Q4 2020 Extraction Oil & Gas Inc Earnings Call

Good morning, I'm, Josh and I'll be a conference facilitator today I would like to welcome everyone to the extraction of oil and gas fourth quarter 2020 financial and operating results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answers period. If you would like to ask a question.

Simply press Star then the number of one on your telephone keypad I would now like to turn the call over to John rent.

Thank you operator, good morning, and welcome to extraction fourth quarter and full year of 2020 results conference call I'm joined today by Tom Tyree C E O, Matt Owens C O O and married.

Now of Boesky CFO yesterday, we issued our earnings press release and filed our 10-K with the SEC both of which are available on the Investor Relations section of our website.

Please be aware of that on today's call. We may make forward looking statements. These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated. Please read our full disclosures regarding forward looking statements in our 10-K and other SEC filings on today's call. We may also refer to.

Certain non-GAAP financial metrics reconciliations to certain non-GAAP metrics can be found in our earnings release and SEC filings I'll now turn the call over to our CEO Tom Tyree.

Thanks, John and good morning, everyone.

I'd like to start by thanking our employees for their hard work during a very difficult, but very successful restructuring process.

A year ago extraction of that 323 employees today, we have 121.

With regret but out of necessity, we reduced our head count by 62% in 2020.

The folks we sincerely appreciate the hard work turned in by our current staff, who picked up the slack as we emerged from chapter 11. This past January.

Our restructuring process was difficult.

But it has also positioned us.

The success of the current environment.

Our streamlined staffing has increased efficiency and collaboration even during the pandemic and contributed to a reduction in cash G&A of nearly 50%.

<unk>, one $3 billion.

Your debt and preferred equity.

We reduced our <unk> borrowings from $600 million.

The $254 million its currently drawn under our revolver.

Reduced our D&C LOE costs by over 20%.

Our run rate transportation and gathering expenses have declined by approximately 50% through the renegotiation of certain of our key midstream and marketing contracts and we eliminated the vast majority of our midstream minimum volume commitments as of.

Part of that same process.

One thing that didn't change during the restructuring is the quality of our property base.

Both in terms of geology and concentration.

Our year end total proved PV 10 value.

It was $1 4 billion using March 1st strip pricing.

And our PDP PV 10 was just under $1 $2 billion.

And today for the first time in a long time, we have the balance sheet. The complements the value of our asset base with a straightforward capital structure comprised of common equity and our borrowing base facility.

Leverage of less than one times EBITDA.

And more than $250 million in available liquidity.

As a company we now have a new highly engaged board of directors and we've adopted a new business model focused on returns over growth low.

Low leverage.

Scale economics can be achieved through consolidation and.

The generation of material free cash flow, specifically with respect to our excess cash flow.

We expect to fully repay our outstanding debt. This year. So we will be debt free by year end and we hope to Institute a dividend policy over the same timeframe.

From a governance perspective, we've implemented a new compensation structure.

All of management incentive compensation and of 100% of our directors annual statements are paid and extraction common shares and the best thing of the majority of the management team of incentive comp is contingent on absolute shareholder return.

We are not aware of a number of compensation structure in the industry that has greater alignment with the performance of the company's common stock.

At the board level.

We've also established the company's first ESG Committee.

As a follow on to our corporate sustainability report, which is available for your review on our website the.

The company has undertaken a series of ESG initiatives and you should look forward to an announcement of the near future and more specifically details our achievements and our strategy in this area.

Taken together, our quality assets low cost structure financial flexibility and continuing focus on responsible ESG policy enable extraction to operate at the front end of.

The North American E&P curve.

As always.

We are focused first on safety in our operations.

Financially. However, our strategy is generating significant cash returns, maintaining low leverage and initiating distributions to our shareholders all while continuing to reduce our environmental impact.

And with that.

I will turn the call over to our President and Chief operating Officer, Matt Owens for an update on our operations.

