Q4 2019 Earnings Call

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6 a.m.

Good day, and welcome to the towers energy fourth quarter 2019 earnings conference call. All participants will be in a listen-only mode. So do you need assistance, please signal a conference specialist by pressing the star key followed by zero after today's presentation. There will be an opportunity to ask questions to ask a question. You may press * then 1 on your touchtone phone to enjoy your questions, please press * then two, please note that the issue is being recorded. I would now like to turn the conference over to Sergio mayworm, please go ahead sir.

Thank you operator. Good morning, everyone and Welcome to our fourth quarter of 2019 earnings conference call joining me here today to discuss our results are Tim Duncan president and chief executive officer and Shane Young Executive Vice President and Chief Financial Officer before we get started. I'd like to take this opportunity to remind you that our remarks today will include wage were looking statements actual results May differ materially from those contemplated by these forward-looking statements factors that could cause these results to differ materially are set forth in yesterday's release and on form 10-K for the year ended 2019 to be filed with the SEC later today.

Any forward-looking statements that we make in this call are based on assumptions as of today and we undertake no obligation to update these statements as a result of new information or future events during this call. We may present both gaap and non-gaap financial measures a Reconciliation of gaap to non-gaap measures was included in yesterday's earnings. Press release wage was filed with the SEC and which is also available on our website at thales energy and now I'd like to turn the call over to Tim.

Thank you Sergio. I'm happy to present our fourth quarter 2019 results and discuss all that. We accomplished throughout the year also on this call. We will address our response to the recent developments in the crude oil Market. It's the fourth quarter brought another positive earnings quarter insignificant free cash flow generation more broadly 2019 was the year of progress for Talis as we generated strong financial results maintain a solid and competitive credit profile and finalize the appraisal of our world-class azama asset in offshore Mexico. We also announced and since closed a major acquisition of a portfolio of producing a high cash flowing oil weighted assets with additional scale and diversity to our business while preserving our conservative leverage and liquidity positions for the future.

Recent events in the market and the resulting commodity price environment have introduced considerable uncertainty for many independent e&p companies tell us however is well-positioned to whether the current market conditions in a portfolio of producing assets is resilient with premium pricing to WTI a favorable fiscal regime and competitive lifting cost. Our balance sheet is well-positioned with a pro forma leverage of 16.2 * adjusted ebitda, approximately approximately 600 million and liquidity and no near term maturities. Finally. We've hedged approximately 10.6 million barrels of oil of 2020 production at approximately $54 a barrel of WTI, which will help preserve our cash flow Generation profile in the near-term. However in response to the recent Trends in the market, we have decided to sneak in decisively reduce our 2020 Capital program compared to our previous guidance in total. We expect to reduce our twenty-twenty spending by more than a hundred and twenty five million dollars through a combination of lower Capital Investments. Yep.

reduction in our operating expenses

The drilling projects that we expect to remain in our budget in 2020 are those focused on quick turnarounds the first oil and existing nearby infrastructure that can still come online in 2020 or early 2018 so we can maintain our already high levels of PDP asset coverage which will further position us to withstand a prolonged downturn with these measures. We estimate that we can sustain a positive free cash flow business that are break-even point below $30 a barrel with our Hedges. We expect to provide additional detailed revised twenty twenty guidance in the coming week.

Our management team has a deep industry experience and has seen commodity crisis. He's in the past and we are prudently responding by cutting gross spending addressing cost across the organization and preserving o t and credit profile members of the management team were together and navigated the 2002 2008/2009 commodity crisis the resulted from the financial crisis. And we also successfully navigated. The more recent 2015/2016 crisis. Both times is a private company without access to the equity markets and we built our strategy of short-term contracts low leverage and active hedging to be able to fully absorb these types of shocks in the market like the one we're going through right now.

We are confident that is among the best position Independence to whether the current market environment. We want to put ourselves in a position to take advantage of opportunities that might present themselves on the other side of this downturn wage that backdrop. Let's turn to our highlights for the quarter.

Production for the quarter averaged 54,000 barrels equivalent per day comprised of approximately 73% oil and 79% liquid. We continue to receive premium pricing for WTI for our oil production with the same price of $57.65 for the quarter approximately $0.83 above the Benchmark this resulted in revenue for the quarter of 233 million adjusted ebitda inclusive of fact of Hedges was approximately $156 million in the fourth quarter with strong margins on a per barrel equivalent and a percentage basis of $31.37 per Boe and sixty seven-per-cent respectively.

