Q3 2020 QEP Resources Inc Earnings Call

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Greetings and welcome to Qiwi P. resources third quarter 2020 earnings Conference call.

At this time, all participants are in listen only mode.

Maybe a question and answer session will follow the formal presentation if.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host William Kent Director of Investor Relations. Thank you Sir you may begin.

Good morning, and thank you Christine for those on the line, we had a technical issue with our conference call provider the sporting a widespread outage from what we understand we're going to let.

The.

Some folks still in here before we get started just to make sure everybody has talked to participate and listen in so at this point well well go on mute for about two.

Two minutes and then we'll check back in and well see if weve got enough folks dialed in and we'll get the call moving appreciate your patience and obviously its 2020. Thank so much will that come back in a moment.

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Ladies and gentlemen, please standby your Qiwi P. resources.

Vince will begin momentarily again, we ask that you. Please hold the line your conference will begin momentarily.

Ladies and gentlemen, please standby your T.V.P. resources conference will begin momentarily again, we please ask that you hold the line your conference will begin momentarily.

Yes.

Good morning, everyone.

Yeah, usually again, we're going to get moving people dialing.

Thank you and for joining US this morning will only offer our third quarter 2020 results conference call.

With me today are Tim Connor, President and Chief Executive Officer, There will be the Chief Financial Officer, Treasurer, Joe Rabid, Vice President of energy.

Not done so already please go to our website GPRS dotcom to obtain copies of our press release, which contains tables with our financial results along with the slide presentation with supporting materials.

Today's conference call, we use certain non-GAAP measures, including EBITDA, which is referred to as adjusted EBITDA and earnings release and SEC filings.

Free cash flow. These measures are reconciled to the most comparable GAAP measure in the earnings release and our SEC filings.

In addition, we'll be making numerous forward looking statements.

Remind everyone that our actual results could differ materially from our forward looking statements for a variety of reasons many of which are beyond our control.

Everyone of our more robust forward looking statement disclaimer and discussion leases space your business in our earnings release and FCC buyer.

With that I will turn the call over to Tim.

Thanks will and apologies again and thanks for your patience.

As reported sales people will be able to dial in and hear recording a good morning, and thank you for joining the call ill begin with an overview of our third quarter operational performance. We continue to focus on delivering value over volume and are holding firm to this principle through these unprecedented times, we remain focused on lowering costs while generating.

Mitigant free cash flow to pay down debt. Following my update I'll turn the call over to build to discuss our third quarter financial performance.

Production declined as expected during the third quarter as a result of limited new wells being brought online.

In the Permian deals use only 12 and 11 20 bodies cuts.

Continued to perform well as shown on slide nine in the IR deck early in the quarter. We brought two wells online on the disco pad in the rules on both wells are outperforming our type curves as shown on slide 10 of the our index and we look forward to completing the remaining four wells on the pad during 2021 now.

Nine non operated wells in Wells were also brought online and are now delivering approximately 5000 net barrels of oil per day.

We are currently running two rigs in the Permian and resumed completions operations earlier this month.

Given the additional production the Wilson along with the increased activity in the Permian, We expect production to begin building during the fourth quarter, leading to an exit rate greater than 50000 barrels a day burden.

Production performance during the third quarter, along with the expected growth in production during the fourth quarter allows us to increase the midpoint of our full guidance from 19.25 to 19.55 million barrels of oil for 2020.

Our drilling and completions team also continues to improve on both cost and efficiency.

As you can see from slide 11 of our IR deck, well drilled and completed in the Permian during the first three quarters of the year were delivered to the cost of less than $430 a foot and completed at an average pace exceeding 3800 lateral feet per day, which remains peer leading we.

We anticipate drilling and completion costs to improve during the fourth quarter and we are budgeting $420 a foot in 2021.

Inflation performance in terms of stimulated feet per day is well above the industry average as shown on slide 12 of the IR deck.

Through the continued improvement capital efficiency, our outlook for capital spend in 2020 has been lowered from 360 million to approximately $340 million.

Louie was up in the quarter, primarily as a result of an increased workover activity focused on returning shut in wells to production in the Permian Elouise for believes expects to finish the full year at approximately $3.50.