Thanks, Tom.

By way of update after ceasing drilling and completion operations back in the second quarter of 2020, we still generated net sales volumes of 83000 Boe per day in the fourth quarter of 2020 of which was 62% liquids.

This year, we recommenced operations with one drilling rig on our wake North pad and one completion crew on our GP pad both in Greeley we.

We are preparing the GP pad to be turned in line during the second quarter and the weak north pad should begin production around the beginning of the third quarter.

As Tom noted we are prioritizing cash returns in all of our operations and we expect to balance the allocation of our cash flow among reinvestment in our projects debt reduction and distribution at the shareholders.

We have also made the strategic decision to up space relative to our historical drilling strategies. We believe this is the optimal way to allocate capital and maximize returns through decreasing cycle times and improving per well you ours.

We have already begun this effort by completing 13 to 15 wells on the G P and wake North pads, which were originally planned for 'twenty to 'twenty four wells each.

And on one of our pads in Windsor, we are drilling only the Codell formation as if the economics are superior to the Niobrara.

I wanted to highlight these first three pads in 2021, because they are concrete examples of how the company has shifted its development strategy with a rigorous focus on capital allocation and maximizing returns.

With that I think we're ready for Q&A.

Thank you as a reminder, task of question you'll need the press star one on your telephone to withdraw your question press the pound key please stand by on the compile the Q&A roster.

Our first question comes from Leo Mariani of Keybanc. You May proceed with your question.

Yeah, Hey, guys.

Obviously, you have a plan to reduce debt to zero at the end of the year here.

And you also talked about consolidation opportunities.

As well in the space certainly seems like the balance sheet is well positioned for that I think in the press release, you did talk about some leasehold acquisitions, but wanted to see if there's any other kind of chunkier deals that you may have your eyes on out there I know there are still some.

The distressed private operators out there in the DJ maybe you could just kind of talk about that strategy over time.

Yes, Leo it's Tom how are you doing this morning.

I'd say two things.

There is.

Kind of a day to day optimization that we do on our assets and those are largely cash transactions, whether they are sales of non core assets or acquisitions of working interest to increase our ownership of our existing projects.

And literally we are considering those in executing those on a weekly basis and then there are of the strategic transactions.

I would say at any one point in time candidly, we're in dialogue with one or more parties about the possibility of.

Transacting.

And that I would say that the majority of those of equity based true.

<unk>.

And I also don't think that the.

The mode that we are in a materially different then.

Of the mode of others of the basin and others in the industry.

So I would say the state of partner of our strategy to consolidate and we're pursuing it aggressively.

Okay.

Then just maybe jumping over to kind of the existing operations here, obviously, you talked about a plan to kind of up space with the wider spacing.

And just wanted to kind of get a sense. When you you sort of look at kind of current permits.

Permits in hand across the company and kind of given the up space. What can you kind of tell us about the existing inventories. If it's just kind of a high level number where extra GE thinks they've got you know three or four years of running room or whatever the number might be and then maybe just kind of add on that you know what's the what's the plan in terms of.

Further negotiations with some of the local municipalities and kind of where does that stand in terms of.

And maybe any new operator agreements or expanding existing ones on the acreage footprint.

Leo This is Matt Youre right, we have really looked at our inventory with an up spacing perspective, focusing on returns we have some slides on that in our presentation that illustrates how we view it but up space accounts that the company has.

Is that 432 locations.

<unk> locations and that was that was based off of when we did our original original guidance, but as you can tell from the slide 13 in our deck that obviously changes with commodity prices, but.

Right now we're comfortable with where the strip is that that we have about 430 of space locations remaining which at our current rig pace and the fact that we drill mostly two miler longer wells would be about eight years of inventory.

As far as the other municipal operator agreements go.

We don't have any new ones that we're currently working on there are some debt will.