Capital expenditures inclusive of spending totaled approximately eighty seven billion for the quarter resulting in free cash flow for the quarter of 44.4 million.

On February 28th of 2020 we closed the acquisition. We announced in December in the fourth quarter of 2019. The acquired assets produced 18.7 thousand barrels equivalent per day and during the eight months. Between the effective date and closing these assets generated approximately 100 million or free cash flow there for the cash component of the purchase price was reduced accordingly from $385 billion to $292 billion. We funded this cash component primarily from a revolving credit facility in cash on hand concurrently with the closing of the acquisition calluses bomb was increased to 1.15 billion, which was secured prior to the announcement of the transaction in December and required the unanimous consent of the 16 banks in our bank syndicate.

Is already bearing fruits beyond our original expectations the Claiborne number three, well has just reached total depth and it was a success The Well, Log 284 feet of true vertical pay across five different pace and surpassing pre-drill expectations because the well encountered both more pace and and more net paid than expected the operator of the Claiborne field Beacon offshore will accelerate a recompletion on a differential well in the field and then come back and complete the number three. Well with expected first oil by mid 2020

and this was

And offshore Mexico earlier this year. We announced the results of melanin schools independent evaluation of the zombie Discovery known as schools quote best estimate of the to see gross recoverable resource estimate is to 670 million barrels equivalent gross with 60% of these volumes on palaces block seven. Now, it's continues to focus on front end engineering design or feed of the project. Our goal is to declare f i d on this development still in 2020 so we can have first oil as soon as possible. But as we mentioned before the timing of f i d is dependent on the conclusion of our unit has agreement with pemex, we continue to be engaged with pemex on those discussions and we're hoping for a quick resolution remain excited about the potential of this project not only for Talis and our partners, but also what they can represent from home so in the long term

We have over one point seven million gross acres under lease and over a million of those on prime rate term acreage. The majority of this acreage doesn't expire until 2023 or Beyond. So although we are making immediate cutoff maintain free cash flow generation during the current commodity environment. We still have a deep bench of opportunities will be available for us to execute at the appropriate time as we look further into the coming months with several tenants of our approach to how we conservatively manage our balance sheet have positioned us to be successful in these uncertain times. We try to appropriately appropriately utilize our acquired infrastructure wage allows for better margins and more opportunity to generate free cash flow. We actively hedge to protect our cash flows from swings and commodity prices and we maintain low leverage and avoid long-term rate contracts. I am confident in the long-term outlook for Talis. I'll now turn it over Shane to discuss details of our financial results.

Thank you, Tim. I will not provide further details on our financial performance during the fourth quarter of 2019 and our current focus on 2020 including select details on a revised offer guidance for the year given the recent dislocations and the crude Market.

As previously mentioned strong realized pricing high oil waiting in a lean cost structure resulted in another quarter of high-margin production with adjusted ebitda margins of $31,000.37 per Bo we or 67% with total adjusted ebitda for the quarter of approximately $156 million dollars after Capital expenditures for the quarter of approximately eighty seven billion dollars and interest expense free cash flow for the quarter was a strong $44 million dollars.

adjusted

Income for the quarter was $72 million dollars or a dollar Thirty $1 per diluted share. We are pleased to note the Tallis generated positive adjusted net income and adjusted EPS for all four quarters in 2019.

Compared to our revised full year 2019 guidance Tallis concluded the year at the midpoint of our Capital guidance at $545 million dollars. In addition. We actually out performed on total operating costs with a total of $245 million dollars or $10 below the low end of our guidance range.

On the balance sheet, we can conclude the year with approximately $739 million dollars of net debt inclusive of our hpone financing lease representing 1.2 times net wage p.m. Adjusted Eva.

You're in debt included a $32 deposit on our recent acquisition, which is not yet closed at your end.

On a pro-forma basis for the closing of our acquisition on February 28th. We maintain the same 1.2 times net debt ratio.

Also for the transaction we had approximately six hundred million dollars of liquidity in cash or availability under our 1.15 billion dollar rbl crash.

In response to recent developments in the crude markets Palace is quickly making adjustments to protect our liquidity position, including significantly reducing our 2020 capital and operational spending plans.

We expect her to our $20 budget by more than $125 million dollars primarily from deferring certain capital projects while these changes will have some impact on twenty-twenty production. Do not expect them to be major. Although they could delay production ads in future years moreover. We've asked the teams to re-evaluate all operating and overhead expenses for any potential for additional efficiencies or savings.

