Feb 22, 2019
Operator
Good morning, ladies and gentlemen, and welcome to the Enerplus Year-End Results Conference Call. [Operator Instructions] This call is being recorded on Friday, February 22, 2019.
I would now like to turn the conference over to Drew Mair. Please go ahead.
Drew Mair
Thank you, Operator, and good morning, everyone. Thanks 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'm here this morning with Ian Dundas, our President and Chief Executive Officer; Jodi Jenson Labrie, Senior VP and Chief Financial Officer; Ray Daniels, Senior VP, Operations; Shaina Morihira, VP, Finance; and Garth Doll, VP, Marketing.
Following our discussion, we will open up the call for questions. With that, I'll turn it over to Ian.
Ian Dundas
Thanks Drew, and thanks to all of you for joining us today. I'll start by sharing some thoughts on our 2018 results released this morning before moving on to our plans for 2019, the details of which we released to the market a few weeks ago.
We had strong results across the Company in 2018, which we believe demonstrate our commitments to creating value for our stockholders. We have designed a capital program focused on maximizing returns which positioned the Company to generate free cash flow and competitive growth while ensuring we retained our financial strength.
We believe that our full year results screen very well relative to these objectives. We generated a return on capital employed in excess of 20%.
We delivered 22% liquids production growth, the high-end of our guidance range. We increased our annual adjusted funds flow by 44%, which drove $160 million in free cash flow.
And we returned a portion of that free cash flow to our investors through dividends and stock buybacks, which totaled over $100 million over the course of the year. In addition, we maintained our best-in-class balance sheet, ending the year with a net debt to adjusted funds flow ratio of 0.4x This morning we also released our 2018 reserves performance.
We replaced 194% of our 2018 production through 2P reserve additions including revisions and economic factors at a competitive finding and development cost of $13.74 per BOE. At an asset level, we replaced 244% of North Dakota production on a 2P reserves basis.
Overall, we grew our 2P reserves by 8% with oil reserves growing 9%. In summary, 2018 was another year of differentiated execution for Enerplus, and I'd like to take a moment to thank our dedicated team for delivering these results.
As we turn our focus to 2019, our framework for value creation remains unchanged. We continue to prioritize reserve returns, capital efficiency improvements and positioning the business for enhanced free cash flow and return of capital to shareholders.
2019 capital budget of between $565 million to $635 million is expected to generate a double-digit return on capital employed and competitive production growth, while operating within cash flow at $50 per barrel for West Texas. As we proved in 2018, we will prioritize our ability to generate free cash flow at oil prices above $50 rather than chasing incremental growth.
At our current market valuation, we continue to see the repurchase of our own stock as a compelling investment opportunity. Lastly, in connection with our 2019 budget, we also provided an outlook through 2021, underpinned by the same principles.
Returns-focused capital allocation largely directed to our high margin Bakken oil asset which sets up approximately 10% to 13% annual liquids production growth quarterly. This plan positions the Company to generate enhanced free cash flow with the outlook expected to be cash flow neutral at $50 for West Texas and the potential for meaningful free cash flow generation and higher prices.
I'll now pass the call to Jodi, to talk through some of the financial highlights and details on 2019 capital allocation.
Jodi Jenson Labrie
Great. Thanks Ian.
Starting with our fourth quarter financial highlights. Our fourth quarter adjusted funds flow was $214 million, resulting in full year 2018 adjusted cash flow of $754 million.
With annual capital spending coming in at $594 million, we realized free cash flow of $160 million in 2018. Our fourth quarter adjusted funds flow benefited from a $27 million alternative minimum tax refund that we expect to realize in 2019.
As a reminder, this is related to the 2017 U.S. tax legislation change which repeal the alternative minimum tax.
We previously indicated that we expect to receive a cash refund of just over $100 million between the years 2018 and 2021 related to this. Last year we recognized half of this or $50 million, and with the additional $27 million realized in the fourth quarter of 2018, we have approximately $27 million left, which we expect to record in 2019 and 2020.
Moving on to differential. Our Bakken differential widened in the fourth quarter to US$5.60 per barrel below WTI.
As we mentioned during our third quarter in November, we believe that the weaker Bakken pricing in the fourth quarter was primarily a function of significant refinery maintenance which temporarily reduce demand for Bakken oil. As refineries came back online throughout December and January, we saw the bid for Bakken barrel strengthened and the differential has now significantly tightened with Bakken index prices trading between US$1 to US$2 per barrel below WTI.
