Q3 2019 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to stand by thank you for your patience.
Good afternoon, I am Carmen and I'll be your conference facilitator today, I would like to welcome everyone today extraction oil and gas third quarter 2019 financial and operating results conference call.
All lines have been place on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If he would like to ask a question simply press star one spend a number when your telephone keep that.
Please be advised that day remarks today, including answers to your questions include statements that the company believes to be forward looking statements within the meaning of the private Securities Litigation Reform Act. These forward looking statements are subject to risk and uncertainties that could cause actual results to be materially different from dose currently anticipated.
Doses. These include among others matter said the company describing this financial and operating results news release issued this afternoon any <unk> filings with the Securities and Exchange Commission extraction disclaims any obligations to update these forward looking statements. While the company believes these forward looking for.
You must have reasonable they are subject to factors such as commodity prices general economic conditions competition technology, and environmental and regulatory compliance the company's drilling schedules capital plans and other factors that may cause its results to differ materially I would now like to trying to call over two movies fault.
More extractions director of Investor Relations.
Thank you and good afternoon, everyone. We're glad you could join US today for our third quarter earnings call with US today on the call we have not out once our president and acting CEO Mary you know what boesky, our VP of finance.
Tom Brock, our Chief Accounting Officer, and Eric Jacobson, our SVP of operations.
I'd like to remind you that today's call. In addition to the aforementioned forward looking statement also included a discussion of certain non-GAAP financial measures. Please be sure to read our full disclosure on forward looking statement and GAAP reconciliations in our earnings release and at our filing on Form 10-Q , which we provided earlier today after the close of trading well now turn over the called them out Owens.
Our president and acting CEO to go through some of the highlights for this quarter. Our 2020 plan along with an update on Mark's health.
Thanks, Louis Good afternoon, everyone welcome to our third quarter earnings call.
I would like to start off by thanking all of our investors and partners for your continued support for marks during this time.
Everything is still progressing as expected and we hope for him to make a full recovery in the coming months.
I'd like to quickly touch on our third quarter results and then go into the details behind our 2020 program and the longer term strategy that we introduced here in our redesigned investor presentation.
You'll also get to hear from marrying that with boesky, our recently appointed VP of finance.
She is new to many of you out there, but she's been with acid extraction since near the beginning.
I'm looking forward to many of you getting to know her better in the upcoming much as we get back out on the conference circuit to talk about all the great things we have going on currently at the company.
During the third quarter, our upstream drilling and completion operations were executed. This plan as we turned on 22 high quality wells in Greeley.
However, we were negatively impacted by a large scale unplanned outage on the western gas system that reduced our production during the quarter by over 8000 Boe per day.
This outage was resolved by the very early part of October .
If you turn to page 10 in our investor deck, you'll find our midstream diversity map that most of you are very familiar with.
We spent the last few years working tirelessly to assembled the most diverse gas processing portfolio in the DJ basin.
It took a tremendous amount of hard work and negotiation with the various third parties involved but I'm proud to say that the transformation. We've all been waiting for is here.
All of the project you see on this map are now fully operational.
We are sending volumes from east Greeley down Rocky Mountain Midstreams East really pipeline, we're moving incremental volumes from our Windsor area to rim rocks appears plant.
An elevation Midstreams Badger CGS is running beautifully servicing our broomfield area.
We're now producing all of our wells without any significant production constraints.
To give you an idea what that looks like during the last week in October we produced over 126000 Boe per day, including over 57000 barrels a day of crude oil.
That being said I still point, you to our revised guidance range, which implies about 100000 Boe per day during the fourth quarter.
It took some time for us to ramp our production up through October and we'll have to see how the rest of the quarter goes with respect to weather.
However, I do look forward to showing you longer term production data from our newly unconstrained Greeley wells to validate how prolific the acreage under the city really he is.
Focusing on capital I think our expenditures during the third quarter came in nicely below what most of you out there we're modeling despite similar levels of activity.
For those of you that had been following extraction since the beginning it's my World class technical team that really sets us apart.
We built this company with the goal of constantly innovating our designs and I think that these cost reductions really demonstrate that.
As a result of our well design optimization efforts, we were able to reduce our 2019 DNC capital budget by 15% with only a 5% impact to our production, which is largely explained by asset divestitures and midstream outages.
On the regulatory front, we once again demonstrated our ability to successfully navigate the Colorado regulatory environment.
During the third quarter, we entered into an operator agreement with Commerce City, and Adams County, covering about 152 mile locations.
