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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Enerplus Q1 2023 Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on May 5, 2023.
I would now like to turn the conference over to Drew Mair, Senior Manager of Investor Relations. Please, go ahead.
Thank you, 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 our first quarter news release. Our financials have been prepared in accordance with US GAAP. Our production volumes are reported on a net after deduction of royalty basis and our financial figures are in US dollars unless otherwise specified.
I am here this morning with Ian Dundas, our President and Chief Executive Officer; Wade Hutchings, Senior VP and Chief Operating 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.
Thank you, Drew. Good morning all. As we come out of our first quarter, operating performance continues to be on track, and we remain well positioned to efficiently execute our 2023 plan, which is expected to deliver robust free cash flow, attractive growth and meaningful cash returns to our stockholders.
2023 capital spending and production guidance are unchanged. Production in the first quarter was resilient, averaging approximately 97,700 BOE per day. This was up 6% compared to the same period last year, despite having sold over 6,000 BOE a day in the fourth quarter in connection with the sale of our Canadian operations.
Operational momentum is building, as we progress through the second quarter, where we have a very active completions program. Wade will provide more details on the operational plan when he speaks.
We generated $260 million in adjusted fund flow in the quarter on capital spending of $139 million, resulting in free cash flow of approximately $120 million. We returned $67 million to our shareholders in the quarter, including repurchasing 3.5 million shares for $55 million.
Since reactivating our share repurchase program in 2021, we have now reduced our shares outstanding by 16%. Our repurchase activity has and continues to be underpinned by our view that the intrinsic value of our business is not adequately reflected in our share price. And therefore, the buyback continues to be accretive to shareholder value.
Furthermore, the reduction in our share count is quite meaningfully enhancing our per share growth metrics. Adjusted net income per share and production per share increased by 8% and 19%, respectively in the first quarter of 2023, compared to the first quarter of 2022.
As previously indicated, we are committed to returning at least 60% of 2023 free cash flow to shareholders. Over the next three months, up through the end of July, we plan to repurchase the remaining 3.3 million shares under our NCIB authorization and then renew our repurchase authorization for another 10% of shares outstanding in August.
In addition to our plans to return capital to our shareholders, we are also continuing to strengthen our balance sheet and our financial flexibility. We reduced net debt by 32% and from December 31, 2022 to March 31, 2023 and ended the quarter with net debt of approximately $150 million.
In summary, the outlook remains strong. We expect to deliver another year of solid execution and well performance from our Bakken development program and with our capital spending weighted approximately 60% to the first half of the year, we anticipate meaningful oil growth and a robust free cash flow profile in the second half of 2023.
Beyond 2023, our deep high rate of return drilling inventory will continue to support attractive return on capital and growth project prospects for years to come.
I'll leave it there and pass the call to Wade for an operational update.
Thank you, Ian, and good morning, everyone. North Dakota production averaged just under 67,000 BOE per day in the quarter, which was 8% lower than Q4. As is typical for us, first quarter production declined sequentially due to the planned timing of our completions program in North Dakota. We brought our last 2022 pad online in mid-October, and our first half this year started producing mid-February.
As Ian mentioned, operationally, the year is off to a good start. Base production is tracking ahead of plan and our drilling and completions program is running efficiently. We brought a four-well pad on production during the first quarter in the Murphy Creek area and early time performance is meeting expectations.
I would note that, as we continue to drive improvements in gas capture and emissions management, particularly in areas where gas takeaway is constrained, we have been adapting our practices to ensure more molecules are captured and sold by curtailing initial production when needed. This pad falls into that category with initial rates constrained to some degree.
This approach of curtailing rates to manage emissions isn't new for us, but it is becoming increasingly important as we deliver on our emissions reduction plan. Overall, these early results support our positive view of the economic returns and development potential in the Murby Creek area.
Looking ahead, we have an active completions program underway with the second and third quarters being our busiest periods. But the second quarter anticipated to be our highest period in terms of capital spending. We expect to bring approximately 20 net operated wells online in the second quarter in North Dakota, which should set up strong volumes in the second half of the year.
