Q1 2020 Earnings Call
Good morning, and welcome to the Talen Energy first quarter 2020, <unk> earnings call all participants will be in listen only mode. Since you need assistance. Please take note conference specialist by pressing star keep followed by zero.
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I would now let's turn the conference over to Sergio My words, Vice President Finance Investor Relations and Treasurer. Please go ahead.
Thank you operator, good morning, everyone and welcome to our first quarter 2020 earnings Conference call.
Speakers on the call today, our Tim Duncan, President and Chief Executive Officer, and Shane Young Executive Vice President and Chief Financial Officer.
Well get started I'd like to take this opportunity to remind you that our remarks today will include forward 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 press release, and our form 10-Q, four the quarter ending in March 31st 2020 filed with the FCC yesterday.
Any forward looking statements that we make on this call are based on assumptions that was off 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 reconciliation of GAAP to non-GAAP measures. What's included in yesterday's press release, which was filed with the FCC and in which is also available on our website at Talbot Saturday <unk> Dot com and now I'd like to try to call over to Tom.
Thank you Sergio I look forward to discussing our results for the quarter as well as recent developments with the company in the industry.
The combined effect to the Kobin 19, pandemic and the associated sudden drop in global demand across all sectors of the economy.
Rapidly resulted in an unprecedented situation for industry.
The environment is challenging but it is a challenge we're working everyday to meet and emerge as an even stronger and better position company then before our first and foremost priority is always the health and safety of our employees our contractors in the community in recent weeks, we bolstered our offshore HSC procedures to include daily temperature scans consistent used to face mask a social distance.
In the daily work and health surveys in other advanced screening techniques as we onboard new crews.
Today, we have not encountered any cobot 19 cases amongst our off for workforce.
We also quickly moved our corporate staff to work from home status as various jurisdictions in which we operate begin to reopen we stay vigilant to continue to protect our people their families and our broader network of suppliers and partners into community.
I still believe tell us is well positioned to whether this current commodity downturn.
I mentioned in our last call. We entered March what the right ingredients to manage an abrupt decline in oil prices, we have low leverage high liquidity robust hedges and minimum long term commitments.
With that recently expanded asset portfolio following the closing of our acquisition.
Our asset base is more diverse the resilience in other than ever but they brought production base across the asset lifecycle highly competitive margins in a flexible portfolio of opportunities that utilize our infrastructure, allowing us to generate material free cash flow in the first quarter. That's still remain free cash flow positive for the full year 2020, even at current strip price.
It is in combination with our hedges.
With respect to the acquisition that transaction closed on February 20, Eightth of this year.
Transaction brings interest the numerous high profile Gulf of Mexico assets, such as Marvel Art job and Claiborne's.
It also substantially increases our exposure and our Mississippi Canyon core area, while introducing new partnerships with other high quality operators throughout the Gulf of Mexico.
At closing we benefited from the free cash flow adjustment from the effective date of July 1st 2019, which reduced our cash consideration at closing.
Also used our equity to finance a large part of the transaction, but the number of common shares issued to the seller being fixed when we signed the contract in December 2019.
The last 12 month period, ending March 31st 2020. These are assets generated an average daily production of just over 19000 barrels equivalent a day and continue to produce an average of 19.7 thousand barrels equivalent a day in the first quarter of 2020.
The transaction is also providing encouraging near term upside such as the successful drilling of the Claiborne number three development well that was recently announced we expect that well to be on line by midyear. This year. You've also seen the announcement of an impactful third party discovery in the region Ecuador's monument discovery that may unlock value from our offsetting price.
Very term acreage.
Oh that we acquired in the transaction that is on trend with this announced discovery.
However, as we enter March the market's deteriorated during the spread of carbon 19, India associated government mandated economic shut down and we rapidly responded to the evolving situation by reducing our capital spending and deferring or canceling growth projects, reducing our operating cost and reducing our DNA expenses.
When considering the assets, we currently own on a pro forma basis, our capital budget is now 40% lower than the capital program across the same set of assets in 2019.
Similar basis total operating in Gionee cost are down 15% and we expect to continue to five more savings as we work with our suppliers and service providers.
We expect to continue to benefit from our strong hedge book throughout the year and we have continued to opportunistically add additional hedges.
