Enerplus Corp (ERF) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Enerplus Resources Fund First Quarter Results Conference Call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator instructions)

I would like to remind everyone that this conference call is being recorded on Friday, May 8, 2009 at 10:30 AM Eastern Time.

I will now turn the conference over to Ms. Jo-Anne Caza, Vice President - Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to welcome you to our first quarter conference call.

Mr. Gordon Kerr, our President and CEO, will be relaying the results of our first quarter in more detail and giving some additional information on our strategy going forward. To help answer some of your questions at the end of the call, we'll also have with us Mr. Garry Tanner, Executive Vice President and Chief Operating Officer; Mr. Rob Waters, Senior Vice President and Chief Financial Officer; and Mr. Ian Dundas, Senior Vice President of Business Development.

Before we get started, please note that this call will contain forward-looking information. Our actual results and outcomes could differ materially from the statements made in the forward-looking information included in this call. And certain material factors and assumptions were applied in determining such forward-looking information. Therefore, listeners should understand the risks and limitations of this information.

Additional information about the material factors that could actual results to differ materially from the information in the call, and the material factors and assumptions applied in determining such forward-looking information, are contained in our advisory on forward-looking information found at the end of our first quarter news release issued this morning, as well as in the risk factors included in our 2008 Annual Information Form and in our annual and quarterly MD&A filed on CEDAR and EDGAR which are available as well on our website at www.Enerplus.com.

Participants are also directed to our website for a replay of this call as well as other information on Enerplus. Investors can call our toll-free investor line at 1-800-319-6462 if they require any additional information.

All financial figures referenced during the call 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 conversion ratio.

Following Gordon's review, we will open up the phone lines and answer any questions you may have. So with that, I will now turn it over to Gordon.

Well, thank you, Jo-Anne. Good morning, everyone, and thanks for joining us on this call.

First off, I am pleased to report that our results for the first quarter of 2009 were in line with our guidance as set out earlier this year and despite the challenging times we're currently facing. Our production volumes, development capital spending, drilling activity, operating and general and administration costs were well on target.

Now unfortunately, commodity prices have continued to be very weak in 2009, particularly natural gas prices. Despite a colder than normal winter across North America, industrial demand destruction due to the weak economy, and substantially higher US domestic natural gas production has led to increased supply levels, which in turn has driven natural gas prices substantially lower in both Canada and the US. Our average selling price was CAD 5.13 per Mcf for our natural gas during the quarter, which is a 32% decrease from the first quarter of 2008.

West Texas Intermediate crude oil prices were also weak and reached the low of $33.98 during the quarter, but eventually stabilized near $50 by the end of March, supported by the effects of the OPEC production cuts and the resulting tighter supply. Our average realized price for our crude oil production was CAD 42.41 per barrel, down 51% compared to the same period last year.

With storage levels for both crude oil and natural gas remaining at or near record levels and the slowdown in the economic activity, we remain cautious in our view of commodity prices in the near term. Our daily production volumes averaged approximately 95,000 BOE per day during the quarter, with it 60% to natural gas and 40% to crude oil and liquids. This is a 7% increase over the first quarter of 2008 and was primarily due to the Focus acquisition, which we closed mid-February 2008. On a full year basis, we continue to expect our average daily production volumes to come in at 91,000 BOE per day with an exit rate of approximately 88,000 BOE per day.

With respect to cash flow, our cash flow from operations was directly impacted by the significant drop in commodity prices experienced during the quarter. Our cash flow from operations for the quarter totaled CAD 169.4 million, which is 34% lower than during the same period last year. This translates in to cash flow per unit of CAD 1.02 per unit as compared to the CAD 1.74 per unit for the first quarter of 2008.

We reduced our monthly cash distributions to unit-holders during the quarter from CAD 0.25 per unit to CAD 0.18 per unit. This decision was not made lightly, but we believe it is essential to preserve our financial strength to take advantage of what we believe will be an opportune time to make acquisitions.

In total, we distributed 53% of our cash flow to unit-holders during the first quarter, compared to 75% for the same period in 2008. And when we include our development capital spending, we spent 112% of our cash flow, or 107% excluding changes in working capital. And this compares to a combined capital spending plus distribution in Q1 2008 of 125% of the cash flow.

Given our development capital spending was more heavily weighted to the first quarter, being one-third of our full year projected spending, we expect that our distributions and capital spending will balance closer to 100% of our cash flow over the full year.

Our operating costs for the first quarter of 2009 were CAD 9.84 per BOE, in line with expectations. Now this is up about 11% from the same period last year, primarily due to our increased spending to meet regulatory requirements and repairs and maintenance charges. Our annual guidance for operating costs is maintained at CAD 10.65 per BOE, which includes an expectation of cost savings, but also reflects the lower expected annual average production volumes for the year.

