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Edited Transcript of ERF.TO earnings conference call or presentation 8-Nov-19 4:00pm GMT

Q3 2019 Enerplus Corp Earnings Call

CALGARY Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Enerplus Corp earnings conference call or presentation Friday, November 8, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Drew Mair

Enerplus Corporation - Manager of IR

* Ian Charles Dundas

Enerplus Corporation - President, CEO & Non-Independent Director

* Jodine J. Jenson Labrie

Enerplus Corporation - Senior VP & CFO

* Raymond J. Daniels

Enerplus Corporation - SVP of Operations, People & Culture

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Conference Call Participants

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* Greg M. Pardy

RBC Capital Markets, Research Division - MD and Co-Head Global Energy Research

* James Kubik

CIBC Capital Markets, Research Division - Research Analyst

* Michael Paul Dunn

GMP Securities L.P., Research Division - Director of Institutional Research

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Patrick Joseph O'Rourke

AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Junior and Mid-Cap Exploration and Production

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Enerplus Corporation Q3 2019 Results Conference Call. (Operator Instructions) This call is being recorded on Friday, November 8, 2019.

I would now like to turn the conference over to Mr. Drew Mair. Please go ahead, sir.

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Drew Mair, Enerplus Corporation - Manager of IR [2]

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Thank you, operator, and good morning, everyone. Thank you for joining the call. Before we get started, please take note of the advisory -- advisories located at the end of today's news release. Our financials have been prepared in accordance with U.S. 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; Jodi Jenson Labrie, Senior VP and Chief Financial Officer; Ray Daniels, Senior VP, Operations; Shaina Morihira, VP, Finance; and Garth Doll, VP, Marketing. Following our discussion, we'll open up the call for questions.

With that, I'll turn it over to Ian.

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [3]

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Thank you, Drew, and thanks to all of you for joining us today. I'll get right into our third quarter results. We delivered another strong sequential increase in our oil production in the third quarter, following a very active completions program in the Bakken during the summer months. Bakken production was up 18% from the prior quarter, driving company liquids production growth of 14%. And with the meaningful reduction to our share count over the last year, our liquids production per share increased 22% compared to the same period a year ago. The production continues to track our guidance, and we've provided fourth quarter production guidance of 103,000 to 107,000 BOE per day, with liquids production of 58,000 to 60,000 barrels per day.

We've effectively completed our program this year for bringing new wells on stream in the Bakken, and fourth quarter capital activity will be approximately 30% lower compared to the third quarter and primarily focused on drilling in preparation for 2020. This will result in modestly lower sequential production in the fourth quarter. The relatively light fourth quarter capital program is also expected to result in significant fourth quarter free cash flow.

Moving on to share repurchases. As highlighted in our release today, we were actively buying stock in the quarter. We repurchased approximately 7 million shares at a weighted average price of about $9 per share. Since we began buying our stock through the third quarter last year, we've now repurchased and canceled over 24 million shares, representing approximately 10% of our shares outstanding. We continue to see attractive value on our shares at current levels, but we'll remain disciplined with our capital allocation as we continue to focus on ensuring we maintain our balance sheet strength.

Through the first 9 months of the year, we had effectively been pre-spending our fourth quarter free cash flow to buy back stock. Jodi will provide more color on this later in the call. So to recap our outlook this year, our plan is expected to provide strong corporate level returns, 15% liquids production per share growth, over $200 million returned to our shareholders and low financial leverage. Importantly, we are delivering our plan on budget and have tightened our 2019 capital spending guidance to $625 million.

I'll leave it there for now and pass the call to Jodi to talk through the financial highlights.

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Jodine J. Jenson Labrie, Enerplus Corporation - Senior VP & CFO [4]

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Thanks, Ian. Our Bakken oil differential widened in the third quarter, while we expected that differentials in the second half of the year would be softer due to growing Bakken production. We also saw U.S. Gulf Coast prices relative to WTI moved tighter very quickly during August and September. The differential between Brent and WTI tightened by $3 to $4 a barrel compared to the first half of the year. And as a result, our realized Bakken differential is expected to be wider than our previous forecast. This weakness persisted into October, however, lower rig count, less completions and stabilizing U.S. Gulf Coast pricing brought some support into November and December. As a result, we are expecting our average Bakken differential for the year to be approximately USD 3.60 per barrel below WTI.