In addition to a pad and FBIR, our second quarter onstreams will include our first two pads in the Little Knife area. The first of which is a seven-well pad that is currently being tied in. We look forward to demonstrating the potential in Little Knife where we are highly confident, we have a significant amount of Tier 1 inventory. We also plan to bring our first set of re-fracs on during the second quarter, which will be a good data point to help us frame what this opportunity set could look like in our portfolio.
Today, we don't include these in our decade-plus drilling inventory, but if successful, we see the potential for approximately 60 additional value-accretive well refracs that could be added. For context, these refrac candidates are producing wells we acquired in 2021 in Dunn County, which were completed several years prior to that. These wells have relatively low recoveries, and we think there is a potential meaningfully increase that with a modern re-stimulation.
Turning to cost structures. Broadly speaking, inflation year-to-date has tracked our expectations and we're seeing some early signs of the market tightness beginning to ease and stabilize. Although, we're not expecting to see substantial cost deflation in 2023, we have seen OCTG prices soften as we have secured inventory so far this year. Declines are being driven by lower input costs, stronger supply and a flattening rig count. This could be a tailwind to cost structures in 2024.
Lastly, I'll touch on activity in our non-operated Marcellus position. Our first quarter Marcellus natural gas production was 180 million cubic feet per day, which was approximately flat to the prior quarter. We continue to expect limited capital activity in our Marcellus position in 2023 with just 3% of our overall capital budget being directed to the Marcellus this year. As a result, we expect our Marcellus volumes to decline as we move throughout the year.
In closing, I'll reiterate Ian's comments about our strong position. Our unwavering focus on safe, clean and efficient operations, along with disciplined cost control is supporting robust margins and significant free cash flow generation.
I'll leave it there. We'll turn the call over to the operator and open it up for questions.
Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from the line of Greg Pardy from RBC Capital Markets. Your line is open.
Good morning. This is Robert Mann on for Greg Pardy. And thanks for taking my question. Just on the shareholder return front, we just wanted to get a sense of what the appetite for an SIB is here in the near-term? And what sort of market conditions would satisfy execution of one from the company standpoint?
Good morning, Robert. We are open-minded to an SIB. It's for all intent purposes sitting on a shelf ready to go as a tool that we'll utilize if we see the need. Your question was whether we need in the near-term, I don't think that likely as we put, I guess, a little more meat around the bone on how we see the next quarter going, we have 3.3 million shares available for repurchase under the NCIB, which -- our share count is only about $250 million. So it's a pretty meaningful percentage.
And we've committed to repurchasing that under current market conditions. So what current market conditions mean – that really means the share price not being in this range, plus or minus, maybe plus - plus actually. We see a fair amount of [indiscernible] of the stock at these levels based on our mid-cycle price fees.
So we think when we look at that amount of commitment, layer on the dividend and then think about that in the context of this minimum 60% commitment and also think about it in the context of how we see our capital program unfolding over the course of the year and that free cash flow profile, which is much bigger in the back half of the year to the first half of the year, we think we're pretty comfortable.
I don't know if you will recall, last quarter, we said we were planning on -- we weren't going to smooth this 60% plus. We were going to accelerate some of that. And that's sort of how the math lines up when you look at this 2.3 million share commitment.
Moving forward, we'll have lots of room under the NCIB once we renew in August, and the SIB sits there. And then, I guess, the broad framework, we'll think about affordability, at least 60% free cash flow. We'll refresh that when we get debt free. And then it's all about valuation. And again, we see lots of value in the stock at these levels.
Yes, that's great. Thanks for the detail. That’s all I have. Thanks.
Your next question comes from the line of Jeoffrey Lambujon from TPH. Your line is now open.
Good morning. Thanks for taking my questions. My first one is just going to be on the broader return of capital strategy as well, just maybe looking at the different options that you have, obviously, a lot of execution on the buyback to date. But if we think about a scenario in which we see better crude prices play out and as strip is indicating and you see the share price react positively in conjunction with that in the space, how do you think about a variable potentially entering the mix longer term?
