Q4 2019 Earnings Call

Ladies and gentlemen, I won't come into the Kelly oil Q4 fiscal year 2019 earnings call. At this time, we were getting additional participants I should begin in a couple of minutes. We appreciate your patience and asset you. Please remain on line.

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Good day, ladies and gentleman, all kind of Italian oil Q4 fiscal year 29 earnings call. At this time are getting additional participants and I'll begin in a couple of minutes. We appreciate your patience and that's what you. Please remain on line.

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Good day, ladies and gentlemen, and what kind of.

Q4 fiscal year 2019 earnings call Todays conference is being recorded at this time I'd like turn the conference over to John Davis for Cosco.

Please go ahead.

Good morning, I'm joined by a few of my colleagues today wed like to introduce Italians, Chief Executive Officer, Richard Little or Chief Financial Officer, Reagan old Pfizer and our Chief operating Officer, Dan You're Rolling This conference call contains forward looking statements for a detailed description.

The board disclaimer see our earnings release issued yesterday in posted on our website. This conference call also includes references to certain non-GAAP financial measures reconciliations of those non-GAAP financial measures to the most directly comparable measure under GAAP or contained in our earnings announcement released yesterday.

We have also published at Investor presentation, which may be found on our website and will be reference during this webcast. As a reminder, battalion adopted fresh start accounting as of October 1st 2019 to coincide with the timing of the company's mold fourth quarter reporting period. Please refer to the Giants annual report on form 10-K for the year ended December 31st 2019 for Burger.

The details regarding first started county any information discussed during this call now I'll turn it over to our team to present, a few scripted remarks, followed by Q in a rich.

Thank you John Davis I'm pleased to welcome the listeners the battalion, <unk> fourth quarter 2019 earnings call and our first Investor update as Battalion All Corporation.

Admittedly, it's been a long time, such a communicated to the market and I assure you that truly transformational changes occurred here.

Proud what we've done over the last few months hooked. After reviewing these milestones you will understand why.

At the start my first acknowledging that the industry as a whole is currently facing two significant headwinds first the kogut 19 virus and second it all out oil price war aimed at the U.S. shale industry.

Thanks business continuity plan allows us to administer the business in 100% remotely, that's including processing payments and invoices to all stakeholders that includes vendors mineral owners in our workforce.

We recognize that we work in that industry critical to the national interest and we don't pick that responsibility lightweight.

Adhere to all CDC guidelines, and we're focused on keeping our workforce safe and healthy.

The workforce for Houston based employees, they lend itself to new technologies are working remotely or field operations are little more nuanced.

Made arrangements to create adequate physical space some of our field staff and are fortunate that the population density on the field is relatively low anyway.

You will hear me elaborate more on the DHS later on but for now I'll emphasize that safety is one of our core values. Therefore, we're ensuring the continuity of art in person safety meetings, which will require multiple times per day.

Breaking teams are the group's a fewer than 10 people and increasing the reliance on radio communications as necessary, we really do value the health and safety of our workforce.

In dealing with the price we're facing our industry. We are prepared to have in many cases reacted swiftly most of the people on this thing that manage through some type of downtime throughout the course of their careers. These experiences a taught us to be more nimble and aware of the signs of slowing market.

Due to all the work we've done over the last few months, we're not only the position to endure this downturn, we're prepared to be opportunistic with a balance sheet friendly M&A.

Going to walk through fourth quarter highlights in more detail some of which include ending 2019 with a net debt to EBITDA ratio at 1.54.

We find ourselves in this position due to substantial realize cost savings operational efficiencies and the solid hedge position that we've built up over the last few months.

Our year end PDP volume is hedge 94% in the first year by three your hedge book with the floor of over $56 a barrel of 2020, using only plain vanilla swaps into white collars.

Well that everything we've done together over the last several months affords us security and confidence as we face uncertainty.

In today's presentation, we want you to walk away with the same impression that we had on this asset why this investment made sense. When we were looking for next opportunity and why it makes as much sense today as it ever has.

