Q3 2019 Earnings Call
Welcome to amplify Energy's third quarter 2019, Investor Conference call Apple five operating and financial results released earlier today and are available on amplifies website at www dot to amplify energy Dot com. During this presentation all participants will be in listen only mode. Today's call is being recorded.
A replay of the call will be assessed accessible until Wednesday November twentyth by dialing 8558592, 056, and then entering conference I'd before 987 to nine or by visiting amplifies website, Www dot amplify energy Dot com.
I would now like to turn the conference over to Mike well sure Senior Vice President and Chief Financial Officer.
If I energy Corp.
It's in our third quarter operating results.
Will follow with an update on our return of capital programs not third quarter financial result.
First we would like to remind you that summary remarks may contain forward looking statement.
Based on certain assumptions and expectations of amplifies management team.
These remarks reflect management's current for your views for the current or future events not subject to verisk risks uncertainties assumptions, although management believes that the expectations reflected in such forward looking statements are reasonable it can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward looking statements.
To reflect events or circumstances occurring after this earnings call.
Forward looking statements include but they're not limited to our statements about and discussion of fourth quarter 2019 guidance.
Please refer to our press release and FCC filings for a list of factors that may cause actual results to differ materially from those into forward looking statements made during this call.
In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books Records and reports for additional detailed disclosure. We encourage you to read our quarterly report on Form 10-Q , which we expect to filed later today.
Also non-GAAP financial measures may be disclosed during this call.
Reconciliations of those measures to comparable GAAP measures maybe found in our press release on our website at Www Dot amplify energy Dot com.
Please note that due to the closings after the merger in early August operational and financial results for Midstates in July were excluded from our consolidated third quarter GAAP financials. However in order to provide our shareholders with a more complete picture to third quarter results unless specifically identified the operational and financial results discussed on this call will be proof.
Former for the merger and will include the July result from mid stage as though the assets were consolidated for the full period of third quarter 2019.
Well this in mind I'll now turn the call over to Ken Mariani Ken.
Since the closing of the merger on August six 2019, amplify team has been working diligently to integrate the assets in systems acquired through the merger.
As we have mentioned previously capturing synergies of at least $21 million was integral to the value of the merger and I'm happy to report that after completing most of the integration work, we feel extremely confident that we're on track to realize that goal.
In addition, based on our progress to date, we expect these synergies should be largely realized in the fourth quarter 2019, 40 realized by the first quarter 2020, Martin will provide additional detail what our gene a little later on this call.
Turning to operations, we generated $31.5 million of adjusted EBITDA in the third quarter, which was slightly above the midpoint of our guidance range of 28 million to $34 million. This result was a testament to strong management of lease operating cost, which offset lower realized prices.
During the quarter.
Production for the third quarter averaged approximately 32700 Boe per day, which was also slightly above the midpoint of regarding trends for the quarter.
These results were accomplished despite weather interruptions that impacted or Oklahoma operations, and a reduction in gas and NGL volumes from our Eagle Ford area due to high gas sellers line pressure.
The most significant production item during the quarter was our decision to modify the process for stripping out NGL at our beer oilfield due to weak NGL pricing.
While the barrel oil NGL stream has always been very heavy primarily C extraction of the lighter lick, which has resulted in a less valuable product to the market.
Due to this and efficiency the company has decided to strip out that's southern lighter deck, which from the gas stream and sell the remaining product is condensate instead of Ngls.
As a result of this adjustment NGL volumes are reduced by approximately 900 barrels per day with an offsetting increase in the oil volumes of 810 barrels per day, the increase in net price realizations of 25% to 30% for the condensate corresponds with a proportional revenue increase.
And it will more than offset the overall volume reduction of approximately 90 barrels per day.
Switching to the development side amplify successfully completed the beer oil expansion project in October 2019, which was in line with are budgeted timeframe.
We have initiated additional gas recycling at the plant and they started the process of bringing the previously shut in wells back online.
Our update or stakeholders on the results to the expansion on future calls, but as a reminder, the company's previous guidance code for oil production to increase by approximately 900 Boe per day with the increased 40 realized over 12 to 18 month period. Following the project completion.
