Q2 2020 Montage Resources Corp Earnings Call

Greetings and welcome to Q2 2020 earnings Conference call at this time, all participants are in listen only.

A question and answer session will follow the formal presentation.

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No. This conference is being recorded.

Now I'll turn the conference over to your host.

Chris maybe get.

[music] good morning, and thank you for joining us for the montage resources second quarter 2020, <unk> earnings Conference call.

With me today are John Reinhart, President and Chief Executive Officer.

Michael Hodges Executive Vice President and Chief Financial Officer.

Matthew Walker Executive Vice President and Chief operating Officer.

If you have not received a copy of last night's press release regarding our second quarter 2020 financial and operating results you can find a copy of it on our website at www Dot montage resources Dot com.

Today's discussion will highlight the companys operational and financial performance in the quarter.

Before we start our comments I would like to point out our disclosures regarding cautionary statements in our press release and remind you that during this call montage management will make forward looking statements.

Such statements are based on our current judgments regarding risk factors that will impact the future performance of monetize resources and are subject to a number of risks and uncertainties.

Many of which are beyond montage resources control.

Actual outcomes and results can materially differ from what has expressed or implied or forecast in such statements.

Information concerning these risk factors can also be found in the company's filings with the FCC.

In addition, during this call we do refer to certain non-GAAP financial measures.

Reconciliation to applicable GAAP measures can be found in our earnings release.

We expect to file our 10-Q later today, which will be accessible through our website or the Fccs Edgar system.

I will now turn the call over to John Reinhart, our president and CEO.

Thank you, Doug and thank you to everyone for listening to our call.

So the last several months the world and the E. M. P industry has been facing one of the most challenging environments in recent history.

Montage resources has managed to this period with a focus on protection of our people our assets and the communities in which we operate.

The company's operations continue to run safely and smoothly in the field, while adhering to our own stepped up screening and distancing procedures that were put in place Warner field work sites.

We greatly appreciate the leadership within our field operations as well as the cooperation of are numerous contractors and ensuring compliance with the additional safety protocols that had been inaccurate.

And our corporate office employees have been working in accordance with the policies of the local regulatory authorities and adhering to interoffice protocols that facilitate a safe and productive work environment as well as restricting all non essential business travel.

[noise] monetize remains well positioned to navigate through the challenges of the current commodity market and broader industry conditions. We believed at one of the best hedges against commodity price volatility.

Is the response of management of our capital program.

We continue to prudently deploy our capital and utilize our viable production base to accrete value in this market.

The company responded swiftly to the sudden oil price drop in demand destruction in March of this year by curtailing production and limiting cash outflows.

These actions included a reduction in capital overhead and operating costs.

We Additionally, harnessed the flexibility of our asset base to shift activity to the dry gas portion of our acreage.

Notably without any detriment tour cycle times or efficiencies.

The balance sheet has remain a top priority for us as we remain committed to the financial health of our business as commodity prices remain volatile in the months ahead.

Over the last year and a half the company has been focused on reducing our cost structure, keeping our financial leverage low and maintaining capital discipline.

As a result, we're navigating the current operating environment with ample liquidity of approximately 295 million as are the end of the second quarter 2020.

We are managing the business with a focus on free cash flow generation and believe the improving natural gas macro well farther allow the company to create significant shareholder value.

Well, it's a multiyear runway of ample liquidity no debt maturities for three years development plan flexibility and efficient execution capabilities, our priority will be to deploy a free cash flow from organic cash flow generation and any noncore asset sales towards debt reduction rather.

In an acceleration of activity.

With the de leveraging process further enhancing.

Our equity valuation.

Our recent announcement of a nonbinding letter of intent to sell our non core gathering assets would you have closed generate 25 million in proceeds that would provide the company the opportunity to reduce leverage enhance liquidity and maintain its already strong balance sheet.

We are extremely pleased to be working with its global third party and look forward to our continue relationship with them.

Due to the current terms in form of the transaction. We are limited Warner commentary on this topic and will be deferring any questions until a later date when we can share additional details.

This announcement follows our previously disclosed commercial agreement negotiations Warner Marcellus processing contract and our gas gathering agreement renegotiation.

Both have further optimize our contractual cost structure, allowing us to expand margins increased flexibility it'd be extremely well positioned to thrive at higher prices.

Over the past year and a half montage has delivered on its targeted production within the context of significantly lower capital spend and lower operating cost structure, all while achieving or exceeding our respective guidance metrics can analysts' consensus estimates.

The current operating environment reinforces the importance of being a low cost producer with high quality assets, maintaining the top performing execution team and possessing limiting contractual commitments.

