Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Silver resources third quarter earnings Conference call.
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Now what the hand the conference over to your Speaker today, Jeff Maggots. Thank you. Please go ahead.
Thank you Christine and good morning, everyone. Thank you very much for joining us for our third quarter 2019 conference call with me on the call today, our Shandong overtime or CEO .
Steve Adam our COO.
Gleeson van Riet our CFO .
We posted a new corporate presentation onto your website and will occasionally refer to during this call. We encourage investors to review it.
Please note that we may make references to certain non-GAAP financial measures, which are reconciled to the closest GAAP measure in the earnings press release.
Our discussion today will include forward looking statements, which are subject to risks and uncertainties mini or what's your beyond our control.
These risks and uncertainties are described more fully in our documents on file with the FCC, which are also available on silver both website.
With that I will turn the call over to Sean.
Thank you, Jeff and I, thank everyone for joining our call. This morning.
Last quarter, we stated our focus on growing liquids production, increasing operational efficiency and expanding a balanced portfolio between oil and gas inventory.
As a roadmap to free cash flow.
Yesterday, we released our third quarter results, along with our 2020 luminary budget, which demonstrates continued execution of our business plan.
Along with the number of keep positive catalyst that im excited to share with you today.
For the third quarter.
Oil production grew 24% over the second quarter and exceeded the high end of our guidance.
Oil volumes comprised 14% of our production.
40% of only grow revenue.
NGL volumes increased 18% and we're also above guidance.
The strong execution on our liquids growth strategy to date has resulted in a 50 50 mix of revenue contribution between liquids and gas.
Impressive considering liquids comprised only one third of our revenue a year ago.
For operating expenses.
We again delivered per unit cost in line or below our guidance.
Our operating expenses include cash DNA, including cash in a decline further to 94 cents per Mcf Pete.
The growth in liquids and beat on costs drove adjusted EBITDA of 63 million.
8% higher then second quarter.
Additionally, by taking our adjusted EBITDA EBITDA less interest expense cash taxes in capital expenditures you will see that we generated approximately 4 million of free cash flow for the third quarter.
Throughout the year, we have discussed how we are attacking every opportunity to expand or high return inventory at attractive prices.
Whether those transactions are large or small scale.
Yesterday, we disclose the new 16000, net acre position and Dimmit County.
This prospect has significant oil in place and more than doubled our oily inventory locations at a very favorable entry cost.
We have already drilled and completed two wells in the block and are seeing encouraging results.
We are in the early days of delineation and we plan to taking measured approach towards optimizing future developments to maximize return on capital.
Steve will provide more color on our plans in his remarks.
Our organic leasing strategy of identifying high return inventory at attractive entry prices has been very successful.
And we retain flexibility in our land budget to continue this ground game approach.
Our view of silver both Merck physicians simple.
Continue building a best in class operating platform.
Highlighted by peer leading cost structure and top tier capital efficiency metrics, such as rosy recycle ratio and Didnt just that production growth.
From there we can access assess external opportunities for expansion.
I encourage listeners to review our latest corporate presentation to see how well cover both stacks up against our competition.
Moving onto our preliminary 2020 budget. Our plan is to continue with a one rig development program, which targets free cash flow generation.
We expect increase oil production by over 25% and reduced capital spending by approximately 30% when compared to 2019.
Our focus remains on hanting on enhancing our balance sheet and liquidity position and opportunistically expanding or high return inventory pro portfolio.
Our conservative planning at 50 to 50 for oil and to fit you forget means the returns of our program critics quickly accelerate with only a modest price increase in either commodity.
Given our recent inventory additions in web and Dimmit counties, and our ability to operate profitably with one rig over the next several years, we plan to remain patient as we look for further acquisition opportunities.
We believe can call, we believe consolidation of the Eagle Ford will play out overtime and see compelling synergies from such consolidation.
Any acquisition or merger, albeit small or large must deliver full cycle returns that are accretive to our existing portfolio and to our shareholders.
For 2020, we plan to run one rig with a capital program of 175 to 195 million.
Our focus is on generating free cash flow by leveraging our low cost structure and capital efficiencies.
With the balance portfolio, we have assembled we have the unique optionality within our asset base to quickly reallocate capital towards the highest return oil or gas wells all within our single basin model.
I'm excited about the continued success some success in strategic Optionality that silver go has as it moves into 2020 beyond.
Steve will provide more insight into our operational performance and guidance followed by Gleason's review of the quarter's financial takeaways.
[noise]. Thank you Sean third quarter results continue to reinforce our teams drive to add to achieve excellence in every aspect of our business.
As we work to persevere through this challenging price environment, our commitment to deliver the best wells for the lowest cost has been prevalent as we achieve efficiency gains and cost savings across our portfolio.
