Aug 6, 2021
Operator
Good morning, ladies and gentlemen, and welcome to the Enerplus' Q2 2021 Results Conference Call. At this time, all lines are in listen-only mode.
Following the presentation, we’ll conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Friday, August 6, 2021.
I would now like to turn the conference over to Drew Mair. Please go ahead.
Drew Mair
Thanks, 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. Our financials have been prepared in accordance with US 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; Wade Hutchings, Senior VP and Chief Operating Officer; Jodi Jenson Labrie, Senior VP and Chief Financial 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.
Our second quarter results reflect the increased scale of our business following our acquisitions along with strong operational momentum. We achieved record quarterly production of over 115,000 BOE per day in the second quarter, 26% higher than the prior quarter.
We expect another meaningful sequential increase to production in the third quarter, which will be the first quarter that fully reflects our two Bakken acquisitions, which closed in the first and second quarters of the year. The second quarter was our most active period of the year in terms of drilling and completions activity and the execution of our capital plan remains on track.
We move the midpoint of our annual production guidance higher by 500 BOE per day following strong execution and outperformance year-to-date and we continue to operate within our capital spending guidance of CAD360 million to CAD400 million. Our free cash flow profile is continuing to move higher driven by the improved commodity prices since the start of the year, our increased production outlook and our disciplined capital allocation.
We now expect to generate over CAD450 million in free cash flow in 2021 based on forward stripped commodity prices. For the remainder of this year, we will continue to prioritize directing the majority of this free cash flow for debt reduction.
We have highlighted a CAD400 million debt reduction target, which aligns with our net debt to funds flow ratio target of one-time or less in a CAD50 WTI oil price environment. At current commodity prices, we anticipate achieving this target by mid next year.
With the step change in our cash flow generation driven by our significantly higher production base and the line of sight to hitting our long-term debt target, we elected to increase the dividend for the second time this year consistent with our approach of sustainable dividend increases. Our Board also approved a renewal of our normal course issuer bid.
Under our framework, we expect to allocate approximately 90% of our free cash flow after dividends to debt reduction, while we progress our deleveraging plan. With the remaining 10%, we will continue to evaluate incremental shareholder returns, including through the further potential dividend increases and share repurchases.
Looking ahead, as we achieve our long-term debt target, we expect to be in a position to meaningfully increase our allocation of free cash flow to shareholder returns. I will leave it there, and turn the call over to Wade for his comments.
Wade Hutchings
Thanks Ian, and good morning everyone. Our operational performance this year continues to be solid.
We completed and brought 23 wells on production in the Bakken in the second quarter, and our completions efficiency is averaging approximately 13 stages per day, up from 9.5 last year. Our drilling performance has also been strong.
We set a company record in the second quarter drilling a two-mile lateral section in 48 hours. On the back of this performance, we updated our 2021 well cost estimates in the Bakken to a US$5.7 million compared to our previous estimate of US$6.1 million.
This represents a significant reduction in our cost structure over the last couple of years were down 10% compared to last year and 25% compared to 2019. As Ian noted, we achieved record quarterly production in the second quarter, which was driven by higher volumes in the Bakken following the closing of our acquisitions and our active completions program.
Total Williston Basin production was over 72,000 BOE per day in the quarter, 53% higher than first quarter production. In the second quarter, we completed our first pad of wells that were acquired in connection with the Bruin acquisition.
This was an eight-well pad in Fort Berthold adjacent to our legacy acreage. The wells are tracking expectations with peak 30-day rates of approximately 1,900 BOE per day on average per well based on the six of the eight wells that have had more than 30 days online.
We anticipate the third quarter to be another record production quarter for Enerplus. We expect to see strong Bakken production growth following another quarter of active completion operations and the full production impact of the assets we acquired from Hess which closed in mid Q2.
I'll now pass the call to Jodi.
Jodi Jenson Labrie
Thanks Wade. Our second quarter adjusted funds flow was CAD184 million with capital spending of CAD130 million and resulting in free cash flow of CAD54 million.
Our realized Bakken oil price differential averaged US$2.76 per barrel, below WTI in the second quarter. Refining demand was strong and there continues to be significant available pipeline capacity in the basin, supporting pricing.
Effective August 1, we have increased our committed capacity to deliver crude oil from North Dakota to U.S. Gulf Coast by the Dakota access pipeline, as part of its broader system expansion.
The pipeline's capacity was recently expanded from 570,000 barrels per day to 750,000 barrels per day, based on comments from the pipeline operator. Enerplus now has approximately 10,000 barrels per day of firm transportation on DAPL.
Based on our year-to-date realizations in the Bakken and improved outlook for differentials given DAPL's expansion, we've narrowed our annual differential guidance to US$2.35 per barrel below WTI from US$3.25 per barrel previously. Turning to the Marcellus.
Our realized Marcellus natural gas price differential was US$0.89 per Mcf below NYMEX in the quarter, significantly weaker than the prior quarter due to a combination of normal seasonality we see in the US Northeast markets and unplanned regional pipeline maintenance. As a result, we have widened our annual Marcellus natural gas price differential guidance to US$0.65 per Mcf below NYMEX from US$0.55 per Mcf previously.
