Q4 2019 Earnings Call

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Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.

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Good afternoon, I am sure me and I will be a conference facilitator today.

I would like to welcome everyone to the extraction oil and gas fourth quarter 2019 financial and operating results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question simply press Star then the number one on your telephone keypad.

Please be advised that the 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 risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those risks include among others matters that the company described in his financial and operating results News release issued this afternoon and in its filings with the Securities and Exchange Commission.

Extraction disclaims any obligation to update these forward looking statement.

While the company believes these forward looking statements are reasonable they are subject to factors such as commodity prices general economic conditions competition technology, and environmental and regulatory compliance.

The company's drilling scandals capital plans and other factors that may cause its results to differ materially.

I would now like to turn the call over to Louis Baltimore Extractions director of Investor Relations.

Thank you and good afternoon, everyone. We're glad you could join US today for a fourth quarter earnings call with US today on the call we have not Owens, our president and CEO Mary you know what boesky, our VP of finance and Tom Brocker, Chief Accounting Officer.

I'd like to remind you that today's call. In addition to the aforementioned forward looking statements.

Also included a discussion of certain non-GAAP financial measures.

Let me share to read our full disclosure on the forward looking statements and GAAP reconciliations in our earnings release, and then are filing on form 10-K, which we plan to final before the FCC deadline of March 16.

I'll now turn over the call it a matter when our president and CEO to go through some of the highlights from this quarter along with the leadership changes, we just announced.

Thanks, Louis Good afternoon, everyone welcome to our fourth quarter earnings call.

First on behalf of extraction its board of directors I'd like to thank Mark Eriksson for his service since founding the company with me back in late twenties well.

Mark played an integral role in helping expects extraction assemble the asset base, we had today and let us through our previous phase of rapid growth.

I wish Mark and his family the very best in the future.

We are proud to announce that Tom Tyree has joined the extraction team is our executive chairman.

Tom brings with him decades of oil and gas corporate finance experience.

Before joining extraction concert and executive capacities at North Woods Energy Vantage energy and Bill Barrett Corporation.

You also has served as a member of the board of directors of Antero resources, and Bonanza Creek energy.

Before becoming the CFO Bill Barrett, Tom was an investment banker at Goldman Sachs for many years.

Please join me and welcoming Tom to extraction.

I'd like to quickly touch on our fourth quarter results, which came out quite nicely relative to the guidance we updated last November.

Then I'll turn it over to marry Nellis Boesky, our VP of finance to touch on some of our financial details.

We turned in strong full year results with respect to our updated guidance.

Roughly 42300 barrels of oil per day, we exceeded our midpoint on oil production and at over 88700 BOE per day, we surpassed the high end of the range on total production.

We also exceeded our asset sale targets generating 56 million of divestiture proceeds.

Putting this altogether or second half free cash flow topped 120 million also exceeding the high end of our guidance range, which in turn allowed us to pay down more RBL than we initially forecasted.

Our focus on improving capital efficiency can really be seen in our full year results as DNC capex came in almost 15% less than what we originally guided to while we were still inside the ranges of our initial production guidance after adjusting for asset sales.

During the fourth quarter, our upstream drilling and completion operations were executed as planned as we turned on 50 high quality wells in Greeley in Broomfield.

Which included our first three mile laterals.

These extended reach wells were drilled and completed inline with our expectations and we are excited about the potential to develop additional reserves with longer laterals, while minimizing our surface footprint.

They've been online for roughly 30 days and had been producing at an average rate of approximately 1600 via we per day and to 77% well cut.

I'd also like to highlight that our company has now gone over 2 million employee hours without a single Osha recordable incident.

This is a testament to the safety first culture, we have created here at extraction.

We will be publishing our inaugural SG report next week and there you will be able to see a lot more about our focus on safety protecting the environment and improving the communities where we operate.

On the midstream side, we've talked a lot about the bottleneck relief, we expect to see from the various DJ basin expansion projects, along with our diversified processing and take away portfolio.

