Q3 2019 Earnings Call
Later, we will conduct a question and answer session and instructions will follow with that side.
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After the why their kids conference call is being recorded.
Without further delay a bunch of carried over to conference to your host Mr., Todd Crathree Hope Investor Relations.
Thank you Ian and welcome to everyone.
Speaking this afternoon will be trim Smith Board Chair, CEO , and President Gary Group, Chief Operating Officer, and Executive Vice President and care rebates, Chief Financial Officer, and Executive Vice President.
Tremor, where do you activities and highlights from the quarter Scary and then Carey will discuss our key operational and financial results trend will have a few concluding remarks as a reminder, today's call contains certain projections and other forward looking statements within the meaning of federal Securities laws.
These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements.
These include risks outlined in our coal fire.
Our website be or why dot com has a link to the November investor presentation.
Website also includes reconciliations for the non-GAAP financial measures, we use to the related GAAP measures from our financial statements.
Later, we will also post the replay wake up this call and the transcript on the site and we will file. The 10-Q later today I will now turn the call over to trim Smith.
Thank you Todd and thanks, everyone for joining us today for our third quarter earnings call.
This quarter was extremely productive for Barry we delivered according to plan growing total company production by 8% in California production by 10% since the second quarter.
And we're confident this growth will continue into the fourth quarter.
Our focus continues to be on creating value for our shareholders across market cycles through a combination of growth and returning capital.
Specifically this year, we expect to see double digit production growth of about 12% companywide.
Providing attractive dividend yield and have repurchased 4% overstock.
We're also pleased to announce that the board has a brief to fourth quarter dividend 12 cents per share.
We are delivering on our promises and we're executing within Levered free cash flow, which we define as free cash flow less dividends and the capital to maintain production.
[noise] towards the end of the second quarter, we began to see the fruits of R 22019 capital program and that production growth continues today.
The company's third quarter production was in line with our plant at 29600 barrels oil equivalent per day.
We are projected to end the year in line with our full year production guidance.
California, where we spent 91% of our capital year to date, we grew 10% the third quarter.
Importantly, we are demonstrating that our assets respond to capital investment and then we can toggle or capital spend and therefore production up or down to best maximize shareholder returns through all market conditions.
We recognize our business model is distinct from most other you'd be companies in the markets.
Like the resource plays and reach which each well starts off at a maximum production rates I piece, a significant portion of various California production ramps up over a period of time.
Reaching peak performance, sometimes four to six months after initial production.
We have included type curves on slides 13, 14 of our November investor presentation that illustrates the significant difference.
In addition to help you with your modeling moving forward, we will provide capex projections are quarter in advance as capex is not linear from quarter to quarter.
For the fourth quarter, we expect to invest 35 to 40 million, which will put total 2019 capex slightly below the midpoint of our guidance.
In 2020, we expect to continue to deliver shareholder total returns in the mid teens through production growth and return of capital towards shareholders by utilizing all the tools available to us as outlined on slide 22.
The regulatory landscape in California continues to be a topic of interest to our shareholder base.
The California Legislative session closed September 13th and we'll begin again on January six next year.
However, our very first efforts continue.
We are committed to protecting our assets.
Our corporate affairs department or government and regulatory teams and our our old actively participating in the California regulatory process with various outreach strategies and programs.
With our investments and focus in this area, we're now well position to respond to potential regulatory and legislative activities.
So far our approach has been effective in helping to minimize the impact of these actions on our business.
Last this past quarter, we engaged to third party consulting firm to conduct a perception study to gauge how the investment community views berries performance as a newly public company as well as to better understand the streets perception of the industry as a whole.
Overall, one of the key takeaways from the study was that the investment community values strong free cash flow.
A healthy capital return strategy.
And our conservative leverage profile.
We believe very delivers on all of these points.
Barry has lived within Levered free cash flow through all market conditions has consistently paid a dividend since going public.
And maintains low leverage at 1.4 times its debt to EBITDA.
Additionally.
Barry has grown low risk production from the existing asset base.
As production heavily weighted towards oil.
Benefits from Brent based pricing, resulting in attractive margins and has based on management estimates at least a 20 year inventory of future drilling locations.
On top of that we are well hedged for the remainder of 2019 and throughout 2020 .
Accordingly, Verizon a strong position to continue to create and delivered top tier value in this space.
I'll now turn it over to Gary who will give you greater insight into our operational performance for the third quarter.
Thank you trim and thanks, everyone for joining us this afternoon.
First I'll speak to production third quarter production growth continued to build on the momentum that began at the end of the second quarter and we're pleased results are inline with our full year guidance, our companywide third quarter production of 29600 BOE per day was up 8% compared to last quarter.