Our general and administration costs were CAD 2.21 per BOE for the quarter, also in line with guidance and an increase of 9% over the first quarter of 2008. This is up primarily due to the addition of staff since Q1 2008 and additional associated office space. We are maintaining our guidance for G&A expense at CAD 2.45 BOE for the full year.

We continue to maintain our balance sheet strength with a debt to 12-month trailing cash flow ratio of 0.6 times at quarter-end as compared to one times at March 31, 2008.

With a credit capacity of over CAD 950 million, we are well positioned to capitalize on potential strategic acquisition opportunities. In the first quarter, our development capital spending was on track with approximately CAD 100 million invested. This is approximately one-third of our annual program as previously mentioned.

Now our program in the quarter was largely focused on our natural gas assets, accounting for close to 75% of our conventional development spending in the quarter. We drilled 123 net wells, achieving a 99% success rate with approximately 84% of our capital spent on properties that we operate.

Many of the decisions to spend capital on our natural gas assets were made late in 2008 when prices were stronger and the outlook more positive. Given the current price of natural gas, we are evaluating our remaining program and may direct more of our spending to oil projects should natural gas prices remain at current levels.

Tommy Lakes, our winter access only property in Northeastern BC, received the majority of the capital spent in our tight gas resource plays during the quarter. We completed our 14-well winter drilling program, including the successful drilling of our first horizontal well on the play. We are evaluating the results of the horizontal well to determine what additional opportunities may exist on this property for horizontal application.

We also drilled 103 net wells on our shallow gas resource plays, with the majority of the capital focused on our Saskatchewan property, where we drilled 49 wells and tied in 80 wells. The remainder of our capital was spent between our Sleeping Giant Bakken oil play in the US, a crude oil waterflood resource plays, and other conventional assets in Canada. At this time, we are maintaining our 2009 development capital guidance of CAD 300 million.

Now with respect to our hedging program, our risk management program provided support to our cash flows, given the effect of weaker prices during the quarter, for a negative realized gain of CAD 46 million. We realized a cash gain of CAD 14.3 million on our natural gas hedges as compared to our 2008 first quarter cash gain of CAD 4.3 million. For crude oil, we realized a gain of CAD 31.6 million during the quarter as compared to a cash loss of CAD 15.2 million for the same period last year.

We remain hedged on approximately 27% of our crude oil production for the remainder of the year at an effective price of just over US$93 per barrel. We are also hedged on approximately 26% of our natural gas production for the year at an effective price of just over CAD 7.50 per Mcf.

And while we did not enter into any new natural gas or crude oil product contracts during the quarter of 2009, we will continue to review our price risk management program with consideration given to all -- to our overall financial position, the economics of our development capital program, any potential acquisitions that we may do in economic development.

With respect to Kirby, our oil sands play, subsequent to the quarter we announced that we were deferring the project. Given the current cost structures, commodity price environment and the current cost of capital, the project does not provide us with the sufficient return to warrant additional investment at this time.

Our efforts in 2009 involve completing an updated resource assessment this summer based on new data from our seismic program and to complete the regulatory application process by this fall as originally planned. We will not, however, continue the advanced engineering work which would have led to a sanctioning decision later in 2009.

We are -- we had already significantly reduced our spending plans in 2009 to CAD 25 million and have now reduced that further to CAD 20 million. Our decision to defer Kirby was based solely on current economics. We believe the Kirby lease has considerable resource potential and long-term value. We will continue to monitor the economics of our oil sands development and we will revisit plans for Kirby as circumstances warrant.

Going forward, we will continue to take a disciplined approach to our capital spending and will look only to invest in those properties that have demonstrated positive economic returns in the current price environment or other compelling reasons to warrant investment. There will be a few minor instances where we will spend to protect our existing interests.

We continue to possess one of the strongest balance sheets in our sector, and we expect to be able to use this strength to pursue strategic acquisitions, principally for tight gas and tight oil. And so on this note, we have seen an increase in deal flow over the past few months, given the continued deterioration of the North American economy. However, there still remains some separation between buyers' and sellers' expectations. We'll continue to maintain our discipline with regard to acquisitions, as we always have.

We have a proven track record of acquiring quality assets at opportune times, and we expect to be able to utilize our financial strength and skills to acquire quality assets that will continue to sustain our business model. We also continue to assess our portfolio of assets to determine those that may not be core to our long-term business strategy. And at the appropriate time, we would look to divest ourselves of such assets.

With the implementation of the [CIF] tax in 2011, we are also working to present our Board with plans to convert to a corporation most likely late in 2010. This would be a change in our legal structure only and not a change in our business strategy. Our assets are well suited to a distribution-oriented business model and we expect to continue to pay a significant portion of our cash flow directly to our unit-holders regardless of our structure.

We are committed to managing our business prudently and responsibly in these difficult economic times, and are continually reviewing our operations for ways to improve our business and drive efficiencies throughout our organization.

So with that, I'll now turn the call back over to the operator and take any questions from the audience.

