Q1 2020 Earnings Call
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I'd now like to hit the conference over to your first speaker today, Patrick Graham Senior director of corporate Finance. Thank you. Please go ahead Sir.
[music]. Thank you operator.
Good morning, everyone and welcome to Chaperone Energy's first quarter 2020 conference call.
Before I turn the call over to our Chief Executive Officer chopped against ski I'd like to encourage you to download our 10-Q and corresponding earnings release.
As well as our updated company presentation, which are currently available and the Investor section of our website.
You can also sign up to automatically receive updates about chaparral through email alerts bead on our investors page.
Please be aware that during the call we will discuss certain topics that contain forward looking statements based on our beliefs.
Assumptions and information currently available to our management team.
Although we believe expectations reflected in such forward looking statements are reasonable we can give no assurance that they will prove to be correct.
There are numerous factors, which could cause actual results to differ materially from what is disgusting.
You can read our full disclosure on forward looking statements and the risk factors associated with our business in our most recent 10-Q.
In addition, we will also present certain non-GAAP measures reconciliations to which can be found in our 10-Q.
With that said I will now turn the call over to Chuck.
Thank you Patrick.
Good morning, everyone and thank you for joining us today.
Before I go into our first quarter 2020 results I'd like to discuss the unprecedented environment the entire energy energy industry is facing.
And how chaparral is responding to these challenges the global Tobin 19, pandemic, coupled with worldwide supply and demand imbalances have created significant uncertainty in oil prices and further tightened the capitalmark markets.
Have a long history of commitment to the health and safety of our employees and contractors as such in early March we provided all employees and our corporate office with the equipment and software it needed to work from home home and shortly after remote work became the policy for corporate employees.
Field employees have been provided additional personal protective equipment to protect themselves and others and all in person field meetings have been suspended.
We have adhere to the advice and directives, a federal state and local governments as well as health leaders.
[music] operationally and financially we've taken decisive action to minimize our capital spend maximize our annual cash flow and provide financial stability.
Leveraging our operational flexibility improved cost structure and strong 2020 oil hedge book, we're reducing our exposure to the current abnormally low wellhead prices to preserve value and maximize cash flow for the year.
We dropped our operated rigs.
Stop all drilling and completion operations and are in the process of shutting in substantially all not a central oil production.
We've also deferred completions of our three most recently drilled wells.
In addition, we are increasing crude storage at our operated wells sides to preserve value and better position the company for a rapid restart of sales when pricing is more favorable.
In early April we borrowed an additional $105 million under our revolving credit facility to increase our cash position.
We've also engaged advisors to assist in evaluating strategic alternatives to enhance the value of the company.
We believe in the long term viability of our strong production base in the mid Con region, and our core acreage position in the oil window, the Anadarko basin.
These geologically advantage core assets and the outstanding team here are the real strength of chaparral.
This can be seen in our solid first quarter results, where we performed well on the factors within our control.
Production increased to nearly 31000 Boe per day and was above the high end of guidance due to the timing of new wells brought online strong well results and operational performance.
In addition, the companywide cost cutting initiatives I mentioned on our last call has helped US continue to capture savings in our drilling completion, Capex Halloween and DNA, all while putting the health and safety of our workers and contractors first.
The solid operational performance, coupled with our hedge position, resulting in strong first quarter adjusted EBITDA generation of nearly $41 million and net income of $4.9 million.
For the first quarter or production was 30.7, M.B. OE per day, which was 3% higher than the fourth quarter of 29 team.
Production mix for the first quarter was 30% oil, 31%, Ngls and 39% natural gas, reflecting our election to reject ethane where available for most of the quarter.
Diving into first quarter operational results, we had 15, new gross operated wells with per sales all in Canadian County.
Included in those wells was the six well Greenback development that came online ahead of schedule and was performing above expectations prior to being shut in due to the current market conditions.
In addition, we began to see our cost savings initiatives materialize as the greenbacks average DMC per well came in just under $3.8 million per well.
These new wells and strong baseball performance helped to contribute to our favorable first quarter results.
In the first quarter, our total capital investment was $55.7 million with $43.3 million on drilling and completion activity $4.2 million in acquisitions and $3.5 million in Workovers.
And additional $4.7 million was incurred in corporate allocations, consisting of capitalize DNA and capitalized interest and the asset retirement obligations.
Given the drop in pricing and uncertain macro environment in early March we provided notice to our drilling contractors that were we were seeing activity by early April we had released both rigs and stopped completion activities, which include delaying the completion of a three well pad for the future.
We will continue to monitor the oil price environment, but we currently do not expect to bring any additional wells online in the near term.
In addition to suspending drilling and completion activities, we're shutting in substantially all non essential oil production with which excludes only wells associated with Waterfloods and those with wells specific mechanical or other risks.
These actions minimize our exposure to low wellhead pricing for crude oil and preserve value for a more favorable pricing environment.
We expect the result of these actions to significantly decrease our operated production in the second quarter and protect potentially longer.
The overall timing of bringing curtailed production back online will be responsive to the commodity markets.
And the process of shutting in wells, we are increasing crude storage had operated wells sites to be position for a rapid restart of sales when prices become more favorable.
