more inflation here given the success some are seeing down here? Can you give a sense for how those factors are all at play here?
Ian Dundas
Yes. So zero to 18,000 in a couple of years is not at trajectory we will continue, obviously, but we do see growth in front of us now.
That ultimate growth question will, in part, relate to the inventory that we are dealing with and as I said, we are feeling optimistic that our inventory is more than 130 wells. So that will influence really how high we go over the next year.
Again, we are not aware of the budget next year but we have been telling people we are running two reprogram right now and that all lays a good kind of pace for next year as well that will continue to drive growth. The question around cost structures and activity level, I don't see us going back any time soon or maybe at all to the inflationary problem that we had in 2012, and there was no infrastructure to maintain the activity levels.
You just didn't have anything and that stressed the system. Those things have been built out now.
So I think the key driver that was influencing that was also land was not held. If you look at our situation right now, by year-end we would be 70% land would be (inaudible) and that's some pretty significant implications that will us go forward with the development programs and that's something that's playing out throughout the whole basin.
So I don't see that driver there. I actually think there is a shot to keep getting better here, from the cost side and our view right now and a leading indicator is the overall rig activity in the basin.
It's pretty flat. I think we are going to have a shot at some cost improvement next year, from whatever design we settle on and we feel pretty comfortable next year but these are pretty (inaudible) well results that other guys have the same kind of things.
So we are certainly keeping our eye on it. We are keeping our eye on access to white sand and those type of things as well.
Patrick Bryden - Scotia Bank
Okay. Great, and then in terms of infrastructure, lots of room or you are going to require to keep stepping through here as you build up volume?
Ian Dundas
No, we feel pretty good. Yes, it feels pretty good.
Patrick Bryden - Scotia Bank
Okay. Great, and then -
Ian Dundas
That question, if I could say, the broad infrastructure question relates in part to rail, of course. The rail has built up dramatically, as you know, and you see that playing an important part of the whole basin egress question.
Patrick Bryden - Scotia Bank
Okay. I appreciate that.
And then, just last question for me. As we look ahead prospectively entering more of a U.S.
reporting standard, can you comment on how we should be thinking about that in terms of the reserve book?
Ian Dundas
In terms of reserves, specifically?
Patrick Bryden - Scotia Bank
Yes.
Ian Dundas
Yes. So as we disclosed earlier, actually you know what?
Maybe I have got Rob Waters sitting here. So why don't we talk -we will do it this way.
Rob will refresh your memory on where we are relative to that and then Eric can pick up on what that might mean from a reserve perspective. That works for me.
Rob Waters
I think what you are talking about,, Pat, is in the last quarter we were, in the MD&A, we were expressing some concern that we might lose our foreign private issuer status and the test that we were focused on was over 50% of our shareholders were U.S. based and it was looking like over 50% of our assets are U.S.
based and you trip those tests. Then you lose your foreign private issuer status which allows us to access the U.S.
markets using Canadian securities through MJDS regulatory regime. As an update to that, and indeed using IFRS accounting, we were over 50% of our assets were in the U.S.
Since that time, we have gone back in history and redone the last three years of U.S. GAAP and in fact, using U.S.
GAAP and of course, U.S. GAAP has different ceiling test than IFRS, in using reserves, we actually passed the test, so 56% of our assets in Canada approximately are in Canada, so we are dealing with the SEC right now just to confirm that that would indicate that we retain foreign private issuers status for another year and remember this test is done in June on an annual basis, so once again we have to revisit the test in June of 2014, so it looks like we are going to retain that foreign private issuer status and that was also what was chipping up.
If we lost it, we would have to do both, Canadian reserves and also U.S. reserves, so if we continue to be a foreign private issuer, we wouldn't have to do U.S.
reserve reporting.
Patrick Bryden - Scotia Bank
Got it. Okay.
Thank you.
Ian Dundas
So wait for another year.
Patrick Bryden - Scotia Bank
Okay. Thank you.
It's always nice to pass it out. That's it for me thanks.
Operator
Your next question comes from Cristina Lopez of Macquarie. Your line is now open.
Cristina Lopez - Macquarie
…a lot of my questions, but I have just a couple more. One is on the Marcellus transaction.