To further illustrate illustrate this growth septembers average production rate was 31700 BOE a day compared to June to average of 27400 be a day, resulting in a monthly exit rate in September that was 16% higher compared to June to exit rate in the prior quarter.
Our production mix and the third quarter was 87% oil, 12% gas and 1% Ngls with California, making up 78% of total production.
For the month of September production was 88% oil.
In California, specifically production for the quarter, consisting of 100% Brent based oil was up 10% compared to the second quarter and 18% from the third quarter of 2018 to third quarter of 2019.
The monthly production exit rate for the quarter was 25400 be we a day up 25% compared to the second quarters exit rate.
That's trim noted this improved growth in our California production is directly attributed to our strategic capital deployment in the first half a year.
That brings me to capital expenditures.
Overall, our spending as it is inline with our expectations consistent with our planned capex for the third quarter of 2019 was 63 million compared to 57 million in the second quarter.
We drilled a total of 82 wells in the third quarter.
31, thermal sandstone wells of which 30, where producers and one wasn't injector and 50 thermal data might wells in California, as well as we also drilled one well in the Rockies.
We also hydraulically stimulated 25 wells and our bell Richfield during the quarter, which completed our stimulation plans for the year in that area.
This work compares to 114 total wells drilled and 10 hydraulically stimulated in the second quarter.
We're currently running three rigs in California and plan to continue running up to three rigs for the remainder of 2019.
The increasing capital quarter over quarter is a result of equipping and bringing wells online that were drilled in the first half of the year as well as cost associated with hydraulic stimulation.
We do not expect the same proportional increase and equipping cost in the fourth quarter.
Additionally, we have spent 20 million year to date 8 million of which was in the third quarter for plugging and abandonment requirements. As you may know earlier this year the state implemented new regulations, which essentially require all oil and gas companies to accelerate abandonment activities on older idle wells, we have submitted our plan to address the.
Yes, I do wells and are working with the California Department of oil and gas for its final approval.
Last I want to touch on expenses.
Our third quarter unhedged topics was $18 in 13 cents per view, we versus $18, a 94 cents per be a we in the second quarter a reduction of 4%.
Including fuel purchase hedge contributions opex per be really in the third quarter was $18, a 90 cents versus $20 on 38 cents in the second quarter a reduction of 7%.
This opex reduction during the quarter was primarily driven by holding cost stable while growing volumes.
As we expected unplanned our natural gas fuel usage rate remained flat from the second quarter to the third quarter at approximately 75000 MBT you per day.
Our average unhedged purchase price for the third quarter was $2.67 per MBT, you compare to $2.03 per it'd be too in the previous quarter.
And with that I'll now turn it over to carry for our financial performance. Thanks, Gary.
To start third quarter and year to date production in capital spending or in line with our expectations and our full year guidance. Our adjusted EBITDA increased 34% 83.9 billion largely due to increased production from our California, Brent based oil assets, we accomplished this despite.
The 9% quarter over quarter drop in Brent oil prices as Gary highlighted our third quarter Opex per BOE, eight, notably improved versus the second quarter, primarily due to our ability to hold absolute non energy operating costs flat, while increasing production the non energy portion of our off.
X was $14.09 per be away in the third quarter compared to $15.53 in the prior quarter. The energy portion of our Opex was up about a million dollars more than the second quarter.
Due to unusually high fuel costs in the first quarter 2019, we expect our full year opex per before we including fuel costs to be on the high side of our original guidance.
We began heavily hedging fuel gas prices purchases in April of this year to mitigate volatility that resulted from unseasonably cold weather and caught gas prices despite to levels much higher than they had been in at least four years given that the system remains vulnerable to disrupt.
Tons, an increase volatility we have hedged the majority of our fuel gas needs through the end of 2020 at roughly $3 per in MBT and have begun to layering in hedges for this first quarter up 2020 at approximately $2.50 per NBT Pete Please see slide.
21, and 29 of our November Investor presentation.
Oil hedges were effective in protecting our cash flow from lower Brent pricing during the third quarter compared to the second quarter lower prices had a $9 million negative oil price impact. However, our hedge settlements contributed a positive $17 million on a core.
Other over quarter basis.
An unhedged basis, adjusted EBITDA was 68.8 billion in the third quarter compared to 66.1 million in the second quarter as the result of increased production.
We continue to manage our oil hedge portfolio and now have Brent swaps at $70 in 20 cents per barrel on more than 60% of our expected fourth quarter 2019 oil so.
We've continued to layer in the 2020 hedges and have 16000 barrels per day of 2020 production hedged at $64 in 25 cents, Brent and another 1000 barrels per day hedged through April at 60, 175 W. tea.
