Enerplus Corp (ERF) 2023 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Chord Energy analysis combination with Enerplus conference call. (Operator Instructions) This call is being recorded on Wednesday, February 21, 2024.

And I would now like to turn the conference over to Mr. Michael Lou. Please go ahead.

Thank you. Good evening, everyone. Thank you for joining the call. Today, we will be discussing the business combination between Chord Energy and Enerplus, and also touching on fourth-quarter 2023 financial and operational results.

With me on the call are Danny Brown, President and Chief Executive Officer of Chord Energy; as well as Ian Dundas, President and Chief Executive Officer of Enerplus, as well as other members of the team.

Please be advised that our remarks, including the answers to your questions, include statements that we believe to be forward-looking statements and forward-looking information within the meaning of applicable laws. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls. Those risks include, among others, matters that we have described in our joint press release announcing the transaction and quarterly earnings releases as well as in our filings with the Securities and Exchange Commission. We disclaim any obligation to update these forward-looking statements.

During this conference call, we will make reference to non-GAAP measures and reconciliations to the applicable GAAP measures can be found in core earnings releases and on its website. We may also reference our current investor presentation, which you can also find on our website.

With that, I'll turn the call over to Cord CEO, Danny Brown.

Thanks, Michael, and thanks, everyone, for joining our call today on such short notice. We're very excited to announce that Chord Energy and Enerplus (technical difficulty) will combine with Enerplus to form a premier Williston basin company. We view today's announcement as the next logical step for both companies as we create a stronger, more sustainable organization that we believe is positioned for continued performance and long-term growth.

I plan to spend some time commenting on the merits of the deal before turning it over to Ian for some additional thoughts. To start, both Ian and I are proud of what our individual organizations have done over the years. Both companies have diligently worked to position their port portfolios in one of the premier oil basins in North America, resulting in top-tier assets spread across the Williston basin that are highly complementary.

Both companies have generated significant free cash flow and have returned a large amount of capital to shareholders. And our teams did this while being good stewards of our environment and the communities in which we operate. Both Chord and Enerplus have talented, hard-working people, and have accomplished a tremendous amount for which they should be extremely proud. Ian and I are certainly proud of them, and we look forward to getting the teams together to share best practices and drive continuous improvement.

Slide 4 of our investor presentation gives a good summary of the merits of the deal. As you can see, this combination checks all the boxes between operating, financial, and strategic goals. It enhances scale and asset quality. Additionally, it delivers accretion on all key financial metrics, which is boosted by significant synergies that we'll get into. Additionally, the combination improves our financial strength and returns, which of course, supports our peer-leading return of capital profile.

Turning to slide 5, you can see the terms of the combination. The merger consideration is structured as 90% stock and 10% cash. Each Enerplus common share will be exchanged for [0.10125] shares of Chord common stock and $1.84 per share in cash. At this exchange ratio and respective share prices on February 20, 2024, the combined company would have an enterprise value of approximately $11 billion, inclusive of Enerplus' net debt. Pro forma for the transaction, core shareholders will own approximately 67%, and Enerplus shareholders will own approximately 33% of the combined company on a fully diluted basis.

Following close of the transaction, the Board of Directors will increase to 11 members, which will consist of seven representatives from Chord and four representatives from Enerplus. Ian will join the Board and serve as advisor to the CDO. The Chord executive leadership team will continue to run the combined company. The combination has been unanimously approved by the Board of Directors of both companies.

Currently, we are expecting to close by midyear 2024. Standard regulatory approvals are needed in both US and Canada, plus the shareholder vote, including HSR review. This is a deal that is good for our shareholders, good for consumers, as we should be able to access and ultimately produce more resource than either company would have otherwise been able to do standalone, and good for our communities since as a larger organization will be able to commit more time and resources to reducing our environmental footprint and focusing on local communities.