We expect differentials to remain relatively weak in the third quarter and then strengthen through the fourth quarter, as regional demand increases heading into winter. We recorded a current tax expense of CAD 4.2 million in the second quarter, primarily consisting of U.S.
federal tax, as a result of higher income expected in the US in 2021. For the full year, we expect income tax expense of between US$5 million and US$7 million.
Turning to our free cash flow outlook. We expect free cash flow generation to materially increase in the second half of the year.
On a full year basis, we estimate that we will generate over CAD 450 million based on current commodity prices. With CAD 117 million in free cash flow generated during the first half of 2021, that points to over CAD 330 million in the second half of the year.
Priority number one for this free cash flow is the balance sheet, as we work toward reducing our current net debt at June 30 by CAD 400 million. Although, we are prioritizing debt reduction, we remain in a strong financial position today and this gives us the flexibility to enhance our return of capital to shareholders in the near term.
We announced a 15% dividend increase today and we also announced that we would allocate 10% of our free cash flow after dividends to incremental shareholder return opportunities, while we are progressing on our deleveraging plan. This could come in the form of additional dividend increases and/or share repurchases.
And as Ian mentioned our Board has approved the renewal of our normal course issuer bid for up to 10% of our outstanding shares. Finally, as an update to the five-year plan that we introduced in April, we have updated 2021 to reflect the year-to-date commodity prices and forward strip for the balance of this year.
The remaining years 2022 to 2025 continue to be based on a flat CAD 50 to CAD 55 WTI oil price. With this update, our cumulative free cash flow estimate over the five-year period increased to CAD 1.50 billion to CAD 2 billion.
I will leave it there and we'll turn the call over to the operator and open it up for questions.
Operator
Thank you. Ladies and gentlemen, we’ll now begin the question-and-answer session.
[Operator Instructions] Your first question comes from Greg Pardy from RBC Capital Markets. Greg, please go ahead.
Greg Pardy
Yeah. Thanks.
Good morning. Maybe just the first question might be for Wade.
And from everything you're saying in terms of the reduction in D&C cost, it really sounds like it's just increased efficiency like less time. But I'm wondering if you've made any changes to either the well construction or how you're completing these wells?
Just curious there.
Wade Hutchings
Sure. Happy to address that.
The wells that we drilled and completed in the first and second quarters of this year really follow the design that we've had for the last several years. So there's no material change there.
When we look at the rate of change from last year that kind of dropped from 6.3% to where we're projecting this year to be at 5.7%. We're seeing about half of that on the drilling side and half on the completion side.
Most of that is from just improved efficiencies on multiple stages, multiple aspects of drilling and completions. I would note that there is an important part of that on the drilling side that's come from essentially a new contract with the existing super-spec rig that we've been using for the last several years.
And so, we're benefiting from kind of the change in the market rates for that as of earlier in this year, relative to several years ago when we signed that up. So we're certainly pleased.
We've actually saw improvements in our completion efficiency and drilling efficiency at a faster pace than we were even anticipating.
Greg Pardy
Okay. Terrific.
Thanks for that. And then maybe just shifting to the cash taxes.
I'm wondering if there's a rule of thumb we can use. Maybe this is more about 2022 Jodi, but I'm wondering is there like a percent of pre-tax we should think about in terms of cash tax next year?
Jodi Jenson Labrie
Yes. I think, maybe if you just want to rule of thumb you could think of call it 1% of net operating income in the US that would be in the ballpark.
Greg Pardy
Okay. Great.
And last question for me is kind of Ian, I mean strategically other things being equal would you prefer to consolidate further in the Bakken, or is the company maybe approaching a size where you're thinking more about basin diversity? And I'm thinking oil and liquids basin diversity more so than the Marcellus
Ian Dundas
Good morning, Greg. While with your setup of everything being equal more Bakken clearly fits the bill, we've got an established footprint.
We see value and scale. We think the setup in the Bakken is really pretty encouraging.
Costs are under control differentials are tightening. And so that would clearly be the focus areas today.
Greg Pardy
Okay. Terrific.
Thanks very much.
Ian Dundas
Thanks, Greg.
Operator
Your next question comes from Patrick O'Rourke from ATB Capital. Patrick, please go ahead.
Patrick O'Rourke
Hi. Good morning, guys.
Just wondering now that you've had your hands on the steering wheel for call it a quarter here with the new asset. Wondering if you can give us your view on kind of where the Bakken base decline is sitting.
Obviously, it seems like you have some comfort with it in order to increase the lower end of the production guide for the year? And then wondering how --with where the well costs are now appears that you're offsetting any, sort of, inflationary pressures with efficiencies.
As you mentioned with the last question here where you would see the maintenance capital level at a corporate level right now?
Ian Dundas
Yes. Good morning, Patrick.
So to decline it's consistent with what we had forecast corporately low 30s. The -- I guess that was part and parcel of bringing it bottom in the guidance.
There's a lot of things that move there though obviously relative to the timing of on streams and then their downtime and everything else that hits you. Maintenance capital.