We'll try to answer the question of why why this company wide Italian Little Corporation why these assets in the Delaware Basin and why now.

In a nutshell the steam as the breadth of experience dealing with challenging acreage positions and challenging markets. We have the expertise to drive down costs and improve performance. These assets are strong we're developing and overpressured. All the reservoir that has the potential to compete with tier one acreage across the Permian and then my comments a surprise from a company that just went through.

Gramercy, but it's true we aim to explain why the majority of the acreage is already held it requires minimal activity going forward, providing a more flexible foundation to adapt to the market conditions.

We feel like the time to take advantage of the investment opportunity as now we've been successful realizing values for companies in the past by getting into positions. When the market is distressed we look for opportunities to get to the business. What others are trying to get out. This contrarian view in my opinion avails itself to opportunity.

The time to get into this business is not what all is trading at a $100 a barrel or acreage multiples or excessive we create value by focusing on the assets. We already have without betting on oil prices are type curve improvements and without relying on leverage to generate growth. There are number of things we've done to further strengthen our financial position, we consolidated our debt.

Synopsys into one office located in Houston.

We've reduced our DNA by roughly 45% and Weve integrated a strong technical team that continues to deliver repeatable results, reducing well cost by 32% less than six months without compromising well performance. We've created an E.S.G. task force to evaluate awareness in our organization, we've secured flow assurance for salary.

Gas production in monument drill complete a double treating capacity yet again by the end of Q1 2020.

We expect this to service our production over the next couple of years under a one rig development scenario.

We have reduced elouise by almost 30% across all of our operations and last but definitely not least we received or acid gas injection well permit that will allow us to treat our gas much more economically will be a strong platform for significant responsible growth in the future.

We're now operating under a new strategy with a new board at a newly integrated team. It always seems fitting that when we re listed on the New York Stock Exchange American on February Twentyth, we did cylinder different name.

Italian will corporation.

This truly is a new company.

2019, despite everything that this company went through we were still able to generate annual oil production growth of 6% to 10356 barrels of oil per day or 11489 barrels of oil per day in the fourth quarter, we reduced our fourth quarter operating cost to $18.28 per BLE first.

His $36.98 per deal we for the fourth quarter of 2018, that's a 50% improvement.

We decreased our adjusted DNA unit costs by 37% to $3.22 per Boe from $5, an eight cents per daily in the same quarter of the previous year.

On slide four I, just want to make a few points.

First of all the assets, how Kona before becoming a pure play Permian operator, they were shed by the end of 2000 Sixteen's of the asset base was totally different long before we arrived.

Second the entity was accustom to a different business strategy historically than today.

Successes of the first phase or the shale revolution, the land grab the buying flip mentality doesn't lend itself to the evolving dynamics of asset development.

Good assets require calculator plan, a tremendous coordination to fully realize the navy outgoing managed to acquire great acreage, but overcapitalize the asset early on and ran out of liquidity to address the increasing hqs issues for monument draw.

We now have the benefit hindsight from which to study the assets development history and identify clear drivers of value going forward.

The battalion team takes more of a walk before you run approach after drilling over 400 wells in the basin in the history of operating prolific unconventional basins across Texas and Louisiana. We appreciate the importance of fully understanding the reservoir before sanctioning of full scale development program.

Integrity as another core value than ours, and we want to deliver what we say we're going to do that means we need to prove to ourselves that we increased the necessary changes to drive value before we move into a full development mode.

I'm pleased to be joined up Italian by my colleagues and friends Reagan and Danny both of whom I worked with at HX resources, which was a private equity backed DMP company.

We sold the Diamond died back in October 2018.

Searching for next venture with again evaluating how con assets and identified key drivers of value that we felt had mirrored.

The operating expenses, including DNA were too high well costs were too high there wasn't enough treating capacity for AIDS to us the acreage has significant running room with multiple productive intervals that were not being tested or delineated.

A significant portion of the acreage is an overpressured orderly reservoir.

