Q3 2022 Amplify Energy Corp Earnings Call
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Welcome to amplify energy third quarter, 2022 Investor Conference call.
Amplifies the operating and financial results were released yesterday after market close on November one 2022 and are available on amplifies website at Www Dot M.
Despite energy Dot com during this conference call all participants will be in a listen only mode.
<unk> call is being recorded a replay of the call will be accessible until Wednesday November 16th by Dialling 800.
6541.
1463, and then entering access code 10110635, I would now like to turn the conference call over to Jason Kim 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 third quarter of 2022, joining me on the call today is Martin Wilshere, Amplifies, President and Chief Executive Officer before we get started we would like to remind you that some of our <unk>.
<unk> 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. Please 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 to provide an update regarding our assets in southern California, followed by our third quarter highlights and an operational update I will then discuss the third quarter results in greater detail and provide updates to our hedging program balance sheet in 2022 guidance Martin will conclude our prepared remarks with comments regarding performance during the quarter current projections.
Strategic goals will then have a question and answer session before concluding this call.
I'll begin with an update regarding our southern California assets.
Since our last quarterly update <unk> made significant progress toward final resolution of all criminal and civil proceedings and continues to advance the permanent repair procedures needed to replace the dermis sections of the pipeline and returned to Bakersfield to production.
Previously announced we reached an agreement in principle with the plaintiffs in the class action to settle all civil claims against amplify ended subsidiaries on October 17th Plaintiffs' Counsel filed a motion for preliminary approval of the final settlement agreement and that motion is currently notice for a hearing with the court on November 16th.
Settlement amount of $50 million will be funded under the company's insurance policies during.
During the third quarter of 2022, we also announced that amplified reached agreements with federal and state authorities to resolve all criminal matters involving the company and subsidiaries stemming from the incident. The resolution of these matters contemplates an aggregate fine of approximately $12 million payable.
Payable installments of federal and state authorities over the next few years probationary periods and reimbursement of certain government agency response costs.
The company also agreed to implement certain compliance measures, including installation of a new leak detection system and increased remote operated vehicle inspections of the pipeline.
With the resolution of these matters substantially complete we are concentrating on safely repairing the damage sections of pipeline and bringing the beta field back online.
On October one we announced that amplified received the nationwide permit 12 from Europe Army Corp of engineers to proceed with the permanent repair plants, which were reviewed and approved by FEMSA earlier this year.
Repair operations are currently underway to remove and replace a section of pipeline damage by infrastructure to shipping vessels in 2021.
Repair procedures are complete the pipeline will undergo a series of safety integrity test as required by both federal pipeline safety regulations and the October five 2021 films, a corrective action order.
We anticipate that FEMSA will review the pipeline restart plan once finalized the company will begin the process of bringing the beta field back online.
Our repair operations have progressed as expected and are subject to the various reviews and approvals as previously discussed we currently estimate bringing the beta field back online by the end of the first quarter of 2023.
Amplifies actions during the course of last 12 months reflect the commitments. We made immediately following the incident to the communities and environment impacted by the release, we worked diligently to support the successful cleanup and remediation efforts and continuing to work cooperatively with the various state and federal agencies involved with these matters. Furthermore, we continued to aggressively pursue our.
Substantial claims for damages against the vessels that struck and damaged our pipeline and their respective owners and operators and the marine exchanged our southern California that fail to notify us of the anchor strikes.
Now onto the quarter production for the third quarter average sparkling 21000 Boe per day, an increase of 3% from 20400 Boe per day in the second quarter.
Quarter over quarter increase was driven by recent development activity Eagle Ford accelerated worker was in Oklahoma and returned to normal operations in barrel after the annual maintenance turnaround in the second quarter.
Third quarter, adjusted EBITDA was approximately $38 million compared.
Compared to $16 3 million in the prior quarter.
