Q2 2022 Amplify Energy Corp Earnings Call
Welcome to amplify Energy's second quarter 2022, Investor Conference call.
Amplify is operating and financial results were released yesterday after market close on August start 2022 and are available on amplifies website at www Dot amplify energy Dot com.
During this conference call all participants will be placed in a listen only mode.
Today's call is being recorded.
A replay of the call will be accessible until Thursday August 18th by dialing 8444887474, and then entering access code pound.
Two five Q Q1, three zero.
I would now like to turn the conference over to Jason Mcglynn, Senior Vice President and Chief Financial Officer of Amplify Energy Corp.
Good morning, and welcome to the amplify energy conference call to discuss operating and financial results for the second quarter of 2022, joining me on the call today is Martin Wilshere, Amplifies, President and Chief Executive Officer.
Where we get started we'd like to remind you that some of our remarks may contain forward looking statements, which reflect management's current views of future events and are subject to various risks uncertainties expectations and assumptions.
Although management believes that the expectations reflected in such forward looking statements are reasonable it can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward looking statements to reflect events or circumstances occurring after this earnings call.
Refer to our press release and SEC filings for a list of factors that may cause actual results to differ materially from those in the forward looking statements made during this call. In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books Records and reports for additional detailed disclosure we encourage you to read.
Our Form 10-Q that was filed yesterday afternoon also non-GAAP financial measures may be disclosed during this call reconciliations of those measures to comparable GAAP measures may be found in our earnings release or on our website at www Dot amplify energy Dot com.
During the call Martin will provide an update regarding our assets in southern California, followed by our second quarter highlights and revised full year guidance I will then discuss the second quarter results in greater detail and provide updates to our hedging program and balance sheet and additional details regarding guidance for the remainder of the year Martin will conclude our prepared.
<unk> remarks with comments regarding performance during the quarter current projections and strategic goals. We will then have a question and answer session before concluding this call.
Thank you, Jason I would like to start by providing a brief update regarding our southern California assets.
As discussed earlier this year the company is required to obtain approvals from FEMSA and the Army Corps of engineers in order to proceed with the permanent repair of the pipeline in.
In mid April we received <unk> approval for the permanent repair plan and we are continuing to work cooperatively with the Army Corp of engineers to obtain the remaining permit.
Though we cannot predict when we receive approval from the court, we expect that within three to four months from the approval date, we can complete the FEMSA approved repairs satisfy the regulatory requirements of safely inspect test and restart the pipeline and returned to platforms to production.
Now onto the quarter.
Production for the second quarter averaged approximately 2400 Boe per day, which was flat compared to the prior quarter. Despite 10 days of downtime for annual facilities maintenance apparel.
Second quarter, adjusted EBITDA was approximately $16 3 million compared to $24 9 million in the prior quarter. The decrease was primarily attributable to timing variances regarding the recognition of lumpy insurance proceeds related to the incident of beta partially offset by higher commodity prices for the second quarter. The company recognized $8 8 million.
Of lumpy proceeds, which represent two months of low prepayments compared to $17 5 million or four months of local payments for the prior quarter.
Capital spending during the second quarter with approximately $13 5 million pre.
Primarily related to development activity in East, Texas, and the Eagle Ford Workover activity in Oklahoma and facilities maintenance at barrel in beta.
Second quarter, Capex was higher than forecasted due to the timing of development activity in East, Texas, where our operating partners three wells online ahead of schedule.
Free cash flow defined as adjusted EBITDA less capex and cash interest expense was negative $600000 in the second quarter was primarily impacted by the timing of fee recognition and accelerated capital expenditures previously noted due.
Due to the success of our Workover program in Oklahoma and the initial outperformance of our development projects in East, Texas and the Eagle Ford We have increased full year 2022 guidance. The midpoint of production guidance increased from 19750 to 20750 Boe per day, and the midpoint of adjusted EBITDA increase from $97 5 million.
To $105 million.
In addition, we are now projected to generate $220 million to $330 million in cumulative free cash flow through December 31, 2024.
Now for an update on our operations in Oklahoma, We continue to run a three rig Workover program focus on returning offline whilst reduction in artificial lift optimization as previously disclosed the artificial lift program is focused on rod lift conversions, and ESP optimizations, which reduced future operating expenses and operational downtime as.
The result, Oklahoma production increased approximately 8% in the second quarter from 6100, 6500 Boe per day.
For the remainder of 2022, we expect to continue the pace of Workover projects to bring additional wells back online and to manage our cost profile to drive incremental free cash flow.