Well, we came into the year with a strong crude hedge book. We've continued to add the book in 20 20 Summit higher prices in January others as recently as this week as you will see in our release last Thursday. We currently have had ten point six million barrels at an average price above $54 per barrel WTI and 20/20 we mentioned in our 2020 guidance in February 8th. We expect to generate free cash flow down to the low 40s per barrel. Well, the world has changed for the time being and that's no longer satisfactory. So we are responding accordingly with these forthcoming changes. We will drive cash neutrality down to below $30 per barrel in 2020 and we will expect to remain free cash flow positive for the year in the current environment.

We plan to provide greater detail and revised guideline items in the coming weeks with that. I'd like to hand the call back over to Tim.

In summary were very aware of the challenges that the current commodity price scenario will present to the industry in the foreseeable future and the adjustments that we need to make this awareness is born out of the experience of successfully managing others similar crises before but also knowing that we have appropriately structured our business to navigate these situations and we're taking a prudent approach to our 2020 budget as discussed earlier and will continue to focus on a maintaining the highest levels of quiddity to manage through this. I truly believe the towels will not only Prevail in the current environment, but will Thrive and be in a position to execute our deep bench of organic and Business Development opportunities when the market stabilized with that all I open the line for Q&A.

Thank you.

Now begin the question-and-answer session to ask a question. You may press store than one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at anytime your question has been address you would like to withdraw your question, please press * then two at this time. We'll pause momentarily to assemble our roster.

And our first question will come from Jeff of Northland Capital markets, please go ahead.

Morning, guys, appreciate all the remarks there Jeff. How are you? I'm okay was wondering of the hundred twenty-five million in savings that you guys suck. You're looking to kind of finalized here in the next couple of months or whatnot. Can you guys just talked about maybe from a high-level kind of a balancing act you guys are working to do in terms of you know, kind of may be sacrificing deferring some longer-term exploration upside versus, you know, lower risk kind of cash flowing projects in the near-term and and kind of maybe which of those two is is getting the Lion's Share of the the deformed if you will. Yeah, that's a good question. So it's a couple of things, you know, and I will tell you you mentioned Cuts over the next couple of months. I mean those those are cuts that to be sure our immediate and you know, when you when you feel like these before and again, we've been through this before I think you and I have talked about that. We've been lucky enough to never preached a bank Covenant twenty years and and don't plan to and so, you know, you have to react immediately and so we pulled the team together over the weekend and had to focus wage.

And what are the most immediate things we can do and and then we asked this very question you ask which is kind of what are we trying to manage what we trying to prioritize we have a short re-contract hundred twenty days that rigged contracts Focus off hooking up the bullet. Well, it's focused on the water flood project that we're doing in our tornado field. We had great success in that first. Well out of the box on the aisle X aspect with Claiborne. It's nice about that. It's converting a completion. And so you know what you're trying to do with what you decide to keep in. Yes, you might have to sacrifice some high-impact exploration. Some of that dough doesn't get cancelled some of that Jeff just gets postponed. You have touched base in the inventory you've created and we keep in mind some of that inventory is by infrastructure some of that inventory, you know might be bigger targets for later down the cycle of the portfolio life. So you've got to believe you built the business in a way that if you have to postpone some of the high-impact stuff you can get back to that later and I think that's why we wanted to reiterate our acreage position and then your strategy in the near-term and that's one of the reasons.

Put it in the guidance announcement and you can take a look at it as we did a run at a lower price deck. And so when you do a run Reserve run at a lower price deck, you've got to kind of first mentioned the SEC. Keep yourself legal and then you can do a sensitivity at a lower price that can you can see that in the earnings beliefs. I think at $45 long-term. And again that's long-term. That's not the next couple of months. Always remember we've got faith in the next couple of months. You've got two billions approved develop value. You want to maintain that value that's your collateralized value. So the focus of what we decide to keep is driven around one making sure a budget to you know, create free cash flow and to that those investments will stabilize you continue to prop up that proved value to prove develop value in a lower price deck. And so that's how we think about it off again the cuts got to be immediate. They may not be all of them. Now. We'll go take a little more time with the team to dig into every layer and so by the time we re guide and in in a couple of weeks, there might be some more Cuts so that's a little more wage.

itemized process over the weekend your

Eating out more of a you know, kind of more of a butcher knife and then over time you get a little more of a scalpel. You gotta have faith in the business you created and how you created it faith in your prospects long-term, which we've talked about and then you're managing that lower price. Excuse me, a lower price deck Reserve Base and keeping that stabilized and you exit the year. And so that's how we think about it. Got it got appreciate that answer and I was wondering the potential of you guys kind of evaluating maybe any cell Downs of any projects that maybe you know, you really want to get after this year, but, you know want to kind of, you know be prudent bouncing to spending as you guys talked about is is that something that you guys are contemplating in the year or is that predicated at all or based baked into that 125 million plus the savings that you guys reference? Yeah. I know it's hard to bake in. I think you have to just look at the projects as you have them and you know, I mean Heavens knows what the market is kind of spell down on the prospect, you know, so I think you really you focus on the ones that you want to age.