Turning to slide 6. We believe this transaction creates a combined company with meaningful scale. The combined organization will have approximately 1.3 million net acres with 98% of that in the Williston basin. Additionally, combined fourth quarter '23 production is 279,000 barrels of oil equivalent per day with over 90% of that in the Williston basin. The transaction also combines high-quality inventory, which supports sustainable free cash flow through the different commodity cycles.

We believe Chord and Enerplus have some of the best inventory in [Boston]. To illustrate the point since 2022, combined Chord and Enerplus have brought 30% of the top 100 wells online when looking at greater than six months of oil production, while bringing only 15% of the wells online over the same timeframe. Our combined position represents approximately 10 years of low-cost development at the current pace with significant upside beyond that.

While the standalone inventory of both companies has compelling returns, the combination expands our three-mile lateral opportunity, and we will continue to pursue additional longer laterals given the success we've had over the past two years. Just to flesh this 3-mile opportunity out a little more. Over the course of 2023, Chord made significant progress in drilling, completing, and cleaning out 3-mile wells. Drilling times have been reduced by roughly 25% since the beginning of 2023. With now only taking 10 to 11 days on average.

On the cleanup side, we've made strong progress over the course of the year and reached [TD] and essentially all 30-plus 3-mile wells brought online in the second half. We get asked frequently if there could be upside to our implied 80% productivity assumption for the third mile. And we believe this is a possibility, especially in light of our progress on cleanouts over the past year.

However, it will take a little more time likely until the end of this year to get sufficient production history to effectively analyze the three-mile declines and determine whether we can increase our EUR uplift assumptions from 140% to 150%.

The Enerplus team is in the early innings of pivoting to 3-mile laterals and already have over 10% of their inventory set. We see meaningful opportunity to increase this percentage in Enerplus' high-quality acreage, which supports better economics and more free cash flow. Additionally, we're continuing to evaluate 4-mile laterals, and we expect to drill our first 4 milers at the end of this year. If successful, these initiatives should further improve returns.

On slide 7, you can see our pro forma market cap is over $10 billion, significantly increasing our size, positioning the combined company nicely within our new large-cap peer group. The combined oil cut is high at 56% and positions us well given the current commodity backdrop.

Slide 8 shows inventory quality and depth as estimated by an independent research firm, which tries to use similar modeling methods across each company represented. The key takeaway is their analysis shows the pro forma quarter right in the mix with large cap names on inventory, depth and quality. While we evaluate our inventory differently than theirs, we believe that they are objective and tried to be consistent. With this in mind, the scale of the combined company is competitive with large-cap peers.

Moving to slide 9. As we think about potential synergies, the opportunity is significant. The combined company expects to benefit from administrative, capital, and operating synergies of up to $150 million per year. Administrative synergies are expected to begin immediately in 2024 an increase in 2025, up to $40 million. Capital synergies are expected to increase to up to $55 million during 2025 and operating synergies initiate in 2025 and are expected to increase up to $55 million in 2026.

The combined company will leverage best practices to further advance efficiencies across the business. The after-tax present value of synergies is expected to exceed $750 million.

As you are aware, this is a cross-border transaction. The team has evaluated the tax ramifications and we do not expect it to be much tax leakage on a pro forma basis. To expand on this bit, the core team has made great progress reducing downtime through the course of 2023. As a combined company, we see additional opportunity to make progress on improving downtime, which is important given base production is the vast majority of any year's volumes.

Additionally, we'll be looking at ways to drive LOE down through field standardization, data analytics, lower failure rates, among other items. You can refer to the appendix for more detail on synergy potential. I should note, our respective teams have spent considerable time together, and look forward to digging in on further synergies. We are confident we can deliver based on the capability and level of rigor from both teams.

Now turning to slide 10, we see our superior profitability. Our high oil cut of 56% underpins healthy cash margins. As we just discussed, we are focused on expanding margins further through a variety of initiatives. Additionally, the transaction is accretive to all financial metrics and accretion didn't come at the cost of financial strength. We maintain our best-in-class credit profile with net debt to EBITDA of 0.2 times at close and minimal near-term maturities. With leverage well below peers, we have additional flexibility for strategic initiatives and return of capital.

