Q3 2021 Goodrich Petroleum Corp Earnings Call

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Good morning, and welcome the good word Petroleum's Corporation third quarter Conference call, all participants will be in listen only mode.

Please signal conference specialist by pressing the star key followed by zero.

After that I guess presentation, where an opportunity to ask questions. Please note that this event is being recorded.

Like the conference over to Mr. Gil Goodrich.

Chairman and CEO. Please go ahead.

Thank you Nick and good morning, everyone. We appreciate you participating in our third quarter earnings call. This morning.

During the third quarter, we acquired approximately 4500 net acres and associated wells in production in the core of the Haynesville shale and Caddo and Bossier parishes in Louisiana. This.

This acquisition meaningfully expands our operated acreage footprint in the core of the play as well as our inventory of future drilling opportunities and locations.

As I'm sure you're all aware the natural gas market improved dramatically during the third quarter and the enhanced pricing coupled with a 7% sequential growth in production led to substantially higher EBITDA in the quarter, which grew from $24 $4 million in the second.

Quarter to $33 2 million in the third quarter.

At the same time as future prices for natural gas increased during the quarter. The change in the fair value of our derivatives or hedge position from the end of June to the end of September resulted in a mark to market non cash loss of approximately $65 million.

We have again prepared a slide presentation and we invite you to follow the slide deck. During our prepared remarks, you can access the slide presentation on the Goodrich Petroleum website entitled three Q2 thousand 21 earnings slides.

I will now turn to the slide presentation for those of you who would like to follow along and our standard disclaimer forward looking statements and risk factors are highlighted for you on slide two.

On slide three we provide our ESG statistics, which we continue to update when appropriate.

On slide four we provide an overview of the company, which we have updated as I mentioned, we acquired approximately 4500 acres.

In Caddo, and Bossier parishes of northwest, Louisiana, and what we call Cedar Grove field.

This transaction increased our core footprint to 32000 net acres, increasing our net acres added thus far this year to 6000.

With the addition of the Cedar Grove assets are natural gas resource potential in northwest, Louisiana grows to approximately two four tcf.

The core of the Haynesville shale continues to deliver very strong results increasing production volumes are helping reduce per unit operating cost, while coupled with the improving natural gas prices, our cash margin increased to 70% in the third quarter.

The expanding EBITDA is having a positive impact.

One other financial measures as well with adjusted trailing 12 months, our Oh, I see a 45% when adjusting for the unrealized noncash hedging loss in the quarter.

In addition, we saw a further improvement in our debt metrics during the quarter and we continue to project year end net debt to EBITDA of less than one.

On slide five we again show our year end 2020 proved reserves with a breakout by category as well as an estimated range.

A present value based on a corresponding range of natural gas price assumptions.

An updated range of investments would obviously lead to higher present value estimates as the five year natural gas strip prices have moved meaningfully above $3 per mcf.

On slide six our cap table as of the end of the third quarter shows the approximately $90 million outstanding under our senior credit facility and $32 5 million of second lien Pik notes are paid in kind.

For a total net debt of $117 million after taking into account the $5 $5 million of cash on the balance sheet at the end of the quarter.

As a reminder, our second lien notes are convertible into our common stock at $21 33 per share.

As I mentioned debt metrics remain low and should continue to improve into year end as well as in 2022.

In addition, our bank group has increased the borrowing base under our senior credit facility by $30 million to $150 million in our fall 2021 Redetermination.

You can see our historical production growth on slide seven which includes the current estimated amounts.

In our guidance for both full year 2021 and 2022.

Moving to slide eight you can see our updated natural gas hedge position consisting of both swaps and collars for the balance of this year and 2022 as well as the small amount currently hedged in the first quarter of 2023.

Our hedging strategy administered by our boards hedging committee.

As always primarily about risk mitigation and capturing hedging opportunities at the time, which will allow us to execute our strategy in the future even if gas prices decline.

We then hope and prepare to be wrong and seek new opportunities in a rising natural gas environment to improve operating performance and the balance sheet.

Our current hedge position provides substantial downside protection.

While also giving us substantial exposure to higher unhedged prices as we execute our 2022 plants.

And with that I will turn the call over to Rob.

Thanks, Gil revenues were $58 7 million and we had a net realized loss on cash settled derivatives of $12 5 million for net revenue adjusted for cash settled derivatives of $46 2 million.

Average realized price was $3 85 per Mcf equivalent comprised of $3 77 per mcf of gas and $78 40 per barrel of oil or $3 <unk> per mcf, when including cash settled derivatives.

Our per unit cash operating expense, which is defined as operating expenses, excluding DD&A and noncash G&A continues to decrease to 86 cents per mcf in the quarter and cash interest expense was six cents per mcf fee for a total of 92 cents per mcf equivalent in the.

Quarter.

Cash margin, including interest expense was $2 11 per Mcf.

We're 70% of our realized price including settled derivatives.