The increase was attributable to higher production lower operating expenses timing variances regarding the recognition of lumpy insurance proceeds and lower commodity hedge settlement payments.
<unk> spending during the third quarter was approximately $9 $9 million.
Primarily related to work over activity in Oklahoma non operated development in the Eagle Ford and facilities maintenance at barrel in beta.
Free cash flow defined as adjusted EBITDA less capex and cash interest expense was $17 million in the third quarter of 2022, which compares to $14 3 million in the first half of the year with data expected to restart early next year, we anticipate free cash flow generation to accelerate and are now projecting Q2 free cash flow of 235.
Through year end 2024 at current commodity prices.
Now for an update on our operations in Oklahoma, We continued our Workover program running three rigs focused on returning offline whilst reduction in artificial lift optimization as a result of this program, Oklahoma production increased approximately 5% in the third quarter from 6500 to six to 800 Boe per day in the field achieved its highest.
Quarterly production rate since the first quarter of 2021 for the remainder of 2022, we expect to continue an active workover program to manage our cost profile and drive incremental free cash flow.
A barrel processing facilities returned to normal operating levels. After completion of the annual maintenance turnaround last quarter, resulting in production of 3600 Boe per day and lower operating expenses, we will continue to utilize targeted workover activity and well stimulations to drive further operational improvements and efficiencies and improved production performance.
In East, Texas, and North, Louisiana, we remain committed to efficiently managing production and costs, while pursuing high return Workover and joined development projects results from the non operated completions or participated in during the second quarter have continued to exceed expectations and we continue intend to participate in similar high return projects into 2023.
In the Eagle Ford third quarter production increased 25% from the previous quarter, primarily resulting from successful development activity earlier in the year.
We're currently participating in 11 gross one net additional development projects, including two refracts, which are projected to be online in the first quarter of 2023, 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 third quarter averaged approximately 21000 Boe per day with the commodity.
The mix of 31% oil, 19% Ngls and 50% gas once beta returns to production next year. The company expects the product mix to return to approximately 40% oil with the low decline and increasingly oil weighted nature of our diverse assets further driving long term profitability total oil natural gas and NGL revenue.
For the third quarter were approximately $112 8 million before the impact of derivatives compared to a $112 9 million in the second quarter. Other revenues were $13 5 million for the quarter compared to $8 9 million in the second quarter for the third quarter, the company recognized $13 $3 million of lumpy.
Proceeds, which represents three months of low fee payments compared to $8 8 million or two months of low fee payments for the prior quarter as discussed during our prior earnings call amplifies lumpy 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 until the data is return.
A full production.
Lease operating expenses for the third quarter were approximately $32 million or $16 56 per BOE, a decrease from $33 3 million or $17 91 per Boe for the second quarter, primarily attributable to lower workover cost a favorable.
<unk> this quarter was $7 5 million or $3 87 per Boe compared to $7 3 million or $3 92 per Boe in the second quarter I would like to note that we expect <unk> to decline in future quarters, as the east, Texas gas NBC expires this year and the Oklahoma NGL NBC.
Expires in June of 2023 production and AD valorem taxes. This quarter were $9 2 million or $4 73 per Boe compared to $8 6 million or four.
Dollars 64 per Boe in the prior quarter.
Third quarter cash G&A totaled $6 1 million or $3 16 per Boe compared to $7 7 million or $4 16 per Boe in the second quarter, primarily due to a decrease in certain professional and advisory fees.
Adjusted EBITDA in the third quarter totaled $38 million, an increase of approximately $14 5 million from $16 3 million in the prior quarter. As previously discussed the increase was primary attributable to higher production timing variance regarding the recognition of lumpy insurance proceeds and lower operating expenses and hedge settlement payment.
Cash capital spending for the third quarter was approximately $9 9 million.
A decrease of $3 $6 million from the second quarter, primarily related to reduced capital in east, Texas and barrel.