Lease operating expenses in the third quarter were $35.4 million or $11.75 per Boe eat which was below the low end of our guidance range of $11, a 90 cents to $13 in 20 cents per Boe.
This result was a corporation due to a companywide focus on cost containment and the initial impact of war efforts on the Oklahoma assets.
Capital spending for the third quarter was approximately $24 million and below the low end of our guidance range of 26 million to $30 million. The reduction in Capex was primarily due to do a reduction in expected maintenance capital crushed in California in East, Texas and reduced capital work over activity.
On our newly acquired Oklahoma properties.
Earlier today, we issued our guidance expectations for the fourth quarter of 2019, including forecast for production Capex in free cash flow.
We are currently forecasting fourth quarter production of 29900 to 33100 Boe per day.
We anticipate production increasing the start of work barrel play an expansion project in the fourth quarter of 2019 offset by production declines across other areas of the company.
Despite the anticipated quarter over quarter production decline the midpoint of amplifies our adjusted EBITDA forecast for the fourth quarter 2019 is $32.5 million in hired in the pro forma adjusted EBITDA for the third quarter 2019 of $31.5 million.
This guidance is driven by our focus on cost containment and stronger realized pricing expectations.
Our revised capital forecast range for the fourth quarter is 8 million to $12 million with approximately $6.5 million at the capital spending allocated to our beer or plant expansion in our rod lift conversion proverb program in Oklahoma. We also anticipate spending a small portion of our fourth quarter capital budget to.
Dissipate in a drawing opportunity in east, Texas, we believe to be a low risk opportunity with attractive economics, which will allow us to further evaluate and delineate this area.
The remainder of our capital budget will be Ali to allocated across our portfolio on maintenance type projects, including capital work overs in facility projects.
Lastly, our free cash flow, which we define as adjusted EBITDA less capex and cash interest expense is expected to be in a range of 16 $21 million in the fourth quarter of 2019.
This implies approximately $22 million second half 2019 free cash flow generation using the midpoint of updated fourth quarter guidance. The strong free cash flow generated in the fourth quarter of 2019 will be used to return capital to shareholders and pay down of our outstanding.
Right.
As we enter the final quarter of 2019 I'm excited about what we've accomplished during the year and what the future Hawtrey amplifies the successful mid stage merger and integration demonstrates the value creation potential of our operating platform that's significantly increased our optionality for future acquisitions in mergers.
Well current commodity prices and overall oil and gas industry sentiment continues to be a headwind. We believe that it also creates opportunities for us to continue executing on our consolidation strategy.
In addition, it appears that are differentiated strategy on free cash flow generation return of capital is starting to be appreciated by the market with amplify share price up nearly 70% since the closing of the merger in August six which compares very favorably to 2% decline and the actual P. index.
Over the same timeframe this favorable market support combined with our continuing strong operational execution will further enhance our ability to deliver on our goal a meaningfully increasing shareholder value with that in mind I would like to turn over the call to Martin to discuss our financial results.
Thank you can I'd like to first provide an update on our return of capital programs, followed by an update on our third quarter financial result, liquidity and hedging positions.
Amplify paid as quarterly dividend or 20 cents per share or $8.2 million on September 18th to shareholders of record on September 4th.
The upcoming quarterly dividend of 20 cents per share will be paid on December 18 to shareholders of record at the close of business on December four this implies a dividend yield of approximately 11% based in our closing price of $7.48 on November 1st.
Amplify also initiated an open market share repurchase program at the closing of the merger with board approval to repurchase up to 25 million of the company's outstanding shares of common stock.
Since inception of our open market share repurchase program. The company has repurchased approximately 2.4 million shares of common stock at an average price of $6 in six cents for a total cost of approximately $14.5 million as of November onest.
As a result, amplify continues to have $10.5 million a repurchase capacity available under our program.
Moving onto our third quarter results net cash from operating activities was negative $7.4 million as of the GAAP number that excludes July results from mid stage I was further reduced by onetime transaction and severance costs, along with a significant change in working capital.
As Ken mentioned earlier adjusted EBITDA for the third quarter was $31.5 million, which was slightly above the midpoint of the guidance range of 20 $834 million. This result was driven by lower than forecasted lease operating expenses offsetting some lower price realizations for gas and NGL, primarily in the Oklahoma region and to a lesser extent our east.