Just want to clarify that all of the lands purchase were in Susquehanna county?
Ian Dundas
No. Virtually everything we had a working interest in.
It's all non-operated. The majority would be in Bradford and Susquehanna, and that's where we would see virtually all of the value today.
Cristina Lopez - Macquarie
Perfect. Then last one is on future growth of Enerplus.
Obviously, you have some big growth areas as the Bakken and Marcellus as well as potentially the Wilrich and Duvernay. Where do you think you can actually take this company on a per share basis?
I know that fiscal '14 budget isn't opened out yet. Is this something that you can see returning to growth in the future?
If so, sort of what targeted payout ratios are you looking at?
Ian Dundas
We have to grow in the future and it has to be profitable. It has to make sense operationally, but our businesses, our plan is predicated on per share profitable growth on a debt adjusted basis.
That is our plan and I think we are well positioned for that and we have been demonstrating for the last couple of years. That absolute level of growth, it's going to be influenced by where the oil price is.
It's going to be by where the gas price is, but when we look at our models and with our perspective on pricing, which is oil is going to bounce around in the 90 to 100 range for a while. Gas, we were sort of at floor, but maybe reach our way up, but it's not going to be dramatic in that kind of dynamic our goal would be better adjust to capital per share growth of 5% on top of the dividend that we are paying.
Then it will move around a little bit and production growth will come with that and maybe be a little bit more than and how much gas you have in the mix influences it quite a bit as you know, but that's our targets and we think are well positioned for that.
Operator
Your next question comes from the line Dirk Lever of AltaCorp Capital. Your line is now open.
Dirk Lever - AltaCorp Capital
Thank you very much. Congratulations on a nice quarter.
I wonder if you could give us a little bit more color on, you talked about you can see the inventory down in the Bakken/Three Forks growing, but given what you are getting on your most recent wells and looking at internal spacing, when do you get the sense of that inventory level? I think you had talked about 130 wells in inventory.
When do you get a sense of when that grows and what should we be looking for milestones. If you had a crystal ball, where could you see that getting to?
Ian Dundas
The upside in the inventory is going to come through downspacing of Bakken, or it could come through downspacing of Bakken, through downspacing the first bench and through increasing the amount of first bench that perspective. It could also be influenced by a bit of those deeper benches, so collectively those are things that we are looking at.
The data that we have today tells us we feel pretty windy about the first bench of the Three Forks over the lion share of the acreage block, so I would think based on what we know today, there is going to be upward pressure on inventory from that. We don't have a lot of data on the downspacing but we have some.
I will turn this over Ray in a moment to talk about some of the specifics on what he thinks on it, but based on what we see today, based on our technical work and based on what we see others doing and having tested these downspacing opportunities in both the Bakken and in the Three Forks, we are starting to feel pretty good that that is going to grow. Then the last piece will be the deeper benches.
The deeper benches of the Three Forks are very likely to work. They are working in the industry and they are working quite close to our acreage.
But when we look at it, we think it's really only the northern portion of our acreage which, call it, 14% of the land, plus or minus. So you have got a lot of oil in this section of land and that could matter.
When you add all of those things up, we could see maybe a double it. Something along this lines.
So that's the broad setup and now I will hope Ray speak more specifically to the timing and a couple of the key things we are doing regarding the downspace and the Three Forks.
Ray Daniels
Yes. Thank you.
We have actually drilled three wells off of our seven space pattern that we will be fracing this month. So by the end of the year, we will have these wells on.
We will carry out testing in quarter one 2014. So by the end of Q1, we think we will have much better insight as to the downspacing opportunities that we have in the Bakken there.
Then we have another test happening early next year and there will be one more by the middle of the next year on this next pad. On the Three Forks testing, we are drilling a vertical well up in the northern section of our land.
We will core right through all of the Three Forks through the next year. It will give us a good insight as to what we see in the second, third benches of Three Forks.
We will be setting intermediate casing at the second bench but depending on what we see from the core, we will either run a horizontal in that second bench or move back up in the first bench. We are relatively confident that the second bench will be good and so we think we will be drilling that out early next year and again it will be February, March time before we get indications on a productivity from that second bench, Dirk.