And then maybe as a second part to this question, can you talk a bit more about how you evaluate intrinsic value internally there primarily an NAV exercise. It's a mid-cycle price that you might use internally? Just trying to get a better understanding of how we compare the different alternatives over time?
Yes. Thanks Jeoffrey from TPH, I think. So our framework for evaluating valuation, you've highlighted it. It's a DCF exercise, it's based on known low-risk our inventory, our view of mid-cycle pricing and then that's compared against share price, and it's dynamic. Obviously, it's impacted not just by commodities, it's impacted by the success of the share buyback program actually, we see buying at these levels is accretive to that number. So it's dynamic, and we'll stay on top of it, and we monitor that really quite carefully.
You've asked would we complement that with other return on capital tools, variables or specials or the like, we're open-minded. We're open-minded to that. When we think about fundamental valuation, we understand the math of buying shares in the context of capital allocation decision. A variable construct is a bit different than that.
And so for us to switch from this mechanism, I guess, we need to see a couple of things. We need to see valuation move to place where we were less comfortable. I don't imagine it would be a binary decision. I think you'd be complementing it with more dividend. We look in the market and we see valuation that's underpinned by a base and a growing base of dividend. So we were committed to growing our base dividend.
On the variable, it looks a little hit and miss to us at this moment. And so we don't see a signal relative to valuation and those dividends being capitalized well. So until we see that signal, we're probably not going to shift, but we'll be responsive to the market and pay attention to what's going on, and we're not going to do something that's going to disadvantage our cost of capital.
Great. Perfect. I appreciate the detail there. And then for my second question, I realize it's a little too early to talk about little knife, just with that seven well pad being tied in as you highlighted. But any comments you're able to share just on your outlook for productivity there, maybe based on what you've seen from operations in the area, or any comments from your observations to date just from your Murphy Creek that you referenced?
Yeah, I think we can -- I think we'll give you a little more color there, and I'll hand it over to Wade. It is early as Wade highlighted, and we'll talk a little bit more about that. But this area is not unknown. There's a lot of data out there. We have a highly calibrated geo model and there is a lot of data from third parties. And so we've talked about our confidence in the area being strong. We haven't seen anything that diminishes that at all.
So, I'll ask Wade to give you a little more color on how we see the quarter holding the pads you're talking about? And maybe actually get in a little bit of the refracs as well.
Yeah. Good morning Jeoff, thanks for the question. I actually want to go back almost two years to when we acquired this acreage. We really liked it at the time. We thought it looked a lot like Tier 1 acreage to us. Everything that has happened since then has been constructive to that view.
We've done a lot deeper characterization of the area. We also saw additional wells come online in our non-op program and just from other industry participants. All of that has really confirmed our view that this Little Knife area compares very favorably to our core position in Fort Berthold.
So, that first pad that you referenced, it's called the [indiscernible] pad. We've completed it, and we're actually in early flowback and it's very early, but I would say we're encouraged by what that looks like so far and look forward to actually demonstrating the broad potential of the little 930 with that pad and the second pad that will also come online this quarter.
So, in terms of what you should expect this quarter in terms of order, we also have another pad at the moment, flowing back in Fort Berthold. But after those two, you'll actually see -- we'll actually have our first set of refracs come online kind of a couple of weeks from now.
And then in the last month of the quarter, you will have our -- that second Little Knife pad come online and then near the end of the quarter, even another set of refracs. So, when we think about productivity of the area, it will likely vary, but we really are excited about these wells that will come online this quarter.
In terms of the refracs, I just maybe give a little deeper context there. These are wells that they've been online for quite a long time. We're completed out of time when completion intensities were quite a bit different. And so it's certainly something that we're exploring here around the potential to recover a lot more oil from those wells with a modern re-stimulation.
You did ask about that four-well pad that came online in the first quarter in Murphy Creek. That's our Kudrina [ph] pad. And that area certainly is further away from the core of the play, but we're actually pleased with the results. They've met our expectations to date, matches some of the other offsets that we saw in that area from another operator or two.
