Q2 2020 Amplify Energy Corp Earnings Call
Welcome to amplify everything.
Third quarter 2020, Investor Conference call.
Amplifies outbreak in financial results were released earlier today in our global amplifies website at Www.
Dot amplify energy dotcom.
The one gets conference call.
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Today's call is being recorded.
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I would now like to turn the conference over to Erin Willis Senior Vice President.
In General Counsel.
Hi.
Energy Corp.
[noise].
I appreciate you joining us today Martin Wilshere implies in term Chief Executive Officer, and Chief Financial Officer will lead the call comments on our second quarter results.
Updates on our liquidity enhancement initiatives before concluding comments about our liquidity hedge positions and outlook for the second half 2020.
We'd like to remind you that some of our remarks may contain forward looking statements and are based on certain assumptions and expectations of implies management team.
These remarks reflect management's current views with regard to future events and are subject to various risks uncertainties and assumptions.
The management believes the expectations reflected in such forward looking statements are reasonable.
Can give no assurance that such expectations will could be correct and then it takes no obligation and does not intend to update these forward looking statements to reflect events or circumstances occurring after this earnings call.
Please refer to our press release in FCC filings for list of factors that may cause actual results to differ materially from that was in the forward looking statements made during this call. In addition, the unaudited financial information they'll be highlight here derived from our internal financial books Records in reports for additional detailed disclosure we encourage you to read.
Quarterly report on form 10-Q, which you expect to file later today also non-GAAP financial measures may be disclosed during this call reconciliations of those measures to comparable GAAP measures maybe found in our press release or on our website at www Dot and fight energy Dot com.
With this in mind I'm now turn the call over to Martin Wilcher Martin.
[music]. Thank you Eric before discussing our quarterly results I would like to again express my appreciation for the ever by team.
Despite market disruptions related city ongoing covert 19 pandemic, we delivered an outstanding quarter and exceeded our expectation regarding their liquidity enhancement initiatives that were previously discussed during our first quarter earnings call.
Extremely grateful for their dedication and professionalism demonstrated by our ways across the organization and reaffirmed amplifies commitment to operating inefficient and safety focus company.
During this call I will provide comments, our second quarter performance of old updates regarding our previously announced liquidity enhancement initiatives and hedging program.
[music] production for the second quarter averaged approximately 27700 before we per day, despite anticipated reductions attributing to the scheduled annual barrel turnaround the previously announced temporary curtailment on our non operated Eagle Ford assets and incremental offline wasn't Oklahoma due to work over economics.
At barrel, we're pleased with the annual plant turnaround in June was completed on schedule and within budget and a plant quickly returned to pre turn around production levels in the first half of July.
The non operated Eagle Ford Curtailment discussed during our first quarter earnings call concluded in April and production levels of since returned as expected.
Finally production in Oklahoma experienced minor reductions in the second quarter as a result of the incremental backlog of wells thing offline as commodity prices remain depressed.
We expect to bring many of these wells back online in future periods, the prices rebound and Workover economics improve.
Lease operating expenses in the second quarter were $27.8 million or $11 in three cents per be are we.
These results reflect quarter over quarter savings of $7.9 billion, that's significantly exceeded our savings estimate of 4 million to $5 million for the quarter and demonstrated the outstanding execution by our operations team.
Capital spending for the second quarter was approximately $7 million, which was in line with our internal expectations, a significant portion of the second quarter capital spend or $2 million or 29% was attributed to the non operated drilling and completion activity in the Eagle Ford, which occurred in April as operators finalize previously initiated development plans.
The remaining capital activity was primarily related to the barrel turnaround high return capital Workover projects are solely maintenance across our operated assets.
Second quarter cashing in any was $6.2 million or $2.45 could be a week, which was in line with our expectations.
Expect that cashing expense will continue to trend down to approximately $5.5 million into third quarter and remain relatively flat thereafter.
Moving onto adjusted EBITDA and free cash went for the quarter.
Second quarter, adjusted EBITDA was approximately $21 million, which significantly exceeded consensus estimates and validated the exceptional execution of our cost reduction initiatives and hedging program I.
