Q3 2020 Amplify Energy Corp Earnings Call

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First name David last NIM route.

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A I.E.R.A. I era.

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[noise] good morning, and welcome to the amplify energy conference call to discuss operating and financial results for the third quarter of 2020, joining me on the call today is Martin Wilcher, Amplifies interim Chief Executive Officer, and Chief Financial Officer before we get started we would like to remind you that some of our remarks may contain four.

Forward looking statements, which reflect management's current views of future events and are subject to various risks uncertainties expectations and assumptions, although management believes the expectations reflected in such forward looking statements are reasonable it can give no assurance that such expectations will prove to be correct and undertakes no obligation and does.

Not intend to update these forward looking statements to reflect events or circumstances occurring after this call earnings call. Please.

Please refer to our press release and FCC filings for a list of risk factors that may cause actual results to differ materially from those in the forward looking statements made during this call. In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books Records and reports for additional de.

Detailed disclosure, we encourage you to read our form 10-Q, which we expect to file later today.

Also non-GAAP financial measures may be disclosed during this call reconciliations of those measures to comparable GAAP measures may be found in our earnings release or on our website at www Dot amplify energy dotcom with that I'll now turn the call over to Martin will sure Martin.

Thank you Jason during this call I will provide comments on our third quarter performance, our hedging program and an overview of our liquidity position and balance sheet. I will then turn the call over to Jason to provide additional financial details for the quarter following.

Following our prepared statements, we will take questions and I'll conclude with closing remarks.

Production for the third quarter averaged approximately 27700 Boe per day, which mirrored second quarter 2020 production performance and exceeded our internal expectations, notably oil production volumes increased by 5% during the quarter to approximately 10800 barrels per day from 10400 barrels per day in the second quarter.

This increase in oil volumes was primarily attributable to world you really have a beta. However, it is important to note that all asset areas met or exceeded internal expectations. Despite intermittent third party weather interruptions and reduce maintenance capital expense.

These results demonstrate the sustainable value of our long life low decline asset.

Third quarter, adjusted EBITDA was approximately $24.8 million meaningfully exceeding internal estimates and validating the exceptional execution of our cost reduction initiatives and hedging program.

Capital spending for the third quarter was approximately $5 million, which was slightly above our internal expectations, primarily attributable to additional costs associated with our non operated Eagle Ford asset remaining capital spending for the year will be $3 million and focused on high return capital Workover projects and facility maintenance expenses across our operated assets.

Free cash flow defined as adjusted EBITDA less capex and cash interest expense was $16 million in the third quarter and was driven by our significant cost reduction efforts, we anticipate a strong free cash flow profile again in the fourth quarter as we continue to operate with a minimal capital budget and execute on our cost saving initiatives.

Since our last earnings call in August we have significantly added crude oil hedges for 2021 and 2022 currently we have hedged approximately 75% of our fourth quarter 2020 crude oil production at attractive pricing in 2021, we've hedged a considerable amount of our forecast of crude oil production with a mix of swaps and collars our.

Collar positions are more heavily weighted to the back half of the year, which will allow for greater upside participation in a market recovery.

We intend to add to our 2021 hedge book over the coming months and will begin to layer on incremental hedges in 2022 and 2023 as the market allows.

As explained during the second quarter earnings call, we monetize most of our 2021 crude oil contracts in order to capture market dislocation at that time and position the company to fully participate in the crude or recovery moving into next year. This trade was very beneficial to the company and we have re head to those volumes locking in the improved economics, our hedging program.

Will allow us to protect future cash flows while also capturing potential upside in an improving commodity price environment.

As of October 30 of 2020 or hedge mark to market value was a net asset position of $13 million.

Third quarter 2020 hedge presentation contains additional details on our current position was posted on our website earlier today under the Investor Relations section.

Moving onto a discussion of our recent credit facility Redetermination and our current liquidity position.

Since the spring 2020, Redetermination, we have reduced indebtedness in compliance with the scheduled monthly 5 million dollar borrowing base reductions using internally generated free cash flow.

As of October Thirtyth, and if I had total net debt of $243 million with $260 million outstanding under our revolving credit facility and $70 million of cash on hand.

Where the spring 2020, Redetermination borrowing base reductions now concluded amplify expects to utilize excess cash flow for further debt reduction and an additional capital for high rate of return projects.