And what the interest on those are and some of those have Partners bullet has a partner the tornado project has a partner and so you focus on those and then you look at the other ones and say hey, can we work with the partnership to mobile a one the next year? They're probably thinking the same thing and then and then on some of the things you might want to do you can package up and think about you know, putting that into a program at a later date. So I think the idea that we're going to go ahead and re guide something that has an assumption we can find a partner probably isn't the smartest way to do it. I think you have to focus on what do you have? What can you control? What can you access? How can you go back? And if you pulled enough cost out of the system again to generate material free cash flow in the current environment, but then also executes and converts them things to PDP improved developed by the end of the year that becomes the basis for a longer potential commodity cycle again been through this before it's it's we're certainly can draw on those experiences, but I think if you try to think hey, maybe I can find a cell down.

Or you're going to be swimming upstream and so I don't think that's an assumption we want to make.

Got it, understood. I appreciate the time. Thanks. Thanks again.

Again, if you have a question, please press * then 1 hour. Next question will come from Richard of Capital One Securities, please go ahead.

Thanks. Good morning, Tim. It's nice. Nice to see a green sticker on the screen today. So that's an accomplishment there Richard if you jinxed it, I'm going to come back after you. All right, I'll take responsibility. So Tim, you know in this environment sort of rate of return her rate. Do you typically look up or for future drilling projects using say a $40 oil price and maybe $100 or $2 gas price? Yeah. Yeah, that's fair. I mean look what's interesting about that is is you know, typically we like to have them, you know, the the minimum low part is say fifty 60% as we think about our portfolio. We might lower that a little bit because as you think about some of these things you don't, you know, when when's the time to start thinking about lower cost of goods so, you know, maybe you can accept a little lower rate of return at a lower deck knowing that and you think about the life cycle of the project and part of that project will probably suck.

Cost of goods but you're not faking that in there, I would.

Tell you what, we're keeping in this plan still have the types of Economics. We would have no matter what they're still greater than 50% irrs and part of that is for the reasons. You've talked, you know, we've talked about in the past there right there on the infrastructure or the cost is sunk and we're hooking up. Oh well that we drilled last year. And so we you know, the things that we decided with the the minimalist rig program. We have to keep in touch really focused on getting our infrastructure using our infrastructure getting PHA fees from third parties into our Optics system, which is a reduction of our objects adding things to our PDP set as we think about all redetermination Etc. And so that's the focus on that and those typically have our highest are ours and you know, I think we've talked about in the past when we construct our budget no matter what the commodity environments and we've talked about this in the past. We have obligations. We have to tend to with respect to P&A. We focus on Asset Management. Those are the easiest things we can do to offset our decline re completions work overs. We try to age

Those in the system and then we focus on our drilling program and we and we think about our infrastructure stuff first or high-impact stuff second wheel of the high-impact. But if you have to cancel something you typically canceled that first. Hopefully you can defer it back to that. That's where I answered the question with Jeff. And so, you know, those sometimes have lower rate of returns because they have longer life cycles and the discount sometimes the lower deck particularly if it's flat lowers the returns now, you know, you're going to get lower costs of goods and those economic Cycles but those are the ones you typically cancel first. Hope you can go get those back focus on your infrastructure focus on your margins keep the ship moving and then be available when you get on the other side of that to be opportunistic, that's helpful. Thank you, Tim and then follow up I found that you know interesting and helpful to have the table in the earnings release regarding the the TV 10 at the the much lower oil prices the $45 and $2 gas, roughly. What do you think the birth?

Associated standardized measure maybe at the same commodity prices

Well, I think standardized measure in terms of just putting taxes into that. Yeah, so, you know Pian a liability all that well, so keep in mind, you know anytime we do this run any p n i n e p p e is associated with proof reserves are endless. And so I and I'm glad you brought that up cuz I always want to make sure we emphasize that we might have some near-term non proved asset and a liability that could be a hundred and fifty plus or minus million dollars in there. And then the question is would these reserves in these flows have a tax liability to them to get them to the standardized measure. I mean, you can probably take off what we take a thirty 35% you know? Yeah, but I I think the idea that you would have a kind of a tax liability in this environment would be pretty low. So I mean there might be some reductions in this but I think there is one thing that the reason we did this and by the way your uplifted by the market market Hedges, so there's there's things that would be in that uplift this value does things to potentially bring down that value. I think some of those things offset. I think what's important one of the reasons?