In terms of Bakken differential risk, we have 16,000 barrels per day of fixed physical sales in place for 2019 at US$3 per barrel below WTI, and we have recently added about 3,500 barrels per day of firm capacity on the dappled pipeline, which gives a direct access to the U.S. Gulf coast and waterborne markets.
So, in total, that's just under 20,000 barrels per day at either fix differentials or with exposure to Gulf Coast pricing in 2019. As a result, we have guided to a 2019 realized Bakken differential of $4 per barrel below WTI.
Generally, we continue to believe that the Bakken is in an advantageous position in terms of pipeline optionality and rail infrastructure, especially given the potential for existing pipe expansion, as well as new pipelines in the basin. This should all help keep Bakken differentials in a competitive range longer-term.
In the Marcellus, natural gas pricing improved to US$0.34 currency per Mcf below NYMEX in the fourth quarter. This led to a full year 2018 realized differential for Enerplus of US$0.43 per Mcf below NYMEX.
That represents an improvement of just over US$0.30 per Mcf year-over-year. We continue to expect or realize Marcellus differential to improve in 2019 as a result of the significant pipeline capacity that was added during 2018, and our guiding to a realized differential of US$0.30 per Mcf below NYMEX in 2019.
We do expect there to be some decent shape to our Marcellus differential this year. However, we have increased exposure to the TZ6 Non-New York market, which is typically a very strong market in winter, however, more moderate during the summer.
As a result, we're expecting strong first quarter Marcellus pricing with realizations moderating during the remainder of the year. Moving on to 2019 capital allocation.
Our spending will once again largely be directed to the Bakken, where we are running to rigs throughout most of the year although there is a short period where we are running three rings before laying one down. The number of completions is expected to be fairly similar to 2018 levels and although production growth is expected to be more back-half weighted, capital spending will be more heavily weighted to the first three quarters and a later Q4 spend.
Outside of the Bakken, approximately 15% of 2019 capital will be allocated across the Marcellus and Canadian water floods and about 5% to the DJ Basin. We have recently signed an agreement for third-party gas processing at a new build facility in the DJ Basin.
The third-party gas plant is expected to be operational late in 2019, and we have no minimum financial commitments associated with this agreement. Our capital spending in the DJ Basin will be allocated toward drilling five gross wells to further delineate our position and hold acreage.
We also plan to lay a gathering system to tie in existing and future wealth to the third-party gas plant. And lastly, we have bought back approximately $7 million worth of our common shares to date in 2019 and plan to renew our Normal Course Issuer Bid with the Toronto Stock Exchange for 7% of the public float when the existing term expires in March 2019.
With that, I'll pass the call back to Ian.
Ian Dundas
Thanks Jodi. So in closing, we remain well positioned to build on our success in 2018, underpinned by our financial strength and capital efficient assets.
We will continue to generate strong corporate level returns and competitive high-margin oil growth while positioning the company for enhanced free cash flow and continue to return capital to shareholders. Thank you for listening with that.
We will now turn the call over the operator and open it up for any questions you might have.
Operator
[Operator Instructions] Your first question is from Neal Dingmann from SunTrust. Neal, please go ahead.
Neal Dingmann
Ian, my question is how do you weigh the shareholder return you guys have been further aggressive on shareholder repurchase versus again now that Bakken dips have improved, it looks like you all are still taking a pretty conservative route given all the wells that you've drilled. Obviously as you mentioned in your release there is sort of conservative completion schedule that you have not only for 4Q but for 1Q.
So really just wondering how you sort of way those two things against each other in today's market?
Ian Dundas
Neal these are capital dips share buybacks like the whole thing is that what you're…
Neal Dingmann
Yes really just comparing I guess it would come down to how do you compare maybe you guys were in such a fantastic financial shape, commodities have improved a bit. So you how do you sort of compare either stepping up buyback versus stepping up activity?
Ian Dundas
I think balance is a key word I'd like people to think about. Today it looks great and December 24 was sort of crummy if you recall.
So we’re trying to maintain some balance in this. When we look at the plan right now think it's really pretty darn resilient.
We've given a range of capital there would not expect it to move very much in 45 to 60 kind of world. You start living in the 40 range for a while we certainly have flexibility to keep spending but we’ll be thinking about economics pretty carefully in that kind of environment.
Trying to decide whether slowing down might be better way to maximize value. You start to get up through the 60s I think you might be or past the 50s into 50s might be dealing some inflationary pressures that we’re not experiencing right now.