Amplify fall 2020 borrowing base Redetermination process is currently underway and we anticipate completing the process before the end of November although the borrowing base was reduced in spring 2020, as a result of market disruptions related to the ongoing COVID-19, pandemic and commodity price volatility, we anticipate that the current redetermination process.

Well provide a result that supports our liquidity position and a solid foundation for substantial free cash flow generation with.

With this in mind I will now turn the call over to Jason Mcglynn, Jason.

Thank you Martin as previously mentioned production for the third quarter averaged approximately 27700 Boe per day, which was flat with the prior quarter and exceeded internal expectations. This outstanding result can be attributed to strong performance across all of our asset areas and beta royalty relief.

Which took effect at the beginning of the third quarter as mentioned in our earnings release, our crude oil volumes grew by 5% quarter over quarter, resulting in a third quarter production mix of 39% oil, 17% Ngls and 44% natural gas lift.

Lease operating expenses for the third quarter were 27.6 million or $10.86 per Boe down from $27.8 million or $11.03 per Boe for the prior quarter and considerably exceeding our internal expectations on both a total dollar basis and a per Boe basis the reduction.

And lease operating expenses was due to the continued execution of our cost saving initiatives instituted earlier this year and production outperformance as we look to close out the remainder of 2020 and move into 2021 Ampliphi remains committed to operational excellence and efficiency in our outstanding operating team will continue to identify and capitalize on.

Additional cost reduction efforts.

PMT was up this quarter to $5.3 million or $2.07 per Boe compared to $4.7 million or $1.86 per Boe in the second quarter of 2020. This increase was primarily related to an increase in oil and gas revenues during the quarter.

Taxes, and other income increased this quarter to $3.8 million or $1.48 per Boe compared to 2.2 million or 87 cents per Boe in the second quarter again. This increase was primarily related to the increases in oil and gas revenue during the quarter Gina expense for the third quarter was $6.4 million, including approximately half.

A million dollars of noncash compensation and point $3 million of nonrecurring transaction costs and bad debt expense, excluding the noncash and nonrecurring costs third quarter cash in a total of $5.6 million or $2.20 per Boe compared to 6.2 million or $2.45 per Boe in the second.

Third quarter of 2020 this reduction in recurring cashing expenses validates the company's commitment to delivering approximately $2.5 million in annualized cash interest savings by the end of the third quarter and pave the way for achieving an annualized run rate of approximately $22 million that concludes our prepared statements with that operator.

We are now ready for questions. Thanks.

Thank you as a reminder, if he would like to ask a question. Please press Star then one on your telephone keypad again that is star one to ask a question.

And our first question is going to come from the line of Jeff Grampp Northland.

Morning, guys.

Morning, Jeff.

Martin I wanted to start on the on the borrowing base front I know, obviously, you don't have a number in hand, yet, but at least Directionally do you have a sense is is flat a possibility I imagine ups ups.

Off the table, but can you be kind of flattish or do you have any sense of if there was a cut the kind of magnitude and do you think the banks are going to want.

So that forced the amortization feature to be extended or do you think that might be able to be removed.

So you know.

Obviously, we have to get through the process, but I think as far as an assumption and obviously prices have increased since our last redetermination and weve executed on the cost reduction initiatives that we had implemented and so I believe that a flat result is very attainable.

No guarantees at this point, but I think a flat ruddock I fly borrowing base with no additional mandatory reduction.

Is the most likely outcome at this point.

Okay, that's great to hear on the on the capital side seeing gas kind of rolling here into the winter I know you guys. Obviously have kind of a normal type commodity exposure in terms of capital flexibility you gas projects make sense for you guys at these prices or just generically maybe would be great to get your thoughts on how you're thinking of.

Capital deployment here beyond kind of the few million of mandatory maintenance Capex, we see for me.

Yes, so obviously as part of our 2021 budget, we're taking a harder look at some of those gas projects. There is a mixture of operated project potential but there's also some non operated.

Projects that we have a fairly significant working interest and that could be of interest to us.

So we are we are certainly looking at those obviously, we're managing for free cash flow and managing making sure that all those projects make sense and from both an IR and payback period perspective. So we so certainly there and much more on the table then they have been in the last couple of years and that will be kind of flushed out in our budget.

Process over the next couple of months.

Okay, Great and last one for me just on the the CEO side of things I know.

You're on the interim side is the board looking to kind of formalize that or haven't had the search undergoing or any kind of color you can provide us on that.