In East, Texas, and North, Louisiana, we remain committed to efficiently managing production and costs, while pursuing high return Workover and joint development projects. The company participated in three gross <unk> six net non operated development wells, which were brought online ahead of schedule in the second quarter and preliminary production results have been encouraging we continue to evaluate addition.
All non operated development opportunities in the area and intend to participate in high return projects to manage our production profile and generate incremental free cash flow.
In the Eagle Ford the company's operating partners completed seven gross <unk> for net new development wells during the second quarter and initial production rates from these wells have exceeded projections.
We intend to participate in additional development projects with comparable return profiles in the second half of 'twenty, two which are projected to be online in the first quarter of 2023.
In addition, we participated in a re Frac project in the second quarter that utilize the latest technology and completion methods and initial production rates from this well have materially outperformed our internal type curves there.
Economic return for this project have been substantial due to higher working interest in with legacy well, which is approximately 20% as a result of the outperformance of this project. We expect similar projects of this nature to be formed in the future.
At barrel, we completed the annual turnaround during the second quarter, which is a 10 day field wide shut in to perform production facilities maintenance on time and on budget.
Technical teams' proactive approach to maintenance in conjunction with their continued evaluation of the reservoir help improved production performance and operational reliability, while facilitating cotwo section and water alternating gas pattern optimization lastly, based on positive results from recent Workover and well stimulation activity, we are allocating incremental capital.
The second half of the year for additional Workover projects I will now turn the call over to Jason to provide a detailed review of our financial and operational results.
Thank you Martin production for the second quarter averaged approximately 20400 Boe per day with the commodity mix of 30% oil, 19% Ngls and 51% gas total oil natural gas and NGL revenues in the second quarter were approximately $112 9 million before the impact of derivatives.
Paired to $93 9 million in the first quarter. Other revenues were $8 9 million for the quarter compared to $17 6 million in the first quarter. The decrease in other revenues was primary related to the timing and recognition of low fee proceeds Martin noted previously on this call as discussed during our prior earnings call amplifiers.
Loopy insurance policies effective for 18 months following the date of the incident and the company will continue to receive payments until the earlier of the expiration of the policy or beta has returned to full production lease operating expenses for the second quarter were approximately $33 3 million or $17 91 per Boe.
Slight increase from $32 9 million or $17 92 per Boe in the first quarter.
<unk> this quarter was $7 3 million.
Or $3 92 per Boe compared to $8 million or $4 36 per Boe in the first quarter. As previously noted the company has now marking its natural gas in Oklahoma, resulting in a reclassification of certain revenue deductions to <unk> expenses by taking our gas in kind in Oklahoma. The company has greatly improved.
<unk> it is natural gas pricing pricing differential which exceeds the related increase in <unk>, resulting from the accounting reclassification.
Production and AD valorem taxes, this quarter were $8 6 million or $4 64 per Boe compared to $7 6 million or $4 11 per Boe in the prior quarter. This increase is largely a function of higher revenue from improved commodity pricing.
Quarter cash G&A totaled $7 7 million or $4 16 per Boe compared to $7 1 million or $3 87 per Boe in the first quarter, primarily due to onetime increase in certain professional and advisor fees.
Adjusted EBITDA in the second quarter totaled $16 3 million a decrease of approximately $8 6 million from $24 9 million in the prior quarter.
The decrease in the second quarter was attributable to the recognition of low fee payments previously discussed partially offset by higher commodity prices.
Cash capital spending for the second quarter was approximately $13 5 million, an increase of $6 $6 million from the first quarter of 2022 the quarter over quarter increase was primarily attributable to non operated development activity in east, Texas, and the Eagle Ford accelerated workover activity in Oklahoma and facilities maintenance at barrel date.
As reflected in our updated guidance, we expect capital spending to be lower in the second half of 2022 free.
Free cash flow for the second quarter was negative $600000 primary related to the increased capital spending discussed on this call and the differences in lumpy payment recognition during the first and second quarters now to our hedge book.
With our Workover programs and non operated development activity exceeding production forecasts and the scheduled roll off of our hedge book, our commodity hedge position has stepped down materially from the first half of the year, which will enable the company to capture upside in the current commodity price environment. We are approximately 65% hedged for the balance of 2022 and 50% hedge.
In 2023 across all commodities, our crude oil production is approximately 75% to 85% hedged for the remainder of the year and 40% to 50% hedged for 2023 on the gas side, we are approximately 70% to 80% hedged for the balance of 2022, and 60% to 70% hedged for 2020.
Three lastly, as a reminder, when we returned the beta field production those crude oil volume volumes, we completely unhedged, which may provide additional upside depending on prevailing prices.