Please see slide 20 of our November investor presentation.
General and administrative expenses dropped 7% to $6.04 per Boe, he and the third quarter compared to the second quarter adjusted GE, an extensive which exclude noncash stock compensation and certain non recurring cost equally 91 cents.
For be OE in the third quarter were $5 in 13 cents per beer, we compared to $4 a 92 cents per be we for the second quarter.
This increase was partially due to higher insurance renewals and true ups. However, the primary driver.
As a continue Inc. was and continues to be the development and growth of our corporate Affairs Department and the activities intended to support our efforts and participation in the regulatory political and legit legislative process.
Primarily in California.
We have been building our capabilities and expertise in this area and our investment has already provided positive results due to the teams ongoing efforts to partner with the state to bring affordable energy to its citizens and becoming less reliant on foreign energy sources as result of this initiative as well as.
Our continuing efforts to improve our internal systems and comply with public company requirements. Our full year adjusted Gionee will be on the high side of guidance for 2020, adjusted Gionee cost should come down on a per Boe basis.
Our taxes other than income taxes are comprised of add Valera property taxes and severance taxes in total cost were $2 million lower in the third quarter compared to the second quarter largely due to decreased market rates for our greenhouse gas allowance requirements in the third quarter addition.
Really taxes other than income taxes will come in on the low end up our 2019 full year guidance capital expenditures in third quarter were 63 million a large portion of which were used to equip and bring online a significant number of wells, which were drilled in the first half of the year.
Our 2019 plan, we expect fourth quarter capital spending to drop off significantly.
Such that total year capital is expected to come in slightly below the midpoint of our guidance, we expect fourth quarter total capital to be in the range of 35 to 40 million.
Our third quarter adjusted EBITDA exceeded our capital expenditures of 63 million by more than 20 million and we generated positive levered free cash flow for the quarter, which includes interest and dividends year to date, we have spent $36 million in stock repurchases.
At the end of September we had availability of 381 million on our 400 million dollar RBL facility, which included 9 million of letters of credit and borrowings of $10 million based upon current pricing, we expect no borrowings on the revolver by year end.
We manage our business over the cycle not on a quarterly basis, our capital plan to set each year and designed to operate within Levered free cash flow on a trailing 12 month basis at the end of the third quarter, we had a breakeven levered free cash flow, which included 222 million of capital.
Expenditures 35 million of interest in 40 million of dividends declared at the current prices, we expect realized positive levered free cash flow for the full year of 29 team now I'll turn it back over to you trends. Thanks, Kerry before turning it over for questions I'd like to make a quick comment about our 2020 budget.
We're currently in the process of preparing next years budget.
But we do know the spending will be down and we will see strong year over year growth. We look forward to disclosing more in February in the meantime, we will continue to keep our heads down and to execute our plan with excellence I will now open it up for questions.
Ladies and gentlemen.
Question at this time. Please press Star then the number one on the telephone. If your question has been answered all you wish to really be so from the Q. Please mr. Keith.
That is taller one.
Thanks.
Thanks.
First question is from the.
From Keybanc.
Yeah, Hey, guys.
Yes.
Question here on free cash flow, so obviously, you're expecting significant free cash flow in the fourth quarter.
How you think about sort of deploying that you talk about paying down small revolver balance obviously be more cash as well you would you want with it.
Are you thinking about getting more aggressive with the buyback or thinking about kind of boosting the dividend. How do you think about free cash flow in the fourth quarter going forward.
I think.
We'll talk about excess free cash flow not only in the this is carried by the way not only in the fourth quarter, but actually talking in 2020 and beyond I think the opportunities for us to do with that excess levered free cash flow will include.
Various think special dividends, increasing the dividend bond repurchases and continuing to grow grow our assets and it's all going to based I wanted to return it what gets the best returning creates the greatest value for our investors. So it's a it's probably a more generic answer than what you want Leo but I think it's hard to put ourselves in.
The box until we actually get to the point that understand which one's going to give the great amount of value back to us and to our investors.
Okay understood I guess I know you didnt mention buyback of shares on that list is that something that's on pause for now.
I missed that yes, that's still an option out there for us and we have that.
And that will also still be as as trim would like to say one of the tools are toolbox.
Okay. That's helpful I guess.
Perhaps you could talk little bit more about the regulatory environment in California seems like the new head of jogger had ban lifted more aggressive than the previous head and I know he's.
Let me sum fines on some companies and I guess there was some fretting over some frac permits that were issued as well how do you think about what the administration.