We will be in the pike, shortly but theyre not anywhere near the size and scale of some of the ones that we've executed in the past such as commerce city or Broomfield with in terms of well counts.

We will continue adding small operator agreements to finish developing our acreage around the edges of some of those municipalities.

Okay. Thanks, guys.

Yeah.

Thank you. Our next question comes from Patrick Sheffield with Beach Point Capital You May proceed with your question.

Hey, guys. Thanks for taking my question.

Congrats on the nice nice start.

Just one housekeeping item in.

The disclosure statement.

Recall, there being a pretty sizable working capital true up that needed to be paid this year and in the.

100 plus million dollars range.

It's all of your free cash flow guidance slide looks.

Quite robust and youre going to end the year with no net debt.

Is that was that working capital, which I thought was a decent chunk of it was.

Tax payments.

Has that been kicked two of future year or.

Was it overestimated or what exactly is going on there.

Hey, Patrick this is Mike Thanks for joining the call I would say that if you look at page seven in our presentation. We gave of 200 million working capital deficit the.

The year end number since we were still in bankruptcy as of year end, it's a little bit noisy.

We do have to your point.

The large tax statements that.

Of that we have made and will continue to make it through April.

April there will be a more normal course of working capital deficit. If you look at page seven.

We have made and will continue to make payments.

Working capital tightened by about $60 million.

And in going forward, given our new production in the commodity price environment that should be a run rate production taxes going forward.

But your year end, having your estimate of having no net debt at the end of the year. It takes into account the payment the youre making in April.

Absolutely its all in.

And we of March with but there were about three types of production of taxes. We made in January February and March the one in April as just the normal course annual tax payment. So really the delinquent property taxes that we did not pay before bankruptcy were all paid through this mark and then April.

The have another large fail, but like I said thats equivalent to.

The much higher commodity price of much higher production that we saw in 2019 and so once the April of behind Us you'll see that more on the more course, but yes the.

The free cash flow guidance is all line after working capital payments.

Okay great.

Thank you very much.

Thank you and as a reminder to ask the question you'll need to press star one on your telephone. Our next question comes from Jeff Robertson with water type of research you May proceed with your question.

Thank you a question Tom can you talk philosophically about the reinvestment rate that you are.

The plan for the business in the context of the dividend and generating free cash flow out into 2022.

Sure how are you doing Jeff.

Thank you for any questions.

I first of all I don't think we consider ourselves beholden to any set percentage of cash flow going in any one direction other than to say that.

We want to direct our cash flow every year two.

Reinvestment in our projects.

To debt repayment and to shareholder distributions of the latter two.

I think the choice will become.

Much more current for us towards the end of the year.

Certainly the second half of the year of probably the.

The fourth quarter. After we're in a position where we pay down most of our debt and what we're weighing is just the distributions to shareholders versus reinvestment.

Any given quarter.

The things that factor into it our economic inventory and commodity prices and our dividend policy policy, which is yet to be determined but we are.

I think we are set on imposing on ourselves.

<unk>.

Distribution policy the deals with on one hand, delevering and on the other hand.

Attorney cash to our shareholders and doing that on a continuous basis once we get our leverage down a little bit further if that answer your question.

Yes, I guess, what is part of what Youre, saying that youre going to instill discipline in the capital allocation of.

Process, but by how much you reinvest versus.

How much you potentially have for distributions.

Well first of all I would say our capital allocation process is already.

Pretty darn disciplined.

We've got we've got a board of management team that are very very focused.

On making sure that.

Any investment we make in any of our projects is highly economic and.

Is accretive to our return on capital employed on a.

On a corporate basis.

But I think the question you may be getting at is when we sit around on a quarterly basis and decide how we're going to allocate capital.

Our very rigorously going to look at the benefit of distributing cash to shareholders.

As an alternative and that probably is different than past practices. I'd also say that it's hard to envision a scenario, even with commodity prices very high.

Where we would not allocate a material percentage of our cash flow.