Turning to slide 11, Chord has significantly outperformed our new large-cap peers over the past several years through a combination of mergers, acquisitions, and divestitures, focus on returns, and returning significant capital to shareholder. All of this was done while maintaining a healthy balance sheet. Notably, Chord has paid $45 per share in dividends since 2021, while the underlying equity has appreciated significantly as well.

So accretion is obviously important to shareholder returns. And as we discussed earlier, the outlook is strong on that front. The pro forma company expects approximately $1.2 billion of free cash flow and a reinvestment rate of approximately 51% in 2024 at $79 per barrel WTI and $250 per MMBtu NYMEX gas.

Return of capital following closing is expected to remain at Chord's pre combination level of 75% plus of free cash flow given the strong balance sheet. Chord's base dividend remains unchanged at $5 per year. The base dividend will continue to be supplemented by share repurchases and variable dividends.

Slide 12 shows our relative valuation and yield, which we view as attractive seeing is they are based on pro forma analyst consensus expectations and don't include the impact of synergies. And finally, slide 13 summarizes the merits of the deal, and I think it's important to note that both Chord and Enerplus have maintained a disciplined approach to M&A. We're confident the combination is the right move and will result in significant value creation for both of our respective shareholders.

Additionally, both Chord and Enerplus have a tremendous track record of being responsible corporate citizens and respecting all of our stakeholders. We remain committed to ESG and sustainability and capitalizing on combined best practices. We also remain committed to supporting the communities where we operate and look forward to building on each company's relationship with the MHA Nation and their leadership.

To sum things up, the combined company is expected to generate significant free cash flow from its low-cost asset base, improve efficiencies, and execute disciplined capital spending through business cycles.

With that, I'll turn the call over to Ian to provide some thoughts on the combination.

Thanks, Danny.

I believe the value-enhancing opportunities from this combination are compelling. This transaction represents a unique opportunity to drive meaningful cost and operational synergies, and improving profitability profile and will position the pro forma business to continue to deliver strong value creation on a sustainable basis over the long term.

We are excited about the opportunities our combination creates for our shareholders, our people, and all of our other stakeholders. The combined footprint is remarkable and Enerplus' core inventory is a strong complement to Chord's position. Building on the success Chord has had with 3-mile laterals across our position should drive further upside to the premier -- to our premier Williston position.

We see significant opportunity to expand to longer laterals and believe the combined company is in a strong position to be the basin leader on this front.

As Danny noted, we believe the transaction is very good for shareholders of both companies. It is an excellent strategic fit. It is accretive to key financial metrics while retaining a pristine balance sheet. The large stock component provides enterprise shareholders with a strong near-term return on their investment and further upside from ownership in the combined entity.

On the operational side, both companies have a strong execution track record. Over the last few years, drilling and completion times have improved for both companies and currently rank in the top tier for Williston operators. Additionally, the enhanced size and scale that comes with this combination supports more consistent activity, which lends itself to more efficient operations. You can see these benefits highlighted in the synergies announced.

The Chord team has a proven track record of executing on integration and synergy capture as we saw with the integrations of [QEP], Whiting, Oasis, and last year's XTO acquisition.

On the enterprise side, we've also been active in the A&D market in recent years and have a lot of integration experience to bring to bear. We look forward to working with Chord team to capture these savings and make our combined business better to deliver more value to shareholders.

And finally, on a personal note, it has been a privilege to lead Enerplus over the past 11 years. I want to thank our employees and their families for their dedication and all the hard work over the years that has allowed us to build such a great organization. We are now ready to get going on the integration with the goal of making an even stronger, more competitive company. Together, we will achieve things that neither company could on a standalone basis.

So with that, I will hand it back over to Danny.

Thank you, Ian. So in closing, I just want to say that we are very excited and happy to announce this transaction and believe the combination of the two companies' premier asset bases, operational ability, and technical acumen will drive further success and create a stronger, larger company positioned to deliver competitive returns in peer-leading shareholder distributions.