The strong fourth quarter production numbers demonstrate the value of our midstream positioning.

Despite cold weather with plenty of snow, we did not see any material production downtime and continue to produce our wells without any significant production constraints.

On the organizational front, we made the difficult choices to reduce our head count to further improve our cost structure as we shift our focus towards free cash flow generation rather than growth.

We reduced our staff by approximately 70 employees in February which represents just over 20% of our workforce.

As a result of this reduction we've reduced our June eight expense guidance by $10 million for 2020.

Again this was not a decision we made lightly however, we felt it was necessary given the headwinds we continue to face in the macro commodity environment.

Out of the prices are down significantly year to date and notwithstanding our strong hedging position in 2020, we believe it is prudent embraced the company for a lower for longer pricing scenario.

Before I turn it over to Mariella I'd like to quickly touching our ongoing asset divestiture program and its modest impact to our 2020 production guidance.

During the fourth quarter, we signed and close the deal to divest a portion of our non operated production for $10 million, which brought our divestiture total to $56 million for the year.

In 2019, we had targeted leasehold expenditures being offset with asset sales and we were successful in achieving this goal.

While the undeveloped acreage market in the DJ Basin is not all that strong right now we continue to find ways to monetize our various nonstrategic assets.

Our divestiture program in 2020 has started strong as we signed and closed on another deal last month for $14.7 million to sell additional non operated production.

After taking into account the production impact from the December 2019 asset sale and the asset sale. We closed in February we have reduced the midpoint of our 2020 production guidance by 2000 Boe per day, and 1000 barrels of oil per day.

I'll now turn it over to Mariella to discuss our financial position.

Thank you Matt.

During the second half 2019, we generated 122 million of upstream free cash flow above the high end of our 100 120 million guidance range and were able to reduce the balance in our revolving credit facility by 8 million.

The 80 million of revolver Paydown exceeded the 75 million guidance, we provided previously.

So what it free cash flow for the second half 2019 was 36 million.

We ended the fourth quarter with 470 million drawn on our revolving credit facility, which represents 49% of the 950 million elected commitment.

Also during the fourth quarter, we took a 1.3 billion impairment charge well they did have the carrying value to our portfolio. That's properties as a result of ordinary mixture pricing and are more measured pace of development to focus on free cash flow generation.

We believe this strategic shift wasn't continues to be the right path as we prioritize leverage reduction in liquidity enhancement.

With that I'd like to open it up for DNA.

As a reminder to ask the question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the Q to withdraw your question. Please press the pound King please stand by while we compiled the culinary roster.

Our first question comes from Welles Fitzpatrick from Suntrust.

Hi, good afternoon.

Good afternoon.

The third Milers that you talked about in the prepared comments, obviously this [laughter] pretty stout that to be clear are those included in the light blue on slide eight labeled Ekso GT new.

No. They are not included in there the wells fairly had 30 days of production as of today. So so we usually don't put him on that slide until until we get about 90 days of production.

But yes, the three mile Wells, we did get the first two of those online from our interchange pad drilling south and they look very strong to date.

Okay, perfect and then it looks like also the the well costs went down a little bit for for the longer wells I think two and a half miles is the only when do you could compare kinda presentation of a presentation, but can you talk to to to what that and you are bump might do on the two and a half milers in the 30 Milers and.

And what having you know good three mile or Pat under your belt might do to to unlocking more locations.

Yeah, I'm as far as the Capex goes we're we're doing everything we can internally right now to continue to push down our cost, especially given the macro commodity environment, we were pretty successful and ER and really in the fourth quarter in negotiating a new prices with our vendors and that's where I'd say, a though the cost reduction has come.

From as far as the three mile laterals and future inventory, we were able to drill and complete those and just a couple of days. So I think our fastest three mile lateral well, we drilled and about three or three and half days. So we didnt have any issues on the drilling or completion side, which was a very good news for us because we do have a lot of locations in the future.