This region.
Pro forma DNA for the third quarter was $28.2 million, which included $12.8 million of transaction cost $6.4 million or severance costs and $1.2 million of noncash compensation expenses. Excluding the merger related expenses catchy name was $7.8 million or 2060 cents per be are we.
Which was below the midpoint of our guidance.
We expect to the majority of our transaction related costs are now behind us and that recurring cash in a will be approximately $7 million in the fourth quarter of 2019 and trend down to $6.5 million beginning in the first quarter 2020.
We will continue to look for additional cost reduction opportunities and anticipate that we may be able to further reduce genie a certain subscriptions and other costs acquired with a merger roll off in 2020.
Free cash flow, which we defined as adjusted EBITDA less capex and cash interest expense was approximately $3 million for the third quarter, which was at the high end of our guidance range. This was driven by strong operating results, coupled with lower than forecasted capital expenditures and cash interest expense.
Do then merger closing amplifies fall Redetermination, we can play this slightly later than usual in the fourth quarter.
At this time, we anticipate a decrease in our borrowing base due during market wide reduction in bank price forecast into spring Redetermination. However, despite this decrease amplify will maintain more than sufficient liquidity moving forward and we will be generating significant free cash flow in future periods that will further increase our liquidity position.
As of November Onest, 2019, amplified total debt of $278 million under its revolving credit facility, where they current borrowing base a $530 million amplifies liquidity was $261 million consisting of $11 million of cash on hand, and available borrowing capacity of $250 million, which includes the impact.
Of $1.65 million, an outstanding letters of credit.
Moving onto our latest hedge position.
Since our last earnings call amplify is opportunistically added to our hedge position and is also restructured or number of hedges to reflect the change in our barrel production mix from Ngls to condensate. In addition amplifiers assumed all of the positions in place that midstates through the merger.
Our new hedge positions are primarily a combination of swaps costless collars and three way collars. These position to allow us to lock in a certain percentage of our future cash flows, but we are able to maintain additional upside while limiting our downside.
We are approximately 72% hedged for the remainder of the year based on our fourth quarter midpoint production guidance of 31500 Boe per day.
As of November 1st our hedge mark to market value with a net gain position of $20 million amplify third quarter 2019 hedge presentation contains additional details in our current conditions and was posted on our website earlier today under the Investor Relations section.
We believe that are positive third quarter financial results demonstrate the strength of this organizations capabilities with strong results. Despite a challenging commodity price environment. We are very enthusiastic about our cost containment initiatives and believe that there will be additional opportunities to reduce overhead costs, an operating expenses moving forward. This concludes our prepared remarks.
For this morning's call, we would now like to invite analysts and investors to ask any questions. They have for the management team operator. Please open the line for any questions.
At this time I would like to remind everyone that if he would like to ask your question to press Star one on your telephone keypad now again, ladies and gentlemen that star one for any questions. We'll pause for just a moment to compiled the cumulative last year.
Can we do have a question from Jeff Grampp with Northland Capital. Please go ahead.
Good morning, guys.
Good morning, Jeff.
Just curious maybe for you can if you could talk about the acquisition side of things for you guys and then maybe if we bifurcated into that.
Smaller asset level packages versus the bigger type of Midstates.
Deals.
Any traction or what can you just talked about what you're seeing the on maybe the bid ask spreads side of things.
Or just overall kind of your thoughts and what you're seeing there.
Yes, Thank you Jeff a question.
With regards to kind of the Indian market in general and obviously, we have ongoing effort to continually monitor the markets and we are seeing quite a bit of.
Assets on the market and.
You know what I'd call mature producing type assets.
And we're obviously focused on not just doing a deal we're doing a good deal that said aligned with what we call our internal score card and we're looking at assets that are similar in nature to to what we already have we're looking at assets that we can use your operating expertise to maybe extract inc.
The amount of free cash flow from so we are seeing quite a bit of assets on the market in mature producing basins.
Obviously with this fall borrowing base season, we think there will be continual pressure on companies to divest himself of these type assets and again, we're going to be very opportunistic very selective.
Yes again what.
Our whole purposes, not this to acquire assets were increased production, it's too to make strategic decisions that are that are accretive to our our model and free cash flow generation capabilities.