I think it is also important to note that the $18 million or monetize 2021 hedges is not included as part of the second quarter adjusted EBITDA for purposes of calculating adjusted EBITDA and covenant compliance under our revolving credit facility. The hedge monetization will be allocated across 2021 to reflect the timing of the hedges at one Wilder.
Free cash flow defined as adjusted EBITDA less capex and cash interest expense was $11 million in the second quarter I'm, primarily driven by our significant cost reduction efforts, we anticipate a strong free cash flow profile for the remainder of the year due in part due to the reduce capital budget for the second half for 2020.
Now I'd like to update our stakeholders on liquidity enhancement initiatives, we are proactively implemented in light of the current commodity market volatility.
As discussed during last quarters earnings call amplify enacted several initiatives to mitigate the effects of market disruptions related to the ongoing covert 19 pandemic and commodity price volatility.
While we completed at some of these initiatives prior to the last call the completion and realization of the remaining projects were critical to our success and I'm pleased to announce at these remaining initiatives were executed with outstanding results.
First operating costs in corporate overhead reductions.
Our lease operating expenses were reduced from $35.7 million in the first quarter to $27.8 million in the second quarter.
Quarter over quarter savings, approximately $7.9 million exceeded internal expectations, a $4 million to $5 million for the quarter.
While we expect that operating costs will increase modestly in future periods, we remain committed to executing additional cost saving opportunities and exceeding our target estimates.
In addition, as previously stated the team materially reduce recurring cashing in a which klein from $8.7 million into first quarter to $6.2 million in the second quarter. This reduction was inline with expectation and we expect genie spending to trend down to approximately $5 million into third quarter and remain flat thereafter.
Second capital reductions amplifies capital spending was $7 million sharing a second quarter, which was inline with our expectations and represented an 8 million dollar reduction from the first quarter.
Improvise remaining capital expenditure budget for the second half of 2020 is approximately $6 million, we intend to stay prudent capital allocation and our activities focused principally on maintenance projects, which are central to our equipment integrity and operational efficiency and high rate of return Workover projects.
Finally beta field royalty relief.
Effective July 1st 2020, amplify qualified for special case royalty relief I just beta field. This program decreased the royalty renovated by 50%, which is expected to result in approximately 500 barrels per day of additional net production and associated and remedy or approximately $7 million per year, assuming a $40 per barrel W.G.I. price.
I'd like to emphasize it this role truly program provides relief about existing production and incremental production in future periods when economic conditions allow for additional development.
Moving onto a discussion of our recent credit facility Redetermination and our current liquidity position.
On June 15th 2020, we announced a successful completion of the spring borrowing base Redetermination process.
The spring Redetermination, what's particularly challenging with depress bank price decks and a negative economic backdrop, driven by the covert 19 pandemic, but we were pleased to be able to work with our bank group and delivery supportive borrowing based solution that provides sufficient liquidity, while we work to delever our balance sheet.
We expect the next borrowing base Redetermination will take place in November 2020.
As of July 30, Onest amplify had total net debt of $259 million under its revolving credit facility and liquidity of approximately $21 million.
Moving onto our latest hedge position since our last earnings calling me amplifies attitudes hedged positions and natural gas for the second half 2020, and 2022 as well as NGL swaps for the second half 2020.
Inclusive of a new hedges the company has over 80% hedge for the second half of 2020 based on amplifies 2019 year in reserve report forecast with approximately 83% of those hedges being swaps and the remainder being colors, our hedge position to allow us to protect future cash flows while also providing the opportunity to benefit from commodity.
Market improvement.
As of July 31st our hedge mark to market value with a net asset position of $25 million.
Amplify second quarter 2020 hedge presentation contains additional details and our current position and whats posted on our website earlier today under the Investor Relations section.
This formally conclude our prepared remarks for this morning's call. We're now like to invite analyst or ask any questions I have from the management team operator. Please open the line for any questions.
As a reminder, that's a question you need to press star one on your telephone to withdraw your question. Please press the pound key.
Please standby weekend culinary roster.
Once again, ladies and gentlemen, if you have a question or comment. Please press Star then one.
And our first question cousins, Yes, grant with Northland capital.
You May proceed.
Morning, guys.
Good morning, Jim.
I know you guys haven't put out anything to permit in terms of forward guidance or anything.