That we could possibly extend to me to have to three mile laterals and possibly test even further in the future. So this will allow us to like like we said in the prepared remarks, hopefully be able to access a lot more reserves and get better better economics from from the same amount of surface locations.

Okay perfect. That's all I have a hub I'll hop back in queue. Thanks.

Thank you.

Thank you. Our next question comes from Jeffrey Campbell with Tuohy Brothers.

Good morning, and congratulations.

New permanent CEO.

My first question was it looked like you tie in line approximately 50% your wells in the fourth quarter of 19 I was just wondering what sort of a tie in line cadence you're planning for 2020.

As far as production goes we're gonna have obviously a decrease from Q1 versus Q4, just given the fact that we turned on so many wells in the fourth quarter of last year, but then we expect oil to stay relatively flat as we move out move on throughout the year. So oil will be like I said relatively.

That flat from first quarter through the end of the year and then we'll see a slight increase in a and B O ease and that just really has to do with the areas of where we're turning on the wells in the second half versus the first half.

Okay and I.

I want to go back to the three mile laterals again, just ask kind of.

Different sort of question I was just wondering if you got drilling such long laterals, and particularly you decided how quickly you drilled them.

This is required to specifically enhanced rigs or services or tools to stands on and drill so fast and it's also wondering if there's anything special on the completion side are required to to finish such long wellbores.

We actually we did that with all the same equipment that we normally use. So there is nothing changed on the drilling side or the rock out here in the space in drills fairly easily so we haven't really gotten close yet with our lateral links on something that begins to slow down. The drillbit. So we're excited about that for potentially drilling longer in the future on the completion side just to be.

Safe on the first two wells, we did a run some dissolvable plugs in the last mile of the lateral just just to be safe and ER. We ended up running all those plugs just fine. So after that we switched to normal plugs and just our normal status full operations and we haven't run into any issues. Yet. So we're very excited with how smoothly.

Everything has gone in our first test with laterals that long.

Just to follow that up is that shift from dissolvable sort of normal plugs does that provide any kind of cost saving.

It does so.

There's probably about a $3000 difference or so in those plugs. So it wasn't much just to be safe on the first two but we're right back down not using those on or three mile laterals now and just our standard plugs.

Okay, great. Thanks for the color I appreciate it.

Thank you next question comes from Brad Heffern with RBC capital markets.

Hey, everyone I'm, just going back to an earlier question I just want to make sure I understand the new guide and the Capex properly is the reduction the guide exclusively due to these non op sales or is there some component of it that's due to slightly lower capex.

It is due to the non op sales.

The lower Capex is just a those initiatives I said, we've been working on and trying to trying to lower our overall well costs.

Okay got it.

And then you guys have this note or in the release about the elevation. A this 46 million dollar potential payment I was just wondering if you could walk through the dynamics of what that is and what needs to happen.

Brad This may not be for your question.

So the voice if million, we we've yet to determine what if any additional announce well being paid to elevation I'd point, you to our disclosure or the one he pointed out in the press release and what that might be.

Currently working with the elevation financing partner, so while we can't comment.

There are those conversations around ongoing and we expect to share additional detail in due course on that payment.

Okay. Thank you.

Thank you.

Thank you. Our next question will come from Patrick Sheffield with each point capital.

Hey, guys congrats on the strong quarter.

Thank you.

A couple abstract your question.

Where.

Great job paying down the RBL any thoughts on what the spring redetermination might hold given the.

Move in commodity prices.

Hey, Patrick <unk>. Thanks for your question, it's it's a little bit early to say, yet I think that the biggest determining factor there it's going to be what happens to two being priced x. I think those are are being better chime in as we speak. So I think if it's a little bit surely to comment on that at this at this juncture.

Okay, and what do you guys with the latest thinking on.

The the prep and the springing maturity on the revolver.

And on a related now did you.