During the second quarter of 2020, the Companys average daily production was approximately 552 million cubic feet equivalent per day.

Which was above the midpoint of our guidance range and inclusive of the prudent curtailment of production during the early part of this quarter.

The quarters production mix was approximately 83% natural gas and 17% liquids.

We anticipate the production mix continuing to reflect a more meaningful percentage of dry gas over the next few quarters and into the full year 2021.

With our strategic shift towards activity and capital spending in the dry gas Utica area, which allows us to capture the upside from the improving natural gas pricing outlook.

With the downward oil price movement and demand destruction from covert 19 pandemic in April the company shut in low cash margin production and its liquid rich producing area.

These shut ins primarily impacted the Utica condensate production.

By June the company substantially returned all of its condensate production with the improvement of oil prices and cash margins.

As anticipated the company's prudent decision of production Deferments had a negligible impact appointed second quarter 2020 cash flows and is a preferential approach because it has allowed us the opportunity to retain the enhance and enhance exposure to the recovery in prices.

The flush production and the outperformance from these wells when they will return to sales enabled us to remain on track with our full year production guidance and a much improved pricing environment.

This rationale.

Economic decision further illustrates the flexibility of our operations the strategic advantage heavy well constructed firm transportation portfolio and the management team's ability to make quick decisive decisions that are necessary and a highly cyclical commodity driven business.

Production cost for the first quarter were $1.25 per Mcf equivalent.

I had an analyst consensus expectations and the third consecutive quarter of a reduction farther highlighting our intense focus on cost inefficiencies.

We continue to work with our service providers and leveraging our volumes and remain activity in order to further drive operating expenses lower in 2020.

The company's total revenue was approximately 91 million for the second quarter, and we were able to deliver in adjusted EBITDAX of approximately 37.5 million for the quarter, which outpaced the analyst consensus expectations by approximately 10%.

In addition, during the second quarter, our cash operating margin, which includes 14 cents of Gionee expense came in at 35% or 76 cents per Mcf he.

Better than the reported margins of many of our significantly larger Appalachian peers, while having a pure well have any per unit DNA in line with its peers.

Which I believe is a substantial accomplishment for a company of our size.

During the second quarter 2020, the company drilled five gross Utica dry gas wells and completed seven gross Utica dry gas wells, all within our Monroe County stack pay area.

The execution team has been able to perform at a high level of efficiency, achieving a company record average of approximately 11.5 stages pumps per day on our most recent dry gas pad.

A company record of 15 stages pumped and a 24 hour period.

And a company record average up 10 stages per day pumped for the full quarter.

Also during the quarter, we turned to sales seven gross wells of which four were Marcellus wells and three were Utica dry gas wells again, all in the stack pay area of Monroe County, Ohio.

As we continue to focus our 2020 plan on Utica dry gas activity to capture the improved natural gas macro we're extremely pleased by the strong operational results achieved that impact our development efficiencies.

This operating cadence allows the team to continue to drive our spud to sales cycle times lower.

Which were 127 days in the second quarter of 2020.

This number represents a 12% improvement over the impressive 2019 results and gives the company the opportunity to realize quicker cash turns.

As a reminder, 2018 cycle times achieved or 220 days spud to sales with the current 2020 estimates realizing a 93 day improvement relative to the pre merger execution history of the company.

Well, our near term focus is on converting our Utica dry gas resources, we continue to be encouraged by the well results in our Ohio, Marcellus development area, which are producing condensate yield above EUR type curve expectations.

He's liquids rich Marcellus wells highlights a development advantage of our core stacked pay area in Ohio in West Virginia.

In addition, our flag casselberry in Pennsylvania, which encompasses approximately 95 undeveloped dry gas locations continues to see production results from our pain or to each well that are trending at or above a highly economic 2.4 Bcf he per thousand foot, but you are.

This dry gas inventory in northeast PA will compete for capital as we look forward into the 2021 development plan.

Looking now at our revised 2020 plant, we have lowered the company's expected 2024 year capital spend by an additional 7% since our last downward revision in may of 2020 to a range of between 120 to 140 million filed following the further optimization of development.

In activity and additional cost efficiencies realized during the second quarter, along with further anticipated reductions remaining in the second half a 2020.

This marks our third leg down in capital spending year to date and is now 35% below the initial plan laid out in early February and is 65% below our capital expenditures in 2019.

The drilling and completion capital will continue to be allocated approximately 100% to the Utica dry gas area in the second half of 2020.

This forecast it spend includes additional well cost savings that equates to an 825 dollar cost per foot lateral and our Utica dry gas area.

Which incorporates all pad readiness drilling and completion operations water and all infrastructure expenses.

