Q2 2020 Bonanza Creek Energy Inc Earnings Call

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I'd now like to have the conference over to your host Mr., Scott Landers Senior director of Finance and Treasurer. Please go ahead Sir.

Thanks, Good morning, everyone and welcome to Bonanza Creek second quarter, 2020 earnings conference call and webcast.

On the call. This morning, I am joined by Air Gregory President CEO Brent.

Executive Vice President and Chief Financial Officer, and other members of the senior management team.

Yesterday, we issued our earnings press release hosted a new investor presentation and filed our 10-Q with yes, you see all of which can be found on the Investor Relations section of our website.

The slides in the current Investor presentation, maybe referenced during our remarks this morning.

Please be aware that our remarks will include forward looking statements are subject to many risks and uncertainties that could cause actual results to differ materially from these statements.

You should read our full disclosures regarding forward looking statements contained in our 10-Q 10-K other 60 filings.

Also during this call we will refer to certain non-GAAP financial measures because we believe there good metrics using the dining performance.

Reconciliations of these measures to the most directly comparable GAAP measures are contained in our earnings release.

Yes your presentation.

We will start the call with prepared remarks.

Now I would like to turn the call over her career.

Yeah Eric.

Thanks Scott.

Good morning, everyone and thank you for joining us today for our second quarter earnings call.

We appreciate your time and interest in Bonanza Creek.

Those of you have listened to our calls in the past no. We prefer to keep our prepared remarks short and leave plenty of time for keeping an eye.

The company's performance during the quarter was inline with our expectations. So I will briefly cover a few highlights from the quarter provide some color on or after the year and then open the line for Q on <unk>.

As I mentioned, our second quarter generally came together as we expected.

We guided to second quarter production being flat to slightly down from the 24.8 Boe per day in the first quarter and the second quarter came in at 24.9 and be a we per day.

Our Halloween for the quarter came in at $2.56 per BOE, we bringing the year to date metric to $2.54 per BOE easy near the bottom end over annual guidance range of $2 50 to $2.90 per Boe.

Our recurring cash DNA dropped 21% into Q2 dollars 72 cents per Boe <unk>, despite relatively flat volumes quarter over quarter.

Lastly, capex for the quarter of $21.7 million brings our year to date capex to $62.8 million versus our annual capex guidance range of $60 million to $70 million.

As we have previously stated we had expected our capex for the year to be heavily weighted to the first half of the or with minimal capex through the balance of the year.

[music] as a result of our performance year to date, we've increased our annual production guidance range.

24 to 25 Mboe per day, and we have reiterated all other previously provided 2020 guidance.

All of our full year 2020 guidance can be found on slide 14 of the investor presentation posted to our website.

I will point out there was a typo into guidance table included in our press release issued yesterday, which lifted oil differential guidance of $4.25 to $5.25 per barrel.

Guidance remains for dollar 75 cents to $5.25 per barrel.

During the quarter, we had the opportunity to acquire working interest in over 25 wells that we operate.

Including interest in wells that have been recently turned to sales and are still building production.

A combination of wells turned to sales in this in the last six months performing stronger for longer and this acquired interest has led us to increasing our annual guidance range for the year.

This increased working interest came to us wrong financially distressed partner seeking relief on their outstanding jet balance.

We were able to pick up the additional working interest on favorable terms and despite the capital incurred during the second quarter.

That we hadn't planned for we still believe we can achieve our previously provided capex range for the year.

[music], we exited the quarter with $58 million drawn on RBL.

As of today, the balances 53 million and our net debt balances below 50 million.

As Weve consistently stated since adjusting our 2020 capital plans in March we expect to exit the year with an undrawn credit facility.

In conclusion, we're pleased with our second quarter and the progress we've made toward our 2020 guidance for the year, we've increased the midpoint of our annual production guidance and we expect Threeq you volumes to once again be flat with the previous quarter with that I will turn the call over to the operator for acuity.

Ladies and gentlemen, if you'd like to ask a question at this time.

Please press the star and the number one key on your Touchtone telephone.

To withdraw your question press the pound Keith.

Please standby, we compiled acuity roster.

Our first question comes from Leo Mariani with Keybanc. Your line is open.

Hey, guys I'm sure why maybe a little bit more information about the working interest acquisition, Yeah, I'll just talked about.

You know what month that closed in roughly how much production was associated with.

With that and what was the rough cost demand them.

Hi, good morning, ladies Brent [noise], so in the financial statements, you'll see it as the supplemental item on our cash flow statement.

But it was approximately $8.3 million.