Okay.

I had to pay the pick it sorry pay the breath and cash or did you pick up.

So on that Patrick we we don't have any updates on the preferred at this time, we we're currently evaluating all of our options there and while we cant going on any specific.

Liquidity as first the first and foremost for us and we're evaluating anything on what would that land.

On on the Picky when you talk a press release by we didn't end up taking dot for the fourth quarter.

And we plan to do that for the foreseeable future.

Oh, that's great.

Thank you very much.

You're welcome.

Thank you. Our next question will come from Leo Mariani with Keybanc.

Yeah, I just wanted to check in with you guys and see if there was any update on the plans to divest some of the midstream here.

Ah Theres no update that we can give at this time, it's it's something that that we're obviously going to be Oh always in the back of her mind and were well pursue it when the time is right, but right now given the macro environment I don't know if right now would be the best time, but but again it is something that we will actively pursue.

In the future.

Okay, and if you folks have any you know new deals in terms of new operator agreements out there with any to local municipalities are counties or anything like that recently to discuss.

We haven't added any new ones since the last press release with Commerce City. So that was so that was the last one but we're still working on other ones a that hopefully we can announce in upcoming quarters.

Okay. Thanks.

Thank you.

Thank you. My next question comes from Hi, Chowdhry with Ivy investment.

Hi, guys congratulations on on the good quarter and.

Congratulation on the being named permanent CEO, just a question sort of on the midstream I'm on the on the preferred you had how would you have so can we get the balance of what is available went out what's currently outstanding on there as we sort of or try to run our math on the midstream assets.

I think this may not thanks for the question. We we have 250 million outstanding. It was a 500 million dollar facility keep in mind, though that that was facility put in place to build to subset often.

Broomfield in Hawkeye, we're focusing just by nature of the slowdown plan to focus on free cash to where we're focusing on brownfield with.

We'll talk I to be TD, if you well, so I think that the balance what and continues to be 250 John.

Okay, and you guys have been picking interest on that since it was drawn right. So there's the belt, but whatever their crude on developed.

Yes, that's right.

Okay, and then just one more other question on the midstream Kim can we get some sort of idea what profitability is had elevation currently today and where we think it's gonna be kind of at the end of the year.

Hi, good profitability.

Other operating income or EBITDA <unk>, how whatever you guys wanted it can disclose.

Yeah, we haven't really disclose any of that specifically for elevation, but we did give a fully consolidated guide, which which with an upstream guy that you can back out.

Hi, Thank you guys I appreciate Todd.

Thank you.

Thank you. Our next question comes from Irene Haas with Imperial capital.

Yeah, just kind of curious about your fourth quarter exploration expense. So high a wondering what that is related to I'm also maybe for Twentytwenty UGI any guidance is is kashi and they can you give me a little color as to what is the like oil and expectation that's all.

Sorry clarified that second part on the GNS again, I think I like what is your all in DNA guidance for next year cash in noncash.

For cash we're at 50 to 60 million, so about 10 million down from what the midpoint of our guide was last year.

For the non yeah, we don't have noncash or that we guide to.

And should we just kinda look at what you've done historically and expect that trend to continue.

Yes, I would.

Thank you.

Thank you.

Thank you. Our next question comes from Jeffrey Campbell with Tuohy Brothers.

Hi, I just wanted to come back and ask a one more I was just wondering.

If there's any effort or any necessity to do a reverse stock split split to reset the stock price at some point and 2020 or beyond.

We don't we're not planning anything like that right now we did just recently dip below a dollar. So right. You know we've got plenty of time to address getting our share price back up and and not having to worry about doing any reverse stock split okay. Great. Thank you appreciate it.

Thank you.

Speakers I'm showing no further questions in the queue at this time I would now like to turn the call back over to management for any further line.

Thank you everybody for joining our full year conference call.

Well, we'll we'll be talking again shortly after the first quarter. Thank you bye.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

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