Thanks for listening. And now we'll turn the call over to Q&A.

(Operator Instructions) Derrick Whitfield, Stifel.

Good afternoon, all, and congrats to you both on the transaction.

Thanks, Derrick.

For my first question, I wanted to lean in on operational synergies. Could you walk through some of the D&C synergy drivers on page 16 in cost per foot terms?

Thanks for the question, Derrick. I think as we think about our opportunity to improve from a D&C standpoint, we're leaning a little bit on some of the experience we had with Oasis, Whiting where we were able to use some of the best combined practices of both organizations. And so we used Oasis practices in some areas. We used Whiting practices in other areas. And really, by having that open dialogue, we were able to just really glean and use different bit technology, use different casing profiles, and it really allowed us to get to improve there.

So when we think about the D&C for this transaction, we've had the teams together at a very high level because we really haven't been able to involve too many people in this approach so far. But even through that very short period of time, we've been able to identify up to $55 million synergies associated with that. So some of this includes expanding into 3-mile laterals, and some of it improves just the overall process that we think we'll be able to drill and complete that.

But I'm going to ask Darrin maybe to expand on it just a little more.

Yeah, thank you, Danny. I'm happy to expand further on that. When you look at Chord's performance in the first quarter, we've drilled our fastest 2-mile well spud-to-rig release in 7.4 days. We're averaging two-mile wells in 8.9 days spud-to-rig release.

Looking at 3-mile wells, we've drilled our fastest well at 9.5 days spud-to-rig release this quarter. And over the fourth quarter, we averaged 10.3 days spud-to-rig release. Those, in general, are 1.5 days to 2 days faster than what we were seeing on the Enerplus. And so that will be a synergy that we can capture just almost immediately.

The fact that we're drilling 70% to 75% of the Chord's wells this year, we're planning to be 3-mile laterals. And we're also going to expand what Enerplus had planned this year. And it'll take time for us to do all the permitting work and regulatory work to make that happen. But clearly, Chord has demonstrated quite the ability on 3-mile wells. And you'll see us doing that going forward post-closing.

I think the other thing to mention on a DCE standpoint, Derrick, is we've also, just from a facilities perspective, one thing that we really did have, I think, maybe leading the basin in is the way we approach our facilities and doing a standardized modular facility approach. And so these end up being much less expensive than stick building your facilities on location. And it's also a lot safer, and it's a better environmental footprint as well. So that's another part, sort of a synergy that we'll roll through into the overall DC&E cost.

Thanks, guys. And then as my follow-up, with respect to the LOE synergy, could you talk to the delayed nature of implementation? I imagine, in part, it's when you're going to change out lift, but any other color you could add would be greatly appreciated.

So I think you're hitting on it, Derrick. And our experience, again, we're able to lean a little bit on the recent transaction with Oasis, Whiting. What we saw there is it took about a year before we saw the operational synergies roll through. And part of that is, and I'll give an example, one of the legacy organizations in the previous transaction had a different rod installation practice and a different material practice than the other, which led to much longer run times on our rod pumps.

And so we had lower failure rate over time. So when you have that lower failure rate, you don't have to do the repair work, but that takes time to sort of bear fruit. And so as we think about these operational practices, some of it's about reducing future failure rate, and it's the lack of future workovers and future LOE that really rolls through. And so that's part of that delay is just you implement different operating practices, and then you see the benefit of it later. And that's certainly what we saw with Whiting and Oasis.

Neal Dingmann, Truist Securities.

Hi, everybody. Guys, congrats. It certainly seems to make a lot of sense. Danny, my first question. You've definitely listed now a long list of potential savings. I'm curious about potential marketing or OFS opportunities given you all now will be the dominant player in the basin.