So really like the growth profile that we’re delivering its competitive, its sustainable and a little bit of extra cash flow or a lot of extra cash flow my first thought is not to put that into the ground. Relative to other capital allocation choices I am quite comfortable putting that on the balance sheet right now I mean that's what we've been doing for quite some time.
We have been building our cash position, but we do see value in the stock. And so again balance is a pretty good way to think about it.
We started to buy stock last year - we started to buy stock before we were free cash flow positive levering off the balance sheet a little bit. Obviously in the fourth quarter where we had a lot of free cash flow and a bit of weak stock price we put a fair amount of that cash against stock buyback.
So I guess the concept will be one of sort of continuing the same kind of plan we have right now. I don't see putting all of our free cash flow again share buybacks I don’t know that's a balance plan, but as Jodi highlighted we actually bought a little bit stock in January and in January we weren’t free cash positive feel pretty good about how things are looking at this moment but we are expecting volatility as.
I think we should all - hopefully that gives you a feel for it.
Neal Dingmann
It does and then the other sort of weighing question is, you continue say you looking at acquisitions but that versus I know a lot of your offset operators, peers are definitely more aggressive than you all when it comes to how many locations for DSU I mean you guys continue to be I think around 10 versus some I don't want to say closer 15 or more. So my question will be how do you weigh going to buy something versus if others seem to be putting a lot more value just you know end up selling to them versus buying something else?
Ian Dundas
Yes, ultimate development scenario vision of development scenarios evolve overtime don't they. We've been pretty steady with ours although it has been increasing over time.
We've never had to walk something back which sort of feels pretty good to us. In terms of the acquisition market out there and what people say and what they believe and what they're developing and all those good wonderful things.
I think there's probably more balance here in the market as to how far you really going some of these areas. Certainly that would be where A&D market is.
We certainly pay attention to opportunities in the marketplace and if there is things in our backyard where we think that we can make money doing that we’ll take a look at it. I think everyone knows it's been a pretty difficult A&D market for quite some time very, very high centered.
And so we've a very, very rigid disciplined approach to thinking about how we would bring something in, value is one of those factors, affordability is one of those factors, accretion is one of those factors. So the thing I think I like people to really remind themselves of we got this three year plan out there that delivers double-digit oil growth and that all anchors on our existing asset.
So we’ll be patient we’re looking we’ll see if there is something that make sense.
Operator
Your next question is from Greg Pardy from RBC Capital Markets. Greg, please go ahead.
Greg Pardy
Just really two questions one had to do with just I guess how you're thinking about your non-op production in the Bakken right now. Can you remind us how large that is and in the past you certainly look to sell that down I mean is something like that possible as well as you go forward?
Ian Dundas
For people who might not remember very high percentage of operator production. If you go back a couple years we were in the 90ish percent range, but we did have call it - all the 10% of our land was non-operated than and we sold that.
Operators became more aggressive approach to it, it gone from a very small thing to a larger thing and we sold that. In fact we would have told you we sold all of our non-op everything and yet today we’ve got non-operating production that is largely coming from leased line wells right.
And so guys on other side or people on other side of the leased line proposed they drilled some of it becomes non-operating connection with that. And so selling those things is not quite as simple as it was before.
And so that number of 2000 to 3000 barrels and it’s been growing and we expect it will continue to grow when we think about our capital range this year it’s a little bit wider than it has been percentage wise and part of that is because there is a bit of flexibility for planning for non-operated spend out there which it’s a bit hard to call. Not everyone’s balance sheet is as strong as ours and we have a range of non-operated assumptions.
So I guess the story out of all of that is it's not as likely to sell as it has been, but the teams do to look at these things. They look at swaps and those types of things as well but it's a number, it’s a number.
Greg Pardy
And the second one just technically with the reserve reconciliations so FTC the change in FTC was pretty big number. Can you just walk us through how that kind of came about 300 million?
Ian Dundas
Yes, so most of the capital is obviously associated with North Dakota I mean those are sort of the big numbers. So the FTC change there we would have drilled 40 wells and we would have added 40 wells on to the books.
And maybe a few more I suppose and so the net increase - mostly associated with North Dakota additional UDs a little bit associated with the DJ although it’s a very small number right now. FX moves around a little bit also like.
We report in Canadian dollars and most of our capitals are in the U.S. So those are single biggest thing but I think it’s important to frame it.
We would have in CAD 2 billion of FTC in the books that's like three and a half years of our capital. It's a very, very small number compared to most of our peers.
Operator
Your next question is from Patrick O'Rourke from AltaCorp. Please go ahead Patrick.