Mark at fair value and it really was mostly working interest in recently completed.

Well.

And so if you if you want to think about it as a balance sheet adjustment of where the receivables went down in the approved properties went up that's out was handled.

It closed.

They first.

Yeah. So it added added a little bit to the quarter, but more importantly, those the recently completed wells are still building. So it did.

Enable us to do take a low end of guidance up that's that's why you saw the adjustment and production.

Okay. So I guess that eight well pad that you guys brought on in June.

Port part of it was was interest in that sounds like.

In a few of the wells there.

Yes, okay.

Got it is there is there like a I know, it's a moving target but is there like a rough estimate in production and we're talking just a couple hundred barrels a day or where are we talking about here. Yeah. You saw the guidance increase on the bottom end going from 23 to 224, so across the entire year its 500 per day.

Okay.

All right. That's helpful. Maybe just to kind of a segue that obviously you know not a huge deal as you guys talk about $8 million I'm, just wanting to get a sense.

You know what else is kinda brewing on the M&A, Brian I know, there's certainly a number of distressed players to up in the DJ Your balance sheet. So you know clearly pretty clean at this point in the cycle.

How are you guys kind of feeling about the potential for maybe other deals.

Over the next several months going forward do you feel like there is opportunity and potential willing sellers there.

Thanks, Leo It's Gregor here you know I think we continue to remain focused on efficiently achieving scale and so clearly you know, our our objectives and our timing with the balance sheet.

She is working to our advantage.

We remain focused on.

You know figuring out where those knows best opportunities lie.

And you know scale is it is extremely important to us and we when we think scale equals cash flow net of debt. So production out of debt is what we're looking for and.

That Fortunately locked favors the prepared and we came into this opportunity a pretty well prepared with the balance sheet and there there are some opportunities and we're certainly looking at all of them all of them that you would expect us to be looking for.

DNA synergies in the DJ make make it much more attractive for us.

Then than other opportunities that might be that might be outside the DJ. So clearly there is a bias for us to take maximum advantage of.

You know those cost efficiencies.

So yeah, we're absolutely looking but we want to reiterate where we're focused on on doing at the right way, yes, it's got to be you know.

A low cost basis it has to improve.

Bonanza Creek and all of the metrics, we have to be a better company on the other side of any transaction you know.

It's got to be cash flow accretive it's got to be improvements in in terms of cash cost structure and all the rest all the things you've been hearing us.

Speak to the investment community about that are important to us and we'll remain disciplined and how we approach these things it's been.

Two and a half years, Oh, Bob capital discipline, and sort of transactional discipline that have led us to where we are today, but it's not wasted honest. That's that this is a a good opportunity for us to flex you know the the balance sheet. We worked so hard over the last couple of years to to really get into the shape of Stan.

Yes, that's a that's very helpful color for sure I, maybe just lastly, I know there's not really.

Much of the way of operated activity I guess I think zero plans you know the rest of the year just wanted to get a sense, the whether or not you kind of hit the ground running in the first quarter I start kind of fracking docs in order to maintain production, how you sort of thinking about it in kind of 44. Its dollar strip a world next year in 21.

Thanks, Leo we're you know the way we're thinking about it is there's a good opportunity between now and the end of the year to start having proactive conversations with our oilfield service providers, particularly on the completion side.

And make sure that they understand we intend to to get go and you know very early in 21, I would say that you're right you know in concluding and Weve reiterated. This a couple of times just you know we're going to carry through the balance of 2020.

With this $60 million to $70 million Capex guidance range and this 24 to 25 Mboe a day production guidance range, we feel really good about that we're going to take advantage of the oilfield services price structure as it stands today and try to get those prices.

Pulled in and sort of affirmed up for the beginning of 2021, and then we intend to carry forward in 2021 with with more docs, we carry a DUC inventory athirty.

Going into 2021, and those will be sufficient to hold our 2021 production flat on a year over year basis.

And.

That's our plan.

So so we are I guess, where renter reiterating essentially what you teed up in summary.

Okay. Thanks I appreciate it yeah. Thank you Leo Thanks Leo.

Our next question comes from Michael shallow with Stifel. Your line is now open.

Hi, good morning I.

I guess just a follow on the last a call that she has there Eric.

Is there any chance you would pull some of the that activity, Florida. So you got some.

Price concessions from your vendors would you consider pulling into that into 2020 or.

You pretty set on getting the balance sheet debt free before you go back to spend more money.

We've talked about pulling forward, Mike, but we're pretty firm on a on on making sure. We exit the year debt free we think that that's a real advantage and it really differentiates our company and the and the strength.