We believe we excel at solving these problems and therefore have a good shot generating value. Even if we are ultimately successful at all the above.

The strategy and focus of Italian oil is to create value organically. We believe we have a strong asset base and experienced leadership team that understands execution capital discipline and accountability.

This is not the first time, we've had to find opportunity on the base. So that is we're creating efficiencies imperative the driving value for the investor.

In our minds, it's not just about cutting costs, but also timing or subsurface knowledge to our operations not only improved well performance, but also improve execution.

Of course, we don't make sense right now to grow through consolidation, but only if it makes sense from a balance sheet standpoint, the benefit that we have over others in our space is that if we can't find the right M&A value, we have our existing assets to create value.

Our assets are focused in the Delaware basin with 52000 acre position from three co located contiguous operating areas that allow for efficient long lateral development. The acreage as well held requires very little continuous activity or future capital Hackberry for instance is 95% held by production while monument draw. It was key to require only three.

Three wells every year at the whole both areas.

Our capital program continues to be concentrated in monument drawl, where it's not uncommon for IP thirtys to be a 1500 2000 Boe per day range with high oil content.

The recent well results over 3000 Boe per day in the area with the reduction in Capex that day will review in more detail. We're excited about the prospects of Breakevens lending somewhere in the high Twentys.

Mosquito has the potential to compete for capital of monument draw in the very near future in the southern portion of West key to where most of the previous developments in place. We recently brought on two new wells that after four months of production are outperforming the type curve by over 70%.

If we can continue to drive costs out of the system. These wells will look very attractive.

In the northern portion of West Quito or percentages tend to be higher working to try to block up this acreage to allow more efficient operations of 10000 foot laterals. Today, we can go into a 5000 foot laterals. We recently completed a standalone well in this area and excited to see the results.

Hi, Gary has the most producing wells. Unfortunately, the lowest decline at an annual decline rate of less than 20%. This is a great cash flow asset for us.

If you turn to slide seven we wanted to show you actual data from a relevant experience as together in the Permian and how significantly affected change in a short period of time.

The serves as the basis for our enthusiasm for Permian development.

One thing I'll say about these results and then I'll turn it over that thing is not only to the results get better, but it ever and since I became repeatable.

Thats exactly right rich, thanks, and good morning, everyone.

Proud to showcase our operating history and to be a part of it team. It's been together under a few different umbrellas, we've been able to take what we've learned after each at that onto the next asset as you can see.

What we've seen after roughly 400 wells in Permian gives me confidence in what we can keep doing here.

And actually excited as ever about our future because it's in circumstances like these that I believe we have and will continue to be separated from other operators for our leading performance.

Our emphasis has been in steel is understanding how they try to subsurface to key operational and economic decisions that impact our bottom line.

This is consistently led to lower capex per foot lower LOE per Boe and higher returns driving us to achieve the absolute lowest possible breakeven prices.

At the same time well performance in the previous two full scale development programs. We led had to improve in order to continue supporting organic growth, where we don't need that here.

Your undeniably the highest producing horizontal wells per foot than I have operated in the Permian.

Focusing on what we've accomplished at the time over the last seven months you can see the results of the teams diligent efforts have been substantial.

32% reduction and well cost and almost 30% reduction in Delaware.

So while the organization was constrained by financial restructuring.

We're continuing to make improvements and I look forward to sharing more of those results in the near future.

As I said the marriage of subsurface and operations is a big part of how we execute I'm pleased with the vast repository of data the asset team has accumulated and that we have at our disposal to dissect.

Translating those insights into results actually happened to occur much quicker than what we expected on slide eight you can see all the wells drilled on the asset historically with battalion, well as depicted in red.

In both areas, we've been actively drilling we're pushing the limits and have decreased spud to rig release by 26% in overall drilling capital, which I'll comment on the next slide.

In West key to I'd like to point out that we've only had one at that we drilled a record well coming out of the gates.

That's one of the fastest wells also as we compared to our offset operators.