Free cash flow for the third quarter was $17 million compared to negative $6 million in the prior quarter the quarter over quarter increase was primary related to the scheduled roll off of out of the money commodity hedges. In addition to the previously noted reduction in capital spending and lumpy payment recognition during the second and third quarters.
Under the hedge book at.
Evidenced by our free cash flow generation. This quarter, we are now starting to realize the benefits from the scheduled roll off of our hedge book and the company will continue to capture additional upside in the current commodity price environment as we roll off additional out of the money hedges in the coming quarters. Currently we have approximately 70% hedged for the balance of 2022 and 50% hedged in 2023.
Across all commodities, our crude oil production is approximately 85% to 95% hedged for the remainder of the year and 50% to 60% hedged for 2023 on the gas side, we are approximately 85% to 95% hedged for the balance of 2022, and 70% to 80% hedged for 2023 as a reminder, when we returned beta to field.
Production was crude oil volumes will be completely unhedged, which may provide additional upside depending on prevailing prices.
Moving onto our balance sheet as of October 28th amplify had net debt of approximately $179 million <unk>.
Consisting of $205 million outstanding under our revolving credit facility and $26 million of cash on hand for the remainder of 2022 and into 2023, we will continue to allocate the majority of our free cash flow to improving our balance sheet and reducing our total debt outstanding the Companys fall borrowing base Redetermination process is currently.
And we will provide further updates as they become available.
On to guidance as detailed in the earnings release last night, we have tightened our full year 2022 guidance ranges for production adjusted EBITDA and free cash flow additional guidance details were provided in our earnings release and can be found in our latest investor presentation. Currently available on our website I will now turn the call back to Martin.
Thank you Jason our near term strategy remains focused on continuously enhancing our free cash flow profile and rapidly delevering our balance sheet as we progress into 2023, we expect to not only continue generating the current level of quarterly free cash flow, but we anticipate materially increasing our free cash flow profile of our hedge book continues to.
Roll off and the beta field has returned to production currently our forecasted 2022% to 2020 for cumulative free cash flow is estimated to be approximately $235 million at current strip pricing and where you are projecting to improve our leverage to under one times by the third quarter of 2023.
As Jason mentioned earlier, we are currently working with our lending group on the fall borrowing base Redetermination and are exploring various solutions to extend or replace the current facility, which matures in the fall of 2023.
Lastly, I'd like to express my appreciation to the company's employees for their outstanding efforts and dedication, particularly over the last 12 months. We have made significant progress towards final resolution of the legal matters related to the incident on our actively pursuing our claims against the ships that caused damage to our pipeline in 2021. Finally, we remain focused on <unk>.
Progressing repair operations with anticipation of bringing the beta field back online early in 2023 with that operator, we are now open for questions.
Absolutely at this time, we will open the floor for questions. If you would like to ask a question. Please press the star key followed by the one key on your Touchtone phone now.
Questions will be taken in the order in which they were received.
If at any time, you would like to remove yourself from the questioning queue. Please press star two please.
Please limit your questions to one at a time again to ask a question. Please press star one.
And our first question comes from John White with Roth Capital. Your line is open.
Good morning, and congratulations on all the progress you've made on the legal matters over the past number of months.
Sure.
Very distracting.
But thank you gentlemen, it looks like a lot of progress has been made at bay that what exactly is going on there.
Are there damage sections of the line being replaced by new.
New sections of pipe or is there a lot of welding going on can you give us some more detail on the actual operations.
Sure.
So the primary repair is to about 200.
50 foot section, that's right, where the actual crack occurred.
That section of the line that's been removed.
And brought to the to the to the beach so to speak to the port.
That's the that's the biggest section of pipe that section will then be replaced with essentially new pipe.
That's kind of where we are in the progress right. Now there is an 80 foot section that also has to be replaced in the clamp that has to replace those two procedures will obviously be a little bit shorter and easier.
So.
The biggest section of the pipeline has been removed and already brought in.