That we can that we can bring forth does this point in the cycle relative relative strength.

And you know, making the the working interest acquisition in Q2 really helped reinforce that that belief. So so we're pretty firm on exiting you know debt free.

With several several quarters of sequential flat production and then gotten started beginning of the year I would say that as a consequence of that we do expect Q1 to dip a little bit we expect 2021 to be flat relative to 2020.

And in young nominally flat to even 2019, but I do want to point out that as a consequence of you know six months of Bob.

No activity in the second half of 2020, we do expect a little bit of a production depth, but we want to reiterate that 2021 will be flat to 2020 on that on that dock activity.

Got it and.

I want to see how French lake fits into 21, I know you kind of going back and forth on that.

Non operated property, but.

Is that likely to be a part of the 21 plan and would it be a meaningful part of the.

The 21 Capex or.

And any production contribution contemplated in the 21 plan from from French like at this point or is it mostly going to rely on those.

Pulling down the DUC inventory, yeah, it's a drawn the DUC inventory that's going to maintain the production Mike and you know our view on on 21, French like is that it's going to be weighted to the back end of the year. If it happens at all and it's going to be drilling capital no contribution of production and probably even know.

No completions capital as a way we're thinking about it.

Based on yeah based on our conversations with.

With all Oxy and I read our read through of their public commentary is yes, if it happens at all that's going to be in the back half and frankly, Mike we're not.

We're not beating on their door to tell him to get after it yes. If you know there, they're making economic decisions, we're making economic decisions we use.

You know wakened return on invested capital to guide, our incremental economic investments and I'm sure. They do the same thing and so we're we're reading I think the signals from the marketplace. The same way. So what's good for them is good for us. It's just a good alignment of interests.

Neither of US are overly perverted to go one direction or the other where we're equally aligned and I think making decisions on economic value accretion.

If it were to slip into 22, I guess, there's enough inventory there.

Wanted more activity you could just pull down the Doug so little bit further than what you're contemplating right. Now is that kind of would look out that's exactly right. We then you know we've we've got a flexible development plan. We've got the docs on that that are attractive and.

You know low to mid Fortys price environment, we're talking about here.

We've got to Doug We've got a good operated plan with great opportunities and legacy if we need to flex that.

Which I don't anticipate we will but we could pick up a rig influx that because we've got great opportunities there.

And then of course French Lake so.

What we've done has created a flexible development program over time that allows us to to operate.

2021, and 2021 on.

Relatively low capex and maintaining flat, we can flex up and the French like moves out we can swing in our own operated program.

Just about on on any kind of flexibility necessary to augment or replace French lake. So it's a really good position for us to be and at this juncture.

Sounds good thank you Eric.

Thanks, Mike.

Our next question comes from Welles Fitzpatrick, what's your with your line is now open.

Hi, good morning.

More wells.

Can you talk at all too I mean, you guys held in a better into Q on account of the EPA differentials that hit the basin.

You know and obviously hit the.

The lighter barrels harder and so you guys fared better than your then your competition can you talk to what that Apiay discount looks like now and what you might what you might think it let it looks like going forward.

Sure Wells this is Brad.

So as you know our differential is essentially very formulaic.

And we are exposed 20% to 25% of our production is what is considered a light barrel the DJ common barrel.

That is exposed to the white cliffs does discount.

And that did expand during the second quarter relative do relatively dramatically.

For one month, it's back down to what we would consider normal level levels and I think it was just posted.

Under a dollar again so.

It did expand out to over $6 in may, but it's come right back in so.

That's why we're reiterating our differential guidance for the year.

Okay, perfect and any.

Any updates on potential midstream.

It's all a day Shannon and how that might affect you guys.

Going forward and the basin.

No we haven't we haven't read of anything that.

That is affecting us in our view of.

Our am I you know remains essentially the same as it's been in the past we were not inclined to to consider or well, we'll consider anything but we won't were not inclined to act on.

Ill or something that feels like a sale lease back that's going to burden our upstream entity with with fees that are you know that essentially our.

A burden in perpetuity.

We remain interested in willing to discuss more.

You know more more creative solutions that kind of lean into.

Eastern flank consolidation wells to your point, if theres something that that looks like it might be an aggregation of eastern flank midstream and we could contribute or am I on on some.

Equity basis that would then result in both.

You know economies of scale and DNA synergies along with some multiple expansion as I as a consequence of that that consolidation. What we think that's probably pretty good business, we think that makes sense and.