This represents a savings of approximately 9% compared to our original 2020 type curve plan.

And given the normalized 808 per foot cost realise one our most recent dry gas pad provides a high degree of confidence in our ability to continue to enhance the cash flows are the company.

Similar to monetize this actions in the first half a 2020, a being an early mover in reducing capital expenditures shutting in low margin production and refocusing on natural gas given the lower commodity price environment and improving natural gas outlook. The company will continue to dynamically optimize the development.

For high quality asset base in order to maximize the fundamental value of our company, while preserving balance sheet health and full year 2020 cash flow generation.

In summary, the second quarter has been another illustration of what sets montage apart from its peers.

The low commodity prices and volume curtailments of challenge the upstream industry, but they have allowed us to demonstrate the underlying strength of montage.

The team has been very responsive to preserving the value of our high quality production base and continues to optimize the development playing geared towards full year cash flow generation balance sheet protection and liquidity position.

We remain in a relatively strong position to navigate the challenges in the macroeconomic and industry environment and are situated well to realize value uplift in the improving natural gas pricing outlook.

With that I'll turn the call over to Mike.

Thanks, John.

While the second quarter was filled with commodity price volatility and interruptions to production for many of our peers. We're very proud of the revenue montage delivered while protecting the economic value its underlying asset.

Adjusted revenue for the second quarter was approximately $108 million and adjusted EBITDAX was approximately $37.5 million both of which have allowed montage to maintain its financial strength, despite a weaker commodity price environment.

Better days appear to be ahead, and we will continue to be dynamic and decisive in our making decisions that are best for the cash flows and value of the business.

While others may have chosen to flow volumes at little or no value to their business, where except significant discounts on their oil production in order to keep barrels online, we acted swiftly and decisively to maximize cash flow and preserve future value.

Given adjusted EBITDAX for the second quarter outpaced capital expenditures by more than $8 million and by more than $10 million in the first quarter of 2020, Despite a significantly front loaded Capex program. In 2020, you can see that montage is positioned well to deliver on its objectives of free cash flow generation and 2020.

During the second quarter, our all in realized price with $2.15 per Mcf fee, including the impact of cash settled derivatives and excluding firm transportation.

I would remind you that only about 60% of our gross market. It gas volumes are committed to long haul firm transportation agreements and that we have a diverse sales portfolio that accesses multiple markets along the Gulf coast in the Midwest and other premium locations with these agreements.

Said another way, we are mitigating basis risk capturing basis strings in certain markets like the Midwest and maximizing flexibility through our combination of low commitment levels and the variety in our sales locations a unique combination amongst most of our peers in the Appalachian Basin.

We're continuing to reap the benefits of our unique ability to sell commitment free natural gas into underutilized firm transportation assets owned by others at prices were which were at a premium to in basin benchmarks.

For the second quarter, we achieved a natural gas differential at 15 cents per Mcf and are realized price of one dollar and 57 cents per mcf, excluding cash settled derivatives, which was better than analysts' consensus expectations.

We're also narrowing our full year 2020 guidance for natural gas differentials due to a combination of strong recent basins prices.

Sales points, we sell into along with our optimization program delivering better than expected result.

On the liquid side, we realized they ate dollar an 18 cents per barrel NGL price equating to 29% of diabetes, excluding cash several settled derivatives.

With our strategically curtailed production in the quarter residing in our liquids area. We were required to make up a minimal amount of ethane through additional recovery that provided a slightly negative impact to our NGL prices this quarter.

Our production sales volumes are sold at Mont Belvieu prices and without ethane recoveries and should allow us to continue to realize better overall in the economic NGL economics going forward and we're looking forward to the opportunity to sell our recovered ethane at gas pricing in the near future once the shell Cracker comes online.

Based upon what has been stated publicly on the progress of the cracker montage is likely to begin realizing the value uplift from this agreement sometime in 2021.

Given weaker currently receive a little or no value for any recovered ethane once transportation and fractionation costs are considered we're looking forward to any incremental EBITDA provided by this agreement that comes without a take or pay obligation for montage.

Our realized oil price during the second quarter of $21.66 per barrel implies a negative six dollar in 19 cents per barrel differential to WT.

Which is inclusive of all transportation expenses, but excluding cash settled derivatives.

This differential was better than analyst consensus expectations, along with most of our in basin peers and as I described in my comments regarding montage as quarterly revenue is partially attributable to the rational economic decision not to flow wells when oil prices could contribute to low margins or potentially reduce EBITDA.