I was just happens I'm extremely proud of our drilling subsurface team in a continuous improvements that they're making.

On slide nine we want to elaborate in a bit of detail on one of the ways. We've incorporated this approach in our drilling operations as a backdrop I'll tell you that we came in focused on 16 fundamental variables. We wanted to manipulate in order to try to reduce drilling costs and cycle times.

Not all of them words, but most have made a significant impact.

The Wellbore diagram on top she has two wells in the same pad.

What do you can see is the following we reached a decision to deviate from our original plan and actively GST here. The 26, so to away from limestones to increase our LP decrease trips and decreased bottom hole assemblies needed to get to TD.

Of course this resulted in savings and in this case, we're talking about nearly half a million dollars.

Again, this is but one of many changes that lowered our cost from $680 a foot in the first half to 2019 to under 450 foot on average for the last six wells.

It doesn't stop drilling either or subsurface team is tying the rock to the completion designs as well.

On slide 10, where depicting an apparent correlation between frac gradient and stimulation costs.

Surprise there.

Here, we are using in version to identify sections of the lateral that may be predisposed to higher frac gradient and we're modifying completion designs accordingly.

This is also just one of many ways, we've been able to report a reduction of completion cost from over 605 foot in the first half for the year under 450 foot in last seven wells, we completed as a team.

It's a 25% reduction and not by simply reducing our job sizes either.

On the contrary, we're able to achieve these savings, while increasing proppant and fluid volumes across the board.

Before we get into slide 11 also like you mentioned, the diligent effort and work by our production operations teams, resulting into a more stable base decline less downtime and a more optimized artificial lift design.

Our engineered flow back some production programs on new wells are also paying dividends. So much so that in the fourth quarter, we hit record production multiple times.

Good News me said at least one today will work for our field operations teams here and Amazing group in our lifetime at all times, but especially during unprecedented times like we're living in right now.

On Slide 11, you can see the result of all the work that went into overhauling hqs handling field wide one of the key tenets of our investment thesis, Mike Rich discussed with the opportunity to optimize Hqs monument, both capacity and cost.

Slide 11 has a lot of information what I'd like to leave you with the three key points.

One we've doubled our capacity to process residual gas produced from our wells to we secured long term from flow assurance for all of our wells and number three maybe most importantly, we reduced unit costs by 70% from the middle of 2019 to year end, principally by Recalibrating the mix of chemicals used to treat.

Qs and comprehensively restructuring critical components of that facility.

Again, the takeaway is that we've got double the capacity in a 70% reduction in unit cost.

To foreshadow a bit we're excited to announce that we've finally obtained to permit for acid gas injection, well and to tell you exactly what that is going to do for US you can see the incredible capacity expansion. The AG I brings us depicted in the graph in the lower left of slide 11.

What isn't captured is the fact that will also be reducing our trading costs. Yet again once were all up and running unlocking yet another driver of value to the bottom line.

As a side note and because the Delaware basin producers have become increasingly required to grapple with acid gas handling.

Like to make a quick distinction and im happy to discuss in more detail requested we.

We discuss handling hqs it isn't simply a question of gas volume because a concentration of hqs changes from well well.

Therefore, it's about volume of sulfur so you'll see is try to give you a few different measures. We report our performance going forward.

I'm going to shift to slide 12 in hand, it back to rich in the second I recognize it this quarter is a bit different than how we'll frame the dialog going forward.

I know Rytary discussed this but I'll reiterate it every call safety and environmental stewardship or pillars of our culture and our strategy. If we can operate safely or if we have to compromise on environmental stewardship and anyway, we just don't do it.

You'll see US open every presentation with what we're doing in the Hs and DSG realms, because we're aware of its significance and because we're proud of our track record.

Rich ill, let you build on that a bit more.

Thanks standing in for say a couple of times now safety is a core value for us together with safety, we have responsibility obligation to what is right for the environment I'm very proud of our safety record as you can see on the lower left hand corner on slide 12 will consistently outperforming the industry and the ex PC average TR IR rates.