Moving on to Marcellus pricing. Our third quarter realized differential averaged USD 0.44 per Mcf below NYMEX. Pricing in the U.S. Northeast markets was relatively weak during the quarter, particularly in September after a cooler-than-normal summer allowed more gas to be injected into storage. We continue to expect seasonally stronger pricing in the Marcellus in November and December as a result of colder weather. We are maintaining our full year differential guidance for the Marcellus of USD 0.35 per Mcf below NYMEX.

Our unit costs trended 7% lower in the third quarter compared to the prior quarter mainly driven by higher production volumes. We are reducing our cash, G&A expense guidance by $0.05 per BOE, with operating and transportation cost guidance unchanged.

Turning to the balance sheet. Our total debt net of cash increased to $521 million at September 30, leading to a net debt to adjusted funds flow ratio of 0.7x. The increased debt net of cash was primarily due to the use of cash on hand to repurchase shares and fund working capital. Through the 9 months ended September 30, we repurchased 15.5 million shares for a total consideration of $155 million. Although we're forecasting strong free cash flow in the fourth quarter, our total spending related to our share buybacks will exceed our free cash flow in 2019. Outspending free cash flow isn't a sustainable, long-term approach to buying back stock. However, our strong financial position has given us flexibility to be opportunistic and still maintain low leverage ratios. To be clear, however, we believe preserving our strong financial capacity is a competitive advantage, and we will not put this at risk.

As noted in our news release today, we've now repurchased the maximum number of shares under our existing normal course issuer bid, which was for 7% of the public float. We've received approval from our Board, along with the stock exchange to increase our current normal course issuer bid from 7% to 10% of the public float. This increase equates to an additional 7.1 million shares that may be repurchased until the expiry of our current bid in March of 2020. We plan to provide a comprehensive update on our spending plans and capital allocation, including our approach to share buybacks when we provide 2020 guidance later this year or early in 2020.

With that, I'll turn the call over to Ray.

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Raymond J. Daniels, Enerplus Corporation - SVP of Operations, People & Culture [5]

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Thanks, Jodi. We saw another strong ramp in North Dakota volumes in the third quarter, with the 11 operated wells brought on production. As is typical for us, our completions program is biased to the warmer summer months and between April and September, we completed and brought 37 gross operated wells on production, which is about 90% of our 2019 program. As we've indicated, fourth quarter capital will be lower and primarily focused on drilling in preparation for the 2020 program. The only wells being brought on production in the fourth quarter in the Bakken are nonoperated.

Well production has continued to be solid. The 11 wells brought on production during the quarter were across 2 pads, with a 4-well pad with a peak 30-day production rate per well of 1,660 barrels of oil equivalent on a 3-stream basis, which was 71% oil and a 7-well pad with a peak 30-day production rate per well of 2,590 barrels of oil equivalent per day on a 3-stream basis, which was 65% oil.

Turning to the Marcellus. We saw a 4% decline in sequential production in the third quarter as we had fewer and lower working interest wells brought on production. Notwithstanding the modest decline in production, well performance in the Marcellus continues to be exceptional. Across the 13 wells we participated in during the quarter, the average peak 30-day production rate per well was over 40 million cubic feet per day.

Lastly, we completed 5 gross or 4 net wells in the DJ Basin during the third quarter. We have continued to test different completion designs to further advance our understanding of the associated well performance and cost structures in this play. It's still early days, but we are encouraged by the initial production results, and we'll provide further details when we have more run time on the wells.

I'll leave it there, and we'll turn the call over to the operator, and open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Neal Dingmann from SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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For the team, was just wondering your thoughts on activity. I guess more specifically, broadly speaking, maybe even 2020 if NGL and gas prices remain as depressed in the Bakken has it been. Or is this activity going to be much more -- or I should say, primarily driven by what the outcome of oil price is?