Because of the uncertainty and fluctuation in commodity pricing, we have decided not to issue guidance for the second quarter, but we do plan to issue guidance again in the future when appropriate.
From an expense perspective, we continue to make progress and decreasing our operating costs for the first quarter of 2020, Hello, He was $10.1 million, which was lower by 1.5 million or 13% compared to the fourth quarter of 2019, even though our production was up as compared to the fourth quarter.
This decrease in L., we was driven primarily by reduced salt water disposal costs, lower well maintenance costs, along with efficiency improvements in field operations.
These reductions are in large part driven by the company wide effort to reduce our cost structure and include incremental efficiencies and fundamental changes to our operations that will continue to provide benefit in the future.
On a per BOE basis, the first quarter Ela, we was three point $3.61 per BOE, we which was a reduction of 15% compared to $4.23 per BOE, we in the fourth quarter of 2019.
During the first quarter of 2020, Chaparrals net DNA expense was $8.1 million or $2.89 per be a week, a decrease of 25% compared to $10.8 million in the fourth quarter of 29 team.
The decrease was primarily driven by reductions in severance costs, partially offset by an increase in bad debt expense.
Adjusted for severance changes noncash compensation and bad debt expense Chaparrals cash DNA expense for the first quarter of 2020 was $5.4 million or a $1.94 cents per Boe, we as compared to $6.1 million or $2.25 per Boe, we in the fourth quarter 2019, representing.
A 14% decrease on a per Boe basis.
And our continual effort to better align chaparrals gionee and overhead expenses with current industry conditions and our reduced activity levels. The company has further reduced its corporate and field workforce since the beginning of year by a total of 18 employees or approximately 15%.
We have absorbed the incremental responsibilities with the talented employees that we retain of whom I'm very proud.
Turning to our financials chaparral reported net income of $4.9 million or 11 cents per share for the first quarter and we reported adjusted net income for the quarter of $10.8 million or 23 cents per diluted share.
Net income included a 71.4 million dollar noncash ceiling test impairment charge, primarily due to a decrease in the prices used to estimate our reserves.
As well as a $69.2 million noncash gain in the fair value of our hedge derivative invest instruments.
Chaparrals adjusted EBITDA for the first quarter was $40.7 million, a decrease of 13% compared to the fourth quarter of 2019, driven by a 90, 10% and 22% reduction in W. <unk> oil prices and Henry hub natural gas prices respectively.
And partially offset by increased production and lower operating costs.
Revenues for the first quarter declined to $55.4 million, which included $37 million from oil $9.7 million from Ngls and $8.7 million from natural gas.
Revenues decreased 24% in the first quarter compared to the previous quarter driven by decreased pricing across all three revenue streams.
For the first quarter, the average realized price for crude oil excluding derivatives that settlements was $44 an eight cents per barrel. The realized NGL price was $11.03 per barrel and the realized natural gas price was $1.34 per thousand cubic feet.
During this period of low prices chaparral is benefiting from a strong hedge book for the remainder of 2020, we have 1.7 million barrels of oil hedged at an average swap price of $51 in 16 cents per barrel.
5.3 billion BT, you have natural gas hedge at an average swap price of $2.72 per Mmbtu, you and 210000 barrels of Ngls hedged at an average swap price of $29, an eight cents per barrel.
At March 30, Onest 2020, chaparral, how to approximately $13.3 million in cash and cash equivalents and $145 million drawn on our $325 million borrowing base.
On April 1st we borrowed an additional $15 million on April 2nd provided notice to draw another $90 million from the borrowing base, which once funded increased the total amount outstanding to $250 million.
We made these draws as precautionary measures in order to increase chaparrals cash position and provide additional flexibility in the current challenging environment.
On April 2nd 2020, the lenders provided notice that they had exercise their right to make an interim redetermination of the company's borrowing base and decrease the borrowing base from $325 million to $175 billion effective April threerd. Since we had drawn the revolver to $250 million. This redetermination create a 70.
5 million dollar deficiency, we've elected to pay this deficiency in six equal monthly installments and the first payment was made on May onest.
On May 15, 2020, the company's lenders reaffirms the borrowing base at $175 million during during its semi annual spring Redetermination.
Want to stress that chaparral is not in violation of any of the covenants in our credit agreement and no premium or penalty will be charged with respect to the six equal monthly installments.
Before we open the call up to Q Nay I would like to briefly touch on our decision to engage financial and legal advisors, who have been tasked with reviewing and evaluating strategic alternatives.
Like many other small cap MPS, we're looking at multiple options that may enhance chaparrals value, we won't be talking about or making any future announcements concerning this process until we have something material to announce.
In closing, we remain focused on protecting cash flow prudently investing our capital and lowering Ela, we and Gionee, while we work to shore up the balance sheet and position chaparral for the future.
In addition, we have taken proactive measured and decisive action to retain value and maximum flexibility.
While we have suspended our drilling and completion activity, we remain confident and the quality of our geologically advantaged acreage position in the oil window of the Anadarko Basin. We are focused on the things that we can control and by continuing to execute operationally, we can best position chaparral to navigate the near term difficulties are.