Looking forward to the second quarter in second half a 2020, we will continue to execute on are adjusted to reduce capital plan, which focuses on previously committed are already commenced projects that remain attractive even in the current environment.
Each of these projects utilizes existing infrastructure that we either operator have access to.
That allows for a quick turnaround to production leased or improved margin profile within our own infrastructure and increases the collateral value of our portfolio, resulting in the best possible liquidity position to withstand any uncertainty with respect to the direction of the commodity markets.
So with that backdrop, let's turn to a highlights of the quarter. It as a reminder, all figures include one month of results from the recent acquisition.
Production for the quarter totaled 58.1 thousand barrels equivalent a day production in March was 70.3 thousand barrels equivalent a day.
58.1 thousand barrels equivalent a day ties to EBITDA.
Which remains strong at $148 million inclusive of hedges capital expenditures for the quarter inclusive of PNM told that approximately 73 million included a $7.6 million seismic change of control expenditure from our 2018 stone energy transaction.
We had positive 27 cents adjusted earnings per share continuing a trend of six straight positive adjusted EPS quarters.
Free cash flow for the quarter totaled approximately 49 million. It was our third straight quarter of solid free cash flow.
As we move into the second quarter, the flexibility provided by a broader and more diverse portfolio gives us more optionality to respond to the current price environment, while maintaining a healthy production base in recent weeks, we've initiated production shut ins at several fields in order to either accelerate previously planned maintenance and upgrade activities or reduce production.
Where it makes sense to do so in the near term the company has not yet encountered any required production shut ins, resulting from midstream or storage capacity constraints.
Proximately half of the current shut ins are driven by the acceleration of various maintenance and other activities planned throughout 2020, which a better positioned the company later in the years prices improved importantly, we're continuing to monitor the market environment and worked with other operating partners from or not in our not bastards regarding additional potential shut ins and production planning in the near.
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As mentioned in our earnings release tell US recently took delivery of both at home or campaign platform rig as well as the transition discover inspiration drillship.
Both rigs are conducting previously planned relatively low risk projects, including the kaleidoscope exploitation well near our Green Canyon 18 platform. The hookup of our bullet discovery and then our tornado waterflood project. Upon completion of these projects towels. Currently plans are released the rigs utilizing the flexibility from our short term contracts.
While we focus on the immediate environment and best positioning our business for the near term. We're also continue to advance our Tom a discovery toward a final investment decision as we push the delivery of our engineering and design work and the coming weeks, we expect completion of a key regulatory steps the declares I'm a shared reservoir falling by directive in the timeline fund.
The government to complete Unitization, we're continuing to progress on the project to reach up I.D. as soon as possible and we look forward to moving our world class discovery to the next phase individual first oil I'll now turn it over to Shane to discuss the details of our financial results.
Thank you Tim I'd like to provide some further details on our financial performance during the quarter.
The first quarter, we continued to maintain strong margins low leverage and good liquidity.
What's included the impact of our acquisition of assets, which we closed on February 28.
As prices declined in the second half of the quarter. Our strong hedge book began to provide material cash flow benefits, helping to sustain strong EBITDA margins of over 80%.
Highlighting a few key results for the quarter.
As Tim mentioned Telos generated production of 58.1 thousand barrels oil equivalent per day in the first quarter of 2020, including one month of results from the assets acquired in the Ilex transaction.
For the month of March we produced over 70000 barrels of oil equivalent per day, including the impact on the transaction after closing.
The company received an average realized price of just under $45 per barrel of oil roughly in line with the average W.P.T.I. prices over the same period.
Thomas generated adjusted EBITDA for the first quarter of $148 million, representing a margin of $28 per barrel of oil equivalent and an 81% of operating revenue.
Dallas generated free cash flow for the quarter of approximately $49 million after capex of approximately $73 million.
We closed the quarter, where the liquidity position of $593 million, including $486 million available under the Companys RBL credit facility.
And approximately a $107 million of cash on hand.
The company also ended the quarter with a conservative leverage position of approximately 1.2 times LTM EBITDA on a pro forma basis inclusive of a full 12 months impact from the acquired assets calculating EBITDA in accordance with our credit agreement.
Dallas has recently begun its next my annual borrowing base Redetermination process and as is the normal course expects to announce results around the ended the month.