During the third quarter, our primary focus was a big falling oil and Webb county gas areas.
The company drilled and completed five net wells and brought online seven net wells.
For full year 2019, we expect to drill 26 to 27 net wells and complete 30 to 31 net wells.
In our Mcmullan oil area. The company brought online a two well pad early in the third quarter.
Produced a 30 day average per well up 1200 Boe per day comprised of 90% liquids.
Both wells were completed using over utilizing over 3000 pounds, the profit and 50 barrels of fluid per lateral foot.
This latest generation of wells are demonstrating a 25% to 30% uplift in the you are.
And our Lasalle condensate area. The company completed a single well pad, which has brought online in mid August and also produced a 30 day average of 1200 Boe per day comprised of 73% Woods.
As Sean previously mentioned, we have delivered strong growth in our liquids production and were above third quarter guidance for oil and Ngls.
Total production of 239 Mmcf per day came in at the high end of guidance.
This beat was largely driven by wells outperforming expectations in that Lasalle condensate and macmall in oil areas.
Our operations team continues to deliver consistent efficiency gains, which we have reduced cycle times from rig release, two first frac stage by 27% compared to 2018.
Looking ahead, we have tightened our full year 2019 capital budget and production guidance to $255 million to $260 million and 228 to 232 Mmcf per day, respectively.
For the fourth quarter, we're guiding for production of 225 to 234 Mmcf per day.
This guidance is largely dependent upon the timing of first production of our six well Webb County Superpad. The first of its kind in silver both history.
One of the reasons. This project is so compelling is the opportunity to acquire direct offset acreage to our prolific baskin field.
Because we expect initial production rates from this superpad to be in the range of 75 to 100 Mmcf per day of gross production. The variance of just a few weeks from our targeted first production date in early December we'll have an impact on total fourth quarter production.
The completion initial production is bad will be our primary focus through year end.
This goal calls for an all in completion cycle time of 24 days for all 610000 foot laterals targeting over 20 stages, and 12 million pounds of sand pump per day.
By utilizing dual frac crews the bundled sand logistics and newer more effective consumable conveyancing deployment systems, we are setting record efficiency goal posts.
Overall from first leased to first production, we expect if completed this project in just five months.
Capital efficiency, and well design optimization continue to be our primary focus as we strive to improve our planning and logistical efforts to reduce overall cycle times.
We've also established a new acreage position Dimmit county, or what we were referring to as deal for Dms volatile oil.
Currently we are in the delineation phase of this 16000 acre prospect.
We were able to build this position at a low cost entry point, and then started delineation through two wells in the lesser tested well western more shallow area the block.
We are encouraged by the early well results with IP 30 rates from each well of 550 Boe per day comprised of more than 80% liquids.
To date, we're now seeing shallow decline rates and have been favorably surprised or gas rates than originally expected.
Furthermore, we expect even higher reservoir pressures as we step out to the deeper and deeper eastern areas a video.
The potential of this area is driven by some of the richest organic level organic compounds levels in the basin.
And we estimate over 750 million barrels of oil in place across our net position.
We strongly believe that applying or capital efficient low cost structure to this area will unlock a significant inventory of higher return location.
As Sean mentioned, we plan to drill and complete additional DBO wells in 2020 through a thoughtful and major development approach.
Additionally, our asset development team continues to be successful at identifying new inventory locations that strategically grow our portfolio and enhance our returns.
Since the beginning of 2018, we have added more than 160 wells to our inventory through bolt on acreage acquisitions and new leasehold positions.
This activity has significantly enhance the inventory of our portfolio, especially with the one rig drilling program.
Remain we remain optimistic in acquiring smaller size positions at attractive valuations to expand the more balanced asset base across the western Eagle Ford.
The diversified commodity mix within our Eagle Ford position gives us a sustainable advantage that requires experience operating personnel along with an end up knowledge of the underlying geology.
With that I'll hand, it over to please.
Thanks, Steve.
In my comments this morning, I'll highlight our third quarter financial results as well as our hedging program and capital structure.
Third quarter revenue was $72 million with natural gas, representing 72% of production and 52% of revenue.
During the quarter, our realized pricing was 101% of Nymex WT.
104% of Nymex, Henry hub, and 21% of Nymex Wi Fi for Ngls.
While gas prices retained a positive differential.
Premium decreased from July to September .
NGL prices were treated from second quarter levels on the back of lower ethane and propane prices.
We continue to forecast NGL pricing softness in the near term, but based on some recent price recovery in ethane and propane we're guiding for an NGL price realization of 25% of WCS for the fourth quarter.
Our hedging gain on contracts covering production for the quarter was approximately $11.4 million.