Perspective feels about fracking out there are these days in California, and how do you think the new had kind of feels about some of the proposed setbacks that we're talking about this past spring.
Hi, Leo this is Trump im going to start and then Jerry can.
And some more detail first of all the new head of dog or is just or maybe hasn't yet taken his seat. Okay. So the finds that were levied against.
Chevron, we're in the works and our related directly to the activities there and that's all I'm going to say about that.
That wasn't necessarily unusual there have been lots of calls and meetings with.
With the daughter and the department of conservation about the well stem well stimulation permits.
Which are the what you call the fracking.
Which are very different in California than the fracking in the Permian for example is but the.
And.
Those are going to be underway, it's my understanding.
There's no intent to stop them.
And we're very much in very active in turn in the Western States Petroleum Association.
As part of our activities and that has been a front and center with the Governor and governors offices. So we're very pleased with the way that's going the other permitting is daughters business as usual.
So right now, we're waiting and seeing obviously, but the new the new had dog or head actually has oil industry experience.
And he is coming from elway and so he's very familiar with California in the political environment as well as the need for energy in in California, I look forward to meeting.
Gary.
I'd just reiterate a couple of things have trimmed mentioned so.
As far as permits for fracking or hydraulic stimulation.
They're called Debbie Estes.
That has been a little bit delayed as you mentioned however for US Thats has no impact on us for this year or into the into the part of 2020, because we don't not have any outstanding request in four WSP permitting at this time, but it is a direct result of them putting someone in that share which has been done and I would.
As add the fact that were in communication with them. Our teams at led by our corporate Affairs group as and trim as as has been very active and making sure that we are in participation with.
Regulations going forward. So it's probably the easiest thing to say, but right now for US we don't see any impact there and lastly, as Tim mentioned, our other permitting is not associated with this it's just.
Permits to drill and those are moving forward as you might expect a Leo this is carrier can get a triple on us on this one.
I just wanted to point out in that November investor presentation on pay on Slide 32, we now start to list the status of.
California legislation and also the expected impact on Barry So people can go out there and see at least what current legislation is and our view of the impact on Barry to give a little more transparency.
Oh, that's helpful for sure and I guess I certainly noticed that your Utah oil prices were better this quarter much tighter Dennis is anything sort of changed out there and maybe that was just kind of timing on sales or whatever.
No. It's this this is Gary so it's a little bit of a reflection of the current market as it moves in that particular area.
Thank you notice that we we drilled one well our may have not notice, but we drilled one well in the quarter in in the Rockies and we're always paying attention to that we like what we have there and when we see those market conditions rise to a favorable.
Physician, we'd like to take advantage of it.
All right. Thank you thank slip.
Thank you next question is from Charles we'd from Johnson Rice.
Good afternoon to to the whole team out there.
Thanks ahead of time for for this update on page 14, but I'm wondering if you could just give us a quick refresh of.
Okay, which of these three type curves you see as most attractive right now.
Not just oil.
Oil pricing, but also what you reference with the decrease fuel pricing and of course capital cost and all the other things.
Excellent well this is Gary again, so I will tell you that the ones to concentrate right now on this page that would be the thermal dynamite, which has been a bulk of the opportunity that we've been taking advantage of in this quarter and then looking at how these how big it business essentially a comparison a very too.
The the resource plays but for US we've been spending a lot of our capital on thermal data might during this period and also in the sandstones. So those are the two type curves that I would tell you want to pay the most attention to at this point in time.
As I did mentioned, we drilled the 82 wells, we drilled in the quarter.
30 of them.
We're in the sandstones plus or minus and 50 of them. We're in the thermal data might.
Right.
On slide 31, David so.
I'm, sorry to interject here, but but just what we should be taken away is that's where you're focused on your activity. Those are your best returns right now and my understanding that that is that is correct. So were constant wheel and we always try and do that obviously concentrate on the best returns that we haven't in the in the opportunity list, but definitely for this quarter that is where the capital was employed.
And I'd like to just this is trend just one more point its.
Those type curves are based on hundreds if not thousands of wells.
Those are not one or two wells of define that type curve, okay, and so there's a lot of data that suggests that those are good type curves.
Got it. Thank you and then and then one other question. This is this is more of a bigger picture question, but what are the ones are the big teams in the MP space broadly I think maybe you can were called unconventional space.
Is it.
Is getting to the right scale and I'm curious does that's.
Is that a relevant question for you guys weathered the scale, but perhaps not of your total asset footprint, but up your the right scale for your operational pace and you don't it and I guess you could apply the question too are you at the right scale in California and also are you were at the Rightskill and some of your more you Rockies assets like Uinta.
Yes.
This is this is trim.