But if we just kind of thinking about 2021 and kind of current strip prices can you just talk maybe broad level, what kind of capital program would you look to to employ in that environment and maybe talk about what kind of no minimum spending that you guys were has put in for any environment and then you know what kind of projects maybe pencils.
Dan.
On the Workover front or any facilities cost enhancement type projects that you guys may want to deploy.
Scenario.
Sure, Jeff you know as Weve discussed before there's a certain level of capital spending required under you know with beta and barrel and some of the facilities projects in Oklahoma, and so probably $5 million to $10 million it kind of base capital spending and depending on the on the calendar year.
And then youd layer on whatever level of activity was gonna be on the Eagleford, obviously those wells still.
Economically makes sense and they kind of a mid fortys environment, which is where we're kind of out and the Cal 21 year I think once you get beyond that it's going to be we're going to look very closely at you know Workover project capital Workover projects, if certain projects in California, and the beta field makes sense that work is ongoing.
And obviously, it's a very Dan dynamic commodity market.
Three months ago, you're going with prices in the mid Thirtys, you probably weren't looking a lot of projects will prices moving into the mid forties, and maybe a little higher there maybe a slightly higher level of activity, but it's still see you know.
Unless we get in to you know the mid to high Fiftys, Ben I think it's still going to me a little subdued relative to the prior years.
And so I think like I said that still to come but for the rest of this year I think we're gonna have a very you know we've we've noted will have a very minimal capital budget World look closely at work over economics, where the focus on cash flow returns and payback periods et cetera.
And more we'll see what makes sense. So there may be slightly higher level work over activity, what prices being a little higher but I'm still inline with what we've discussed previously.
Okay. Great appreciate that for my follow up you touched on Eagle Ford a little bit here do you guys have any line of sight on second half activity is that embedded in the second half budget that you guys talked about and then more broadly I know that was potentially a divestiture candidate pre kobe's. It does the stabilization in the case.
While the market maybe make that something you, it's kinda revisit or is that still kind of on the back burner to the extent wells kind of hanging around these levels.
No I think right now we're not projecting a lot of activity in the Eagle Ford for the remainder of the year. Obviously, we don't operate and there's some docks. There are some wells that were proposed and not completed and so there could be additional activity beyond what were projecting but we've deferred most.
That into 2021, and our expectations like I said that something that you know.
When prices kind of moving up more recently, maybe there's there are some level of activity sneaks back into the latter half for 2020 from some operators.
In regards to it as a divestiture can that I think we've we put that on hold for the time being obviously, we can't stop inbounds and you know to extend the dose.
Become attractive World War consider anything, but I don't think thats likely for the remainder of the share, but obviously you know from our long term perspective that assets still doesn't fit our strategy as well as the operated assets and so mailing we revisited 2021.
Alright, great versus the time or [noise].
Thanks, Jeff.
And our next question comes from Noel Parks, what Coker Palmer.
I see.
Hi, good morning.
Want to know.
Just a few questions.
Did you.
Talk a little bit more about the the hedge monetization dimension that they were not included in adjusted EBITDA.
Even though I guess, they're kind of a one time cash event, but yeah. They are actually going to be recognized over time.
Yes, good going a little more detail in that.
Absolutely. Thank you know so with the hedge Monetizations. Obviously these are 2021 hedges that were unwound and the way that we look at this from an accounting perspective from a non-GAAP perspective from a GAAP perspective. They are included in.
Earnings and and cash flow from operations in this quarter. That's how are you know as they realized hedge gains from a non-GAAP perspective, obviously, we want to make sure that those gains are reflected in the periods in which they were were actually you know unwind from and so from both a credit facility perspective.
In an adjusted EBITDA perspective, and the free cash flow perspective that will all take place in 2021, we do not take did not take any credit for that for those $18 million a proceeds in our adjusted EBITDA, our free cash flow in the second quarter, we will unwind those that was 18 million spread across the full.
To your 2021, and so call it four and a half million dollar per quarter.
Essentially will be put into 2021, adjusted EBITDA and free cash flow and it works the same way in our credit facility. So that that value is not lost from a credit facility perspective that will be adjusted EBITDA in the credit facility calculations as well 2021 and that matches the head.
Just what the actual periods in which those hedges, where we're essentially locked in.
So it on a GAAP basis, though do those show up as a current liabilities.