So that process is ongoing.
And we expect that to you.
Take a few more weeks.
After that as we mentioned in the.
And our and our statement there is a series of tests.
Both hydrostatic testing and then in line inspections that we complete and then are reviewed by FEMSA and Betsy as part of the restart plan and once that's approved then we can start putting oil through the pipeline again.
Obviously, it's an or.
We're kind of giving ourselves a little bit of room on timing just because we don't know how long it will take to do the review, but like I said, we expect this will be done prior to the end of the first quarter and hopefully before that.
Thanks, very much for that.
Good detail.
And good luck on that.
On your lawsuit against the shipping companies and I understand that you don't want to comment, but as I understand it the preponderance of the evidence that the coast Guard has.
Revealed is.
<unk> strong.
Are you anticipating a settlement.
Prior to the trial date or do you think youre going to go to trial.
And while there could be there.
Theres different informed that this could take.
I don't want to get into strategy or how strongly I believe about this case, but you've noted that we mentioned, but there. They were anchor strikes. We believe there is a substantial amount of evidence of that but in any event.
These damages are ongoing until this beta field has returned to production. We continue to lose revenue as a result of quite frankly, the damage caused it has really nothing to do with the the spill event itself. It ties back to the actual time of when the shifts caused the damage so theres a little bit of a different frame.
We are suing for individually versus what we are suing for on behalf of the insurance companies, which is tied more to the contribution.
To the.
The cost of the actual spill event itself.
So.
So this is going to be an ongoing process I think like I said. These are two of the largest shipping companies in the world. So.
It might take a little bit of time or it might get southern quickly. It really just depends on how commercial things get.
Again, very good detail and I appreciate that.
That uptake.
I'll pass it I'll pass it back.
Thank you John .
And our next question comes from Jeff Robertson with Watertown Research. Your line is open.
Good morning, Thank you for taking my questions.
Jeff.
Net beta two questions one will the work you all have done to restore production.
Have much of an impact on operating costs for those assets as you restart them.
And secondly, you all had talked previously before the spill about some redevelopment opportunities or some re completion opportunities could you just provide an update on where that might stand and your capital allocation process either for 2023 or.
Maybe even 2024.
Yes, there is a great questions.
Let me start with the operating cost first one of the things we've done this year as we've continued to electrify the the platforms. So theyre going to be running on more short power versus diesel power of this obviously helps with air quality standards and other things as well. So we have been making changes even while we've been down in order to further reduce the FIC.
<unk> costs going forward when we first come back online one of the things that will note is that where we're projecting kind of a reduced rate for some time.
Because obviously being offline for more could be.
17, 18 months by the time, we come back online we wanted to make sure that we're being conservative and not over projecting crude volumes coming straight out of the gate and so we have a ramp up of our <unk>.
The production from about 50% of the.
Production rate prior to the to the event and that does not include the impact of royalty relief anymore. So we ramp up from about 50% up to the 100% over time.
We have the crude already on the platform, we have the rigs ready to go for whenever we get back online. So obviously our first primary.
Primary responsibility is to kind of get all the existing wells back online as quickly as we can so thats, where we will start our focus.
We do still have all the permits in hand for the.
But what we were doing prior to the event, which included as you may recall a couple of smaller projects that we are planning to do in late and in 2021, and then two large projects in early 'twenty, two which or had some real potential to increase production of the field. Those projects are still very valuable and even more so.
Pricing.
So why will you would expect we will revisit that once we kind of get the beta field back and most of the existing wells back online I can't give you an exact timing of that yet it fairly dependent on how quickly we get the existing production back online and kind of fully restored.
Okay. So there's still those development opportunities are still.
It's fair to say, it's still very attractive, especially in today's commodity price world.
Yes. They are even they are far more obviously, we did lose royalty relief, but that was because pricing has jumped up so much in those projects are much more valuable now even without relatively from that than they were when we were originally intend.