As you will see in our slide deck and discuss later in my prepared remarks, both per unit cash expense and cash margin rate first or second among our gas peers when comparing against the second quarter financials.

We will update these peer comparison slides once everyone is announced third quarter earnings.

We expect production to grow commodity prices to be higher in per unit cost to continue to fall and therefore cash margin to continue to expand throughout the remainder of this year driving significant EBITDA growth and free cash flow.

Capital expenditures for the quarter totaled $27 9 million of which nearly all was spent on drilling completion and facility costs associated with Haynesville wells.

During the quarter, we conducted drilling and completion operations on 12 grows four five net wells and <unk>.

Added four gross two two net wells to production.

Interest expense totaled $2 2 million in the quarter, which included cash interest of $900000 incurred on the company's revolver and noncash interest and debt amortization of $1 3 million primarily incurred on the company's convertible notes.

Turning back to slide nine of our slide deck all of our activities remain in the core of the Haynesville.

We continue to seek and review additional bolt on opportunities to expand our 32000 acre footprint through additional acquisitions and drill to earn farm outs.

Our acreage is currently approximately 75% undeveloped and 80% operated.

On slide 10.

We've updated our inventory in north Louisiana to reflect our Cedar Grove acquisition and as Gil said now hold in excess of two point or close to two four Tcf of reserve exposure, including 560 Bcf and proved reserves at year end 2020 at $2 50 gas.

We've not quantified or inventory at Angelina River or the Tms since all of our activity is planned for north Louisiana.

Our wells to continue.

Wells continue to perform very well and as we've stated many times before we believe our well performance is driven by a number of factors one quality of our acreage in the core of the play is supported by significant well control and core data.

On an optimum completion design, where proppant concentration fluid levels cluster and interval spacing and pump rates provide a material difference in results and flowback technique that minimizes daily drawdown flattens. The decline curves provides high recoveries of gas in place and most importantly maximize.

<unk> returns.

To date, we've only seen a small amount of service cost inflation and our economics as shown on slides 11 through 13 are as good as we have seen them in the basin.

The combination of the outperformance of our curves higher realized gas prices reasonable service costs and low lifting cost that has created a unique situation where at a minimum of $2 $50 gas price, we can generate approximately 100% or greater.

Irr's.

These field level economics are flowing through our corporate returns generating very high returns on invested capital and creating significant value and growth for our shareholders.

Moving to slides 14, and 15 as I said previously.

Cash cost per unit, including interest expense of 92 cents and our cash margin of $2 11, or 70% of our realized price, including hedges has us at or near the top among our gas peers.

Our adjusted return on invested capital for the quarter was shown on slide 16 as extremely attractive at 45%, which has always been number two ranked company out of our gas peers and if you will flip to slide 17, you will see we also ranked second on this return metric in the much larger 33.

Company peer group, which also includes public oil companies.

For the remainder of 2021, when you bake in higher production higher realized prices and lower per unit cash costs.

<unk>, our cash margin and return on invested capital will move even higher.

In summary, our team is executing very well our balance sheet is in very good shape with low debt metrics and heading lower.

We are generating superior returns both in the field and at the corporate level.

With this favorable backdrop for the remainder of 'twenty, one and 2022, we look forward to continuing to share our results, which we believe will only get better.

With that I'll turn it back to the operator for Q&A.

Yeah.

Thank you.

Well now begin the question and answer session to ask a question you May Press Star then one on you touched on phone.

Youre using a speakerphone please pick up your handset before pressing magee.

With all your question. Please press Star then two.

At this time, we'll pause momentarily to assemble our roster.

First question comes from John White of Roth Capital. Please go ahead.

Good morning, guys. Good morning, good morning, John Lunger.

Congratulations on another la last quarter, you guys just rolled through these with the greatest disease.

I'm curious it.

I'm sure it's harder than it looks.

You touched on oil field service costs I believe you term them moderate or reasonable is is that what you're seeing are you seeing any indications of increases.

Yes, John this is Gail good morning, So you know.

This year it looks pretty good we've seen really relatively small amounts of inflation, we had actually baked in in our pre planning.

<unk> inflation that we've actually seen we have seen some around the pipe side pipe prices have been up a little bit.

Early indications are that perhaps in 2022, you're going to see some.

Some modest inflation.

We think in the Haynesville around the completion side in <unk>, but nothing that we can point to this morning, I'll say, it's actually baking the cake at this point.

Okay I know that's on a lot of People's minds. So I. Appreciate you are offering your your color.

Yeah. Thanks, John.

I'll pass it on.

Thank you John.

Thank you again, if you have a question. Please press Star then one.

Our next question is from David Snow Energy Equities, Inc. Please go ahead, yes, hi, good morning have you looked at the comps for the southwestern changed.

Haynesville acquisition and how do they relate to your card.

Company's comps.

Yes, David This is Rob we have it's an interesting transaction.