Going forward despite increased demand for condensate in the basin in comparison to a few months ago, we expect our oil price differentials for the remaining six months of 2020 to be between $9 and $11 per barrel well ahead of many of our peers.

As a modeling note the full year, we'll guidance differential range is tighter than our forward quarterly outlook for Q3, and this is simply a function of the monthly oil index being lower during a period of curtailed oil volumes for montage. The company is producing the bulk of its oil in 2020 during higher pricing environments and therefore, the resulting.

Realized price for oil generates a lower differential when compared to the average monthly index.

For the second quarter, our $29.1 million of capital expenditures, which was better than analysts' consensus expectations consisted predominantly of 27.6 million of drilling and completion capital and 1.5 million in land and other capital.

Our first half capital expenditures were approximately 60% to 65% of our expected revised full year capital expenditures of approximately 130 million at the midpoint and we expect our quarterly capital spending cadence to slow considerably in the second half of 2020.

The strong results for Q2 were the result of continued operational efficiencies achieved by our operations teams lower service cost realized from our service providers in the basin and a disciplined focus with respect to expenditures on infrastructure and land.

Looking back we have now lowered our capital expenditure guidance by 35% or $70 million for 2020 since the guidance with initially issued in February and our 2020 full year production guidance has changed less than 1%, even when including the strategic shut ins that were implemented in April and May.

Every dollar counts in the upstream industry. These days and the reduction to our capital spending guidance announced a couple.

Weeks ago and reaffirmed in our earnings announcement is evidence of our ongoing commitment to efficiency.

With respect to our current hedge position, we're pleased that we've hedged approximately 70% of our 2020 natural gas production, while also adding to our propane and in basin differential hedge position.

Well, we are encouraged by signs of improving macro trends for natural gas supply and believe that better days are likely ahead, we remain committed to a disciplined approach to hedging our cash flows and we have continued to add to our 2021 and 2022 positions as opportunities arise to create incremental value and certainty of cash flows Keith.

In mind that we use a mix of structures in our hedging program and therefore, we participate in rising commodity prices on at least a portion of the hedges that we have executed.

We currently have approximately 60% of our oil production hedged at an average floor price of above $55 per barrel well above the market price for oil even with the recent increases in prices.

Finally, and perhaps most importantly on the financial side of our business. We continue to maintain approximately $295 million, a liquidity and financial leverage ratio of 2.4 times at the ended the quarter, which we believe positions montage as one of the best in class for small and mid cap gas companies from a financial perspective so.

Said another way our current liquidity is more than two times, our current year capital expenditure program with the business it looks to generate free cash flow in 2020 and beyond and we feel our financial position is very strong.

To summarize with the improving gas macro for later this year and into 2021, starting to materialize in the forward strip market. We believe montage is well positioned for the quarters in years to come.

As one of the only small cap natural gas upstream companies that can look to generate free cash flow in 2020, while still providing modest production growth all while maintaining low leverage and significant liquidity. We believe that montage has positioned itself well for the future.

On that note John will wrap up the prepared remarks.

Thank you Michael.

Overall, we remain thoroughly impressed with the entire montage team and their push to enhance value of our asset base in our company as we distinguish ourselves through operational financial execution.

Our core position and one of the Premier natural gas basins in the world for the portfolio of quality inventory and a mix of opportunities across commodities will allow us to region redirect capital quickly without degrading returns.

The cost structure or the capital efficiency, we have achieved through our drilling program. We thank everyone for joining US today. This concludes our prepared remarks operator, please open the lines for questions.

Thank you at this time will be conducting a question and answer session. If you would like to ask your question. Please press star one on your telephone keypad confirmation code will indicate your line is in the question. Keith you May price start to if you would like to remove your question from Q participated using speaker equipment, they may be necessary to pickup in your hands. It.

My question to start.

One moment, please while the pull for questions.

Our first question is from Brad Heffern with RBC capital markets. Please proceed with your question.

Hey, good morning, everyone.

With the understanding that you haven't given guidance yet can you talk sort of how you're thinking about the 2021 plan at this point.

You know Thats, a look more like a maintenance plan or sort of just what are the guide posts that are going to determine how you frame it.

Yes, it's a good question Brad This is John as you know it will probably come out with.

Typically the plan for full year guidance in 2020 Watt will be late in the year or early in Q1 of 2021, However, what would what we've historically said here is.

A low kind of growth mode is where the current strip prices is is bringing us to to look forward on future with their activity planned. So I'd look at kind of a generally a low single digit growth.

And maintenance capital as we've articulated before in our prior calls of about $140 million to $150 million gives us that kind of growth trajectory. So while we can't provide specifics, we certainly like the pricing and the strip with natural gas. So continued focus on gas and probably the strip prices not a super heavy growth mode next year.