On the spill size, we address we reduced our still volumes both in total and relative to hydrocarbon production.

For all these metrics will not be satisfied until we've reduced and down to zero, but for now and I'm pleased with the trends.

Something new that I mentioned earlier in the presentation is the formation of an SG task force will help us elevate the importance and visibility of environmental stewardship and social awareness throughout our organization.

Many of these things we do on a daily basis, but it's never been idea the stress the importance and significance of our actions for instance, we've been tracking our FLIR intensity for some time, if you look at the graph at the bottom you see that we measure favorably versus our peers recently installed incinerator Valkyrie hqs treating plant to reduce sulfur emissions.

We've installed over 20, VR use that our major gathering locations all of our oil and water production is transported across the field via pipeline to reduce truck traffic in the field in our lease roads.

And we've had an active leak detection program in place all along we even on our own FLIR cameras into self inspections on a regular basis.

With that let me turn it over to Reagan to review the financials.

Thanks Rich.

I'll begin with a focus on our liquidity position and then touch on a few highlights from Q4 19.

About emergence from bankruptcy in October we entered into a revolving credit facility led by the bank of Montreal.

As of year end, we had a borrowing base of $240 million and $144 million drone.

After giving effect to cash on hand, an undrawn letters of credit we had $99 million of total liquidity available to us at year end.

We recognize the impact the current market environment has on our access to liquidity and while we believe it is too early to comment specifically on how redetermination season is going to pan out for the industry. We are aware of and we have confidence in a variety of plans to manage our near term liquidity.

Also had confidence and BMO they have been reliable partner for us with a strong relationship that predates battalion, our relationship that was built on a consistent track record of delivering on what we've said and therefore, a foundation of trust battalions net leverage of 1.54 times at year end is among the lowest in the micro cap space and all the work that way.

Went into our restructuring last year positions us well as we navigate this market.

We're also glad we managed to build a strong hedge book before the price for.

Our risk management philosophy is predicated on hedging a high percentage of PDP three years forward using plain vanilla swaps and three way collars. There are no three way collars or other 40 roading instruments in our derivative mix.

Our hedge book has a mark to market value of $125 million as of last Friday March Twentyth, which is based on a weighted average hedge price of $54 per barrel on 88% of our PDP volumes for three years forward through the end of 2022.

We've obviously been running a permutation of downside stress test scenarios and believe that we will remain compliant with covenants and maintain the ability to execute on a cash flow neutral plan.

Leaving the company in a position to resume and active capital program when conditions ultimately improve.

Now I'll walk through a few financial highlights from our fourth quarter and year end result.

Annual production for 2019 was 10356 barrels oil per day compared to 9748 barrels of oil per day for 2018, that's a 6% increase.

For Q4 oil production was 11489 barrels oil per day, which exceeded our Q4 plan as our field teams rapidly and effectively deployed there optimization programs.

Production for Q4, which made up of 57% oil, 19% Ngls and 24% gas.

Total revenue was 65.6 million for the fourth quarter of 2019 of which all represented 89%.

We realized 95% of the average Nymex oil price during the quarter as well as a $2 million gained from our hedge program.

We reported a GAAP net loss to come stockholders for the fourth quarter attended a half million dollars for 65 cents per share.

After adjusting for certain items, including the effect of unrealized derivative losses restructuring and reorganization cost and I'll refer you to the press release for the details on those adjustments after those adjustments the company reflected net income of $11.3 million or 70 cents a share.

Adjusted EBITDA totaled 32.6 million for the fourth quarter of 2019, and 89.7 million for the full year.

Total operating cost per unit or $18.28 per BLE for the fourth quarter of 2019 compared to $36. A 98 cents per deal we in the same quarter last year.

And $30.40 per be a read for the third quarter.

The significant decreases are attributable to optimizations of Hqs treating operations and substantial reductions in general and administrative costs.