Really.

With full business remaining below $5 GM.

GNS continues to come down as demonstrated on slide 13 of the IR deck, and we spent 49% less on DNA expense in the first three quarters of 2020 as compared to the same timeframe in 2019.

I will now discuss briefly our current outlook for 2021 as demonstrated on slide 13 of the IR deck.

Although we plan to complete the remaining four wells on the disco pad and the wells are 2021 development program will be primarily focused in the county line area of the Permian, where we anticipate completing 51 net wells. We expect this program to maintain production relatively flat and delivered positive free cash flow.

As WCS price of approximately $35 per barrel.

Although we expect to drill and complete more wells in 2021 than we did in 2020, we have lowered our expected capital spend in 2021 to approximately $300 million given the capital efficiencies discussed earlier.

In summary, we have adjusted our development base continue to lower costs and expect to deliver more than $200 million of free cash flow during 2020 and expect to generate positive free cash flow at $35 WT ATI in 2021.

The increase in expected free cash flow for the $150 million to our new forecast of $200 million as a result of continuous improvement and cost and efficiency and is not related to the announcement of an additional tax receivable.

A recent development activity in county line demonstrates our ability to be a low cost developer of core acreage, while delivering outstanding well results. We believe we are well positioned to move through this unprecedented reduction in demand, while continuing to pay down debt as we look forward to things gradually returning to normal I will now turn the call the bill to discuss the third quarter financial.

Results, along with information on our liquidity position.

Thanks, and good morning, everyone I'll spend my time. This morning, providing you with some details about our third quarter results.

Including the improvements to our balance sheet and liquidity position updating you on our 2020 guidance and finally opening the call for Q on that.

However, before providing those updates I wanted to highlight a couple of noteworthy items that we announced during the quarter.

On August 27th we announced the receipt of our $170.7 million AMTI credit refunds, which included $5.6 million of interest income, we followed that announcement, but the second press release on August 30, Onest announcing that we had issued a notice of redemption for the remaining $275 million of a 2021 senior note.

Okay.

On September Thirtyth, we announced the completion of the redemption, which left us with fewer outstanding senior notes and we have had since the third quarter of 2012.

Finally yesterday, we reported that during the quarter, we recognized an additional income tax receivable of $81 million from an additional AMTI credit refunds of which approximately $50 million is carried on our balance sheet as a current asset and is expected to be received within the next 12 months.

We are pleased to receive the $171 million AMTI refund ahead of our anticipated timeline as his receipt along with cash on hand allowed us to redeem the remaining outstanding 21 notes earlier than expected.

The repayment of the notes coupled with our cash on hand continued free cash flow generation and the additional empty refund receivable should allow us to continue to execute our plan of creating value for our shareholders through the strengthening of our balance sheet and improving our liquidity.

Turning now to our third quarter results, we delivered another strong quarter of financial results. Despite the ongoing industry and market challenges during the quarter. We generated net cash provided by operating activities of $329.6 million and reported free cash flow of $98.3 million, a $3 million improvement compared with the 95.3.

<unk> million of free cash flow generated in the second quarter of 2000.

We have now generated free cash flow of $162 million during the first three quarters of 2020 compared with an outspend of 66 million during the first three quarters of 2019 and improvement of more than $225 million.

Improvement was primarily due to a $212 million decrease in accrued capital expenditures, which was primarily driven by two factors.

First a significant reduction in operating activity in the third quarter and second and equally as important by our peer leading drilling and completion costs.

$12 million increase in adjusted EBITDA and $10 million decrease in interest expense also impacted the increase in free cash flow.

We reported a net loss of $49 million in the third quarter compared with a net loss of $184 million in the second quarter.

$135 million a decrease in net loss was primarily driven by $115 million decrease in unrealized derivative losses, and a $16 million decrease in DNA expense.

In the third quarter, we generated 160.4 million of adjusted EBITDA, a $3.1 million increase compared with the 157.3 million generated in the second quarter.

The increase was driven by $57 million increase in oil and NGL sales in the quarter, which were partially offset by a $51 million decrease in realized derivative gains both largely driven by higher commodity prices.