<unk> intended to do them.
Just a question on the on the hedge book structure.
Jason for 2023 are the hedges spread pretty evenly through the year or will they roll off as the quarters progress.
Yes, they'll roll off a little bit it's fairly even I mean, we're not projecting a sizable decrease in production volumes throughout the year. We have some of the joint development Thats going on in the Eagle Ford and East, Texas Dental.
Offset that plus the benefits of the work over program in Oklahoma keeps it fairly flat and notwithstanding kind of the nature of the assets with beta and barrel. So it will roll off a little bit, but not substantially as you kind of look at them. The structures are a lot more advantageous than what we had.
This year. So we'll have a lot more benefit as we kind of roll forward just speaking specifically to the gas side. I mean, we are only have collars for 'twenty three at this point in the floor is about $3 50, and they call out just under six Bucks, so kind of right in that sweet spot with some potential upside as we go forward.
Great. Thank you very much.
Thanks, a lot Jeff.
Yes.
So I think at this point, we're going to take some questions that we received as well from from various investors as well, Jason perfect and just consistent with what we did last time, but we've received a number of questions from some investors that have consolidated that in Alaska, a few of those here and just continued to encourage people to send those along.
Our way and we'll roll this forward as we continue with this and future quarters.
One that hasn't been touched here is in relation to inflationary capex environment and kind of our plans that roll forward through our three three year free cash flow forecast. The specific question is do we raise the capex in our free cash flow slide in and what are we seeing from an inflationary aspect and what are we doing.
That's different from other people to try to mitigate that.
Yes, certainly thank you and thank you for submitting this question.
First of all we have increased capital through the $23 24 cycle a lot of that has to do with finalizing a little bit more of our planning related to east, Texas and the Eagle Ford development during that time period, we have seen inflation, obviously on the drilling side, even though the non op partner and those are already incorporated into the 'twenty.
<unk> 24 event.
Obviously, the returns are still very very strong as well so.
We are we're not immune to inflation.
Certainly we've seen it on.
The base low side earlier in the year, it's mitigated somewhat lately.
But we've seen that across a wide range of things everything from chemicals to saltwater disposal and everything in between so we.
We are certainly accounted for that going forward and in our capital forecast. That's that's in there as well.
Obviously, the other capital forecast more around facilities and kind of our workover projects haven't seen that same level of inflation.
Workover projects that we do or are a little bit easier and kind of easier to kind of manage from an inflationary perspective. So we haven't seen quite as much inflation on notice.
We think we have incorporated all of that into the future projections and as we get more granularity into kind of future plans, we will continue to update and revise that future cash flow forecast and with obviously with the next one coming after Q4 with the full year 2023 outlook.
Great and the last question that hasn't been touched on that we received from a number of people is can we provide any additional color on the pending our BL maturity and the plans to address that through an extension or refinance.
Certainly so.
As we mentioned we are currently talking to our lenders primarily about an extension in the near term.
All of this financing becomes a lot easier ones. Once beta comes on it gets back online. So we are trying to extend that fairway for a certain amount of time in order to give us a little bit more flexibility.
We'll look at all any at all kind of options to refinance that could mean kind of an RVO with fewer banks it could mean.
A new financing structure completely so theres a lot of alternatives out there and quite frankly, we could do it in the near term, but it becomes a lot more attractive and easier once betas back online. So we're trying to give ourselves a little bit more time to get that done so.
We will have something on that hopefully.
The coming months and will update the market when we have that.
Great I think that concludes the Q&A portion of the call. So I'll turn it to Martin for some closing comments.
Thank you Jason.
Thank you everyone for participating in the call today.
We're continuing to work diligently to finish the year strong on the production side and and really focus on getting data back online as early in the first quarter as we can.
We will continue to update all of our stakeholders on our progress and as always if there's any questions. Please don't hesitate to reach out. Thank you everyone.
Okay.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.