Q3 2021 Earthstone Energy Inc Earnings Call
Greetings and welcome to the Earth's Stone Energy's conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder.
This conference is being recorded.
Joining us today from Earth stone or Robert Anderson, President and Chief Executive Officer.
Mark Lumpkin Executive Vice President and Chief Financial Officer.
Steve Collins Executive Vice President of operations, and Scott Philander, Vice President of Finance.
Thank you Mr. C lender you may now begin.
Thank you and welcome to our third quarter Conference call before we get started I would like to remind you that today's call will contain forward looking statements within the meaning of federal Securities laws. Although management believes these statements are based on reasonable expectations. They can give no assurance that they will prove to be correct.
These statements are subject to certain risks uncertainties and assumptions as described in our third quarter 2021 earnings release and in our filings with the SEC. These.
These documents can be found in the investors section of our website www dot or stone energy Dot com should one or more of these risks materialize or should underlying assumptions prove incorrect actual results may vary materially.
Conference call also can also includes referenced 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 announcement released yesterday.
Today's call will begin with comments from Robert Anderson, Our CEO, followed by remarks from Steve Collins, Our executive Vice President of operations and Mark Mark Lumpkin, Our CFO and then we will have some closing comments from Robert I'll now turn the call over to Robert Hey, Thanks, Scott and good morning, everyone. I know, it's a busy morning. So we appreciate those.
Have you who cannot join us for this quarterly conference call.
Our outstanding third quarter results demonstrate the effectiveness of both our strategy and our execution throughout the year, we have substantially increased our scale through attractively priced acquisitions that have resulted in an approximate doubling of daily production volumes, which should be close to 30000 barrels of oil equivalent or Boe.
Per day by year end, while we continue to drive down our per B O E cash operating and overhead costs are L. O E plus cash G&A was under $7.50 in the third per BOE in the third quarter compared to last year, when we averaged about $8 50 per Boe.
We continued to generate substantial cash flow free cash flow in the quarter. Despite the capital costs of having added a second rig in early August which will have no associated production or cash flow benefit until early next year.
Year to date, we've generated almost $80 million in free cash flow and over $150 million in free cash flow over the past six quarters, Although we have increased our capital spending with the addition of the second rig we expect to generate free cash flow in the fourth quarter, which will be used for debt reduction and mark will.
Give us a little bit more color on that as we proceed through the call.
This week, we closed on our fourth acquisition of the year, which was the previously announced Portland acquisition, a bolt on Midland Basin asset located near our tracker acquisition that we closed in July not.
Not only did we purchase it at only 1.7 times estimated adjusted EBITDAX, but with the assets near our existing Archstone operations, we expect to realize some incremental operating synergies and drive down operating costs further.
We are really pleased that we have successfully continued to close on accretive and well priced acquisitions of low operating cost high margin producing assets throughout the year. We have significantly increased production cash flows inventory in our acreage profile with minimal impact on our debt to EBITDAX ratio.
Additionally, these acquisitions have used equity as a meaningful component of total consideration to the sellers.
So by taking shares these new investors are validating our strategy and confidence in our team's execution.
Exiting this year like I mentioned, we'll have approximately double daily production versus last year, we should have a similar.
The level of leverage as measured by debt to EBITDAX, while only increasing our share count by about 34%. So we have significantly increased production per share over the past year and with the rising commodity price environment and our continued reduction in per unit costs. We are delivering what we believe are exceptionally strong.
Long increases in per share value.
Our ability to get highly accretive deals done using a mix of cash and equity has allowed us to maintain the strength of our balance sheet. So that we can continue to be active in the M&A market.
We are exiting the year is a significantly larger company and believe our added size and scale now position positions us to look at larger acquisition targets that add production cash flow and drilling inventory, but as is our history. We intend to remain very disciplined and continue to apply strict technical and financial reviews.
So any deal we consider discipline.
Discipline is key to our operating execution as well.
Full integration and careful execution are incredibly important to us as Steve will cover later.
So we will closely monitor our pace make sure we fully understand newly acquired assets and promptly apply any learnings that we may gain throughout the process. We believe our two rig program is a good fit for our current asset base and plan to continue operating at this pace in 2022.