We've got we've got an idea about about how that might work and you know because it it would allow for not only synergies and economies of scale, but also for third party volumes to flow through.

[music].

Our equity contribution to something like that we think about that and we think thats probably the most a reasonable.

You know potential but to your to your point, specifically, there's theres nothing working as far as we can we can see.

You know reading the same cap public commentary you read.

No nothing in the works.

Okay perfect that makes sense I you know I would now what do you use my last question to ask about politics, but with the with Paul. This is a recent commentary I don't think that's necessary. So thanks. Thanks for let me on appreciate it well.

As a reminder, ladies and gentlemen that is star then one to ask a question.

Our next question comes from Noel Parks with Coker and Palmer. Your line is now open.

Hey, good morning.

No.

[laughter] just had a general question in India is that.

You know, we do start turned a corner on some of the macro quoted worries and you know we see prices keep.

Creeping up a in the strip.

Did you have a sense of.

[noise].

I hate to see a.

Pretty clear price that you get more active but I I guess.

Since youve been such active hedgers.

Sort of like it did.

Do you anticipate that we could wind back up back in a situation with.

Sort of a hub backwardated curve that would sort of change your your hedging strategy from what you've been doing recently with a lot success actually.

No. This is Eric Gregor I. I think.

You know what if we see.

Coated related demand side pressures that.

Begin to manifest themselves in a strip that is much more attractive.

My my read and I'm going to getting pretty macro on this but my read is.

That OPEC is going to act in a way that defends their market share.

And frankly, I think we've seen it already.

As.

North American Unconventionals have begun to talk about putting shut in production back on and we've talked about bringing frac crews back and there's been more active conversation around activity increases.

You hear the Saber rattling you see the saber rattling and the defense of the market share that OPEC has taken such a big black Guy to gain I think they'll do whatever is necessary to maintain that market share and so I like my personal view as I.

I think that the can the modest contango. We're in today is about reflective of the dynamics that are that are necessary.

And unfortunately, it's going to put a lot of stress on North American Unconventionals because.

The structure doesn't doesn't work across the board it works in in certain pockets.

But it doesn't work across the board and I think thats exactly by by design.

So I.

I see again, what I'm, saying is you have cobot end demand pressures, resulting an upward pressure on price I think that's going to force action from OPEC and they're going to immediately act and given the sensitivity of the price to that surplus it'll put it right back where it needs to be in order to suppress Pos jail. So.

That's that's a lot of speculation by Gregor So I just want to preface that.

And that's why we think our systematic hedging strategy.

Caught Oregon.

Arranged around not only oil and gas.

Hedging swaps and collars, but also in minimizing any long term contract risk on the operation side of the business and sharing.

Strong capital allocation according to.

Economic value accretion WACC and return on invested capital. We think those are all the right mechanisms to allow us to respond quickly and correctly to the signals as opposed to trying to name prices because if you name a price you're only talking about one side of the DNC economics.

Theres always the cost side of that too and so.

I also I just you know it just.

It's tough on the industry when across the board, we start talking about a lot more activity because I guarantee you know the folks that have a lot lower.

Cost of production are listening to that chatter and they don't like it and it it just brings additional pressure.

On this on the supply side and so.

Let me stop there no and just see if that answers. Your question if not please please clarify.

No. Thanks, that's that's a that's great just to certainly here how you you rank the likelihood of the various factors you know geopolitical supply and demand.

Demand. It's a it's just was looking for and you know it it does feel like despite the challenges with a bid ask.

Sort of like we're on the verge of maybe some pretty serious consolidation long overdue consolidation happening in T. and it was it was encouraging good to hear you say, despite having high standards for what you'd acquire that it's it's not lost on you that yeah. This is Oh my.

Maybe a particular, particularly good window of opportunity for picking up assets given your balance sheet. So I guess thinking about the different basins and maybe with some of the regulatory regulatory fear about Colorado, hopefully add being in contrast, with many new fears about on the federal side.

You know as far as the property in acreage valuation do you think we've kinda maxed out maybe the the DJ discount.

Other basins and they can especially the Permian at this at this point do you do you think that's maybe gone as far as it's going to go and maybe might start basically the DC Jay relative to the Permian might.

Hitting upward and value.

That's my view and I I think the multiples would show the multiples have compressed.

Disproportionately in in Delaware and Midland.

On both sides of the Permian more than our multiple has expand so you could you could say that the DJ multiple has stayed compressed while other basins have compressed toward the DJ which is not exactly what you'd like to see but in terms of relative performance.

