Q4 2020 Battalion Oil Corp Earnings Call
When it comes to Tibet giant workforce quoted to those 'twenty earnings call. As a reminder, todays conference is being recorded.
Now I'll turn it over to battalions manage on Finance Christian Inc. Mr. Lang you may begin.
Good morning, I'm joined by a few of my colleagues today and I'd like to introduce battalions, Chief Executive Officer, Richard Little our Chief Financial Officer, Kevin Andrews, and our Chief operating Officer Daniel ROI.
This conference call contains forward looking statements for a detailed description of our disclaimer see our earnings release issued yesterday and posted on our website.
This conference call also includes references to certain non-GAAP financial measures reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings release announcement released yesterday. We have also published and Investor presentation, which may be found on our website and will be referenced during this webcast now our team will.
And a few scripted remarks, followed by Q&A and with that I'd like to turn it over to rich to start things off rich.
Thank you Chris on the first welcome everyone. Joining us this morning for Battalion Wells fourth quarter 2020 earnings call. We issued our earnings release and presentation last night. We're excited to walk you through those results and describe why we find ourselves very optimistic as we enter 2021. Despite the ongoing challenges we face from Covid and the recent on.
Operational issues caused by the weather.
We will provide you a more fulsome update on the Italians response to the recent winter storms, a little later, but I did want to begin my comments by commending our team for the outstanding job they did in <unk>.
Navigating a violent and life threatening storm and field.
Field personnel were quick to react to all the challenges they face and we are proud of the balance that we're able to strike between keeping our teams safe and providing a critical and essential service and meeting the demands of consumers and the region.
We're all well aware of the challenges the industry faced in 2020, the combined impact of the COVID-19, pandemic and the oil price war proppant and downturn, there's been as severe as anything I've seen in my career and when.
While that may have stalled our plans to grow it didn't stop us from having an exceptional year.
Kicked off 2020, with the new strategy and new team and a new name and we've spent much of the year building and new identity.
We demonstrated our ability to execute reducing well costs by 37%.
And adjusting operating cost per Boe by 12%.
Later of which we did in spite of temporary shut ins and May and June disrupting operations.
We displayed our commitment to capital discipline and quickly reacting to the downturn by cutting D&C capex by 66%.
We acted on our belief that ESG matters by creating and ESG task force and implementing measures across the board and hold ourselves to a higher standard.
We actively managed our balance sheet divesting of noncore assets to meaningfully pay down debt and continuing to work with our banks to manage liquidity.
We also set ourselves up for future success by obtaining two acid gas injection permits and strengthening our hedge book.
After halting our capital program and the first half of 2020, we shifted our focus to optimization and efficiency and I'd like to thank our accomplishment show, we've made the best and a challenging year.
As a result of that hard work and 2020, we're now well positioned to deliver our 2021 planned flat to single digit production growth with a significant increase in free cash flow.
And we believe we can accomplish this goal while targeting a 70% to 80% reinvestment rate of EBITDA, how do we achieve this by.
By staying disciplined on our approach.
It begins at the field level we're on.
Our operations team continues its work on methodically, reducing drilling and completion costs and improving our production cost per Boe.
It continues with our hedge book, where we have 90% of our expected 2021 oil production hedged, providing downside price protection, but offering flexibility to add more volumes and a higher price environment.
This is all supported by the strength of our balance sheet, where we entered 2021 with $31 6 million of liquidity and expected cash flow that should allow us to maintain liquidity through the year and remain flexible to invest further if the market conditions improve.
In addition to executing on our 2021 plan, we intend to continue pursuing M&A opportunities with a focus on strategic transactions, which might provide additional scale and serving as a deleveraging event for the company.
As we move forward as an industry, we hear battalion believe ESG, you must be a core value to survive and thrive on.
And our commitment to the environment was on display this year as we exited 2020 with reduced flaring intensity, a 0.1 Mcf per barrel initiated a campaign focused on pit closures will reduce truck traffic keeping more volumes on pipe and <unk>.
Utilize real time spilled detection and gas monitoring to ensure we minimize our impact.
Those environmental concerns bleed through into our governance structure as we've created and ESG task force to push forward key 2021 initiatives and enhanced board oversight and the ESG goal setting and performance.
We're also proud to have successfully navigated through a COVID-19 response plan was zero impact to the business. Despite instituting work from home measures for office staff, all while positively impacting our community by donating PPE to first responders and <unk>.
Central items to youth organizations, our commitment as an organization is not only to be a top tier operator.
But doing so on a responsible way.