A few months ago I would've said, a two rig operated program for 2022 would run us about $250 million without non operated activity. However, with the recent and expected cost increases we are still working on this estimate, but our 2022 capital program will be impacted by currency.
Cost pressures and we would expect it going up 10% to 15% from here.
Our team has been doing a great job working to offset some of the cost inflation with operational efficiencies, but with the significance of what we are seeing inflation will not be completely offset.
Now I'd like to turn the call over to Steve Collins to provide an update on operations.
Thanks, Robert and good morning, everyone.
During the third quarter, one of the rigs in our two rig program completed drilling on a four well pad in Western Reagan County on our West Hartgrove unit, where we have 87% working interest.
That rig also completed drilling on a three well hamman pad Upton County, where we have a 75% working interest and it is now drilling on a six well pad in Upton County, where we have 100% working interest our second rig was deployed mid quarter and is operating smoothly and is currently drilling on a five well pad in Upton County, where we have 100% working interest.
We expect to complete drilling there in the next couple of weeks and then move the rig back to Midland County to commence drilling a four well pad.
As we highlighted in our earnings release, we completed three wells in Midland County at the end of the second quarter and today. The three combined are producing around 1500 Boe per day with 80% oil towards the end of the quarter. We turned to sales four short lateral wells on the Pearl Jam pad in Midland County, which continue to clean up this is the.
The first set of wells drilled and completed on the hiring acreage acquired early this year, we are eager to evaluate well performance and our operational approach and apply what we learn to the future development of the R. M acreage in 2022.
During the fourth quarter, we anticipate bringing on the four west Hartgrove wells in Reagan County, and the three hamman wells in Upton County.
These recent completions are all with short laterals.
Which has taken up a large portion of our 2021 plan and we look forward to bringing on a string of longer lateral wells in 2022 with average lateral lengths closer to 9000 feet.
Our operations team has done a good job working with vendors to find ways to minimize cost increases while maintaining best practices. For example, we've been working with our pipe supplier on assembling casing and tubing inventory in bulk to help offset recent spike in spot casing prices. This will be evident as we continue to run two rigs in 2022.
Without interruption.
Let me wrap it up with a couple of quick comments on the integration of operations on our recent acquisitions.
We took over operations on the tracker assets couple of months ago, and it's been a very smooth transition with no hiccups. Although this is a low cost asset we're starting to see the potential for cost reduction under our management.
As we take the operations over it fallen where similarly, well prepared for the transition and are eager to integrate those assets.
Having established.
Operating operations base nearby will be really advantageous for a smooth transition and we look forward to continue to driving down costs and what is now a sizable asset base and that part of the Midland Basin.
With that I'll turn it over to Mark Thank you, Steve and good morning, everybody.
Today, I'm going to try to streamline my comments, a bit and not repeat all the standard GAAP results for the quarter, which as you know are available in our earnings release and in our 10-Q and instead I'm just going to focus on some key highlights. So let me start with a few big picture comments related to the balance sheet during the quarter, our borrowing base on our revolving credit facility was increased from five one.
Third 50 million to $650 million as a part of our regularly scheduled redetermination.
With borrowings of 207 8 million at quarter end, we had over 370 million of Undrawn capacity at quarter end based on debt at quarter end and the $65 million of EBITDAX for the quarter, our debt to third quarter annualized EBITDAX was one one times as you know subsequent to quarter end, we funded the approximately 39 million.
Of cash consideration in the Portland acquisition, which we closed on earlier this week.
And that still leaves us with over 50% availability on the revolver, our liquidity remains very strong.
Looking toward year end and as Robert alluded to we're tracking ahead on our targeted leverage reduction, which even with the incremental debt from Portland, and the fourth quarter really.
Really hits, a goal and it does better than the goal we are expecting to achieve and we now expect to be well under that stayed at 1.25 times debt to EBITDAX target at year end and are hoping to be closer to one times leverage at year end and really as you look into 2022, we continue to expect our deleveraging too.
Accelerate with absolute debt levels going down as we use free cash flow to pay down debt, but at the same time EBITDA rising as we have more production and less burdensome hedges from.
From an EBITDA standpoint, our EBITDAX of $65 million was a 21% increase quarter over quarter and that came in a little bit higher than we expected driven not just by the strength of commodity prices, but also by lower than forecasted low AE and our ability to control G&A costs.
