Q1 2022 Battalion Oil Corp Earnings Call

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[music].

Good day, ladies and gentlemen.

And welcome to the Battalion oil Q1 2022 earnings call.

Reminder, today's conference is being recorded.

Now I'll turn it over to Battalion Oil Corporation Finance manager.

Mr. Chris lying to open the call.

This Lang you may begin.

Okay.

Thank you and welcome to our first quarter 2022 earnings calls with me today are a few of my colleagues, our Chief Executive Officer, Richard Little our Chief Financial Officer, Kevin Andrews, and our Chief operating Officer Daniel Rohling.

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 announcement released yesterday.

We have also published an investor presentation, which may be found on our website and will be referenced during this webcast.

Our team will begin with a few scripted remarks, followed by Q&A now, let me turn it over to rich.

Thanks, Chris I'm excited to be here. This morning, I first like to thank everyone, who has joined US on the call today, We released our earnings and our Investor presentation last night after the market close both of which can be found on our website and then you referenced here today.

We're off to a strong start in 2022 and I'm excited to share our progress to date.

Our goal for 2022 was to ramp up activity and drive significant growth in daily production, while remaining committed to capital discipline and operational efficiency.

We're we're four months into our long term development program and the early results are promising.

We kicked off our capital program in December with the spreading of a three well pad in our operational performance there was exceptional on the <unk>.

Drilling side, we exceeded plan on footage drilled per day, reaching a total depth on each well ahead of plan, while remaining tight with our target lines throughout the lateral.

We kept that operational excellence moving as we completed the wells with high competition sees in line with our aggressive plan.

We assumed inflation will hit our industry. This year. The question was just how much was.

Was that question remaining largely unanswered. These operational efficiencies are critical as we continue to combat inflationary pressures due to supply chain disruption and labor shortages.

When we issued guidance earlier this year, we described 2022 as a wind up in activity with only two new wells put online during the last 12 months, we fully expected to see a natural decline in production early in the year before the new wells came online and returned to growth.

With our first three wells now flowing back we're excited to say that moment has finally come we're looking forward to sharing the data those wells in Q2 and show the market how our hard work translates into results, but for now I can say that early flow back results in other key indicators are encouraging.

We also expect to wrap up drilling on our next pad, which is the Keller pad in the next week and anticipate having those wells flowing back in June .

Our stated strategy has four key tenet develop our liquid rich acreage positions to grow production and reserves efficiently.

Enhanced returns through continued improvement in operational and cost efficiencies.

Maintain financial flexibility and attain growth through strategic business combination.

Based on our progress this year, we believe we are well on our way.

With that let me pass it over to Danny to continue providing some detail on our operational results.

I Couldnt agree with you more rich as you mentioned our capital program is off to a strong start.

Largely a function of our relentless focus on operational excellence, we're drilling faster outpacing our previous wells and those of our basin peers and exceeding our footage drilled per day target on each well this year.

Completing our wells more efficiently to meeting our pump efficiency target despite setting lofty goals, all while working with the new Frac partner the.

The production teams worked hard on continuing to reduce downtime across all the fields in Q1.

We realized a 16% reduction in well downtime versus our 2021 average.

Our operations teams deserves the major recognition here, we stood up a new rig with new crews pulled a new frac fleet from another basin to Frac. Our initial three well pad and continued ongoing production and midstream operations across all our assets without a recordable incident, we often talk about our effectiveness and efficiency, but what's most.

Important is that we're doing it the right way and keeping our people safe while we do it.

As we build that positive momentum in our development program. We also continue to seek out ways to improve our go forward planning.

One example would be some subtle tweaks, we made to our completion design on the first pad.

We're testing the use of upgraded surfactants with the goal of enhancing fluid recovery and increasing <unk>. This is our third such tests in the area and we've seen promising results from the previous trials.

We've also pumped tracer to better understand the interaction between wells in the area. So we can continue to fine tune our forecasting.

Your child wells in future development.

That data, we hope to come away with an even greater understanding of the reservoir. So we can continue to fine tune, our completion design and well spacing in such a way to maximize recovery and most efficiently develop the field as we continue moving towards multi bench and multi rig scenario.

Gaining operational efficiencies are critical as we continue to fight inflation in 2022.

No secret that the industry has been hit hard by cost increases and supply chain disruption, we faced our fair share of it as well.

While we baked in approximately 15% inflation in our 2022 plan versus 2021. The continued uncertainty we're seeing in the market could further impact our capital expectations for the year.

As always we will continue to monitor the market closely and take active measures to mitigate further cost increases to the extent, we're able to do so.

As we said last quarter a lot of hard work was put in to prepare for a return to development and our early results leave us even more confident in the direction, we're heading both operationally and on the ESG front.

In addition to having no recordable incidents, we continue our downward trend in flare intensity as a practice, we will not flow production. If we can't do so on pipe, meaning we want flair unless there is a downstream emergency or shut in that's a great spot to be in with all our wells across our 40000 acres.

Now I'll pass it off to Kevin to walk you through some of our financial results.

Thank you Danny and good morning, everyone.

Total production in the first quarter of 2022 declined as planned to 14767 barrels of oil equivalent per day as compared to 17283 barrels of oil equivalent per day during the fourth quarter of 2021.

Having kicked off our 2022 drilling program in December with a three well pad, we did not anticipate new volumes to come on line until the second quarter of 2022.

With our Wilson pads flowing back as scheduled we expect second quarter volumes to remain in line with the first quarter before ramping up through the end of the year.