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [3]

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Yes, I think at the high level, it really is in oil. Oil really drives the activity levels. I think, obviously, gas-related infrastructure and those things are the margins going to affect some producers. But broadly, I think it's just an oil story. Certainly, it will be for us.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Okay. And then just one last one, just M&A thoughts, specifically, given today's environment. I'm just wondering and maybe it's not this black and white, but I'm just wondering, the easiest way to ask is just if you see yourselves these days as maybe a net acquirer, net acquiree or potentially neither these days.

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [5]

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Our vision is moving forward, and so we're always sort of thinking about both sides of that equation. Over the years, we've had a plan to sell noncore assets when we saw opportunities to do so. So I think you always have to think about that. As we think about our core area, we're looking to build it out typically. And we've got a balance sheet that gives us some latitude to think about that. So this market is pretty complicated, generally speaking, of buyers with expectations seemed a bit disconnected from -- certainly from the reality of public company valuations, so not a lot of stuff has been happening. For us, I guess, the key drivers remain similar. We're looking at full cycle economics, and we're looking at something that makes operational -- would make operational sense. We're going to keep our balance sheet strong. So I mean that gives us lots of latitude to look at smaller things. As you start thinking about bigger things, it becomes pretty complicated when you look at the implied valuations of our stock. And I think it's one of the primary reasons that not a lot of stuff is happening in a lot of places.

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Operator [6]

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Your next question is from Greg Pardy from RBC Capital Markets.

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Greg M. Pardy, RBC Capital Markets, Research Division - MD and Co-Head Global Energy Research [7]

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Couple of questions. One is just on the balance sheet. I mean it continues to be very strong. What are you targeting maybe as a debt to cash flow and maybe, call it, a mid-50s oil price? I'm just trying to get a sense that way.

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [8]

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It's a good question. I'd say at the highest level, we want to have a robust and resilient plan, and that resiliency means you have to maintain balance sheet strength. And as your debt creeps up, you better be thinking very, very closely about hedging and those sorts of things. For us, I think, at a high level, I think a lot of us think about 1x as being the old 2x. And it's very dependent upon, are we talking about 50? Are we talking about 57? Are we talking about 45? Those things really change things a lot for us right now. Maybe another cut of it, Greg, I think it's -- I think this balance sheet is a competitive advantage for us. And so think about it on a relative basis on some levels as well. We want to have a really, really strong balance sheet compared to our peers. We don't necessarily have to have the best balance sheet in the space, and we will use it, but it certainly is going to maintain -- we're going to keep a strong, relative strength there.

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Greg M. Pardy, RBC Capital Markets, Research Division - MD and Co-Head Global Energy Research [9]

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Okay. So it sounds like you probably run a variety of scenarios in terms of what you'll look like in 2020 from a balance sheet perspective, free cash flow, et cetera. So there's not any one number at any one oil price?

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [10]

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No. No, I think that's very fair. And all of our capital goes into our -- virtually all of the capital has been going into oil. Yes, we do have a nice little gas position in the Marcellus, and gas prices influenced affordability as well. So yes, we look at it all, and scenario analysis has certainly become the new norm in the last 5 years.

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Greg M. Pardy, RBC Capital Markets, Research Division - MD and Co-Head Global Energy Research [11]

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Okay. Okay. Second question is it doesn't sound like there's too much more to say around the DJ. Just -- it may have been in the release and I missed it, but how large is your DJ production now?

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [12]

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It's actually -- you can probably see something that's looked like around 1,000 barrels in the release. Sorry, I should know that number. We haven't given a lot of detail on it, though. And if I can give you a little more color, Ray used the word encouraging in the well results. So we had our first 5 wells. We've got another 5 down, and those wells would have been completed right towards the end of August. So they would have only shown up in the quarter, just a little bit of production in the actual quarter. So you bring those things on, on a staggered basis, call it, 2 months, maybe a little bit more than 2 months we have on those wells right now. So it's just a bit too early to be talking about it. As we think about spending plans for next year. As Jodi said, we're going to give some color right towards the end of this year or into next year, and that would be a pretty logical time to give a little more color about those wells and how it all lines up.