Based on the midpoint of our guidance. Our total estimated production is 67% hedged for the remainder of 2019.
Gas production of approximately 73% hedged with a weighted average price of $2, an 89 cents per MBT.
Our oil production is approximately 66% hedged for the weighted average price of 59 dollar than 57 cents per barrel of oil and our NGL production is approximately 40% hedged with a weighted average price of $27, a 93 cents per barrel of NGL.
For 2020, we have 86 Mmcf per day of gas production hedged at a weighted average price of $2.66 per mbps, and 3700 barrels per day of oil production hedged at a weighted average price of $56.06 per barrel.
No. The 2020 figures are inclusive hedges entered into subsequent to quarter end.
In addition, we also used oil and gas basis swaps to manage our exposure to differentials.
The remainder of 2019, we have gas basis hedges on 159 Mmcf per day with a weighted average differential of negative two cents and oil basis hedges on 650 barrels per day at a weighted average differential of positive $4.58.
For 2020, we have GAAP basis hedges on 129 Mmcf per day with a weighted average differential of negative four cents.
As new pipeline capacity towards the Gulf comes online, we anticipate slightly lower basis premiums going forward.
With that said Theres no doubt that the Eagle for his location provides a competitive advantage as we realize premium Gulf coast pricing for both oil and gas.
Turning to cost.
Lease operating expenses were 25 cents per Mcf fee in line with guidance.
Transportation processing cost for the quarter were 31 cents per MTV, while production taxes for the quarter were 5.2% of wild guess revenue.
Both coming below the midpoint of our guidance range.
Adding our Ela, we Tempe and production, Texas, together, which Youve total production expenses of 73 cents per Mcf fee, which we believe stands out amongst our peers.
Cash DNA of 45 million was below guidance of 5.1 billion.
The fourth quarter, we're guiding for casting at $4.8 million to $5.2 million.
Our cash operating expenses, including DNA totaled 94 cents per mcf the in the quarter compared to 95 cents a year ago.
We remain on track to achieve our 2019, all in cash operating expense target.
$1 per Mcf fee.
Our ability to continue to drive our cost structure lower as a defining attitude of silver Boe.
In total strong liquids production and efficient operations resulted in adjusted EBITDA of $62.9 million.
At $2, maybe five cents per Mcf fee, our adjusted EBITDA per unit continues to benefit from a higher liquids production mix.
And increase from second quarter levels of 273 cents. Despite a decline in commodity prices as our hedge position provided some stability.
As Sean noted earlier, we generated $4 million, a free cash flow for the quarter.
I will add that we achieved this will spending approximately 5 million on our organic leasing program.
Finally, turning to our balance sheet, we had $282 million outstanding under our revolving credit facility at the end of the quarter.
And our liquidity product position was approximately $131 million.
Subsequent to quarter end, our borrowing base was redetermine to $400 million.
I'd like to thank our banking syndicate for their continued support.
At the end of the third quarter, we are in full compliance with all the financial covenants had significant headroom.
With that I will turn over to Sean to wrap up our prepared remarks.
Thanks Gleason.
To summarize the third quarter illustrated the company's track record of execution.
We generated positive cash flow more than doubled our oily inventory increased oil production and further reduced our per unit costs.
Our borrowing base provides us the liquidity to continue assembling our balance commodity mix portfolio and to pursue our low cost development program.
Our fourth quarter operations are focused on delivering silver both largest and most complex pad and the company's history, we should coincide with seasonal highs in gas prices.
Heading into 2020, we are more encouraged than ever.
We're controlling what we can control commodity prices clearly is not within our control.
However, optimizing well performance balancing our production mix, adding accretive inventory further reducing cost and allocating capital to our highest return projects are within our control.
And on that front. We have consists consistently executed on our stated objectives.
We are proud of our progress.
But by no means complacent.
Our preliminary 2020 plan sets us up for more than 25% growth and oil production at 30% reduction in capital spending year over year in a self funding development program targeting positive free cash flow.
Silver Boes best in class operations is generating peer leading returns across Rowsey recycle ratio did just that production growth in cash operating margins.
Today, we stand out amongst our peers given the transformational change from where this organization with just three years ago.
We are afforded the unique optionality to remain discipline and self funded which we leverage to our advantage as we continue our organic growth and optimization strategy and evaluate potential asset packages and partners of choice to accelerate the size and scale of silver both in basin leadership.
We look forward to updating our shallower shareholders next quarter and with that I'll turn the call back to the operator for today.
And as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q and a roster.
And your first question is from Don Mackintosh of Johnson Rice.
Good morning jobs.
Impressive quarter, particularly on the free cash generation.
A little bit earlier than Youre expecting I think fourth quarter was originally the target what were some of the drivers are not getting you to that free cash flow inflection point was it.