Moving on to our balance sheet on June 20th we successfully completed the spring borrowing base Redetermination, which terminated the automatic monthly reductions of the borrowing base and affirmed that at $225 million.
The next Redetermination is expected to occur in the fourth quarter of 2022 as of July 31, amplify had net debt of approximately $185 million consisting of $215 million outstanding under our revolving credit facility and $30 million of cash on hand for the remainder of 2022, we will continue to allocate.
The majority of our free cash flow to improving our balance sheet and reducing our total debt outstanding.
Onto guidance as detailed in our earnings release last night, we have again increased our full year 2022 guidance ranges for production and adjusted EBITDA as a result of the performance of our Workover activity in non op development projects, we increased the midpoint of our production guidance by 5% to approximately 20700.
50 Boe per day, and we've also increased the midpoint of our adjusted EBITDA guidance by 8% to $105 million.
Additional guidance details were provided in our earnings release yesterday and can be found in the latest investor presentation. Currently available on our website as a reminder, due to uncertainty regarding betas returned to production our guidance does not assume data is back online in 2022.
Now I'll turn the call back to Mark.
Thank you Jason.
The current commodity pricing environment, coupled with strong operational performance has allowed us to pursue additional projects across our asset base have increased production and cash flow generation. We believe that these projects demonstrate our commitment to prudent stewardship of capital mitigation of operational risk and generation of free cash flow, which will advance the delevering of our balance sheet and drive shareholder value.
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We continue to believe that we remain substantially undervalued in the current market due to our significant reserve value and projected free cash flow generation, our 2021 year and total proved reserves have a PV 10 value of approximately $1 2 billion.
At strip pricing as of July 29, 2022, and our forecasted free cash flow through year end 2024, it's approximately $220 million to $330 million, which is approximately 50% to 75% of our current enterprise value.
I would like to conclude by reiterating that safety continues to be our highest priority. We remain committed to operating safely and in a manner that ensures the wellbeing of our employees business partners and stakeholders and the protection of the environment and our surrounding communities our dedication to safety environmental stewardship operational excellence disciplined capital.
Allocation and de levering efforts have demonstrated our ability to drive substantial long term value for all of our stakeholders with that operator, we're now open for questions.
Thank you Sir and at this time, if you would like to ask a question. Please press the star and one Keith on your Touchtone phone.
You may remove yourself from the queue at any time by pressing star two.
Once again that is star one to ask a question and we'll pause for a moment to compile the Q&A roster.
Our first question will come from John White with Roth Capital. Your line is open.
Thank you good morning, congratulations on the nice results and the.
The increased guidance.
Thank you Jeff.
I know you've probably.
Can't offer any more detail but.
Are you getting any kind of signaling from the corps of engineers on.
When they when they might deliver their their decision.
Are they indicating that would be in 2022 or is that more of a first half 2023 event.
No. We still believe that this is going to be in 'twenty two event and while there is no tangible progress in terms of seeing.
Seeing the permit online.
There's a lot of things going on behind the scenes and we've made very much made progress with the corn.
<unk>, which is the other remaining regulatory agents involved in and kind of that process. So we're hoping to move this along sooner rather than later, we just don't have any specific control over the timing.
Obviously this has been an eight month process to this point, so where they are definitely taking their time and their dotting our i's crossing their Ts understandably, so, but like I said, I think where we're making progress towards a resolution here and we'll hopefully get more more to come very soon.
We've also made progress on spending capital on beta as we started to make preparations for eventually coming back online. So youre starting to see a little bit of that as we as we progress as well.
Okay. Thank you I'm sure it's frustrating.
It sounds like you're doing all you can any update on the lawsuit against the shipping companies.
They're proceeding there is what we would call motion practice, there is a lot of moving pieces there.
Large shipping companies with <unk>.
<unk> in one jurisdiction owners in another jurisdiction and operators in the third jurisdiction. So theres a lot of paperwork flying around so.
No specific progress per se, but we are continuing to move along there are some important.
Hearings coming up in the coming weeks and so we will continue to make the progress as fast as we can but obviously once you get into these kind of litigation situations. They can tend to drag out a little bit on especially with the ships.
Understood and good luck on that and.
One more follow up if I may.
On the revolving credit facility congratulations on getting the getting rid of the automatic monthly reductions.
And.
On your next.
Borrowing base Redetermination in for Q is that when you think youll move for extension of the maturity.
Thanks, John Yeah, we're really happy with the result that we had of the spring borrowing base Redetermination that was done in Q2, and it's a conversation that we continually had with the bank group, even going back to late last year. After the incident at about the maturity that's coming up and how is the best way to go about addressing that.