Okay. Thanks for that.

And then obviously there have been tons of medicine and the commodities markets can you just talk through how you see the various arrows competing various areas competing at this point, especially when you look Florida at the future strip.

Yeah, I think actually it's pretty nice to have a very diverse and a high quality asset base for us. So you know there's 640 locations throughout the entire footprint.

We look at the current pricing in the returns because remember our capital allocation is strictly based on economic returns.

Our moderate commitment levels really does it push us to make decisions based on any kind of ft or other financial arrangements that we may have so it really is about the economics of the different areas and I would say that at today's prices. The Utica dry gas is the most economic but I can tell you right now with the.

Recovery that we've seen an oil price honestly prices in the NGL stabilizing the Marcellus is right behind it and I would probably ranking at today's prices the Utica condensate.

Last so if you look at the again the portfolio, what what kind of is impressive considering the Marcellus and Utica are fairly close the stack pay within which we.

We're going to be developing these things in Ohio really provides that extra kind of incentive in returns for us as we look forward to developing those so dry gas Utica and in condensate would be how the economic stack up in today's inventory environment.

Okay. Thanks for the answers.

Yeah.

And again as a reminder, if you have any questions you May press star one on your telephone keypad.

Our next question is from Duncan Mackintosh with Johnson Rice, Please go see which of course.

Good morning, John.

Turning.

Oh, maybe for Matt.

Well continue to show some pretty impressive cost reductions on the Capex front with your Utica dry gas now.

Below your type curve assumptions on a dollar per foot just wondering if you could provide some color around you know how much of that's efficiency gains how much of it as a service cost deflation and you know kind of where do you see that trend going forward.

Yes, no I appreciate the question as Matt.

Yes, I think.

Certainly a mix of efficiencies and cost deflation from our service providers I think as you as we've gone from year end 19 kind of rolling into Twentys estimates modified a foot.

They will drive those down $80 a foot on the type curve.

Basis as you've seen our recent results our latest pad, yes, you can be dad by 3% and so the teams really are are driving those efficiencies.

Our DAC, we've got some material.

On a drilling side, we're increasing our lateral feet per day or the deep Utica formation, our completions team has said.

Multiple records this quarter from all in an average of 10 stages per day to a single day record of 15 stages, a day and so when you think about those efficiencies that are long lived in the and that have staying power those continue to drive the costs down.

I'd say, our planning side, where we've developed in Monroe asset the way. We have this year you know when you think about limits at a rig moves and existing water infrastructure between the pads in a in a very tight window, that's enabled us to reduce our cost and so part of our planning processes to certainly eliminate those costs in the dead times, which.

Your first cycle times faster all of those things are kind of roll into the efficiencies that drove that down and that of course on the service side I think what are the things that.

We'd like to do as they pretty flexible and not commit to long term take or pay contracts and so we've been able to go pad to pad kind of renegotiate rebid on every job and so that's enabled us to continue to take advantage of the market prices as they continue to decrease the things like pressure pumping services fuel.

Just taken advantage of those those cost reductions in recession, there, we're seeing with our service providers.

So all in all its a mix I think where we're at an efficiency side is.

Based on leading top top cortile for sure and so those those have the staying power that reduce the cost.

For the long haul.

Alright, Thank you very much.

Then from a follow up.

Just wanted to say congrats on getting that infrastructure still done in a pretty challenging quarter, but you know its debt reduction is kind of become the the name of the game here.

Do you see other noncore assets, you could look to sale to potentially kind of expedite your your debt pay down.

In the next 12 18 months.

Hey, Dan This is Michael I appreciate the question I think I think.

The news that we were able to announce recently, we feel good about I think we're consistently evaluating what's left in our portfolio. We've talked about some of those in the path.

We talked about the flat castle area, we talked about undeveloped locations just given the inventory that we have so I think theres, probably some opportunity down the road I don't know that there's anything specific to point out I mean, we do have a lot of toggles available to us.

So we'd like to keep those in mind and think about what the right way to move things are in the benefit for us of having a flexible businesses that we can be opportunistic.

And so that flow through really to all the decisions, we make whether their business development related or whether they're financial or operational. So I guess long story short I think there's probably some things out there, but nothing specific I think that we'd point you're right now.

Alright, thanks for the color look forward to fall in oil.

Thank you.

And we have reached the end of your question and answer session and I'll now turn call over to John My Heart for closing remarks.

Now we certainly appreciate everybodys participation on the call today, the company continues to thrive and do well operationally and financially.

And we look forward to our next quarterly results call. So thanks, everybody for your time.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.