Obviously, if you look at it on a flowing metric I.

I think we've seen something in the 2600.

Per flowing and Cfe.

I've seen it we've seen it kind of dissect it in other ways.

Trying to allocate acreage value in and by the way.

It takes allocating value to the acreage to get into the base and it's just it's highly desirable there's.

Obviously, some transactions that have occurred recently and there are people that want and so.

It's not a basin, where you can just go in and pay for PDP and expect to get it it's clearly acreage value CPO.

If you apply those metrics to us the stock's worth more that's not surprising.

If you look at 2020 previous guidance.

We're certainly still trading well below our peers on a enterprise value to EBITDA multiple and yet we still have a pristine balance sheet. So we think as we continue to post numbers on the scoreboard.

Youre going to Youre going to see EBITDA grow dramatically and we feel like.

We ought to get recognition for that as the numbers are posted so.

More good news to come.

And I think as Gil said, we have plenty of room for upside on the gas price strip that we see and yet we have plenty of protection and a balance sheet that's going to go.

Play very well next year. We're also setting ourselves up I think we've talked about this before too to be able to pay off the second lien notes.

I think that's in our plan with the free cash flow generation in 2022, and then potentially once that happens to be in a position and we're not calling for it yet, but certainly be in a position to ultimately pay a dividend down the road. If the board decides to go that route so everything.

Trending exactly where we thought it would and hoped for so looking forward to really good 2022.

Some of the companies are talking about.

In the.

Foreseeable future and ending of there.

Tax free.

Income tax free status.

As Nols are used up how does it look for you.

Oh Gosh, David This is Gil we've got significant Nols.

Well over $200 million of Nols, and very significant capitalized rbcs as well so it would be very difficult barring a change in the tax laws.

For us to forecast our tax pay status for quite a few years in front of us.

Okay and and <unk>.

New regulations being proposed for methane how do you.

How do you stand relative to that.

Yes, David this is Rob again.

Look it's extremely prudent for us and our entire industry to ensure that we minimize any methane emissions and we're all over that.

Routinely.

Put out our statistics are ESG slide will show you that we just hardly flare anything.

It goes immediately into the pipeline.

<unk>.

We follow all the guidelines of the various agencies to make sure that we're checking our equipment.

And keeping our emissions down to the bare minimum and we're going to continue to do that so we think it's healthy.

Certainly it adds cost into the into the into the business, but it's prudent and by the way the more the more you spend on that the less that goes into the ground, which is bullish for commodity prices. So we think it's the right thing to do and it's the right messaging.

We will continue to.

<unk> kind of prosecute in and do that.

<unk> stuff for our business.

Yeah, Okay, just one more on the southwestern acquisition they have.

Reserves are not too far different than you, but their production is 700 million compared to 123 I mean for you was about 166.

They are fully developed in Europe, you have much more to go or how does that compare.

Yes, David So the acquisition that they announced this morning was the G O southern.

Robert equity back company.

They still have a lot of running room over there in our view good acreage.

They've done a very nice job developing that asset over the last few years.

And so we would view it as a as a win win we think it's relatively fair valuation today in today's market I think the southwestern is picking up a very nice asset with a good bit of future development. So no I would not consider them that asset fully develop it all there is still a lot of running room for them.

Okay. Thank you very much thank you David.

Yeah.

Thank you next we have a follow up question from unlike the Roth capital. Please go ahead.

So you just mentioned Rob the possibility of paying a dividend at some point in the future and that caused my years to per caps.

I think consensus opinion regarding declaring the dividend is a there is some.

Hi, Permanents.

Two such a dividend so before you would decide you declare a dividend.

Would you and the board discuss our stock buyback given given your cash flow.

Well.

All of this is preliminary obviously and we can't get out ahead of of our board.

Because we're just not there yet I think as we've discussed before initially paying off the second lien.

We will pay down the revolver further.

But youre going to get to a point, where your debt to EBITDA is going to be extremely low.

And then at that point in time.

After we posted very good numbers on a quarterly basis.

We expect the stock to do to continue to perform well.

And if it's severely underperforming then you always have the option of that.

Stock buybacks versus dividends, but.

Let's get to that point before we we kind of make that make that choice.

But thats always on the table clearly if you feel like you are.

You are better suited to take down an undervalued stock.

Dark versus paying a dividend.

Thank you and I understand we're still very early on on both of these issues.

Great. Yes. Thanks for the question John we appreciate it.

I'll pass it on.

Thanks, Sean.

Again like we have a question.

That's one.

This time, we have no further questions I would like to turn the call back over to Mr. <unk>.

Remarks. Please go ahead. Thank you. Thank you Nick.

<unk> well positioned as Rob just articulated for 2022, we have the right assets the right balance sheet and the right team in place to execute our strategy and plans for next year and we believe we should continue to lead to continued strong shareholder returns in 2022, we thank you for your attention. This morning.

Take care.

Okay.

Okay.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.