So again bottom line is I think it is a target rich market and I do think wish this fall borrowing base season, you're going to see even more opportunities out there in the market.
No market.
Mark May have some additional insight as well he'd like to share yes, Jeff I'll, just add that I think theres targets on the acquisition side, but also on the merger potential as well. So we're looking at you know a variety of options and we've kind of high graded the ones that we think of the most actionable.
And in regards to your question about bid ask spread I'd say, it's there and so real.
Obviously, the the kind of assets that were looking at our you know there's a certain price would be willing to pay in and in some cases. The sellers are still wanting more but I think it is shrinking a little bit as people are coming it's kind of more of a realization on that side as well so more to come on that but we're certainly in the market and looking on both the merger and acquisition.
Side.
Got it thank you and and I'm also curious on the buybacks and like you guys or real active your last couple of months on that front wondering about.
How you guys are maybe evaluating expanding that should you guys go through that and then let's say the near medium term and maybe how you guys kind of way the pros and cons of the buyback relative to.
The trading volumes that would that we see in your stock.
Yeah, I'll take that one so I think obviously as we start to look at our our budget for next year will will weigh exactly what you said, the pros and cons <unk> of the.
Adding to the buyback versus paying down debt or adding to the dividend or other uses of the free cash flow on the acquisition side. So it's kind of a balancing act as to what we will decide to do but I think we'll have an update next on next earnings call for something like that.
Okay and last one for me with the tweaks that you guys made up in the Rockies with the NGL recoveries can you just maybe ballpark on what type of improvement you need to see from the NGL market for you guys to kind of refer back to to the status quo. There. If you well and then can you talk about operationally is that an intensive.
Thing to do like could you guys.
Make that switch relatively quickly.
Or is that really.
I guess from a shut in downtime perspective, any tweaks that you guys will need to make to make that change back.
I'll take the operational part yes go ahead, Jeff on the operational side, it's a it's a relatively easy tweak you know basically what we're doing is adjusting the temperature of our chiller.
Obviously by adjusting to temperature of the chiller, you either going to increase or decrease recoveries. That's essentially what we're doing so we never want to make short term decisions that have long term implications. So this is something obviously, we can adjust if the market was to go back the other way.
Yeah, I think it's probably a six or $7 barrel type of difference right now Jeff I mean, it's just you know you've you've heard this probably on calls across.
A variety of basins, you know Ngls or just were weak relatively.
We had this.
Specific opportunity, where the value of the condensate even adjusting for the small production impact which was basically 10%.
25% to 30% revenue.
Is significantly better than.
Even with a 10% production decrease so we felt this was more than worth it and like I said and you know if Ngls consistently moved up kind of in that range and asked me that range relative to the value of the condensate than we could obviously switch back and it'd be a relatively easy process. Yes, I think I had one thing not to get overly technical when we.
Talk about the mix here, it's it's a very rich mix, meaning it's much higher percentage of heavies a lot of times when we talk about some of these other resource plays they have a much higher component of the the the lighter.
End of the mix. This is a mature producing seo to flood we're all the low the lighter inch have already been strip dot. So again that makes it even more attractive yes sort of 70, 80% Cfive previously just worth more as condensate now as opposed to stripping out the propanes and Butanes et cetera.
Got it.
Jeff and.
Good good to have that operational control and flexibility I. Appreciate the time guys. That's all for me.
Thank you Jeff.
Once again, ladies and gentlemen that star one for any questions over the phone line again star one for any questions questions.
And at this time there no further questions.
In closing I'd like to thank the entire amplify team across all of our location to business for their commitment to safety production.
And the relentless effort on cost containment seamless integration. The mid stage merger is a great demonstration of what this platform is built to accomplish I'm very fortunate to lead such a talented and hard working team.
As always I'd like to again, thank our investors for their support we believe our strategy of combining significant generation of free cash flow. It's sustainable return of capital recreate long term value for our investors and we appreciate your support today as we continue to execute or Proliance. This concludes our prepared remarks. Thank you again for joining us.
Today and as always please don't hesitate to reach out to us with any questions.
Ladies and gentlemen, thank you for participating in today's conference call you may now disconnect.