Combined total LOE and transportation expense was up nearly $7 million compared to the second quarter, two combined $48 million for the quarter. The increase was largely tied to our work over activity returning to more typical levels during the third quarter.

Finally, DNA expense decreased by more than 5 million quarter over quarter, primarily due to a decrease in the mark to market adjustment of our deferred compensation plan.

We continue to do to answer ended commodity derivative contracts during the quarter and we currently hold swap contracts totaling 4.3 million barrels of oil at an average price of $57.58 per barrel for the remainder of 2020 for 2021, we currently hold spot contracts totaling 10.4 million barrels at an average price of four.

$43.48 and Costless collar contracts totaling approximately 400000 barrels at a 40 by $49 and 20 is that color.

Please see the 10-Q for additional details on a derivative portfolio.

Turning briefly to our balance sheet at the end of the third quarter total assets were approximately $5.2 billion and total shareholders' equity was approximately $2.8 billion.

Total gross debt was approximately $1.6 billion, we had no borrowings outstanding under our credit facility $12 million of letters of credit outstanding and $9.5 million in cash on hand.

On the liquidity front at quarter end, we estimate that we could borrow up to $747.6 million under our credit facility and incur up to $500 million of junior guaranteed indebtedness and still remain in compliance with our financial covenants you can find more details about our liquidity on slide 18 of the IR day.

With regard to the liability side of the balance sheet as I mentioned earlier, we redeemed the remaining $275 million of R. 21, senior notes during the quarter and 2020, we have now either redeemed or repurchased more than $430 million of our senior notes, leaving approximately $1.6 billion of those notes outstanding.

As shown on slide 16, you can see that since January 2019, we have now repaid more than $900 million in outstanding debt.

Moving on to guidance as provided in yesterday's release, we have updated the company's 2020 guidance reflect our current expectations for the balance of the year, Tim already shared updated guidance for oil production and capital investment earlier. So I'll just provide a couple other quick update.

The midpoint of our 2020 guidance for lease operating expense is $4.75 per Boe, while the midpoint for adjusted transportation and processing cost is $3.65 per dealer.

This results in total lifting cost guidance of $8.40 per BOE, we at the midpoint at 50 cents per BOE, a decrease from our prior quarter guidance.

And finally, our 2020 guidance for DNA expenses 80, $86.5 million at the midpoint of which approximately $11 million related to share based and deferred compensation expense, which fluctuates with the price of Q destock as well with other general stock market changes.

The midpoint of our updated guidance represents a $1 million decrease from our prior quarter guidance. Please see our earnings release for additional details on this guidance with that I will now open the call up for questions.

Thank you we will now be conducting a question and answer session. If you would.

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One moment, please while we poll for questions.

Thank you. Our first question comes from the line of elite gyro them with JP Morgan. Please proceed with your question.

Hey, Good morning, guys, Tim I was wondering if you could maybe address kind.

Kind of the decision to go to more of a maintenance mode versus I think your previous outlook was more of a mid single digit kind of growth. We do note that you did take down your capex expectations.

Yes part of that was just the math you know we're going to end the year with a 50000 barrel a day exit rates were up about 3000 300000 barrels. So if you look at the math, we haven't changed what we're doing and why we started just a little bit earlier with our completion activity to make sure we got the the consistently improve.

We needed and when you do the math on it goes live year on year, and we're focused on a whole lot more on getting the cost down delivering enough volume to deliver the profit amount of cash so really it is a value over volume and so.

The volume you know, we didn't try and drive to a flat year on year, but we don't see a need to grow until we see growth in price. So I hope that helps.

That's helpful. I guess my follow up Tim we've seen some some pretty good well productivity on the University here are 312 development.

And as we think about the county line asset next year, you talked about 51 net wells thoughts.

Thoughts on maybe the ability of the program to replicate this level of well predict productivity or is it too early to say.

I think it's a little early to say as you can imagine there's there's changes in the geological formations as you work through all of these these fields and so.

I think the the next wells, we're bringing online or wells that have no interference with the previously drilled wells and tells a lot as we move south you'll see a little bit of change the majority, but in general it's consistent throughout.