As you as you know, it's a it's a realized gain and the cash and so we just from a non-GAAP adjusted EBITDA perspective, we just back it out.
So it isn't cash flow from operation today than it is statement and obviously there's been cash.
It is cash on the balance sheet, but it does not be it is not reflected in our adjusted EBITDA or or publish free cash flow number.
Great. Thanks.
Next I just want to maybe could you talk a little bit about.
I guess, how you categorize sort of the recurring versus a nonrecurring hello.
HM.
Yeah, obviously, we I think from an operating team perspective, they didn't outstanding job of.
Finding and executing on.
Longer term recurring expenses, which was INR 45 million dollar estimate.
Weve far exceeded that but we've also they also found some short term onetime type items that you know, we werent significant value drivers, but at the same time, where we're not trying to claim that will be forever.
And that's probably in the range of call it a million term million and a half.
Dollars of operating expense now there's a couple of other moving pieces. When you know some of those cost savings initiatives didn't come in until May and but we'll also look at a little bit more potentially on the workover side, so but for men called a million term million and a half dollars of of operating expenses I would call nonrecurring.
Well just opportunities identified and executed by by the team during the quarter and that saved us substantial amounts of money.
Oh, Okay great.
So one thing I was curious, though we did see.
One of the relatively rare.
Asset sales.
A few days ago and that was a range of sale I believe it it was Oh Terryville area golf in North, Louisiana, and I was just curious what you sort of.
Thought of the devaluation for that transaction done you know do you do you see that as Apple true.
Your your position then just example of how it should be value.
You know, obviously, we I have a personal long history, knowing that that Terryville I said from the old MRT days.
You know it is a little different asset you know, it's probably got more upside.
And higher gas prices, and it's got higher NGL content than than our cotton Valley, which is obviously any the east Texas side. This is in Louisiana, and and so it's a little bit more risk and little bit more trouble.
And I think there's a little bit paid for that and so I thought it was a pretty decent valuation under the circumstances, but you've also seen gas prices rallying and NGL prices starting to firm up. So I said I thought it was it is a very reasonable transaction and I think no if.
Gas prices continue to trend in that direction, then they'll do well with the acquisition.
Okay and just the last one for me I I was wondering I'm I have been hearing about you don't see continued shuffling going on around.
Private equity held assets and a this.
As a some companies getting sort of a distress state I'm.
Probably with their their bank lenders I was wondering in in some of your bases that are.
Relatively mature <unk> do you see or have you been approached money.
Opportunities to do like a contract operator type role I'm I'm aware I I've heard of the something similar where you know a bank got some properties they really want to operate them. They want to sell in this environment. So they they look for that that's sort of third party that come in.
No I think with our platform we're obviously.
Set up to take on those kind of opportunities as they present themselves I think right now wouldn't say anything is imminent on that front or that that's something that we're actively pursuing but.
As you say you know there could be more activity as as banks getting more involved and don't want to set up operating teams for specific asset areas. Obviously, we have a very strong operations team and you know I think these quarterly results speak to that and like I said, if if those opportunities present themselves were kind of look at it as an on an individual.
Basis, but it's not a not a business model idea that where we're going to go out in full force and look to to contract Albright for for a lot a different groups, but it could make sense right circumstances, and so certainly something we would consider given the platform would allow fitted for us to do that with minimal incremental costs.
Okay, Great. That's all for me thanks.
Thanks So.
Once again, ladies and gentlemen, it do you have any questions or comments. Please press star then one.
[noise] [noise], ladies and gentlemen, this concludes today's conference.
Well I would now like to turn to call back over to more English or for any closing remark.
Thank you.
As an organization the second quarter began with a lot of uncertainty, but do you need outstanding efforts of the amplify team. We're now moving forward with renewed optimism for the remainder of the year walkover 19 related issues are still dampening demand and prices are slow to cover the organization has demonstrated resiliency and ability to adapt to the current environment was.
Strong free cash flow expected for the remainder of 2020, we look forward to continuing to execute our stakeholders and preparing for future opportunities.
Thank you as always for joining us today and if you have any questions. Please do not hesitate should reach out to us. Thank you.
Ladies and gentlemen. This concludes today's conference call. Thank you participating and you may now disconnect everyone have a wonderful day.
[music].