I can answer that several ways, but the feedback we get in the sense. We have is scale is important to Barry.
Our teams are in place or ability to execute our fully in place and scale is a big deal going forward I will say however.
We're continually looking at how to improve the scale or grow the scale.
And we do small bolt ons, we've talked about in the past.
We are focused in areas that we do well in that would be the west side of the San Joaquin.
The midway Sunset field in particular as well as we're very very good in Utah now that said, we're always looking at transactions, but.
We're looking for.
Value, adding transactions and.
Otherwise at this stage, we don't comment.
Further on the status.
I would say I'll add on as well as Charles it needs to fit within our financial policy. We have a very good asset base, we have very good operation and we don't need to how to balance sheet screws up what we're already providing from growth and return of capital. So as trim says that needs to be a value added transaction.
That's an important point that thank you.
Thanks, John welcome.
Thank you. The next question is from Kashi.
From segments energy.
Hi, Good morning, Hey, good morning, guys and thank you sorry, good evening.
Thank you for taking my questions.
I guess, maybe the first one big picture.
You highlighted that and I know you want to share much much details on 2020, but you did highlight that capital should be moving lower.
On a longer term basis, and maybe not necessarily 2020, but as we lived through the next three or five years.
Do you have a sense of how you think about.
The amount of the amount of growth you want to have the amount of free cash flow yields you want to have said you want to be like a 5% grow over the next five years, you want to be a 10% growth just trying to give a sense of how we should think about berries growth rate over the over the medium term.
Yes, cash, it's I don't want to be pinned into the cornered needed as tremor, Gary I think the idea for US is looking at at a total return and what makes the most sense gearing to any particular year as trim poured out we have the we have a unique asset base that allows us to toggle, both up and down and and.
And as you've heard in the past, we keep a two year plus bullpen of things, we can move in and out a fairly quickly. So I think it gets it gets all back to what maximizes the value back to our investors. So is it is it growth some years it may be growth at some years that may be returning more capital back to us.
So I think what our ideas is at least at least from a total return point of view, even in very tough markets trying to focus on a 10, 10% plus type of total return, which would be a combination of growth and return of capital either for met the dividend share repurchases.
Special dividends and or bond repurchases as well.
But we do have a again I want to act like we had a five year plan, but as you know.
That is good is having in the it's not much work more than the papers written on based upon market conditions right. So I think we have pretty good visibility for the next couple of years beyond that it's just kind of.
Speculation on strip pricing.
And this is true Kashi I guess I'd like to add to that as the context of what our business model is.
And we are.
Focus in California, which if you will remember is Brent based it's isolated from the rest of the United States.
The energy every barrel of oil we produce in California is used in California, and so we have very captive market here.
Their energy needs actually grow.
And we have now so when I say at the end probably the most important piece of this is all of this is based on our ability to execute and keeping our head down and executing through the market cycles.
Gives us the opportunity to.
Discuss the distribution value.
Back to our shareholders, which is we want to maximize value. So we look at it is growth.
Plus the returned to shareholders.
Together.
We have.
We have luxury of being able to.
Go either way or both.
Okay.
That makes sense and I guess, maybe just from for my quick follow up.
You guys highlighted really strong volumes in September I think it was about.
Were 31000 700 billion barrels of oil equivalent per day with an 88% oil.
The expectation that as you guys look at production in October November December that you're sort of holding that September being flat or with all the wells that came online in Q3 with the expectation be for that rate, maybe a little bit higher entering fourq.
Kashi This is Gary and so we're excited about where we are on rate.
We like where we are and we're happy with where that projection is going to be.
Let me answer it this way if I can without giving you a straight number using the information that's available to us all.
I think we're guiding you to.
In line with our guided annual guidance and I think if you take the first nine months and you figure.
Roughly around the midpoint of guidance then you can figure out what the fourth quarter is going to look like on an average rate.
And you can kind of see what that change would be from that September rate.
Okay. Thank you.
That's me answer your question I think with the information that's available to us all.
Sometimes.
Good day doing that.
Yes, the math down and want to.
Looking further confirmation.
Okay.
And remember we spend money now and we spend money in the.
In the first half as we've said and we're seeing would result, so the results for the rest of the year are based in large part of capital what's already been spent.
Got it thank you.
You bet.
Thank you again, nothing reminder, to ask a question you will need to press star one.
I'm showing no further questions at this time.
Like to turn the conference Betsy.
Mr. Smith for closing.
This will be very brief we appreciate all the participants and thank you very much for joining and we look forward to talk due next quarter.
Ladies and gentlemen. This includes today's conference call. Thank you for your participation and have a wonderful day.