So we ultra spacing a little bit we move away from Carbonite, we do all the right things to try and replicate but I think it will be a little early to.

To say that we've obviously rwas down somewhat.

Yes, okay well done.

Okay, and then in the Dean and will tend to live in a real positive surprise to be able to continue to see good performance there.

Yes, as we go in the year, we'll continue to do that you guys will do to alter as we need to but hopefully the rock gives us the same kind of results Greg.

Great. Thanks, a lot.

All right thanks very much.

As a reminder, and he would like to ask a question press star one on your telephone keypad.

Our next question comes from the line of Derrick Whitfield with Stifel. Please proceed with your question.

Thanks, and good morning all.

Okay Derrick.

Perhaps for you tend to start out.

Your team, it's clearly operating in a different efficiency level relative to industry as evidenced by the charts on page 12, and 13 of your IR deck in your view what are the one to two key enablers of you're fracking efficiency.

All right well good Joe Redmond here and he's accountable for delivering all these good things so I'm going to turn that question over to them.

All right. Thank you and good morning, Yeah the.

I would say was that over the course of time, you've seen that we've continued to drive down our drilling and completion costs actually that's happening on both disciplines.

As we look at the drilling cost Weve continued to optimize our <unk> motor and bottom hole Assembly selections, which really the goal there is to reduce the number of troops in and out of the well so that we get to TV more quickly. So we're continuing to make advances on that front, which is dragging down the cost of our drilling.

Phase and then as we look at completions as we shared with you guys before the key.

Everything we do there is some frac technology, where we are now pumping.

On two wells at one time, and then efficiently move through a pot of wells now with that simultaneous operation and we've continued to work on that front, improving our efficiencies as you recall.

We shut down the Frac crew back in March and then.

Backup earlier this month as Tim mentioned that we use that quiet period to plan and prepare for activity coming back in our team got efficiencies back on track and very very quickly just within a few days, we actually hit a new record.

Fracking over a mile of lateral in a 24 hour period.

Here in this month, so that teams done a great job. Our focus there has been just eliminating downtime in the measure we use there is a pump time efficiency historically, we averaged something around 80% then after we got back Rolling this month, where I've seen an average over 90% on pump time efficiency again, just eliminating.

Downtime and keeping everything running as often as we can which lowers costs and you've just done more quickly, but we do continue to pump. The same frac designs as we have on the other 312 wells and the team's done a great job focusing on driving efficiency, which is driving down cost.

Great. Thanks.

Thanks for that added detail and perhaps as my follow up for Bill.

Bill after updating our model for your quarter in your operational guidance. There now appears to be a path organically address your outstanding 22, and 23 notes assuming your free cash flow profile at a low to mid Fortys price deck in the utilization of your credit facility is that a reasonable assessment in your view.

Yes, Hey, Derek.

Again, our goal is to generate as much free cash as possible to continue to address our you know our our debt maturities.

I don't know that we're going to generate $465 million between now and September. It's why do I mean, if prices improve thats certainly a possibility, but that is our goal of driving.

Driving to do that but we have the flexibility under our credit facility as it stands today.

Ted to take care of that and then you know with that coupled with free cash flow generation. We believe that there is a.

Path to address this important topic, which is front of mind for me everyday and quite frankly, the gentleman sitting across from Mr. cut.

We talk about a daily so it is it is something that that is number one on the list at this point and we are keenly focused on it I think there is a path to success there.

Very helpful. Great update guys and thanks for your time.

Mr. Guy we have no further questions at this time I would now like to turn the floor back over to you for closing comments.

All right. Thank you very much Oh. These again for the confusion at the beginning of the call, but I hope you see either we are continued to focus on taking our costs down paying down debt or.

Just just doing the blocking and tackling but the best we possibly can do and its really difficult time.

We're not relying on price recovery. We were we believe we have more than more to get is when it comes to cost reduction of the biggest thing I want to do again like it did last call is that bank organization you can imagine how stressful. This is to run the organization from an employee standpoint.

In a remote fashion.

Special Shout out to our field organization, they're showing up every single day.

They are taking.

Second the findings into companies due to work safely and we're Super proud of you guys and appreciate everything you're delivering so with that I think we'll end the call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

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