As activity ramps back up and 2021 I'd like to take a few minutes to highlight the hard work. Our team has done to improve our performance on the capital front before we cut back on our drilling program last year, we have made tremendous strides our cost per foot drilled had reduced by 38% from $316 per foot and the first half of 19%.
$195 per foot and the first half of 'twenty and our feet drilled per day had improved 25%.
So we were drilling our wells faster and doing it at a much more cost conscious way as we get back to drilling and 2021. Our goal is to continue that trend if not improve on it.
Our completion performance tells a similar story and.
And early 2020, we're really making strides we were pumping larger jobs on average both prop and fluid and doing them on a much lower cost as oil prices dropped and we decided to halt our plans to complete any additional wells, which left us with four drill, but uncompleted wells and no defined time line for completing them.
However, we are excited to say that in December we got back to work and we picked up where we left off.
In addition to previously identified efficiencies that helped us drive down costs. We're also excited to say that we were able to preempt demand and the service market and secure low per well cost, which should really benefit us as we progress through the year.
In addition to these cost savings and we've been pumping larger jobs with higher loading and testing fluid designs with premiums. The fact that all while driving costs down by roughly 15%.
As we move forward, we aim to continue bundling our services to further drive down costs, while improving pad to pad cycle times. We've also talked in previous quarters about marrying our subsurface knowledge with our operational plans and we expect that to continue as we consider G and G and our frac designs to limit initiation and pumping difficulties.
The strides we've made with cost reductions and operational improvements are a real testament to the work our drilling and subsurface teams have put in on the production side 2020 was an opportunity for our production operations team to demonstrate its ability to react quickly and execute flawlessly as they did just that.
As a result of the collapse in oil prices on the oil instead of the Covid pandemic, we were forced to pull back on our operations and the dramatic way and.
On May and June 2020, we were forced to temporarily shut and producing wells and as a result of low commodity prices and not only did we get that production back up to previous levels. By Q3, 2020, we were able to exit the year, having reduced our production cost per BOE a day by 18%.
I'd like to take a moment now to discuss the impact on our response to the recent winter storms and battalion, we recognize the critical role we play and producing the commodities have helped keep our lifestyle on and our houses warm, particularly and challenging times like we faced recently however, our first priority every day is the health and safety of our employees.
<unk> and those contractors and service providers that work with us as.
As the storms raged on our goal was to keep as much production of oil and as safely as we could we did a good job of walking that tight relative.
We have not yet been able to fully quantify the impact to our first quarter production, including any downtime from temporary shut is spot on.
He has done a great job quickly evaluating any damage, we experience and getting us back up and running we will have better understanding of the full impact of the storms and will provide information on that on our first quarter results.
Before I hand, it off to Kevin to review the financials I'd like to reiterate just how important and safety and environmental stewardship are here at battalion. They are truly a key part of our strategy and a big part of the culture.
We can't do it right, we won't do it at all and we're quite literally put our money where our mouth is as we have EHS and ESG incorporated into our compensation structure.
We're proud of our record and our aim is to set the standard moving forward.
Kevin.
Thank you and good morning.
I'll start with a recap of our year end liquidity position and then touch on a few highlights from Q4 2020.
As we mentioned on our press release yesterday, we completed the sale of certain of our northern West Quito assets deployed and energy partners for cash proceeds.
Of $26 3 million and subject to customary post closing adjustments.
This transaction significantly enhanced our liquidity at year end and position us well as we enter 2021.
At December 31, 2020, the company had liquidity of $31 6 million, consisting of $4 3 million and cash and 27 3 million and availability under our revolving credit facility.
By nearly any metric of 2000, and 'twenty was a challenging year and one on which access to liquidity was critical.
On October 2000, and Tony we entered into.
And third amendment to our credit agreement with bank of Montreal, which among other things a lot of bar and base to remain at 190 day and suspended testing and the current ratio until December 31 and 2021.
This amendment helped free up liquidity and added flexibility going into 2021.
Our net leverage ratio was two two times, a year and and we continue to assess options to reduce leverage.
We also continue to focus on protecting our cash flows by actively managing our hedge book.
Our approach to risk management is to hedge a high percentage of PDP layering on additional hedges as we develop our assets using swaps and two way callers.
As of December 31, 2020.
Approximately 90% of our expected oil production in 2021 was hedged at an average price of approximately $45.
With our cash flow is well protected and 2021 and a strong liquidity position here and we feel confident and our ability to execute our 2021 plan, while remaining free cash flow positive for the year.
Now I'll walk through a few financial highlights from our fourth quarter and year end results.
And actually in 2020 average 16858 barrels of oil equivalents per day compared.