More outperformance on the well side or more cost efficiency or combination of both just some color there would be appreciated.
Yes, Hey, more good morning done I appreciate the comments in the question, yes. It is a combination of both improved performance.
On the liquid side the production there.
Continuing to increase our product mix towards a more favorable revenue streams. Those specifically on oil I think our operating margins for the quarter were nearly 75% so definitely peer leading there and so the product mix helped us as well as lower costs, we continue to drive.
Our cost down coming in at 94 cents, an Mcf really helps us take advantage of.
Our low cost structure.
And again, I think Gleason mentioned, it but the the $4 million the free cash flow.
Included $5 million on land spend so we're actually living within cash flow and growing our inventory at the same time. So we're very pleased with where we're at.
Okay, great. Thanks, and then maybe for Steve Congrats on unit, putting together the Dimmit County position I.
I guess what was it about that acreage one maybe why was it why was it available for the organic leasing and what was the attracted Joel and then maybe a little further what are some of the things that you all expect to achieve there that maybe others, we're not able to.
Okay. Thank you Don just kind of specifically we had done some regional work throughout the basin and head come across.
Different areas based on hydrocarbon content as well as where there had been some underdeveloped opportunities.
That's what attracted us to this area and then we wanted to see what we could do with with all of our endeavor base a knowledge what could we do to further extend some opportunities there and exploit the exploit the the property in the play.
And so what we did is.
We elected to take a kind of a low cost the entry position on a massive number of acres and then applied to some of our science to these first two wells science being some deep petrophysical knowledge as well as some core knowledge.
That then in light of allowed us to take for what the peripheral area work had been done and combine it with our analysis to improve the targeting and then to also come up with a late generation completion design of which we tested a couple different scenarios on both wells.
And that therefore gives us a path forward on how we can not only achieved the results that we already have been how we can continue to work those results.
And to continue to prosecute the acreage as we see were better development opportunities exist.
So thats a little bit of a ground play coming forward on how we looked at it from the beginning as to kind of where we are now and then how we continue to want to look into lending delineating the acreage as it relates to to the opportunities we've already seen in the first two wells.
Okay, great Thanks, and congrats on another strong quarter.
Thanks have a good day.
And your next question is from Neal Dingmann of Suntrust.
When it all sticking with it Didnt play for a second you talk just a little bit more on that what's the.
Existing infrastructure in that play as well as.
I mean, just chat or you can give or overall comments you can give as to the type of capital you allocate in that area in the coming quarters.
So ill, let Steve answer that one yes. So in terms of the infrastructure Neil It's it's relatively skinny. It's one of those new areas. There's there's less infrastructure as you go out to the Western Plains and there is a little bit more as you come towards the east and we'll just have to collectively put that together as weak.
Continued to see the development unfold as well first of all the delineation and then the latter part of the development from a from a capital plan, we plan to drill.
Maybe to two plus wells next year, we have a strong line aside after we took out the science cost of the first two wells and we're already there at forward to sub 4 million dollar well costs. So we feel pretty very comfortable that we can be in the sub 4 million and continue our delineation and then once we get an opportunity to see when we want to pull the trigger or.
Factoring process, we should be able to exploit that it.
Numbers that are.
Sure well within our reach below the 4 million, but more importantly, we can do it on a mass scale and should be able to have strong execution ability there.
Hi, good none would just one last follow up could you just talk I had asked in a while just how you view the total inventory oil your comments in plays such as Lasalle Macmillan just wondering sort of what the totals are these days and how you view the running room. Thank you.
Yes.
So when we think about our inventory, we bucketed into liquids and gas right now we're sitting north of 700 locations identified on our Greg or physician, probably 30, 540% of that location counts associated with liquids.
And the other component associated with more of our dry gas acreage said.
In terms of where we've been executing in the Lasalle and Macmillan area. We still have several years of inventory opportunity set there and what we've been very pleased with is we've been able to get in there in either pickup little bolt on acreage blocks that allow us to drill longer laterals in fact in the coming quarters.
Looking at drilling a number of 10000 foot laterals that.
Historically, we had those flake at about 5000 to 6000 collateral so we're getting longer laterals in those areas to improve.
The economics and commerciality of our position in then we're finding opportunities to bolt on blocks.
At or near by that have given us the opportunity to take advantage of our presence already so we think we can continue to.
Fine opportunities to keep that inventory loaded.
And you look at where we stand from an R. Over P viewpoint, and we have 15 years of opportunities in front of the so.
We like our inventory and look to expand it further.
Very good thank you.
Thanks.
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And there are no additional responses at this time.
Okay.
Thank you everyone for joining us this morning, and look forward to updating you on fourth quarter and year end.
Next year. Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.