Why we did want to do the run for two reasons one.

I think it shows you a little bit of the asset coverage on proved develop against you know, our current debt outstanding and that there's plenty of asset coverage there and I think it also shows, you know, look you can take a billion dollars off of this month $100 off of his reverie are in the net debt and shake and elaborate but it kind of shows where you still have Equity value in these prices for the stock and obviously look everyone's trading away with with some of the other brown or concerns, but we think there's a lot of equity value obviously even in the lower environment for the company anything else.

Oh that makes sense it does and you still green thankfully. Yeah that you're off the hook. All right guys. Thanks so much.

Again, if you have a question, please press * then 1 hour. Next question will come from Marshall Carver of hiking and energy advisors, please go ahead. Thank you you I see the the development. Well success at Claiborne. What's do you have an expected rate on that when it comes on when when it comes on life, you know, it's I don't yet Marshall and we'll think about it when we re guide and I want to reason is is what was nice about this project and and and again admittedly were not the operator. We're getting used to a couple of projects not being the operator but the guys would be can have done a great job is because we actually had a little more success than we thought we realized now we can go to another offset well and accelerator recompletion. And so instead of having one completion in play here. It looks like we have two completions in play. And so I think we got a study that this is all kind of in the last several days. And so I think we need to study that and think about what's the impact of both of those completions?

Either way, it's it's upside for us and and these are volumes that this is in their infrastructure system. So it's no different than if it was one of ours and by our infrastructure system, so we think those would be online potentially by mid-year at least certainly one of them in mid-year and I'll have an impact in the fall when we do the redetermination, but I don't have quite those numbers yet. Again. We're just kind of new to the partnership. We just close the transaction page. Think about what that looks like is we as we really tighten up this next round of guidance. Okay, thank you. And and with your reserve report just being published wage. What what would you say the base decline is for the company, I guess pro forma with the new assets. Yeah, but you know, I do you think your basic line is? Yeah. I don't I don't have it out of you know, right out of the reserve before but I think one thing I said in the past and and a little generic but I think speaks generally with most of these offshore firms is you know, basic line. Typically when we like to see it around 5 a.m.

15% and how we kind of get there is you know, there's three types of Curves in a typical offshore. Well the first the front part of the curve which can be flat or very little bit of decline good rock properties, you kind of hold then the middle part of the curve is is the exponential decline that can be twenty 25% that middle part of a well curve and then sometimes these things flattened out for whatever reason, you know water influx and it rolls over it can be on question. But whatever causes that late part to flat out our view and a good offshore firm, you want to have a mix between those early Wells those flat parts and then those you know, obviously when you have mature, well, you're going to have that exponential putting that together you get around 15% So in the absence of new completions, you can kind of expect that that's one of the reasons why we want to keep some capital in the system to always have engaging those new wells that flat part of the curve. So we're entering into a calendar year with the right combination. And so, you know getting to your question 15% typically the answer but but the broader issue is really how do you age

The right combination of wells year-over-year.

Year, so you can kind of maintain the right types of decline that are manageable.

All right. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Tim Duncan president and chief executive officer for any closing remarks, please go ahead sir.

Thank you operator a couple of closing remarks, you know one it's certainly difficult time. It's it's trying times. You know, I think we wanted to provide some confidence that we've we've done this before and we've looked at these difficult issues. We're going to attack them decisively quickly. We're continuing to look to see if there's more to do but we have a tremendous tremendous amount of faith and faith in the long-term business model and what we've created in the inventory we have and how we can manage through this and still look forward to what it looks like a year from now a year and half an hour. I also want to remind some folks on the call that game planning on having an analyst day this afternoon. Hopefully everyone got the notice that we're not having that anal stay for all the obvious reasons related to travel but just as a reminder in case anyone didn't get that note, there won't be an analyst a this afternoon. We look forward to having that and and peeling the onion back on on all the things that we think make our business. So interesting, but obviously right now the focus is on hunkering down and get off.

For this oil price crisis, we will come back with some updated guidance. We hope to do that in the coming weeks. We're working hard to tightening everything up that we talked about today, but for the time being I think that's that's where we landed with today's call. We appreciate everybody everybody being on the call and we look forward to speaking to so many of you soon.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.