Great. Thank you. A lot to look forward there. It sounds like over the next couple of months here. I really appreciate it.
Thanks Jeff.
[Operator Instructions] Your next question comes from the line of Travis Wood from National Bank Financial. Your line is now open.
Good morning, guys. Sorry, I thought I withdrew Jeff. Jeff hit the question that I wanted to ask. But since I did withdraw, I’ll maybe ask on inflation. We saw some commentary from other operators in North Dakota starting to get a little busier through the back half of the year. So maybe could you just remind us in terms of how you have some services secured and how you're thinking about inflation through 2023 and I think you made a comment on maybe there's some tailwinds on pricing into 2024. Thank you.
Sure, happy to, Travis. This is Wade again. In terms of our 2023 program that the – all of the services and consumables needed for that program with one exception, which I'll come to, have been secured for a long time. So even though, yes, we see activity ebb and flow into play, and maybe it's picked up a bit, we're not concerned about our ability to execute this year's program. That's pretty much locked in.
The only key piece that we chose, purposely not to lock in was our facing in tubular costs and supplies. And so we've essentially been buying that on a quarter-by-quarter basis. Our view has been that steel prices were likely ease at a minimum, stay flat, if not roll over this year. And so we want to – we wanted to take advantage of that dynamic. And so far, that's worked out really well for us.
The last two quarters, purchases, we actually saw about a 10% reduction each quarter in the cost of the casing. And so that will continue to be our strategy as long as we see that kind of dynamic in the market, where we think future casing costs will be lower than today.
In terms of our strategic procurement activity, as has been our pattern for several years, we're already working on 2024 and 2025 in terms of ensuring that we're securing the rigs and pressure pumping services and in certain places, consumables where we need them for those programs. And so we feel like we're fairly well positioned there.
In terms of the broader ability to predict what costs will look like in 2024. It's a bit early to be firm about that. But it looks like on a broad basis, most of our key services and consumables have stabilized in price. And so that's probably about the simplest view we could give for next year. But if we continue to see steel costs roll over, which are, frankly, the largest part of our drilling cost that could give us a bit of a tailwind to see a little bit lower cost next year at a minimum.
Okay. Fantastic. That's great color. Always appreciate it. Thanks, guys. That's all.
Sure.
Your next question comes from the line of Patrick O'Rourke from ATB Capital Markets. Your line is now open.
Hi, guys. Good morning. Thanks for taking my question here. It sounds like a bit of an embarrassment of riches within the Bakken, Little Knife, Fort Berthold and even Murphy Creek, everything that's going on. Maybe with respect to one of the assets in the portfolio that doesn't see a lot of attention here. You do have the three wells at Wattenberg that you're drilling this year. I'm just wondering if you could provide an update with the timing where we could expect to see some news. And then maybe more broadly, what the strategy with respect to value realization for this asset to look like in the future?
Patrick. We're not embarrassed, but we're pretty proud. Yes, the DJ is -- it's a great little asset. It's got strong economics -- a little is sort of the key work for us. And so we've declared that asset strategically encore. So what does that mean? I mean I guess that's code for open minded to parting ways with it. But we see a lot of value in the asset beyond just the producing 1,000 BOE a day level that it's at. And so in a market like this, which I'll characterize as volatile from an M&A perspective and sometimes difficult to transact, we made a decision that the best answer for that asset at this minute is to drill a few wells and unlock value that way at this moment in time. So relative to the timing on those wells and those sort of things, we'll hand it off to Wade to talk about sort of where we are in that program.
Yes. This three-well pad that we've already begun execution on returns look really solid. So more than happy to bring those online this year. That will be in the summer. So timing of new information really to be in Q3.
Okay. Thank you.
Thanks, Pat.
[Operator Instructions] There are no further questions at this time. Please continue.
All right. Well, thank you very much for your attention. Again, it's a busy reporting day for a lot of folks. We'll let you get back to your day jobs and appreciate your support. Have a great safe weekend. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.