Clearly bank pricing has come down in the current environment.
Well, we have supported partners and our bank group, our assets performed well and we have solid reserve adds to the borrowing base.
Our early read is that while we will see some reduction in the borrowing base it will be very manageable as it relates to maintaining strong liquidity.
And it will be more than sufficient in the current market environment.
One reason it was nice to be onto the downturn with $600 million liquidity was to be position to absorb some volatility.
Following our initial 2020 financial guidance provided on February 18th of this year global demand for oil deteriorated substantially resulting in a dramatic drop in crude prices.
As a result talent has responded by aggressively reducing 2020 capital and operating costs, including deferring or eliminating non committed capital projects, reducing yellow easy and DNA expenses and other cost saving measures.
In aggregate, we have taken over $200 million of capital operating and overhead costs added the system for 2020 and reduce capital alone by approximately 40% relative the pro forma 2019 levels.
The impact of these project deferrals and approximately 6000 barrels per day in the second quarter of temporary outside operated shutdowns has been roughly 8% on production for the full year and we feel we will remain cash flow positive for 2020 at current commodity prices inclusive of our hedges.
Finally, salus continues to benefit from it strong hedge book throughout 2020.
For the remainder of 2020 the company company currently has approximately 10.3 million barrels of oil hedged or over 80% of our expected oil production for the remainder of the year.
At a weighted average price of $47.29 per barrel.
We have recently added to gas hedges to our book for both the second half of 2020, and the full year 2021 and feel good about where we are on gas as well.
With that I'd like to hand, the call back over to Tim.
Thanks, Shane and closing, we're pleased with our financial performance for the quarter on a broader level. Despite the immediate commodity market backdrop, we must take stock that we're stronger more diverse and better position company than this time, a year ago, we successfully praise and advanced a world class International discovery, we consistently executed.
Operationally with a busy drilling and development calendar and we completed a major acquisition. This significantly increased our production reserve base in inventory for the future.
We've done all this while maintaining consistently a consistent low leverage profile, increasing liquidity and better positioning the company for the current environment. We now find ourselves then.
And Weve quickly responded with the reallocation of capital extended again cost reductions.
Even though we expect to pull back for the entire industry, including tell us into second quarter, we're still focused on generating positive free cash flow for the year inclusive of our has hedges even if the current strip Holt.
Our team has deep experience in our basin through multiple commodity cycles, including successfully navigate into 2015 16 downturn and we're confident in our employees our assets in our ability to persevere. Despite the abrupt shift in oil prices in the near term.
While we continue to take prudent steps and prepare for any environment in the coming months in year I still believe the talus does in a position to thrive as we look toward the future and with that we'll now open up the line for acuity.
We will now begin the question and answer session I ask a question. Please press Star then one on your Touchtone phone.
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Our first question today will come from Jeff Grampp with Northland Capital management.
Morning, guys.
Yes.
Hey, Tim was hoping I appreciate the at the remarks on Zama and I know, that's kind of fluid and ultimately kind of hard to predict but can you had as best you can kind of walk us through timing of next events and in particular I guess wondering when does that decision ultimately need to be made on operatorship to alike.
I was kind of continuing before Jeff I'd.
Right, Yes, well look thanks for the question and by the way I Hope, you're doing well out there in California, but.
Who is the case in Mexico is always somewhat been saying we knew when we went down there that the our role is going to be an important obviously, it's an oil producing nations relies on oil revenue as part of its treasury and we knew we had to execute we had to execute well and we think we've done that.
Now we've kind of entered this space because the discovery that will certainly maybe even bigger than we thought in part of that discovery. We believe goes onto that lease next door. We had an obligation under our contract to make this filing that we call into visa. It lets the government know that by our analysis. After the appraisal that we believe we have shared reservoir it feels like.
Common sense, but look it's a filing we had to make.
We made that filing with scenario, which is the equivalent of the energy Department down there obviously, there's a technical element to that filing. So then they lean on CNH, which is the technical regulator in the leasing regulator, who then renders the decision on our information of yes that is or isn't.
In a shared reservoir now these are filings that we would make Jeff if it was BP on the other side or shell NBP on on next door leases. So this part of it doesn't have really anything do with Pemex, specifically being our neighbor now along the way we've been talking with Pemex, we have a pre unitization agreement with Pemex, I recall that kind of a parallel process.