Thank you. (Operator instructions)

Our first question comes from Gordon Tait from BMO Capital Markets. Please go ahead.

Good morning. Just on your strategy this year to focus more on your oil opportunities, can you maybe highlight sort of which three areas like where exactly you intend to concentrate some of your efforts?

Gordon, good morning. And, well, generally I would suggest it will be within our Bakken oil plays, both in Saskatchewan and south of the border, and we may increase some of the optimization activity in our Waterflood plays.

And then in terms of your Bakken, do you know offhand roughly what your sort of acreage position is, I guess, when you sum up all the parts you've gotten?

Well, I mean, probably of note is the fact that last year we invested in acquiring 26,000 undeveloped acres in the Saskatchewan. Now we haven't expanded on additional acreage within Montana. However, having said that, we do have additional drill locations and refracs that we could do there. And on the Montana side, mostly likely what we'd do is move to maybe more of the refracs, because the economics in those go around at the sort of the CAD 30 to CAD 35 level.

The other thing I think of note is the fact that where we don't spend on drilling activities, we're really in effect parking those opportunities in the interest of keeping our balance sheet strong, because again as I said earlier our focus is going to be on our acquisition in terms of where we can actually truly grow opportunities for the future.

Again just one more question on your Bakken, do you have a sense of how many wells you might actually -- I know you have been doing a number of refracs, but do you have a sense of how many wells you might drill?

Well, in the Montana area, we have about 15 third well per sections that we could do. There's about 40 identified locations for fourth wells per section. And then again back to the refrac, there's about 120 refracs that we can do in that particular property. And then we have some locations identified for the Saskatchewan area. I don't know that we'll actually advance on those this year, Gordon, but there is probably a handful that we can do there as well.

All right, thanks.

(Operator instructions) Our next question comes from Brad Borggard from CIBC World Markets. Please go ahead.

Hey, good morning, guys. Just to kind of follow up on Gordon's questions, in terms of what type of capital spending you are currently seeing in the US, what kind of numbers should we be expecting under the current numbers you spend and then where that number could potentially move to if you do shift to oil kind of the way you're speaking? And then also I missed the number of locations at fourth well per section as well?

Well, first of all, with the fourth well per section, which is -- would be along leased lines -- is about 40, Brad, that we've identified. I think in aggregate for our US spending, we're looking north of CAD 40 million, CAD 20 million of that is potentially in the Sleeping Giant play and then we have a few areas of interest in Utah, Wyoming, and we can direct some additional spending there.

Did I miss anything, Garry?

No.

Okay, thanks. Gordon, actually one other question if I could, can you give any more color on the initial horizontal at Tommy Lakes and kind of what your thoughts are going forward? Is that the way you'll look to develop the field going forward?

Well, I would just say at this point, Brad, that the results are positive in terms of the well. But we truly have to go through a full evaluation, especially in the context of current prices and cost structures. But in terms of the well performance so far, we're encouraged on that.

Okay, great. Thanks guys.

Our next question comes from Roger Serin from TD Securities. Please go ahead.

Good morning, everyone.

Good morning.

Good morning, Roger.

I wonder if you could just...

You're not going to ask me about retirement again, are you Roger?

No, I'm not. I might ask you why you want to...

I wanted to put that rumor to rest right away.

Two things. First, I'll ask you a technical question and then wonder why you have put your call on at the same time as Paramount, but I'm glad we got the call.

We don't actually connect with Paramount when we [place] a call, but that's an interesting observation, Roger.

Gordon, can you outline kind of from a transformational acquisition, give me some of the parameters that that would look like and what your -- what you think a transformational acquisition would look like and how big that could be?

Well, I don't know if I used the word transformational, but maybe it's not bad. I mean one of the areas of interest to us are the shale gas plays that have been developing in the US. And here the recycle ratios and the investment economics are quite robust even in the lower price natural gas environment. And again, will depend on the opportunity. But you can look historically at the size of the deals that we've done to get some I would say guidance. Albeit, it is a tighter credit market, it's a tighter equity market. But as I also mentioned, we've got as you know a very strong balance sheet.

We're also looking to expand in other tight oil, tight gas plays, so some of the areas that you're -- that are well known in British Columbia and Alberta in terms of the Montney, and then maybe further expansion if we -- if we're able to -- in the Bakken type plays in southern Saskatchewan, but also south of the border, Montana and North Dakota.

Okay. And I just forget things, historical precedence, what sort of size deals would you think that is, is that sort of north of CAD 0.5 billion already?

Well, I think your memory is better than that, Roger. I mean we have done deals up in size towards, as you know, CAD 500 million. I'm not suggesting that it could be a single transaction, we might do a multiple set of transactions here to position in some of these assets that we'd like to have more of.

Thanks very much

Okay Roger.

There are no further questions at this time. Please continue.

Well, I guess if there's no further questions, thank you everyone for attending and thank you operator and we look forward to future discussion. Thanks very much.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.