We added 18 million of free cash flow in the quarter, which brings us close to 80 million of free cash flow for the year and we expect to continue generating free cash flow, which we will apply to debt reduction from a production standpoint, we're right around our expectations of 20836 barrels of equivalent of oil per day and that was comprised of 44%.
Oil, 20% natural gas and 27% natural gas liquids.
With the closing of the Portland acquisition. This week, we have increased our production guidance for the balance of the year to a range of 28500 to 29500 Boe per day, and we expect to be exiting around 30000 Boe per day as Robert mentioned due to bringing on new wells throughout the quarter.
Further on the guidance, we've reduced our cash G&A guidance for the year with the third quarter haven't come in better than forecasted and on the Ela. We we also came in really well with L. O <unk> per Boe in the third quarter of $5.46 being below the low end of our guidance, which was a range of $5 75 to $6 per Boe.
We've closed them for them. This week and then it will take a little bit of time to apply our low cost operating approach to those assets, we did not lower the per barrel equivalent LOE guidance for the remainder of the year, but we're certainly aiming to be on the lower end of our fourth quarter guidance from a capital expenditure standpoint, we've not changed our guidance for the year, but as Robert mentioned, we are seeing some.
Upper pressure pressure on service cost plus we have a little bit of incremental non operated capital mouse late in the fourth quarter. So while we're not increasing our range of 130 to 140 million of Capex, we do expect to be at around the high end of the range.
As you know we are benefiting in a limited way this year from the run up in commodity prices with our oil and natural gas gas production being pretty significantly hedged we do expect to be relatively less hedged in 2022, and we've also been utilizing some colors into our hedging strategy, which gives us downside protection, but more exposure to upside on commodity prices as well with that.
I'll turn it back over to Robert for closing comments.
Mark well 2021 has certainly been a unique year for all of us and very much so for the oil and gas industry with unexpected challenges and continue commodity price volatility that we've been able to identify and seize some excellent opportunities to strengthen or stone.
We utilized our strong balance sheet, along with equity consideration to continue our consolidation efforts and closed over $430 million of accretive deals that added over $500 million of PDP value alone not including any upside these transactions along with our drilling program have us doubling production.
In 12 months and allowed us to take a very significant step forward in adding size and scale, while maintaining balance sheet strength. This is consistent with our message and strategy. We have been discussing with you over the past several years as we look to 2020 to driving shareholder value remains our primary objective.
When assessing potential deals and despite the acquisition market incorporating higher commodity prices, we will continue to pursue opportunities that complement our asset base and further improve our operational performance as a larger company now we are better positioned to participate in this challenging M&A environment. However.
<unk>, we will not sacrifice our strong cost structure.
And our clean balance sheet to get a deal done now.
Now with that operator, we glad to take a few questions.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Once again Thats Star one to register a question at this time.
Our first question is coming from Jeffrey Campbell of Alliance Global Partners. Please go ahead.
Good afternoon, and congratulations on the board on the acquisition.
Wanted to ask a few questions there.
Does the low decline aspect of the assets imply that these are larger older long tail wells.
A little bit so Jeff not not dramatically they had some new wells that were completed this year, but the majority of their production has been on for quite some time so yeah.
Okay.
Do you have any relevant color to the high margin aspect of assets. I think this is an interesting for investors because the assets aren't are not that old.
Yeah, I mean again, it's a low decline really good near term that we've seen near term in prices with NGL and natural gas has helped and not a wall hot differential that is.
In a way blown out and then <unk>.
Cost of operations, but not as low cost as the tracker assets.
And we haven't built all the upside in that we could but I know, Steve and our guys will be able to drive down some are low there. So we even think the margins will improve on standalone basis compared to what we had in our internal model.
And that was sort of my last question with regard to Orland, just any specifics on what sort of synergies here.
See that will add value just interested there since it's already up and up and running asset what are you guys able to come in and do the knock us down.
Yeah, Theres, probably some low hanging fruit that we can talk about in the first quarter after we get it.
<unk>, but you know.
We're not going to use as many people in the field as they had we've got good supervision across our asset base with with folks already.
