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Enerplus Corporation (TSX & NYSE: ERF) announced yesterday its 2020 exploration and development capital budget of $520 to $570 million and outlook through 2022.

“We remain focused on creating value for shareholders through a combination of sustainable, high return production per share growth, free cash flow generation and low financial leverage,” stated Ian C. Dundas, president and chief executive officer. “As we further prioritize our ability to generate meaningful free cash flow throughout commodity price cycles, we are moderating our production growth outlook.”

Dundas continued, “Our revised 2020 plan is expected to generate 12 percent liquids production per share growth under a reduced capital program that is approximately 13 percent lower than 2019’s program of $625 million. This plan is also expected to generate free cash flow at oil prices above US$50 per barrel WTI, a portion of which we intend to continue returning to shareholders through our dividend and opportunistic share repurchases.”

Highlights of the 2020 Budget

  • Improving capital efficiencies with well costs in North Dakota anticipated to be US$400,000 lower year-over-year
  • Annual crude oil and natural gas liquids production is expected to grow to between 57,000 to 60,000 barrels per day
  • Seven percent annual crude oil and natural gas liquids production growth at the guidance midpoint (12 percent growth per share)
  • Free cash flow forecast at commodity prices above US$50 per barrel WTI and US$2.25 per Mcf NYMEX
  • Continuing focus on return of capital to shareholders through dividends and share repurchases
  • Price protection on 56 percent of forecast net oil production at a floor price of US$57 per barrel WTI, hedged largely through put spreads and collar structures, retaining meaningful exposure to higher crude oil prices
  • Maintaining low financial leverage

2020 Capital and Operating Plan

Enerplus’ high quality position in North Dakota will continue to attract the majority of the company’s capital spending in 2020. Enerplus has allocated 82 percent of its 2020 capital budget to its North Dakota development to drill 41 to 46 net wells and bring approximately 45 net wells on production. Sustained improvements in drilling cycle times, completion efficiencies and cost reductions are continuing to drive well costs lower. Enerplus expects its 2020 well costs to average US$7.2 million, approximately US$400,000 lower than its 2019 average.

Enerplus plans to spend eight percent of its 2020 capital budget across its Canadian operations. Capital activity includes drilling approximately nine net producer/injector wells, along with ongoing polymer injection for existing projects and facilities maintenance and optimization.

Capital spending in Enerplus’ non-operated Marcellus position is expected to be meaningfully lower in 2020 compared to 2019, in response to lower anticipated natural gas prices. Enerplus plans to spend five percent of its 2020 capital budget in the Marcellus to drill three net wells and bring two net wells on production.

In 2019, Enerplus continued to advance its understanding of cost structures and well performance in the DJ Basin. The five wells brought on production in late 2019 were completed using various proppant and fluid intensities with encouraging results. On average, the wells have produced approximately 40,000 barrels of oil per well in 130 days on production. Currently the best performing of the five wells is St. Albert 8-67-21-22C, which also had the most competitive completion cost structure. The well has produced over 51,000 barrels of oil in 130 days on production. In 2020, Enerplus plans to drill 5 net wells and complete 3 net wells in the DJ Basin, which includes participating in non-operated wells. With line of sight to competitive development costs, this program is designed to make further progress enhancing economics and to retain acreage.

2020 Guidance 

Enerplus’ oil focused capital program is expected to increase crude oil and natural gas liquids production to between 57,000 to 60,000 barrels per day, on average, in 2020. The company’s natural gas production is expected to decline in 2020 due to limited capital activity in the Marcellus in response to lower anticipated natural gas prices and the company’s decision to abandon and reclaim its non-core asset at Tommy Lakes in Canada due to increasingly marginal economics. The planned shut-in of Tommy Lakes in early 2020 is expected to impact the company’s 2020 production by 1,600 BOE per day (90 percent natural gas) with minimal impact to cash flow from operating activities. Total company production is expected to average between 96,000 to 100,000 BOE per day in 2020.

As a result of the company’s 2019 investment profile with only modest fourth quarter capital activity, production in the first quarter of 2020 is expected to decline from the fourth quarter of 2019. Following this, crude oil production is expected to meaningfully increase driven by North Dakota volumes, with strong growth forecast for the second half of 2020.

The company’s realized Bakken crude oil price differential below WTI is projected to be US$5.00 per barrel in 2020. Growing basin production in the Bakken, combined with a narrower Brent-WTI crude oil price spread, led to wider Bakken oil price differentials in the fourth quarter of 2019 and these pricing levels are expected to continue in 2020. For the Marcellus, weak winter natural gas demand year to date is expected to result in a wider natural gas price differential in 2020 compared to 2019. The company expects its realized Marcellus natural gas price differential to average US$0.45 per Mcf below NYMEX in 2020.

Operating expenses in 2020 are expected to average $8.50 per BOE, an increase from 2019 levels as a result of the Company’s liquids production weighting increasing from 54 percent in 2019 to an expected 60 percent in 2020.

Return of Capital

Enerplus remains committed to returning capital to shareholders through the combination of a sustainable dividend and share repurchases. The company is maintaining its monthly dividend level at $0.01 per share and intends to allocate a portion of its 2020 free cash flow after dividends to repurchasing stock, based on current market conditions. The company’s 2020 investment profile, with higher capital spending during the first half of the year, is expected to result in free cash flow generation in the second half of the year. Enerplus will retain flexibility to pre-spend a portion of the expected free cash flow to repurchase shares earlier in the year.

Since initiating its share repurchase program in the third quarter of 2018, Enerplus has repurchased 24.3 million shares, representing approximately 10 percent of shares outstanding. The company currently has 7.0 million remaining shares authorized under its normal course issuer bid which expires March 25, 2020 and can be renewed thereafter for another 12 months for up to 10 percent of the public float (within the meaning under the Toronto Stock Exchange rules).

Outlook through 2022

Consistent with its approach to 2020, in 2021 and 2022, Enerplus expects to provide a competitive balance of sustainable, high-return growth on a per share basis, free cash flow generation and low financial leverage. This is expected to result in a high single-digit annual liquids production growth rate over this period and is expected to be further enhanced on a per share basis through future share repurchases.

Price Risk Management Update

Enerplus has approximately 22,000 barrels per day of crude oil protected in 2020, representing approximately 56 percent of net 2020 crude oil production at the guidance midpoint. The company has used swaps, put spreads and three-way collar structures to hedge crude oil providing downside protection at approximately $57 per barrel, while retaining meaningful exposure to higher crude oil prices.