Well, obviously weve you know our primary focus for the last six months has just been making sure we got everything executed on the operation side.

As far as I know Theres no ongoing search for this and that difference CEO. So I expect the Sunbank goal will review that in the coming months and going into 2021.

Okay sounds good thanks for the time guys.

Thanks, Jeff Thanks, Jeff.

Our next question will come from the line of.

No parks Coker Palmer.

Good morning.

No.

I hope everyone is doing well down there and just a couple of question you did talk a little bit.

Good.

Yes, your memory about the.

Monetizations you did earlier in the <unk>.

Yeah.

But I was just looking at the updated hedge totals were there any monetization performed in the quarter or were there just normal settlement.

No. There are just normal settlements during this quarter those hedge monetization took place in the second quarter. When the Cal 21 strip was in the mid Thirtys and we felt like before the end of the year, we'd have the chance to re hedge though the volumes you know Ed.

Such a better environment, so somewhere between 42 and 45, depending on the hedges and we hedge those volumes kind of locking in that that gain and and so that that was kind of always the the idea and we were able to execute on that during this quarter.

Great and I know you don't.

That said, a little bit of dislocation and we'd anticipate that kind of going back to the norms as we move farther out into 2021 and in forward pricing and there has been some of that stuff happening in the mid con area too and as we said, but we've actually had some better pricing as Martin mentioned in the Rockies, So we'd anticipate that going back to more historical norms.

Moving forward, but it think as Martin said, a good proxy for Q4 is kind of where we're at right now.

Okay, great and.

Are you.

And even in the current you've talked about sort of.

Define maintenance capex level.

Five to 10 million.

And we we had.

Well go after it looks pretty good but we certainly have more disruption on on oil pricing in just the last couple of months.

And.

If we were.

If we turn the corner with Covidien and things.

Start stabilizing or improving a little bit for oil.

We have that we spent in contango. So we should we at least have that little bit of encouragement in the strip.

Do you have any sense of at a higher price whether there are any sorts of projects that sort of low hanging fruit.

Huh.

Might head to the front burner, if say a quarter from now we were.

Sort of clothing back in on on 50 sort of where we were headed sort of like in late summer.

Yeah, I'll Audra said, obviously you know we have you know a number of workover opportunities across the company, especially in Oklahoma.

And as we've talked about those some of those U.S.P. projects might make more sense at 50 than they do at 40, bringing some of that production that basically just offline right now bringing that back online those are kind of low hanging fruit and the right economic environment. You know obviously at the beginning of this year, we talked about developing beta.

So that's something that if we see some continued price improvement through 2021 that might be when we visit those projects and then obviously, we already talked about the fact that gas is a lot more attractive now and that applies to both east, Texas and you know some Oklahoma and small oklahoman projects potentially as well. So we have a we have some.

Opportunities, but we're also like I said going to be very conscious of free cash flow in 2021, while it's we're still in this depressed environment, but if we can start to get a little bit of clearance and that seems to be in a situation that 50 and above level. Then maybe you do start to moderately increase activity levels.

At that point.

Great and as an example for those those workover opportunities.

Especially the DSP substitution.

Whats roughly the the payback time on Uh Huh.

Project like that.

Typically we look at you know high grading the ones that are a year or less and so there's there's several of those still in inventory right now and obviously as the price both the gas price no price improves a greater number of those kind of move up the rankings and so those are.

The kind of things, we'll be looking at as the market continues to recover because they are a mixture of gas oil and Ngls, obviously, and so where were cognizant of all three stream is there and the impact that has on the economics.

Okay, great. Thanks, a lot.

Thanks don't thanks Anil.

Thank you at this time, we have no further questions.

[noise] alright. Thank you. So this year has been challenging for the industry and our company. While the ongoing COVID-19 pandemic has continued to impact demand and prices have been slow to recover the organization has demonstrated its resiliency and ability to adapt to the current environment.

Cannot express my appreciation enough to the company's employees for their outstanding efforts and continued dedication.

I'd also like to thank our stakeholders for their continued support as we persevere through these difficult times with string strong free cash flow expected for the remainder of 2020 and 2021, we look forward to continuing to execute for all of our stakeholders and preparing for future opportunities. Thank you for joining us today and as always please do not hesitate to reach out to us with any additional questions.

Thank you for participating on today's conference call you may now disconnect.

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