Compared to 17986 Boe per day for 2019 or a.
6% decrease.
The decrease in average daily production year over year was driven by a temporary shut in and have a portion of producing wells across all our operating areas and May and June 2020, as a consequence of low oil prices.
Average production in Q4 was 17293 Boe per day compared to 17076 barrels of oil prone oil per day, and Q3 with Q4 production made up 54% oil.
24% gas and 22% Ngls.
Total revenue was $42 six.
$6 million for the fourth quarter of 2020 on what.
And as you all represented 81%.
We realized 95% of the average Nymex oil price and quarter.
Well as recognized on a one $2 million gain from our hedge program.
We reported a GAAP net loss to common shareholders for the fourth quarter of $63 8 million.
Loss of $3 93 per share.
After adjusting for certain items, including the effect of net unrealized derivative losses, and our forecast and in parallel.
The press release for details on those adjustments.
The company and reflected a net loss of $7 5 million or a loss of 47 per share.
Adjusted EBITDA totaled $8 8 million for the fourth quarter of 2020.
And $71 1 billion for the full year of 2020.
Capital expenditures for the full year totaled 89 million compared to 259.002 million 19.
And that 89 million spent in 2020.
55 million was related to drilling and completion activities and.
And 32 million was related to the development of our tooling and equipment and gathering support infrastructure.
This decrease and capital expenditures in 2019 to 2020 and as a result of our decision to suspend our capital program at the end of Q1, and 2020 and the <unk>.
Fact that we are reporting a 6% year over year production decline in spite of a suspended capital program and temporary shutdowns across all our channels. This summer is a credit to the outstanding work performed by our operating team and 2020.
Looking forward to 2021 as a result of the northern West Quito transaction, which bolstered our liquidity, we were able to accelerate our 2021 capital program as we commenced operation on four docks at a monument draw area and December, allowing us to preempt demand on the service market and secure.
The advantage pricing.
We also plan to spud, Jamie Welch and Q1 2021, and as a result, we expect to incur the vast majority of our capital and the first part of the year.
We built this plan around maintaining our production base until we see confidence return to the commodity markets and we will remain flexible and continuing to assess when conditions may be appropriate to ramp up our activity.
With that I'll turn it back to rich to offer some concluding remarks.
Thanks, Kevin as Ive stated with a disciplined approach. We believe we are well positioned to deliver flack of single digit production growth with significantly increasing our free cash flow. During the year. There is certainly work to do to get there, but we believe we have the right team and the right balance sheet to make it happen.
We also think we're in a unique position to grow through M&A with the strides we've made and driving costs down and paying down debt even in a down market. We continue to believe that week and approach M&A from an advantaged position.
A lot has been made about a global energy transition and.
And and move away from oil and gas, we believe very strongly that oil and gas is a price and that future, but it has to be done and a smart and responsible way.
And you walk away from today with the same confidence we have the battalion has the right team and the right assets to do just that.
A lot happened in 2020 and in many ways and it feels like the dust hasnt quite settled but we view 2021 is and opportunities to come out of the gates running and to start to build momentum as we enter into this new future.
Thank you for your interest and book value and that's going to conclude our scripted remarks, I'll turn it back over to the operator to facilitate Q&A.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad and you guys here.
And the speaker phone, please mixtures and the attention is turned off charter adjusted NAV to reach our equipment.
Ken.
And one to ask a question.
Such as gentlemen, Hello, everyone and opportunity to signal for questions.
The first question comes from Noel Parks and tool he brought day.
Good morning.
Good morning, no. Thanks.
Alright.
A few quick ones and I wanted to run by you.
You mentioned applying your subsurface knowledge and I understood right to.
Drilling and completion operations I'm, just wondering what sort of changes you might that might have in mind.
Yeah. Thanks, no so first.
It's the understanding of where we drill the well so if were going on.
Steer a lateral we tend to stay away from call it high carbonate.
Concentrated areas, because we see higher frac gradients, which are going to drive up your completion costs and they're not as productive. So we'll still clear steer clear of that it's also good but we know that we are going to be dealing with it that we set up our stages appropriately where do you have like.
Frac gradients for what's your pumping so tendency when you're fracking is for the Fracs.
Fracs to go and.
The lower Frac gradient type areas and so what you wanted to do is have the stages and set up to where you would have similar type frac right and so you're stimulating rock across the entire lateral instead of having it go off and some of your lower Frac gradient type zones. That's an example of how we might want to use or do you use the subsurface and our frac designs and theres others, but.
But thats, probably one of the key ways of driving down costs, it's easy to understand.