This is our second large scale operator agreement outside Weld County signed after Senate Bill 181 was passed.
Turning to our 2020 guidance our plan is to invest just enough to maintain our operational momentum and use the incremental free cash flow to bolster our liquidity and pay down debt.
The overarching theme of our plan for the future is free cash flow generation to drive production growth per debt adjusted share.
Overtime, we expect to grow our free cash flow via modest production growth lower base declines and meaningful reduction in interest expense as a result of paying down debt.
I've also continue to challenge my team just squeeze every bit out of our cost structure further maximizing our capital efficiency without sacrificing well performance.
Look forward to seeing what ideas, we come up with.
Before I turn it over to Mariella I'd like to quickly touch on our ongoing asset divestiture program.
During the third quarter, we divested the majority of our 2019 non operated program for approximately $22 million.
This brings our year to date divestiture total to approximately $46 million, which is right in line with our land expenditures to date.
Offsetting our land expenditures with asset sales has been our plan and we continue to execute on that with additional potential divestitures in the hopper.
I'll now turn it over to Mariella to discuss our financial position.
Thanks, Matt.
We ended the third quarter with 450 million Undrawn on our revolving credit facility I.
On November 4th as part of the fall Redetermination process, our borrowing base and elected commitment were reduced to 950 million. Despite a 20% increase in PDP reserves since the spring Redetermination.
The decrease was driven primarily by an approximate 60% reduction and the NGL price that used by the bank group.
Despite the borrowing base production, given our plan to generate significant and growing free cash flow into fourth quarter and into the future remain comfortable with our liquidity position.
That being said, reducing the balance in our revolver is one of our top priorities and we intend to use free cash flow generated during the fourth quarter to reduce our revolver balance by over 70 million.
We need to just under 50% drawn by the end of 29 team.
Our preliminary 2020 guidance implies between 40, and 60 million of free cash flow next year I'm fully consolidated basis, which represents a free cash flow heels of over 15%.
As we continue to decrease interest expense with debt reduction, we expect to further improve our free cash flow profile.
We also have full common equity ownership and elevation midstream, including a 25% equity stake in plot River midstream.
He system food volumes from Merck really in brownfield areas, which we expect to continue growing.
Consistent with what we said in the past we think these midstream assets have considerable bally today would be worth more next year as these volumes continue to increase.
So with everything we've outlined here, we have a clear path to continue improving our liquidity, while reducing leverage.
With that I'll, let you open it up for <unk>.
Thank you, ladies and gentlemen, NASA reminder, to ask a question just press Star then one on your telephone keypad to withdraw your question. Please press the pound key and we ask that you. Please limit your time to one question and one follow up.
Again, if you have a question just press Star then one.
And our first question is from Welles Fitzpatrick with Suntrust. Please go ahead.
Hey, good afternoon.
Good afternoon, Okay. So Oh Wow, you guys talk about the asset sales in one to 2000 barrels a day is that range is that just a.
The timing of the close issue.
It was a it was a thousand roughly a thousand barrels of oil per day in about 2000 BOE, we for the full year.
Okay, I apologize and then on Coyote it looks like those inflicted at around eight months nine is that a function of the ongoing or I guess not ongoing anymore, but of the midstream issues that would have been present at that time or set a function of Oh, what you think that the well a profile will look like.
No that that actually we drilled 10 wells on the Coyote pad initially and we came back in and drilled the remaining six wells that were going to the south off of that pad. So that was the wells being shut in for the offset Fracs and then coming back online and cleaning up afterwards.
Okay, Okay got it I'll hop back in the queue. Thanks.
Yep.
Thank you.
In our next question is from Brad Heffern with RBC. Your line is open.
Hey, good afternoon guys.
So so Matt though the numbers that you quoted for that last week of October obvious thing well above you know I know the Fourq you guide or the 2020 guide. So is that just conservative in some or is this just flush production and we're gonna see decline you know what the stabilization of their production base sometime during next year.
It was mostly flush production. So during during that month of October we turned on about 50 Wells and then we also had the the production that was constrained on the western gas system coming back online at the same time. So so we did have a lot of flush production coming on but a I'd say the majority of it was due to the new wells that we're bringing.
On that we had been completing during the second third quarter and it was really just kind of the eastern Greeley pipeline system and the Badger system, all kind of coming on line right around the same time.
Okay got it and then as far as that trajectory goes on 2020 with its Capex plan do you see being relatively flat production throughout the year or how do you expect it to trend.