Vision the company for the future.
And with that operator, we'll open it up for QNX.
Thank you as a reminder to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question press the pound.
Your first question comes from Derrick Whitfield from Stifel. Your line is open.
Thanks, Good morning all.
Good morning, Dark Green.
With regard to your 2020 outlook I, certainly appreciate and understand the challenges associated with providing quarterly guidance and the current environment.
We would assume strip pricing could you walk us through the likely production trajectory for 2020 and I'm speaking of directions.
Directionally.
I'd also note the economic conditions, where it may make sense to bring curtailed volumes back on line or complete new wells.
Yes.
Yes sure thing Derek.
We are.
As I said, we are we're shutting in the majority of our production the way we're executing on that is that we are producing.
Wells until their oil tanks are full so we're not selling any of the oil we're retaining it on location. So as tanks Bill were progressive lease shutting in more and more wells, it's kind of a rolling shut in as those as those wells progress.
The way that plays out is that our oil the strongest in one of these wells get shut in first because they felt the tanks that tanks fastest.
And lower producing wells take longer to produce thanks, guys. Good to fill the tanks the gas here wells take longer so it's a it's a gradual decline in our in our daily rates as we shut in these wells.
So we're continuing to that to shut them in the.
If we play this out.
To the fall if we don't see recovery in prices, we could have upwards of 70, 75% of our production shut in by sometime in late June or July.
When things turnaround and when we think about bringing production back on when we look a few months out when you look at prices that we see in the third quarter that search look attractive to us from a from a overall pricing perspective on the crude side.
The other thing that we're watching in that regard is the shape of the curve the steepness of the contango because we do have an adjustment.
Associated with the roll the one third two third role.
That in contango serves as a deduct on our pricing so we need to see a flatter curve at a higher curve to bring bring production back on but again, if we if we see a flatter curve.
With pricing that's just a few months out I could see us looking at bringing wells back online and associated with that that starts to discussion about getting our ducs completed as well.
Thanks very helpful.
As my follow up but wanted to focus on your cost improvements and certainly wanted to complement you on your team on the progress you guys have made.
Would it be fair to assume that nearly all of the Q1 improvements are structural in nature.
If you could if you note if there are incremental savings.
You could pursue in the coming quarters.
Yeah sure thing Thanks for the question very proud of the team.
You talked about our companywide initiative to generate cost savings I'd and start to ideas and start to implement those and the first quarter. We certainly start saw those start to flow through to the financial results.
When we look at the overall.
At the at the nature of the savings I'd say that the vast majority of them are structural in nature changing the way, we do things changing up lip designs changing the way we're operating in the field.
Recall I think it was about only about.
Maybe 15% to 25% of those were market related and the and the balance were structural and should be sticky as we go forward. So very proud of the team that has not only field operations. That's also.
The gionee and at the corporate level that were that we're generating those savings so.
Tremendously proud of the efforts of the team those are going to be it those are going to be sticky in a market turnaround in we're going to be much better positioned.
To succeed as we go forward.
That's helpful. Thanks for your time.
Great. Thanks there.
Once again, if you'd like to ask a question. Please press star One. Your next question comes from done Mackintosh from Johnson Rice. Your line is open.
Good luck.
Quick question on the increasing storage I mean is playing there to just bringing in additional tank batteries as amir larger pads, and and what kind of cost would be associated with that.
No cost associated with it what we're talking about is just using the existing.
Tank battery on each location.
The.
Those tanks are built.
To handle the crude bringing in temporary tankage would I think habit risk.
Spillage that were that we wouldn't be comfortable with.
The tank batteries that we've got on location have safety equipment, they've got monitoring equipment, they've got secondary containment. So if there were released from the tank that it would be contained on location and those things are hard to achieve with temporary tanks. So we're just filling up the the equipment that we got on installed on location currently.
Okay, great. Thanks, and then I guess.
Potential for an improving gas your particularly as you know looking out into back half of this year.
Do you have some maybe gassier.
NGL and gas content wells that might come on before you semi earlier was.
Yes, I'd say that would be the potential that certainly we've got.
Got a broad mix in the of wells in the portfolio. The gas here wells, where we are benefiting from gas and NGL revenue streams, even now.
It's really the disconnect in the in the oil price that is that is driving the shut in so we look at gas and Ngls little bit differently and that roll calculation is really what what I would say triggered the decision to shut in in May what was the 40 cents reduction in April two two our crude pricing widened out to nearly $8 an $8 deeds.
In May and that was that was the point, where we said no it doesn't make sense to expose ourselves to be sorts wellhead prices.
When we see better pricing just it just a couple of months down the road. So we do we do look at and jails and gas.
Little bit differently, and with little bit more strength, particularly looking ahead to next winter and 2021, that's we're looking forward to enjoying enjoying higher higher prices for those streams.
Alright, great. That's it for me thank you.
Great. Thanks.
We have no further questions I turn the call back over to the presenters for closing remarks.
Great. Thank you and thanks, everyone for joining us on the call today, we're facing some very unusual challenges in the industry, but I believe we have the right team at chaparral to manage through these difficult times.
As for your time this morning.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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