And I'd also just jumped on and this is Daniel Rohling.
And say that we also have used our subsurface views to really take a look at where water and H just may be coming from and the teams have done a great job beginning to identify that and our.
And you know a long way down that road is helping us as we move forward and our development to be able to try and mitigate a higher water higher HSR.
Oh great.
Thanks for the thanks for the.
The detail and.
So I mentioned.
We'll try and gas monitoring.
And net.
And they've been doing increasingly want.
Yeah.
And what the incremental cost of that might be and I was wondering if.
And there was a plan to go out and maybe retrofit legacy wells with a similar similar equipment.
You know what we have going right now is that we own four different flair cameras that we take around the field daily and test the different.
All of our locations. So all of our locations are getting scanned and viewed to make sure that we're not having escaped the patches and connections and things like that so every location is getting monitored.
Oh, okay, great Thanks and on.
A little bit of a housekeeping question what was the doctor on FTE and every year.
Sure. So as you might've seen and our comments we at end of year, if you're defining it as December 31, we had already started on.
Fracs in December we saw an opportunity where we felt like we could save on completion capital by getting an early start and we also see no dependencies too.
Forward for supply chain challenges to happen when the first of the year comes around which which we actually did see some of that.
Some of the other operators so we started fracking.
Two of our four ducks.
And before the end of the year and then relative to the other two at the beginning of the year technically.
I think of it as starting starting with the completion of those four docks at the end of the year and bringing them online and the first quarter. So I think about that.
Oh, great. Thanks, and then just last one for me you did mention a little bit of Uh huh.
On supply chain issues, he saw with other operators.
And basically hit.
Bottom of the cycle for a service.
Service cost material cost at this point.
And do you anticipate any and inflation on the horizon and if so.
And your plan for a certain amount.
Okay.
Yes, no the majority of our activity as you saw on and on our guidance is happening and the first part of the year. So we haven't built inflation into our numbers for this year on the completion side, but absolutely I think we ought to count on and as we're seeing oil prices trading with a six handle on it.
We ought to start seeing some more.
Some more activity putting strains on the equipment that is currently being used and that's been our results and and inflation.
With me and my thought.
Good enough thanks, a lot.
Thanks, Bill I appreciate your interest.
Once again, if you would like to ask a question. Please press star one.
We take the next question from Michael and Maya at Kessler checks.
Hi, Good morning, I was just wondering if you could comment on.
How are you doing hedging and.
Q2 for 2021 and going forward.
Some of the comments and.
And you've talked about the low key on.
And we'll have generally on realized gains on physicians obviously.
We went away on the <unk>.
Just interested if you could comment on.
And the outlook, how you hedge protection.
Okay.
I'll, let Kevin answer that.
So in general were.
Our plan is to and we've executed on it is too.
Edge.
Percentage of our expected production and 2021 and 2022.
We are like.
Like we said on the on the call earlier, we're 90% hedged on oil for 'twenty. One we have some room and 22 to add hedges and we have been doing that and we will continue likely to do that during this year and.
Depending on.
The outlook for 'twenty, three and prices and 23, eventually will start out and probably some hedges and early 'twenty three but we do believe and hedging, especially as we increase our activity and.
And we have planned activity, we have certain obligation wells and we plan to drill we may decide to do more on the future depending on pricing and we will.
<unk> tried to match up our hedging program with our <unk>.
Activity in the field.
And is it a fault and it's 90%.
Hedged and is that kind of is there a goal and you guys try and stay on.
Well I think what we typically show and is that we'd like to protect our cash flows and we've been anywhere from 75% to 90% of our production.
Just.
The way we approach hedging is that we like the hedges to protect our cash flow we've made the investment and we will.
Want to protect those cash flows and then we see it and environment like what we're in right now.
And we create the flexibility to be able to invest into that market as prices increase and then when we do that we'll hedge those volumes as we make those investment decisions, but I think we've been anywhere from 75% to 90% hedged historically.
Thank you very much.
<unk> and no further questions at this time, Mr. <unk> I would like to turn the call back to you for any additional or closing remarks.
Okay, great. Thanks, and again I just want to thank everybody for their interest and battalion.
There's no doubt the 2020 was a difficult period and our industry, but we do feel like the accomplishments that we were able to achieve only made us a stronger organization and.
And we do feel like that our disciplined approach to development.
And has positioned us well and will position us well and our recovery market. So we look forward to sharing some of those accomplishments with you as we get into 2021. Thank you very much.
Okay.
This concludes today's call. Thank you for your participation you may now disconnect.
And.
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