Dirk Lever - AltaCorp Capital
All right. And if I could get you to shift over but still be in the U.S.
and go to the Marcellus, what is the thinking there as far as the inventory levels. Are you starting to think about expanded inventory within the Marcellus as the results come in there?
Ian Dundas
Let me, I guess, refresh your memory. So we had just over 200 BCF on the books at the end of the year, and we pointed to a contingent resource of 1.3.
If you want to think, maybe locations, we would have, I think about 18 undeveloped locations in that 2P report. The contingent resource report would have been 187 net locations.
Whatever they were before, they are more now after this acquisition and we are on a pace of around 15-ish net wells a year. So we have got a lot of inventory, and a growing inventory in some of the best areas.
Dirk Lever - AltaCorp Capital
Excellent. Thanks very much.
Ian Dundas
Thanks, Dirk Lever.
Operator
Your next question comes from Gordon Tait of BMO Capital Markets. Your line is now open.
Gordon Tait - BMO Capital Markets
Thanks. Good morning.
Just on the new way you are drilling these Bakken wells, the 40 frac stage wells. What sort of a one-year decline rate would be associated with those ones?
Ian Dundas
We don't really know yet. So if you look at our type curves in our materials, they are updated today, or they will be today, we still haven't changed our one-year type curve.
Our one-year type curve is 70%-ish. It depends where you are calculating.
Well, call it 70%, maybe a little better than that from IP 30 to exit rate. We are clearly hitting these things and we are seeing this in the first month's rate and some of our longer wells have four months and we are seeing those out before that curve quite significantly.
I think the risk would be that it is all acceleration. If you look at EOG was early to do this and has longer sample set than some people.
There seems pretty good declined performance that is it's not steeper than their initial curves, so I guess we are hopeful that we are going to effectively shift the curve, but we will see. Time will tell.
I think, it's pretty hard to argue that economics are going to be better in all scenarios and I think you have a good shot at increasing reserve estimates here at some point.
Gordon Tait - BMO Capital Markets
You have done a pretty good job selling properties in the marketable assets for sale, so two things. I was wondering are there more assets you earmarked for sale, are you happy with where your balance sheet is sitting?
Then maybe specifically can you just maybe talk about your [Duvernay].
Ian Dundas
Sure. We have never been unhappy with the balance sheet.
We have always been happy with the balance sheet. The drivers here were I guess to maintain flexibility, but there are also free up money to put into other opportunities that we had all would be overly focusing the business, so at 1.2 times [turning] that to cash flow feel really good and feel okay were 9 actually.
When I look at the portfolio now, where about 90% of the value in the company exist in those four focus areas, so we are very focused from a value perspective, there's still some assets of the conventional gas in Canada that were not getting a lot of attention and we will start looking to compete for capital, so we keep looking for opportunities to get those out of the portfolio when we could be smart about it, but it's an important part of our business, but it's not going to rock our worlds financially. They are not strong cash flow contributors, but their assets will leave it on an appropriate time.
In terms of the Duvernay asset and the potential - say or something. The Duvernay - I mean, position that to sell Montney was in respect it was hard, because it's a really good asset.
Teams are at a really good position. It's focused growth and running room, but it didn't have the liquid content that we wanted and we just didn't see it competing, so when you sort of think about in term of focus and capital allocation and striving for top decile economics it was quite an easy decision and we just needed to get value and we are very happy with the value we got in it much as in a tough market, but we are really pleased with the value in all circumstances.
The Duvernay is very interesting for us. It's got a lot of risk still clearly and we have drilled with our three core data points on our land, so not a lot, but we are rapidly moving, so we get more information.
I would say that we are hoping to achieve is to end up with that 4 million a day plus well with whatever I call it, 100 barrels, a 1 million, and that could look really exciting economically, and so if we target that, you will have some choices in front of us. One very possible choice is develop it all ourselves, someone else shows up with - here's an extra money to help accelerate that, we will look at that and think about at that time, but I would say the base case at this point is we are moving forward with our own plans and we will see how that evolves.
Operator
(Operator Instructions) I have no further questions queuing up at this time.
Jo-Anne Caza
Okay. I think then that wraps up our call.
Thanks very much for your time everyone and have a good weekend.
Operator
That concludes today's conference call. You may now disconnect.