And then we see a couple of operational things that we just do differently than they do in a.
We will work with some vendors and hopefully drive some costs down anything else Steve that cover.
No we already have supervision area, we already have our operations base. So we just expand on it a little bit instead of creating something from scratch.
Got it.
I wanted to ask a broader question about Iran.
Form and follows the tracker acquisition that was also in the area.
Yes.
The tracker seems to be competitive within the.
Our stone portfolio. So I was just wondering is there anything in particular about areas that you like or is it just sort of happened stance that these attractive acquisitions came to you one after the other.
Oh, we do like the area because it's low cost it is a little bit gas here. There is some good drilling opportunities that will capitalize on in 2022, but they were attractive and priced right and sellers.
That we're willing to take equity and so everything kind of lined up.
The Portland, guys, you know actually contacted US and said Hey, I saw you did the tracker deal and you know is there.
Or is there some opportunity for us to join in and that's kind of the way. It happened. So we hope that there's more of that coming as we continue to execute.
Yeah, that's a nice way to make an acquisition.
My last question.
Regarding what you said earlier a couple of times today, you said that.
It sounds now in a position where it can.
Take on larger acquisitions.
Don't want to assume anything here or what is what do you see as the most important variables that support this assertion that you can take on a different kind of deal if you want to.
Well, we're always going to manage each acquisition independently and review it.
Maybe to death as some of our guys would say.
From a technical standpoint, and then financially it makes sure that it fits I mean, we've got some.
Levers to pull with a pretty clean balance sheet, but at the same time, we're not going to.
Managed to leverage number that gets us in trouble at $80 oil when you know maybe it goes to 60 or 50 or 40 at some point in the future right. So.
Each deal is somewhat probably unique in has to stand on its own but you know we can go look at deals that have.
Larger cash flow components, but also some inventory and as long as they fit.
And the scope of where we're looking at.
Which we've been pretty open about where are we looking at Midland Basin is first and then the Eagle Ford and the Delaware are two other areas that are.
Have very good competitive opportunities for us to consider that's kind of how it works Jeff.
Okay No that's perfect. Thanks, I appreciate all the color today.
You bet Thanks, Jeff.
Thank you. Our next question is coming from Neal Dingmann of Truth Securities. Please go ahead.
Good morning, guys, maybe the railroad just ask my two questions now, but you mentioned you know obviously shareholder return being top does your you guys have suggested maybe using this the scale is still just wondering if you still think that's the best use if you might comment on shareholder return and then just secondly on just the two rigs.
I think one is an uptick but maybe just.
The idea of where do you plan on continuing to run those thank you.
Okay. Good questions Neal I think we're still a little bit.
Young to be able to develop.
Our sustainable distribution type model whatever that might be I think we need we need some additional scale and we see that there are still a lot of opportunities out there to.
Consolidate.
And I think we're better suited to do that then just sit here and run two rigs and distribute cash flows free cash flows after we get down to a certain debt level.
Well, we'll just continue to run two rigs I think it's the right pace for the asset base, we have today.
And will delever to a certain point and then free cash flow will be considered as a as we have it in order to buy other opportunities and continue to scale up size up our business. So.
Hopefully that.
Answers your questions.
Operator, we'll go to the next question.
Onto the next question. Our next question is coming from Scott Hanold of RBC capital markets. Please go ahead.
Yeah, you know things Hey, Robert back to you some of the commentary on <unk>.
Consolidation it still seems a very high focus for you all and you did make some I think a comment at the end of your opening statements that you know the the market is getting a bit more challenging or it's a more challenging market can you give some color around that and you know what a well you have to think where do you think you have to do to be competitive.
Yeah.
Yeah. Good question, Scott I mean, it in every environment, a N D or M&A is always challenging.
When prices are where they are it makes it a little bit harder because sellers.
Now there might be a different kind or a bigger bid ask spread.
Sellers are looking at you know $80 oil and want to get paid for it and we.
We are a little bit nervous about where it is we love the cash flows, but you know do we want to go buying assets at the top of the market, maybe maybe it's going to $100 I don't know, but you know that that creates a little bit of.
Issue between the buyer and seller a lot of times.