We are in conversations with the group along those lines and seen what is available to us, but we're also looking at a number of different items. It's a key focus of mine and Martin's for the next quarter and rolling into Q4, we understand that the maturity is November of 'twenty three it becomes current before the end of the year. So we're absolutely focused on it no updates at this point.
Time, but there are various paths for us to take to address that.
In the near future.
Yeah.
Okay. Thank you very much and I'll pass it along.
Thank you John .
Alright. Thank you at this time, we have no further questions in the queue I would like to turn it back over to Martin for any additional or closing remarks.
Thank you I'll start with limited amount of coverage that we have from the analyst community. We do get a number of questions from investors. So we wanted to bring some of that forward and encourage investors to send a lot of additional questions and habit that we can address on the call. So I'll go ahead and ask a couple of questions here and Martin.
And myself can can go about addressing those.
As we can and move this thing forward one of them that it seems to be a highlight of a number of people is the low <unk> and how we recognize that but then also how the calculation is for what we get paid on so I'll, let Martin address that and I'll expand as we kind of roll forward.
Yeah.
Yes, certainly.
<unk>.
As we previously disclosed, it's basically where pay that.
Roughly $40 a barrel for a certain volume.
That works out to approximately $4 $4 million per month.
It is recognized based on when it's quote unquote approved.
So kind of the.
As we've kind of moved through the process, sometimes we get a little ahead, sometimes they get a little behind.
But that's why you've seen four months in one quarter and two months in another quarter, we're hoping that the processes kind of streamline now the way, we're just doing three months every quarter.
Through the.
Until we get it back online.
It is right now that is kind of the process and everything else. So the only thing I'll add is the $40 a barrel that is a contractual number that was set at the time. The policy was put in place. The policy that applies to this incident was put in place in October of 2020, we were in the middle of our.
Of our insurance renewal at the very beginning of this incident. So it had an adjusted at this period of time and if you think back to what <unk>.
Commodity price was in that window. It set somewhere were relatively close to what that is so that's how the calculation of $40 a barrel comes about all right.
The next question I'll add one more thing obviously and this has come up before but just to clarify obviously theres a big difference between $40 and what the actual price has been that's clearly a big part of our litigation against the ships is the lost revenue caused by the damage.
That they inflicted on our pipeline, so obviously, well, but there's no guarantees or timing that I can put to that but that missing revenue piece is obviously, a very large amount and it will continue to grow until we get back online and that is key to one of the major parts of our litigation against <unk>.
Perfect and another question that comes up quite a lot is our hedging strategy and what we're looking for from forward hedges historically, we've had a little bit higher hedge percentage and hedged a little bit further out. So just wanted to address that and I'll, let Martin starting I'll expand as well.
Sure I think I think if you what you've seen as you've flipped from the first half of the year. The first half of the year was by far the most punitive to us on a hedging perspective as.
As we flipped into the second half of the year I think youll see the the hedging percentages have dropped materially.
That's partially due to fewer hedges. It's also partially due to an increase in production and that flows through all the way through 2023. So we've been trying to preserve as much upside as we can even our hedging strategy has been predicated around I think all of our hedges on gas for example in 2003 are actually colors not swaps.
Some of them are extremely wide band. So while you may have a negative mark to market on it doesn't mean, that's going to cash settle with any kind of negative.
Payment. So long story short, we are looking to kind of preserve as much upside into the future as we can.
And we are hedging.
As to try to preserve that upside as we go forward, yes. The only thing I'll add is when we look further out we do have hedges through 2023 at this point in normal course, we'd be looking to add more into 2024 and start layering some base level of hedges for participant action due to the credit facility and where we're at on the Mark to market.
With some of the banks.
Little difficult to get credit out through 2024, so that's something that we're focused on and working towards addressing as we extend the maturity on the RBS facility or do something a little bit different there. So thats kind of the reasoning why youre not seeing any hedges placed for 2024 at this point in time, but also a catalyst for why we're wanting to address the RBS facility or just one ask.
Setup.
But that's really it I think we know through our prepared remarks, and Johns questioning which was great. We have addressed a lot of the questions that we received but this is something that we will continually do as we roll forward on these conference calls.
Invite anybody to send in questions and we'll try to highlight three or four or five of them on every conference call, but all of it to Martin to address some final closing comments.
Just like to say thank you once again for everyone.
Who participated in the call today.
Continuing to work hard to move things along with beta and obviously very focused on the remaining assets as well and continue to look forward to a very strong second half of the year as demonstrated by our increased guidance. Thank you all for participating today.
Thank you ladies and gentlemen, this does conclude today's conference and we appreciate your participation you may disconnect at any time.
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