Patrick O'Rourke
Just a few quick questions here. First, you've had a chance to slowdown a little bit in the Bakken over the last call it four months here.
Just curious if you guys have a view on what the base decline on that asset alone would be right now?
Ian Dundas
Yes, it would be - again, it depends on the moment in time here you're measuring that. But high 30s low 40s.
Corporately we are [indiscernible] about 30s how we would think about it with the Bakken. I use 40, as a round number for North Dakota.
Patrick O'Rourke
And then just wondering in terms of the reserves here the future bookings, just wondering the treatment, you know a lot of it was step out single wells - originally now. You're coming back to pads and such just parent-child relationship on the bookings for the EURs.
Ian Dundas
I'd say the methodology has been actually quite consistent over the years. We have a perspective on recovery factor that is unit-by-unit and have a lot of data in place - lot of control relative to oil places.
So it's recovery factor driven. As we have been positioning overtime for higher density bookings, you got to really think about that relationship between the existing well and the future UDs.
And so this last year we would have had 8%, 10% of our units would be sort of fully drilled and so in those fully drilled units you will bring 10 wells and in fact you want to get really granular with those lease lines wells I talked about earlier, you actually can have up to 11 in some instances, even 12. We would think those are things sort of like half a well with lower recoveries on some levels.
And so out of all of that comes a governor of EUR sort of recovery factor per unit and if you're really paying a lot of attention to the reserves, there's a few negatives, book revisions that showed up in the report. I think context is important there.
So the producing reserves went up, the proven reserves went up, but there were a few existing UDs and some of those high density units where when you actually look at the amount of oil that we're saying we're covering that unit we had to write down the existing UD a tiny bit to make room for the 4 extra wells or the 5 extra wells that we drilled. And then time will tell.
Broadly speaking parent-child, big issue in industry. Everything we see, the Bakken's lining up really pretty well in connection with that and a lot of those parents are performing pretty well and the children look okay.
They're taken after mom and dad. So we haven't seen a lot of issues out there.
But we've been thinking about this for years and I think I've been pretty cautious as we brought wells on the books and pretty cautious as we thought about long-term development scenarios as well.
Patrick O'Rourke
And just one kind of capital allocation question here. I know you walked through a scenario earlier where there's a preference for share buybacks over putting additional capital in the ground.
But if we walk through a scenario where you know perhaps your stock has a great run and you see less value there, I know you have the three year plan but how - what's your ability to be reactive within the goal posts of 2019? I know there's a delay with pad drilling and kind of getting production on and the steps to get there.
But do you have an ability to maybe increase the budget or be reactive if the share price was really strong through the year? And then kind of maybe a view of what the economics in the spot market for services would look like if you could do that?
Ian Dundas
Thank you for that question, there's a lot going on there. So, we have a powerful ability to operationally react.
Our team has done a spectacular job, positioning ourselves to move up and down and you actually saw some of that towards the end of last year where things were collapsing. We were really having to ensure we didn't overrun our headlights.
So the teams are - have strong capability. It's the spot market there, is the service market - yeah, the market is there.
In a stronger pricing environment would be quite the same extent? It wouldn't be the same, there'd be some inflationary pressures, but North Dakota pretty good and there's some capacity in the system certainly compared to a lot of basins in the U.S.
I think the more important question though is strategically what do we want to do? And so I am not interested in chasing incremental growth are.
Our stock runs which I could understand why it would. That’s probably telling people like our plan and part of the thing would like about the plan in that scenario is that we’re going to be balanced and we’re not going to artificially chase growth.
So don't see us needing to do that. The second part of your question though was super interesting to is, do we think about valuation of the share price when we think about stock buybacks.
We do, I think it is important part of it. Does it mean we would go to completely zero, we probably always convince ourselves we see value in our stock, but we probably wouldn't put as much into it because I think that is part of the equation.
And our best idea in that instance was the balance sheet, was on the balance sheet. We’d probably also be on conversation around the dividend level it’s pretty modest right now and that was by design.
In the fullness of time it may well go up hopefully it will because that would mean we've been successful and that we built a broader capital base. But the worst idea we have is to put cash on the balance sheet that's okay.
Operator
[Operator Instructions] We have no further questions at this time. You may proceed.
Drew Mair
Well, thank you, everyone. Appreciate everyone dialing in today.
Enjoy your weekend. Thank you.
Operator
Ladies and gentlemen, this concludes today’s conference call. We thank you for participating and ask that you please disconnect your lines.