The whole position is over 30,000 acres. We've been sort of focusing our activity on about 1/3 of that, pretty concentrated block there, and that block is the one where we gave some -- a bit of scope, which we said, you could see up to about 400 wells on that, so could be meaningful. And we're really just in the evaluative stage right now.

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Greg M. Pardy, RBC Capital Markets, Research Division - MD and Co-Head Global Energy Research [13]

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Okay. And just to be sure, the 5 you referred to, the 5 downward last year's venture, a total of 10 wells down?

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [14]

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Yes.

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Operator [15]

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Your next question is from Patrick O'Rourke from AltaCorp Capital.

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Patrick Joseph O'Rourke, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Junior and Mid-Cap Exploration and Production [16]

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Hopefully, this isn't too redundant. I guess my fingers are a little slower again into the queue than the other guys. But just kind of wondering, Jodi touched on maintaining the balance sheet here. Do you guys have a specific threshold in mind that you don't want to go above with the share buyback? And then second part to the question, when we're -- I know you don't have a budget out yet for 2020, you've had some pretty impressive per-share growth here, which we think is really the right way to look at production growth. What do you think is the primary driver of that per-share growth in 2020? Is it the drill bit? Is it the share buybacks? Or how do you look at maybe keeping some of that powder dry for some of those opportunistic M&A opportunities out there that seemed to resonate best with investors if they're done through cash rather than equity?

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [17]

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Yes, there's a lot going on there, Patrick. So let me hit the -- we don't have an absolute single point in time debt metric. I do think, as we -- as I mentioned to Greg, keeping relative strength is really, really important here. And as we think about scenario analysis. The only thing I'm absolutely convinced of relative to oil price next year is we will see volatility. And so having something -- having a balance sheet that feels pretty good when oil is in the 40s, feels like a pretty good plan to us. So that sort of sets some outer limits on how much debt you would have, and obviously, you have single risk mediation and hedging in connection with that.

To your question about 2020 and how all that works, as Jodi said in her comments, we made a decision this year that we were -- our balance sheet was so strong, we would use some of that strength, and we would outspend. So we took all of the free cash flow we generated, or planning on generating, and some extra capacity and we're buying shares. And so now we've bought 10% of the stock. You can't do that forever, obviously. But to frame it, $100 million of debt is a pretty small change to our debt cash flow metrics. We've got flexibility as we think about it. As we think about the principles next year, they're going to drive our spending plans or influence them. They're going to be very similar to the principles that we're going to play this year. The capital is going to be largely focused on the Bakken, and that's going to drive competitive liquids growth. We're not just chasing growth though because that growth in this kind of price environment is very economic as well.

We are focused on a plan that generates free cash flow. I think that's a plan that plays well in the market. It's also a very sustainable plan, and it's a plan that we delivered -- that we're planning on delivering again this year. Balance sheet strength is critical. Obviously, if we could generate free cash flow, that gives us a lot of choices to maintain financial strength.

And so then to close it off with your sort of last question, how does other spending, share buybacks and how do those things fit into the mix? I think in some levels, respects, you have to be opportunistic, but we see really compelling value in the stock right now. And so there's a reason that we increased our approval limits for the NCIB. Our expectation is we will continue to execute under that plan. And then we'll sort of dial the details and the specifics of that up as we move towards the end of the year to try to give people a bit of a sense as to how we think about spending that free cash flow and directionally and how much. And it will be contextual, as you say, these things peak for -- these things compete. We look at share buyback today, though, you're buying Enerplus reserves on a 2P basis at about $10 a BOE. That's pretty compelling when you think about other M&A opportunities that are out there. So we continue to see share buyback as having a place in our business.

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Patrick Joseph O'Rourke, AltaCorp Capital Inc., Research Division - MD of Institutional Equity Research for Junior and Mid-Cap Exploration and Production [18]

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Okay. And then maybe just one quick follow-up question here. Are there any implications to moving your credit facility to U.S. dollar denomination there? Does that save you interest? Obviously, most of your assets and expenses are south of the border, so that makes sense. But just wondering if there's any other positive implications.