Capital expenditures incurred in Q4, 29 team or $36 million.

Including 24 million, and DNC and $11 million and infrastructure costs.

Capital expenditures for the full year totaled $259 million compared to $585 million in 2018.

DNC expenditures decreased from 438 million in 2000 $18 million to $162 million in 2019, and I'll remind you that this assets still supported a 6% production growth with that 63% decline and capital expenditures.

Looking ahead to 2020, we had already planned to incur the lions share of our full year capital in the first quarter.

We've started five wells and we're completing seven.

With the changing market conditions, and assuming that these conditions persist, we expect to incur very little DNC or infrastructure capex in the last three quarters of this year rich back to you.

Thank you Reagan as I've stated, we've been busy cleaning up the balance sheet and driving down costs.

We think we're in a unique position to create value and grow in a down market. We have the right leverage and the right gene is structured to approach M&A from an advantage position.

At the right opportunity doesn't present itself, we still have significant growth opportunities within our own asset.

As shown on slide 17, we have a significant reserve base with almost 60% of the volume coming from wells that require very little remaining capital and that's not the mentioned all the upside potential that we have yet to delineate when the market conditions are right.

Moving to slide 18, our initial plan for reporting guidance in 2020 was to keep a single rig running throughout the year and complete 12 to 14 wells, we expected to spend approximately 130 million in total capex and generate about a 10% production growth, while maintaining a cash flow neutral profile, assuming a $55 flat price deck.

Given the current price environment, However, we need to pull back capital will reduce spending as I said in the beginning of this presentation, we have the ability to react quickly without causing harm to the business. We've now released our Frac crew, we will evaluate the merits of releasing our drilling rig.

The rig is on a pad right now, but we have time between now and the end of May to finish up these wells and make a more informed decision on a path forward.

That decision could result in a planned reduction of approximately 45% and only completing six to seven wells all those wells are expected to be online in Q1.

As efficient use of capital should also result in about a 7% drop in production for the year versus our initial plan in 2020, So said differently, we're forecasting that with the slowdown we have a plan in place that could hold oil flat year over year spending minimal capital.

I know, that's a lot to digest and I want to thank you for your attention is a no doubt challenging times and I'd be toned enough not to acknowledge that but I'll try to do my best to reassure you that we've been here before and all the work we've done over the last six months can be a more appropriate preface to this first chapter of our story.

You can tell we're proud of what we've done so far and look forward to sharing more progress with you in the next quarter.

Thank you for your interest in battalion.

That concludes our scripted remarks, I'll turn it back over to the operator for QNX.

Thank you, ladies and gentlemen, if you'd like to ask a question you may do sit by pressing star one on your telephone keypad using speakerphone. Please make sure. The mute function is turn it off to let your signal to reach our equipment.

Sure one for questions, we'll pause for a moment hello, everyone and opportunity to signal for questions.

At Star one for questions or comments, please star one.

As we have no further questions in the queue at this point I would like to turn the conference back to our speakers for any additional or closing remarks.

Thank you.

And again I want to thank everybody for their interest indicates an oil.

I hope we were able to convey to you what we're excited about the future and what we've done over the last few months has prepared us for this downturn I realize.

That's not the case for many of our appears to me as service providers that we partner with to develop our acreage. So while we talked a lot about our excitement in the future. We recognize that the hearing now the here and now it's going to be difficult for me the workers in our industry.

I'd like to have shown time to time again. This industry is resilient, we'll get through this downturn together in fact, if you look back at many of the technological advances in efficiencies that we've experienced in our industry.

They are created at least on this messaging. So we learn from these experiences and will come even more resilient on the other side of these events I've no doubt that this will be the case here as well.

Addition to the uncertainty in our industry families are also having to protect themselves from the spread across the virus, we'll continue to put the health and safety of our workforce and their families first and foremost as we do.

Our parts stopped the spread of the virus.

Thanks for your time today.

Ladies and gentlemen. This does concludes today's conference. We appreciate your participation you may now disconnect.

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