And that that has its own cadence I've talked about then in the past it has its own speed certainly co bed slows that down it's a culture were face to face is helpful. So any interim we're going through these filings. We believe the CNH will render a decision fairly quickly that it's a shared reservoir, which then takes that back to sit there and then scenario.
Says look we formally want to see you guys engage and wrap up this unitization discussion process. So there's a little more I would say government emphasis on wrapping up the process that maybe there would be if we were just you know normally through normal business practices trying to negotiate the unit. So again, hopefully not too confusing, but we've been running down these parallel to.
Our next those parallel tracks are going to merge into something that the government has an expectation we try to wrapped up now that doesn't mean it gets wrapped up in four and six weeks, Jeff It can take anywhere between three and six months to wrap that up and that does push maybe with the F.I.D. to where we wanted to be maybe in the middle of this year towards the ended the year just a reality.
At one the negotiations to I think the inconveniences in inefficiencies of Cove. It just kind of is what it is now once we get that wrapped up. The process is then I think we've had graphics did show. This we file our development plan because again you want to file the development plan as a partnership and part of what Unitization does it pulls that.
Partnership together, we file that development plan that has a ruling and then you've reached F.I.D. and you start construction so.
We've always said, it's around two and a half years post I'd to construct and get the first oil that's to part that to me is less uncertain. If you will it's always been about pulling this process and pulling this partnership together kind of into Unitization and so you know the progress is I think we're seeing a little more tightening from a government.
Process. So that we don't have just simply an independent negotiation you have something that's coming together with a little bit of oversight, which we think is just not helpful to the process.
Does that.
The answer your question, Yes Super helpful. And then my follow up on the the shut ins and the deferred production that you guys are looking to attend plummet and in Twoq. You can you guys. Just talk what's assumed in guidance in terms of bringing that shut in production online I assume that accelerate a maintenance is pretty straightforward that'll come on when that's done but what do you.
Passing on to shut in front.
Yes, it's interesting I'm sure. It's a hot topic as you go around the portfolio companies you cover in and I would tell you just when you think about it off shore.
It's actually maybe just just a little bit trickier onshore obviously, they've got a lot things. They think about they think about their basis differential they've got onshore wells there they're proximity to their.
Other handling facilities is pretty quick in pretty short when we go offshore you have it a different a range of assets you can have a subsea well. The flows 20 miles that might just have variable cost you could have a platform that you operate this got 40 people on it that has a higher fixed cost and so you know we shut in offshore all the time, we have you know down.
Downstream maintenance issues, if we have a third party pipeline shut in if we have to shut in for a name storms. So we're not unfamiliar with shutting in I think shutting in for extended periods as periods of time as you think about our reservoirs. It's something you have to think about in terms of long term health of the reservoirs, but we do at every two and a half years in the Phoenix steel for dry dock.
But I do think our fixed cost structure tends to be a little higher now there are areas for us where we have production handling agreements to create revenue in our facilities. So the Phoenix area, Our Pompano area Green Canyon 18, we actually have revenue, we get by handling third party production that drives down our breakeven that's helpful right.
The overarching emphasis is on liquidity are these decisions to shut in liquidity accretive are they liquidity enhancing and it's not those calculations really vary from asset asset offshore I would say in a more complicated way than they do onshore and I think because of that as things start to rebound I suspect you'll see these decisions to bring offshore.
Let's back up quicker than maybe you will see on onshore where they just have a little more flexibility. So we expect the which is why we tried don't make our best attempt in our guidance. We expect obviously see it quite a bit to shut ins in may monday's. Those may persist through June we would expect some of those we would expect things to start running a little closer to normal in the second half.
The year.
Got it I appreciate the time, thank you all right Jeff Thanks for your questions.
As a reminder, ask a question please press star one narrow.
Our next question comes from Marshall Carver from Heikkinen Energy Advisors.
Okay.
Yes, good good morning, and thank you for the dates.
Glad that you don't have any.
Covert cases in the company that Thats good to hear.
I guess my question, you've had the prudent reduction in spending and really a rapid response.
This year.
Reducing your spending.