Well, we will expect probably a slight decline in the beginning of the year just given what we're exiting at but for a year over year basis, we're focusing on flat oil production and then we'll have a slightly larger than that or on our be always just given the areas that were focusing the drill bit right now and greeley in broomfield, which are areas that.
Maybe a little bit more gas and ngls than what our traditional production mix has been.
Okay got it and then just finally I wonder if you could put a little more color around the decline in capex for the fourth quarter. Obviously, it's it's pretty late in the year and that's a pretty low implied.
Number for the fourth quarter. So how did you achieved that.
For the for the fourth quarter. Its we don't we don't have a lot of frac activity happening in the fourth quarter. Most of our capital plan for this year was the big dollars that were spent in the second and third quarter getting ready for all the volumes to time up and come online with the the to midstream facilities that we were in the process building and then or.
And then in the fourth quarter were back to mostly drilling and then we'll be back to completions again in the in full time in the first quarter.
Okay. Thank you.
Thanks.
Thank you, ladies and gentlemen, I saw a reminder, easy I've a question just press Star then one to get into Q.
And our next question is somebody young with credit Suisse. Please go ahead Mike.
Hi.
Follow up just on the 2020 production profile I'm just wanting to make sure are you expecting the oil production also to be flattish at 42000 Boe per day through the year.
Oh after a little bit of decline early in the year.
Yeah, a there won't be huge amounts of fluctuation, but like I said, the first the first quarter might be a tad bit low but on a year over year basis. We're we're guiding 2020 to be the midpoint at 42000, so basically flat year over year to what we're guiding in 2019.
Got it but its but it won't be declining <unk> like by four key 20 production will not be declining sub 42000 Boe per day.
We're not anticipating that at this time got it and and can we serve a expend on the PDP oil decline looking at slide five.
If a year on nine a year and 19 your PDP decline using a high 40% range.
Bye.
By year end 20, a lower PDP decline, how would that translate to a potentially lower maintenance capex for 21.
Yes, that's that's exactly what it would do so our base decline has come down.
Ever at each year, and as we're slowing down and focusing more on free cash flow. We don't have as much flush production coming on each year, which therefore would also translate into a lower base decline and from this plot you can see we were kind of in the upper Fortys at year end 2019, and then we're forecasting that to be somewhere around the mid fortys.
Or maybe a hair lower at the end of this year, so, yes, lower maintenance capex to keep that flat going forward.
And what would that be are we talking about 50 million dollar lower or just directionally could you help us was up some sort of magnitude.
Well for this this is a this decline that you're looking at here is oil only and for the Capex range that we gave next year. We're also guiding to pretty much flat year over year production. So were fairly close to our capital plan next year's fairly close to the maintenance capex for for oil.
Okay, all right. Thanks.
Thanks.
Thank you.
Question from the line a wells that fits projects I fly Suntrust.
Hi, guys. Thanks, Phil I mean, how backend you hit on this in the prepared remarks, but it's fair to assume that the 100 to 120 of cash flow in Fourq, you and then the 50.
Next year goes to take down the revolver and then you you can put the series a days on on the revolver is that is a is that the kind of game plan as it stands now.
Oh, we haven't determined exactly how we're going to move forward that we're still evaluating what we're going to do with the series a but as far as the free cash flow goes for the fourth quarter. This year and where we have next year, we're going to be focused on enhancing our liquidity and then also looking at potentially reducing debt in other ways.
Okay, Great and then the the decision on the Hawkeye elevation build out if that went forward as it it's safe to assume that that would fall almost entirely are entirely in 21 and beyond.
At this point with the plan that we have right now slowing down and focusing more on de levering and generating generating cash flow. It's pushed some of our development outwards and that would that would include Hawkeye. So it has been pushed a little bit from what our initial plans were a year or two ago.
Okay and then just just one follow up you know you got some talks about monetizing elevation in the past is that is that something that you would want to want to sell as kind of one piece or given that hawkeyes kind of moving a little bit to the right could you sell plat or maybe sww.
You know independently.
They can be it can be done either way. So we have the we have the option to do Platte River independently or we could do it as a combined system. Its its really going to depend on what the cash flows looked like that and what kind of valuations people are going to put on it you know plant River is a larger system. Then then elevation is right now it's got a lot more production history.
And more total barrels moving through it but we do expect volumes to continue ramping in the elevation system throughout next year and the following so we do have the option to do either one.
But potentially might be able to get a better value if we combine both together.