Well, Neil, I'd say when we probably won't get too much into marketing, we won't get the teams together to start talking about any of that until sometime post close. From an OFS perspective, I think both companies had good contracts with folks, and the basins both had premier programs. I think the real savings we may see from that sort of practice isn't so much through per-job savings, although, we could see some of that, but it's really about the operational efficiency we're going to pick up through the program.

And so you can imagine running one completion crew but not being able to run it through the course of the year. If you're able to sign a longer contract because you've got that program through the entire course of the year, you're going to do -- you're able to not only get contract -- see contract savings, but your operation is actually much more efficient, as well. So your per-job cost goes down on two fronts. So that's kind of how we're thinking about it.

Yeah, it makes sense. And then can you just remind, would you all say kind of what you're anticipating for effective date and assumed close, and then if there -- what type of -- if any lockup there will be?

So looking at anticipated close of potentially by midyear.

Okay, and then any lockup on the guys?

No.

Oliver Huang, TPH.

Good afternoon, all, and congrats on the deal, and thanks for taking my questions. Just a quick question on the longer laterals. I know in the past, you all have highlighted 55% to 60% of remaining inventory being conducive to 3-mile lateral development on a Chord standalone basis, and it looks like you all are highlighting greater than 40% of pro-forma inventory in that bucket, which doesn't really imply that many Enerplus locations falling into that 3-mile lateral bucket. So just kind of wondering how much of that Enerplus plus inventory could be developed as 3-mile laterals, potentially, and if there are any sort of leasehold limitations that are preventing you all from doing so?

Yeah, so the way I think about that is they just started on Enerplus to start thinking about getting 3-mile laterals. And so I think we mentioned in our prepared remarks, we're just over 10% set up for 3 miles, but we have not actually had the time to do the Tetris work to continue to figure out what that could look like on a pro-form basis combined. And on top of that, there's just a lot of permitting work that needs to be done.

So we actually think there's more upside to the 40% number we announced. We just wanted to start conservatively in order to be able to move that up over time.

Awesome. That's helpful. And just one other question on the completion side of things. I know you all have generally run more conservative spacing to maximize per-well IRRs. Are you all planning to make any changes with respect to the type of spacing that Enerplus had previously been running on their asset base? I think they were probably running a few extra well, including a couple in the three-fourths depending on where you are in the basin.

Yeah, I think as we get the teams together, we've got a spacing philosophy that's generally a little wider, has wells that are a little longer, somewhat due to the least geometry we have with some larger completions, and that's worked well for us over time.

I think as we get the teams together, we're going to evaluate on really a DSU and sort of a DSU-by-DSU basis, what's the appropriate development methodology for that specific area. And so we will -- one of the things we know is that if we don't want to overcapitalize areas, but by the same token, what we don't want to do is space out too wide so that we're missing high return opportunities within that DSU.

So I think you may see spacing a little wider as we move forward, but it's something we need to get the teams together and share best practices and share learnings, and it's one of the opportunities for actual value enhancement as we think about this deal.

David Deckelbaum, TD Cowen.

Congrats on the deal, everyone. I appreciate the time tonight. I am curious just -- I know you said that you wouldn't issue pro forma guidance until the deal closes, but I guess can you sort of give us a sense of the appropriate rig and frack criteria? Are you baking in a better balance of rigs versus completion crews? I think you alluded to it in your last comments, Danny, on just having a dedicated crew for a longer duration time. Is that inherently what's driving that $55 million CapEx? And I guess, like, what does that balance look like between the two companies pro forma?

Yeah, I think as we move forward, it's going to take -- as you can imagine, so there is an inertia to a development program, and so you've got to get all your permits done. You've got your infrastructure laid out. And so unfortunately, we can't -- they don't move really quickly, and so -- and we haven't been able to get the teams together to really work a pro forma development plan in detail, and we'll have some restrictions on doing that up until close.

And so we will -- through the transition process, we'll develop a combined development program. Clearly, we've got assumptions we're using now, but we'll refine that as we move forward. And then post close, we'll roll out a full new development plan for the post-closed organization. And in that process, one of the advantages we will get with this is more continuous operations and a better balance of being able to run operations continuously.