Quite a bit from the beginning from the original guidance to now how should you know you've given guidance around 2020 production how should we think about the lower spend this year is impacting next year I know you haven't given any guidance for next year, but how should we any color you have on that and.
Do you have.
As a follow on to that do you have a maintenance capex that we should think of for your company.
Yes, well look I think on the maintenance question I would I would almost argue you're right you're looking at it in the New guide. If you will you know again less obviously shut ins that.
When you think about building a budget you don't think about those shut ins as a general matter. So if you look again I think what I talked about in the transcript and in the earnings release and then my quote if you look at the assets we own it let's just take March Marshall because March was kind of a clean rate with the assets that we purchased you think about those assets and pull those assets back to 2009.
He.
I think I think that but that total capex spend and you would have to reconcile this with our Capex and then our announcement deck Marshall, but I think that would take you to about $600 million and so now you have the midpoint of this updated guidance somewhere around 367, 370, So thats, where you get to the 40% if not for the.
If not for somebody shut ins that obviously are our here for various reasons in the dramatic drop in oil price you would be somewhere around a flat number. So that gives you maybe a little color around maintenance, but but thinking forward. The next year I said, here's what I would tell you.
And I think we've talked about this in the past maybe I've talked about in previous calls you think of our capital program somewhat like a like a tower and you stack in the obligations and obviously, there's some PNNT we have to do every year. We can try to have some flexibility around that but there's some compliance related to PNNT offshore that's a certain part of our program and a full year maybe.
That's 12% to 13% as we pull some back moved the timing around maybe it's 8% to 10% there might be some other things that we spend money on but we pull a lot of that back. So we're going to pull back the gmg, we're going to pull back some of the leasing maybe have some minimum dollars in there.
Notice into first quarter, we had a previous gmg payment on seismic related to the merger and stone in 2018, so there might be a little about little bit of that in the system. We do like to do asset management, that's typically been somewhere around 15% of our capital program because those helped the profitability of our assets. They help us manage PNM a you know.
Those are marshals or kind of recompletion changing out pumps things of that nature, So that asset management stays in there and then we get to the drilling and look as much as we'd like to explore and trust me when I say, we'd like to explore.
We know we have to pull some of that back when we're in a softer commodity environment. Obviously those are the first things that we had to cancel or in hopefully just defer frankly from this year to next year, we might have to defer those further and it's one of the reasons, we try to keep our contracts short. So we don't find ourselves foreseeing ourselves into wells that you ought to defer which again is yes.
Application stuff, what we tried to keep in the system are those things, where we're utilizing our infrastructure and a very.
Very quick way and so the bullet well we found it we're looking it up.
You know the well we're drilling on Green Canyon 18, with the platform rig. If we have success were immediately hooking that up the waterflood projects well that kind of immediately has impact and the reason we do that is because we're taking either reserves that aren't book that we think are low risk or taking reserves and pod and we're putting those into the proved development category to kind of raised.
Collateral value of our assets and Thats one thing I think Marshall we're constantly focused on isn't just low leverage it isn't just liquidity, but to maintain that liquidity do we have a reserve base that highly developed its got high collateral value that we can work with with our bank group and so those investments to the extent, we can keep them in are going to stay.
And that recipe is going to be repeated depending on the environment next year. So you can kind of guarantee that those key elements were going to keep in are probably going to stay in the question is when we get the price support to add back some of the elements that obviously, we needed to cancel this year.
All right.
Yes. Thank you very much you bet.
If anyone has any further questions. Please press star one at this time.
Seeing no further questions. This will conclude our question answer session I would like to turn the call back over to Tim Duncan for any closing remarks.
Thanks, Operator look we want to thank everybody for joining the call. We know there was an array of calls this morning is all the sir.
Putting out our guidance.
In the summer timeframe certainly it's unprecedented times, it's we've navigated several of these cycles before we have a team in place that is used to this this one clearly is different everyone's working as hard as they can we feel very good about the position. We're in we feel good about our response to the crisis.
Our commitment to keeping our folks in our community safe.
But we're also mindful of making the right decisions to keep this company in the right footing that it makes it through this crisis and frankly comes out the other side into position to flip from deepened soft mentioned, so we're going to keep working very hard. We appreciate your support at the company and thanks for participating in the call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.