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Jodine J. Jenson Labrie, Enerplus Corporation - Senior VP & CFO [19]

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Yes, there's -- it's really no change, honestly. It's just the majority of our spending and our outstanding senior notes are in U.S. dollars, and we can actually borrow -- either way, we can borrow in Canadian or U.S. dollars, whether the actual facility is denominated in U.S. or Canadian.

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Operator [20]

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(Operator Instructions) Your next question is from Mike Dunn from GMP FirstEnergy.

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Michael Paul Dunn, GMP Securities L.P., Research Division - Director of Institutional Research [21]

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Ian, I see that you guys reported $13 million of property and land acquisitions in the quarter. It sounds like it's mostly in North Dakota. Can you -- I'm just wondering, I'm assuming these lands are in and around, if not, additional working interest on your existing acreage there? And then maybe some color on what you think the undrilled inventory that you've picked up there?

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [22]

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You're correct on your assumption on the first one. There's -- the line is pretty well held out there, but there's lots of little opportunities, a fair amount of work going on relative to swapping and increasing working interest and those sorts of things, so that activity was all sort of in connection with that and a bit of leasing going on. Sorry, the second part of your question?

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Michael Paul Dunn, GMP Securities L.P., Research Division - Director of Institutional Research [23]

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Oh, I was just wondering if you guys had an estimate of the number of net overall locations that you've picked up.

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [24]

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Yes. So oh, sorry, locations we've picked up. No, sorry. We haven't updated that number. It would largely, though, they'll be working interest change, and I don't have that number.

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Operator [25]

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Your next question is from Jamie Kubik from CIBC.

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James Kubik, CIBC Capital Markets, Research Division - Research Analyst [26]

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Just a quick question with respect to NGL price realizations in the Bakken, they're obviously pretty light in the U.S. for Q3 at $2 a barrel. Do you see them staying at these levels in Q4? And are they contracted? Can you help us understand how that looks going forward?

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Jodine J. Jenson Labrie, Enerplus Corporation - Senior VP & CFO [27]

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Yes. No, sure, I'll take that. So NGL prices have weakened considerably throughout the year in both Canada and the U.S. just driven by the significant growth in the associated gas and higher NGL production growth. The Conway NGL mix has decreased from 50% of WTI in Q1 to 35% of WTI in Q3, so this is what's driving a lot of the impact on our realized liquids pricing. However, keep in mind, NGLs are less than 5% of our overall production mix. Going forward, though, we expect prices to recover a bit here in Q4 and actually into 2020 as additional fractionation capacity comes on in the U.S. Gulf Coast and some of the debottlenecking pipeline between Conway and Mont Belvieu. So I think it's going to improve going forward here.

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James Kubik, CIBC Capital Markets, Research Division - Research Analyst [28]

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Okay. But nothing contracted that would keep them depressed at these levels then?

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Jodine J. Jenson Labrie, Enerplus Corporation - Senior VP & CFO [29]

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Sorry, no. All of our gas is processed and are -- majority of it anyway, and North Dakota is processed with Targa, and so they are the ones that transport and sell our NGLs.

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James Kubik, CIBC Capital Markets, Research Division - Research Analyst [30]

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Okay, got it. And then just a quick one on operating costs. They trended down nicely in Q3. Any reason that they would increase in Q4? I know you had your guidance flat, but should we expect some similar in Q4?

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [31]

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We're comfortable with our guidance. Yes, I mean, winter and snow and downtime and things get expensive. And so there's always a little bit of seasonality to it that's built into it. So we had a good run in the summer, for sure. But I'll give you an example, we keep adding 40 producing wells a year, and managing downtime continues to be a focus area and workover rigs are part of that, and that rolls through to OpEx. So it continues to focus, and you often have things a little more complicated as it starts to snow there.

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Operator [32]

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There are no more questions at this time. Please proceed.

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Ian Charles Dundas, Enerplus Corporation - President, CEO & Non-Independent Director [33]

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All right. Well, I know people have a busy day, so thanks for everyone's time, and hope you all have a good weekend. Thank you.

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Operator [34]

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Ladies and gentlemen, this concludes your conference call today. We thank you for participating, and ask that you please disconnect your lines.