And when I say better balance, just not the need to start and stop crews as the year moves on because the overall pro forma program will be larger, and we should be able to pick up some operational benefit as a result of that.

If I appreciate the response and I know it's -- I'm just curious how you're thinking going forward now. With this deal, you guys both scale up. You're staying in base and consolidating this area, and there's obviously some ample synergies there. Does this change how you think about the company's position in the marketplace going forward? Or do you anticipate this being sort of the beginning of further consolidation in the basin that's been already fairly heavily consolidated.

Well, I'd say it's hard to speculate on what happens moving forward. Really kind of focused on this deal and what this deal does for both of our respective organizations. Michael?

Yeah. I think that another way to think about it, David, is like we've got about on the Chord side, 100 a day of production. With Enerplus we're adding, we're getting to about 150 a day of production. We're still only about 12% to 13% of the [Bakken]. It's not -- there's a lot of players still, and I get it that it's somewhat consolidated. We certainly have some big players in the basin.

I think this just puts us in a really nice position now. We'll continue to look at what can further be done in the basin. But certainly, other people in other basins have consolidated way more than where the Bakken is. So we think there's still continued opportunities, and we're just in a good position overall.

(Operator Instructions) John Abbott, Bank of America.

Thank you very much for taking our questions. Just to go back to David's question that was just asked on looking at potential opportunities to further consolidate in the Bakken. You did mention the fact that you have a strong balance sheet, post this via roughly about 0.2 times. Would you want some time -- would you be willing to act on -- if it came available, would you be willing to act on something sooner versus later, or do you want to see the synergies from this transaction?

Again, John, I'd say it's kind of hard to speculate on sort of future hypothetical opportunities. I think the strong pro forma balance sheet we have is going to give us a lot of flexibility, and that could give us flexibility from a return of capital standpoint to whether resiliency with commodity price fluctuations, or to pursue different growth opportunities. And so I think we'll take those things as we see them in the future.

But the number-one priority is going to be putting these companies together, really coming together to get the best out of both organizations. Both organizations have done an incredible job, and we can learn from each other and get better, though. So that's going to be the first and foremost is we're going to get the most out of putting these two companies together.

Absolutely. And just looking at the pro forma portfolio, I mean, there's a -- on Enerplus' side, there is a position in Appalachia. Will there be opportunities for divestitures coming out of this?

Yeah, I think as we look at the Appalachian position, it represents about -- it's in a great spot in the basin, a core position in the basin with a good operator. It represents only about 2% of the pro forma EBITDA. So I think as we -- it's a very small part of the overall company. And as we look at what's sort of treated like other -- all aspects of our portfolio, we'll continually evaluate sort of all aspects of our portfolio on should they stay in or should they not stay in.

Kevin McCurdy, Pickering Energy Partners

Hey. Good afternoon, and congratulations on potentially becoming the largest Williston producer. Just one question for me. We kind of expected you guys to have a mid-single-digit cash tax rate in 2024. Can you remind us where Enerplus is? And what -- if any, you would expect there to be a change after this transaction?

Yeah, so we've done a bunch of work on that cash tax side. The combined entity is going to have a very similar type of cash tax profile going forward. We don't think that there's a lot of tax leakage in the transaction overall. So we'll continue to give a little bit more guidance on that going forward. But it's in a similar neighborhood to where -- what we've been talking about on the court side.

Yeah, maybe a hair or less. But, yeah, it'll be similar on a pro forma basis.

And is that going to continue out into past 2024?

Correct. That'll be continuing on past that.

(Operator Instructions) There are no further questions at this time. Mr. Brown, please proceed.

I'd just like to thank everybody for joining the call today. It's an exciting day for both Chord and Enerplus shareholders as we are able to announce this very important transaction and a combination that we think is really going to benefit both of our shareholders as we move forward. So thank you for giving us your time this afternoon and for joining our call.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you all for participating. You may all disconnect.