To shareholder distributions.

Our debt repayment if it happens to be this year.

Thank you a question if I can follow up maybe for Matt Owens.

On slide <unk>.

<unk> 13, where you talk about the day spacing.

Thank you said, Matt that the current numbers are based on strip pricing I'm just curious how does the.

Changes in prices and changes in cost how does it affect the ideal spacing for development.

Yes, Youre correct.

<unk> 13 is illustrative of how we kind of of our looking at each development area in our inventory.

Obviously, we're not going to make real time changes based on weekly moves in the commodity price, but we're going to be more focused on what it looks like 12 months to 24 months down the road.

But if there is a long term uplift and the strippers not backward dated as much that could shift as to the rate slightly on this plot on page 13, but really the main goal we're going for here is not not necessarily maximizing our net present value. It's really maximizing the return on each incremental dollar we invest in the ground.

So how much more capex or how much more NPV or are we getting net present value of are we getting for each capital dollar that we're putting in the ground and on this particular example that we're showing here the limit limit is in our minds right around 12.

Thank you.

Thanks.

Thank you. Our next question comes from Dave Zimmerman with Eaton Vance you May proceed with your question.

Hi, and thanks for the call.

Yes, Jeff just asked my question about the spacing a little more elaboration.

Sounds like it was driven by incremental well economics.

As opposed to whatever it was driving it in the past the.

Appears that other basin operators are doing similar things.

How much does the.

Spacing approach.

Very among your.

Three or four large areas.

Dispersed as the.

Quality of your regional areas.

Hey, Dave Thanks for the question. It does vary on that same slide 13, Youll see in the first bullet point, we mentioned, it's anywhere between six and 15 wells per section.

And that really covers our acreage position in the core from the northern end in Windsor, all the way down to the southern end and Hawkeye.

For example, the lower end of that scale would be the acreage that we have in the Hawkeye area and the main reason for that is.

Just the amount of formations there so in Hawkeye if you remember the Codell formation is not present, it's of Niobrara only so down there we're looking at about six wells per section in the Niobrara.

As you move North and you get into Broomfield, North Hawkeye you get into Greeley.

Have the Niobrara and Codell formation there so they both they both plan and right now the best Economics that the company has is really the remaining pads, we have in the Greeley area and those will be the ones tipping the scale of towards the upper end around 15 wells per section.

Great. So essentially you'll be drilling your best wells first.

No question about it presumably right.

That's that's the general plan that we have over the next few years, Yeah, and then just the last one.

I thought the Hawkeye required some.

Meaning full infrastructure midstream infrastructure spending bill.

Before it's really ready to develop.

Can you just.

Speak to that order of magnitude of.

Potential midstream.

Requirements to get Hawkeye ready or is Hawkeye already.

Also.

That's a good question. So when we first purchased the asset of couple of years ago. You are correct. There was very little of midstream infrastructure down in the area, particularly for.

For the gas processing and there was actually no oil infrastructure in place at that time over the last couple of years.

A large public company drilled some more wells down in that area of spread out across their position.

Since then purchased by a private operator, who has continued the development, but they have continued to expand their gathering infrastructure with respect to gas and it covers most of their position, which is really the western flank of our position and we're not too far from the gathering infrastructure for the pads that we want to drill.

Oil and the next few years and then there is also a oil midstream company, who has come down and started laying gathering lines. So.

While it is not is built out and robust as it is up in the Wattenberg field. There is continuous expansion going on both with the gas gathering and the oil gathering down in that area.

Okay excellent. Thank you very much.

Thanks, Dave.

Thank you and that concludes our Q&A I would now like to turn the call back over to Tom Tyree for any further remarks.

Thanks, very much for joining us. This morning, if you do have follow on questions. Please feel free to contact any of any member of the management team, but in particular, John rent, our VP of Investor Relations. Thank you.

Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

[music].

<unk>.

Yes.