We don't have a firm number out there, but we pointed to I think CAD 500 million next year sets up 3% to 5% growth sort of start back off that growth and around CAD400 million. I think it's a good round number to think about.
And just maybe just a sort of comment our ability to offset inflationary costs. I think we're actually doing a very good job on it.
We -- there is a bit of pressure in the market and you're hearing this -- other producers talk about it as well steel and like. And so if you really got under the hood and you look really closely at year-to-date well performance we'd be a bit ahead of that number that we're putting out there.
So we have built in -- we've anticipated some modestly higher costs over the course of the year and then that gets you to that 5.7%. And the big picture here is we continue to do a really good job growing great efficiencies and we're sort of eating into and in fact year-to-date more than leading into any inflationary pressures we're seeing.
Patrick O'Rourke
Okay. Great.
And then Ian, you're always very thoughtful on your approach to the commodities. So I'd like to hear your view on this.
You're using a bandwidth of 50 to 55 right now for your kind of five-year plan. And just wondering what you would have to see in the market out there to shift that to something a little bit higher and incorporate that in your business planning and the way you're allocating capital?
Ian Dundas
Yes. I don't get cold thoughtful very often.
So thank. So it's a good way to start the day.
I think there's a few things here. In absolutely inherent in all of this is thinking our way through sustainability and thinking about volatility.
So we're just not that smart. And there are a lot of things that are up there that can move those prices around a little bit.
So we're using what we think are mid-cycle prices to guide our business. And as we think about higher price environments we will take advantage of some of that through hedging strategies and the like.
So what would -- if we had a strong, strong view of a higher market would that influence activity behaviors? I don't know that it would honestly.
Some of the things we do. We only have a very strong view on the market.
And if the Board market is not there to be able to mitigate some of that -- that would meet any activities we have. As you think about things like as we realize -- look right now we're realizing higher prices meaningfully higher prices than that.
But our forecast is not money in the bank. And so we are very cognizant of actual results versus forecast.
So I don't think there's anything, sort of, fundamentally out there that we would do dramatically different. And in fact if in the strong rise -- like you can easily create a stronger price forecast than 50 to 55.
I think it's very plausible. I think it's actually potentially likely with that probably comes higher inflationary assumptions that we're baking in now.
So we'll be balanced on this. And we think that, our goal is to be able to make money in all cycles.
And that means, conservative balance sheet management focusing on returns, using risk management tools to take price risk out of the equation, as we're spending dollars. And so that's what sort of guided us for years and is going to continue to guide us in the future.
But I think the oil setup feels pretty good right now. And if you told me, we were averaging about 55, I wouldn't bet against that over the next couple of years.
Guess, we'll see.
Patrick O'Rourke
Okay. Thank you.
Ian Dundas
Thanks, Greg. Sorry, Thanks, Pat.
Operator
Your next question comes from Cody Kwong from Stifel. Cody, please go ahead.
Cody Kwong
Hi guys. Thanks for taking my call.
I got a question for probably for Ian, when you guys were talking about your free cash flow priority being 90% debt, 10% return of capital until you get to your debt threshold that you want, how does that change once you meet that target? And if you can maybe expand upon that, whether it's through just kind of in theory or if you had some actual numbers that you had in your mind?
Ian Dundas
Yeah. Good morning Cody.
Thanks for that question. I think we'll stay away from numbers here.
The concepts that, we've laid out 90% to debt. Once we're through that level, which could be within a year, possibly the signal that we've sent is we see higher returns to shareholders.
We haven't put a pining what exactly that looks like in part, because if you want to look at the environment you're in at the moment and how competing priorities exist. But we do think we've got a really attractive plan that grows the company and puts us in a great position to delever and to continue to provide capital to shareholders.
The tools that we've highlighted things that we think are important a growing rock-solid sustainable base dividend, we think is something that will be really attractive to shareholders which means, it needs to sustain price volatility as well. So we're on the path to continuing to move that forward.
We also think share buyback plays a role. And we think it particularly plays a role, when you look at the valuations of our company, we see significant intrinsic value that we plan on unlocking in share buyback and plays a nice role in that.
It also helps support the sustainability of the base dividend and keep your capital structure strong. So I guess those are the principles that are guiding us.
There's others out there, who have a variable dividends and specials and those things.
Cody Kwong
Yeah.
Ian Dundas
And we'll remain attuned to the market and those sorts of things. But right now I think sustainable growing base dividend, I think share buybacks particularly when we see the valuation that we're seeing right now.
And then, think, once we've hit our debt targets more coming for shareholders. And then, we'll work to provide more visibility, as we get closer to that as to what more looks like.
Cody Kwong
Great. Thank you very much.
Ian Dundas
Thank you.
Operator
[Operator Instructions] There are no further questions at this time. I'll turn it back to Ian for closing remarks.
Ian Dundas
Well, thank you everybody. Appreciate, you dialing in today.
Enjoy, the last little bit of summer. For those Canadians who are watching the gold medal soccer match.
Sweden, I won't say anything about it. Enjoy, the rest of your day.
Thank you very much.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating.
And ask that you please disconnect your lines.