Total revenue was $81 6 million for the first quarter of 2022 of which well represented 77%.

We realized 99% of the average Nymex oil price during the first quarter, but realized a $32 8 million loss from our hedge program.

We reported GAAP net loss to common shareholders for the first quarter of 2022 of $92 7 million or $5 69 per basic and diluted share.

After adjusting for certain items, including the effect of net unrealized derivative losses and I'll refer you to the press release for details of those adjustments the company reflected a net loss of $3 5 million or a 22 net loss per basic and diluted share.

Adjusted EBITDA totaled $11 8 million for the first quarter of 2022.

During the three months ended March 31, 2022, we spent $24 2 million on oil and natural gas capital expenditures of which $26 million related to drilling and completion costs and $2 4 million related to the development of our treating equipment and gathering support infrastructure.

To follow on Dan's comments here, it's important to note that when we issue guidance for 2022, we anticipated inflationary pressure and included some amount of that in our plan that said a lot has changed in the macro environment during 2022, and it's difficult to say what the remainder of the year will bring.

We continue to monitor the market closely and remain aggressive in our efforts to mitigate both inflation and supply chain disruptions.

A few comments on liquidity and capitalization.

At March 31, 2022, the company had liquidity of $78 5 million.

And a $43 5 million of cash and $35 million in delayed draw term loans available to be drawn under our term loan agreement.

On April 29th we borrowed $20 million available under the first delayed draw term loan agreement. This draw was done in anticipation of a ramp up in capital expenditures as we continue our 2022 drilling program.

Finally, a few comments on the Companys hedges.

As a result of the run up in the commodity prices that occurred in the first quarter, we carry a $152 6 million net liability from derivative contracts at March 31, 2022, with $99 $6 million of that booked as current as many of our 22 hedges are significantly below current market prices.

It is important to note that the majority of these 2022 hedges relate to our base production.

With our 2022 capital program ramping up.

We anticipate significant incremental volume to come online in the back half of the year, which will allow us to increasingly capture higher prices and increased cash flow.

As we move through the year, we will continue to roll off these low market hedges and layer on new ones to protect the returns of our capital program.

Now I'll turn it back to rich to offer some concluding remarks.

Thanks, Kevin with the continued increase in commodity prices, the new wells flowing back and our team is operating at peak efficiency. There are many reasons for us to be optimistic.

We're excited to have returned to growth and look forward to generating substantial increases in production and cash flow as we move through the year.

Once again, thank you for your interest in Battalion that concludes our scripted remarks, and I'll turn it back to the operator to facilitate Q&A.

Thank you very much sir.

Ladies and gentlemen, thank you hate to ask any questions. Please press star one on your it's helpful. Keypads. Please check your mute function on your phone is switched off closely with rich equipment. So once again.

Do you have any questions. Please press star one.

We'll pause just won't go away.

Tessa signal.

Yes.

Today's first question is coming from Mr. Jeff Robertson, calling in from water Tower Research. Please go ahead, Sir your line is open.

Thanks, Good morning.

Killer Pat can you talk about how many wells that is.

Subsequent can you talk about the skirt the drilling schedule in terms of pad development for the remainder of 2022.

Yes.

Yes sure.

The killer path of two well pads. So the first pad was the Wilson pad that we'll be talking about in the second quarter. The next pad Keller pad, which will be a two well pad.

I think the next pad after that we're looking at doing another three well pad.

And that we're still discussing whether or not the pad. After after that Paul will pad is going to be two or three wells.

I think you could expect that.

Call it two to three well pad.

After the Keller.

And with its three after catalyst.

Maybe two to three after that.

Two to three after that so we'll look and see what the program looks like and where we drill.

Okay.

Do you have any do you have any delays in terms of field infrastructure tying these wells in or are they did it is the infrastructure already available.

Yes, the infrastructure is already available we put in a major trunk line going north to South and then we have these.

These risks coming off of it that we produce down there was produced through to get back to the main trunk line. So it's a fairly efficient system that all goes back to our central production facility.

So yes, we've got the majority of infrastructure already in place.

Yes.

This is Daniel.

HOS handling is all in place as well so we get that question a lot also.

Good to note that we've got the ability to handle this one well pardon me a one rig program even ramping up.

Yes to more so we have that in place as well.

So as your production grows will your gathering and transportation costs.

Basis decline.

By putting more volume through the facilities.

Yes, yes, yes, so good observation and yes, I mean, as we put these high volume wells into the system with with capacity in place. We do anticipate that we'll see a decline in that dollar per Boe.

Trick.

And then lastly, I think Kevin you talked about hedging are you under your bank agreement or your credit agreements are you required to layer in hedges for the incremental volumes are bringing you're bringing on.

Yes, we are we.

We had.

Approximately 65% for the wells are brought on when we start spending the capital.

And when they become PDP wells for the first two years will hedged 85% of the wall and the natural gas.

Okay. Thank you.

Thanks, a lot Sir.

Ladies and gentlemen, once again, if you have any questions. Please press star one at this time.

As we do not appear to have any questions. At this time I'll turn the call back over to Mr. Richard Little for any additional or closing remarks. Thank you.

Okay, great. Thanks.

And thanks again for your interest in Battalion oil.

<unk> had a fairly busy first quarter for from an activity standpoint, and we look forward to reporting on some of those results on our next quarter earnings call. So thanks again.

Hi.

Ladies and gentlemen that will conclude today's conference with takeaway should your participation. You may now disconnect have a good day.