We know the DJ can can generate returns that are that are comparable to any basin.

In the U.S. and it's it's not so much on the well performance side as it is on the cost side right at the Niobrara drills like butter, it treats really well and we're well pipe and we've got consistent access to vary.

Very good.

Low cost supplies, a bulk of labor and also an oilfield services. So all those things contribute to the returns profile in the DJ and so I think if you.

If you think about all of that in the context of your first question or your first comment which was the regulatory and surface political environment might be getting incrementally better for us and potentially incrementally worse across other basins I do think that tilts that tilts towards the DJ.

At the same time.

There is.

A limited number of operators.

In the DJ that are that are capable of flexing up in a $40 price environment. So you combine all that stuff and it does create for it for a pretty interesting.

Long overdue consolidation dynamic.

I'd also point out and all that.

Our exposure to federal lands is I think it's less than 5%. So we have very very little exposure to federal.

Changes, which reinforces the whole salary.

Great Yeah, no. It's it's good to.

Your next Brexit it seems like that's.

Perpetual question that everyone's getting people kind of wanted an update on what their federal exposures to script here that Hello.

And I guess, just the last one just as housekeeping right up top you you mentioned.

Well, what your oil differential was I just want to double check what did you say that it actually should be in the guidance.

Yeah. Thanks, Thanks, No. We're reiterating for dollar 75 cents to 525 as the range. That's our full year range. We just we just at a typo in the press release it was right in the Q, it's right in the IR deck. It just there was a typo in the table that was lifted and to the end of the press release. So we wanted to reiterate that.

No problem I, just I just want make sure I had it right. Thanks a lot.

Thank you all for me.

Our next question comes from line of Michael shallow with Stifel. Your line is now open.

Yeah, I just wanted to follow up on.

The.

Through the regulatory environment does look like is getting better, but just curious what's the CEO GCC board known please have you seen any change in the in the pace of permits and any new proposals.

Coming out of.

The agency that.

That could have impact you either way.

Hi, This is about Dean Mike Thanks for the question.

No were work we are seeing steady progress I think that.

The agency is working through their process and we're working to.

Integrate those those changes into our internal process and so just in the last the last couple of months we've seen.

Steady steady progress on.

Getting both location and.

Well, yes.

Does that does that help.

Yes, It does I guess did relative to the pace previously is that.

Any change there look like its.

I guess could it be a bottleneck going forward or do you think it's.

It's a speeding up.

No I think it's certainly speeding up from from what it was.

Three or four months ago.

Realistically I don't think in Colombia, a fast processor faster process, we just need to.

Incorporate the new changes the new rules and.

And I think that given our rural setting and given our infrastructure in place.

We don't anticipated.

Hey.

A bottleneck for our operation, Yes, I don't Mike. This is Gregor I agree with Dean I don't think we're going to see it snap forward.

I think it I think the best way to describe it as it is deliberate it's a it's a very deliberate process with the Seo GCC.

And the other you know.

Regulatory bodies, whether you're talking about Weld county in the course, you're familiar with all of this but for those who arent you've got the counties and the municipality is.

Not on our acreage, but you bet municipality that the Seo GCC has to consider and so they're they're very methodical I am encouraged though that the professionalization of the board and particularly that.

You know director Robbins is now the chair of the new professional Seo GCC Board of Commissioners.

That is all encouraging and Julie Murphy. She is the new director she wasn't lieutenant I think.

Directly reporting to director Robbins all of this is good because there's no change in the tone. There is no change in that thesis.

It is it remains constructive and I think most recently governor policies position.

This is something we've been saying for a while in both our our earnings calls and in other conversations with the investment community we've been saying.

It's in Governor Boluses administrations interest to see Senate Bill one of the one work and to stabilize and kind of allow things to go through rulemaking to be sort of deliberate methodical and work at a steady pace.

And for up for a while we were saying it and he wasn't but now he's saying the same thing look let's.

Yes, let SB one of the one work we have rulemaking, we have a professional commission, we have willing and capable operators and let's give this some time to stabilize and I think it's good for everyone script is going to be good for the for the people of the state of Colorado.

And it's going to be good for.

I think the economy in general.

So so we're encouraged by the professional commission and we're encouraged by the tone and the deliberate nature of the process.

That's helpful. Thanks, guys.

Thank you Mike.

That concludes today's question and answer session I'd like to turn the call back to Eric later for closing remarks.

Thank you Liz we appreciate everyone's interest in Bonanza Creek have a nice day. Thank you.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program you may now disconnect everyone have a good day.

[music].