Okay. Thank you very helpful. Thanks.
Thank you. Our next question is from Leo Mariani with Keybanc. Please go ahead.
Hi, guys I was hoping to provide a little more color around kind of rough activity levels. In 2020 in terms of you know what unit around on the rig side as well as then Frac crew side and how many wells you might expect attorney in line.
Next year.
Yeah. If you look at a turn to slide eight in our and our new new investor deck, we outlined that on their it'll be a between one and a quarter and one and a half rigs and Frac fleets is where we'll be for the year in 2020, and then the gross wells drilled and completed and turned in line or a list.
Did write down there on the page, but they're all right or right around 90, or 90 wells and a little bit over two mile average lateral length.
Okay and.
And I guess just in terms of debt reduction and you guys had a program to buying back bonds that's been in place for awhile.
Where do you kind of stand there have you kind of bought back I think it was a 50 million left on the authorization as of last quarter, a and obviously just where your bonds are trading.
Do you want to kind of getting more aggressive in by those in the open market was free cash flow with whats your plan for the bonds.
We do still have a and a an authorization outstanding to repurchase more bonds in the open market, but I'd say right now our near term focus is enhancing our liquidity to the range that we're comfortable with and then after that we will.
Look at Opportunistically, reducing debt, whether that's buying bonds at a discounted price or or something else, but once we get liquidity taking care of and in a comfortable range. Then then we'll evaluate the next methods.
Okay, and I guess, just kind of talked about 100000 barrels a day average production I guess the per day on the fourth quarter.
He kind of have any kind of tighter capex range for fourth quarter.
Might be able to provide here just trying to make sure I get my arms around how you get to the free cash flow number down for Q.
No nothing tighter than the you know the three quarters that we've already reported now and then the revised guidance range for the full year.
Okay. Thank you.
Thank you.
Thank you and we have a question from the line of Marshall Carver from Heikkinen Energy. Please go ahead.
Yes. Thank you with regards to the Capex next year.
Turned in line schedule do you expect Capex and turn in lines to be.
Through the year as we can to be.
These are going to be dramatically first or second half weighted.
No. We we tried to do the best that we can't every year to keep that that study but.
So I think it'll be fairly fairly close to around 50 50 in the first half in the second half, but that's still is being fine tune given the pace that our rigs are going and if and as a pad ships up but you know 20, or 30 days or not it cuts could shift at around a little bit so we'd be able to give more color on that as we get into the first quarter.
Okay, but [laughter].
As far as well and that goes for both completions on for.
Capex dollars.
Yes.
Okay.
And Oh as a follow up.
Last quarter, you talked about the oil pricing dynamic in terms of differentials getting better into next year do you still.
To that being the case.
Yes, we've seen that trend to continue to get better second quarter was when our differentials were at the highest I think we're right around nine bucks.
In the second quarter, we've seen that come down into the low AIDS for the third quarter like we were anticipating and I think for right now we're seeing its day right around the low AIDS through the end of this year, and then hopefully getting I'm, a little bit little bit better in our favor as we go into the first quarter in second quarter next year.
Alright, thank you.
Thank you.
Thank you and we have a question from the line of Gabe Daoud with Cowen Your line is open.
Hi, good afternoon guys.
Back to the onshore rain and you're going to.
Did you give and oil mix on then.
Should we just something similar to what you put up in Threeq, you about 44 enough. So.
Yeah and that that rate. It was a 126000 BOE a day and 57000 on the oil so is right around the mid fortys through the percent oil, but again remember that is just because the all of the turn in lines that happened right at that time were in our Greeley in Broomfield areas, which is traditionally have larger higher Giovanni.
As than our traditional production mix, but the oil volumes are still are still similar to what our traditional oil mix it or production volumes have been.
Okay. Thanks, that's helpful. And then just a quick follow up.
We closed 46 million.
To date on assets.
Was there what was the exact timing I guess like one of those assets sales pauses in threeq or was that something earlier. This year and then just kind of revising guidance now just I'll be curious on the timing.
We had the one one.
Divestiture that closed in the first quarter that we announced that was around 22 million Bucks and then we had the you know some very minor ones in the second quarter, but then in the third quarter is when we decide this second sale that was also right around $22 million close.
Okay got it thank you.
Thanks.
Thank you, Sir and Sir I'm, not showing any other questions in acute I would like to turn to called back to my Owens for his final remarks.
Thank you everybody for your time today that concludes our conference call have a good afternoon.
And thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating and you may now disconnect.