As we think and look at deals what I think makes us attractive as a buyer in a situation where equity can be used as we've had a good really good response by investors in the market when we have announced deals and used our equity edge.
And each a seller has.
<unk> has seen some value increase accretion to selling to us versus doing an all cash deal that same kind of price. So I think that helps as well when we look out there at the competitive landscape and how we have an advantage.
And when you when you think about those kind of transactions you want to do going forward. I mean, you know it seems like over the last year or so it's been a bit of a mix of you know some transactions that can add you know really core acreage with inventory scale and then some that look more opportunistic in the bottom line.
You can get them below.
Go get them at PV, 20, or whatever just a real cheap price and.
You know as you go forward it seems like there's more of an appetite to maybe do more on the inventory core inventory side versus just the low cost deals or do you see that it's still a little bit of a balance in our mix.
I think if we can have a good mix of those two would be okay, but there's definitely.
Opportunities out there to look at deals that have inventory and then there are some chunky.
Assets out there in the market or will be coming to the market that are more cash flow PDP weighted and we'll take a look at either of those two.
It just depends of the kind of consideration that we can use whether one of those is more attractive than another I mean, if it's a 100% cash deal that has a lot of inventory and not much cash flow and and it's big that probably doesn't.
<unk> make the most amount of sense for us versus one where we can use our equity in some form.
So it's definitely a balancing act.
Got it and then you know lastly, with those two rigs are running through next year. You know is at what could be in terms of like color on on working interest and you know kind of the the location you'll be targeting you know can you give us.
Yeah sure I don't think its going to be a whole lot different than this year in terms of you know we'll have wells that we drilled that are somewhere between 70 and 100% working interest I don't know exactly off the top of my head the balance, but definitely Mark and Scott can help you out there a little bit and I don't know what the average is.
But we're getting longer laterals next year, so our efficiency will improve our you know on a per foot basis, or however, you want to think about it but.
But then again longer laterals, a little more costs. So you know, we're we're definitely baking that into our thought process of our budgeting that we're going through now will continue to focus in Upton and Midland County, we'll do a little bit of drilling on the tracker assets that we acquired in <unk>.
Ally so over an area of <unk> County, and then we will have a pattern to sprinkled in there that'll be in Reagan County, So it's a good diverse set of assets across our our footprint.
Got it I appreciate it thank you.
Once again, ladies and gentlemen, if you do have a question. Please press star one on your telephone keypad at this time.
Our next question is coming from John White of Roth Capital Partners. Please go ahead.
Good morning, and congratulations on another nice quarter.
Thanks, John.
Talked a little bit about oilfield service inflation.
In your opening remarks is it too early to put some ballpark percentages on that looking into 2022.
Yeah.
Well I I kind of gave you a little bit of a preview of what we're thinking you know, maybe it's 10% to 15%, but it is a little bit early yet as we.
Still are trying to figure out you know exactly lateral lengths in pipe use there wasn't a have and what's going to happen with Frac services and things like that I mean, we're seeing.
You know I like everybody else labor diesel.
Other casing anything steel related costs or are increasing.
That's not as great going forward as it has been this year.
Okay.
Yeah, we're hearing about pipe cost increases from a couple of other companies too.
On your Hamman 45 pad did you complete a well in the Jo mill.
We did.
Good memory.
How did it go.
It might be the highest oil producer on that three well pad is that right rocky starboard is doing right now its cleaning up yesterday.
Wow.
That's.
That's a little surprising given the given the history of the lower sprayberry and the Wolfcamp B.
But I'm glad to hear it and congratulations.
Thank God that yeah, we've got a lot like it a lot more Jo mill locations there.
We have a few yes, we might expand our inventory in that area because of that.
Yeah.
Okay. Thanks, again I'll pass it on.
Thanks, John.
Thank you at this time I would like to turn the floor back over to Mr. Anderson for closing comments.
And thanks, everybody. We appreciate your attendance and we look forward to talking to you soon.
Ladies and gentlemen, thank you for your participation and interest in Earth's Stone energy you may disconnect your lines or log off the webcast at this time and have a wonderful day.
Okay.
Yeah.
Okay.
Yeah.
Yeah.
Okay.
Okay.
Yeah.
Uh huh.
Hum.
Yeah.
[music].
Yeah.
[music].