Q3 2022 Battalion Oil Corp Earnings Call

Okay.

Please standby.

Welcome to the Battalion oil Q3, 2022 earnings call. As a reminder, today's conference is being recorded now I'll turn it over to your host Battalion Oil Corporation Kris Lang you may begin.

Thank you welcome everyone to our third quarter 2022 earnings call.

I'd like to introduce a few of my colleagues that have joined me. This morning are 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 Monday and posted on our website.

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 Monday, we have.

Also published an investor presentation, which may be found on our website and may be referenced during this webcast.

Now our team will begin with a few scripted remarks, followed by Q&A at this time I'd like to turn it over to rich to begin.

Thank you Chris.

Good morning to everyone joining us for our third quarter earnings call.

In November of last year, we closed on a new term loan with a simple goal in mind.

Company back to development mode, and start to drive meaningful growth in production and EBITDA.

With the majority of our wells from this program coming on in the back half of the year, we need this process wouldn't happen overnight.

Patients would be key.

Production in the first quarter declined over the fourth quarter of 2021, as we work to bring on our first three well pad.

And then in the second quarter production rebounded nicely volumes from our new wells were more than offsetting the natural decline of our existing production.

And that was driving modest production growth quarter over quarter.

Today, our third quarter results speak for themselves.

Our average daily production is up almost 8% over the second quarter.

With most of our base production hedged at or anything of the year those new volumes provided us with critical access to a higher commodity price environment.

And as a result, our average realized price for crude oil increased 11% over the second quarter and that's despite a 15% decline in average crude oil prices.

The increased volumes together with an improved pricing drove a 34% increase in adjusted EBITDA over the second quarter of 2022.

Bringing total adjusted EBITDA in the quarter to $24 3 million.

That's our highest since 2019.

I'm also excited to talk this morning about an important update we shared earlier this week.

And that's the news of a recent third bone spring test.

While results are still early production from that will appear to be in line with our wolfcamp well performance this year.

Several producing bone spring wells around our acreage and quite a bit of our own subsurface work focused on this area.

We felt confident that zone will be productive on our acreage.

This test is successful will go a long way and further derisking the bone spring and could allow us to shift to a multi zone development, while potentially increasing inventory.

This is an important test for us and we'll continue to watch closely as we close out the year, we expect to have a more complete update on our next call.

Looking forward with socio political and economic headwinds, causing tension in the commodity markets.

We once again find ourselves planning into uncertainty.

As always we will remain cautious as we work to finalize our 2023 capital budget.

We expect to enter the new year with confidence.

New three well pad that was brought online in October and two more wells on the way before the end of the year.

Have a bone spring tests underway with promising early results and our operational excellence has been on display as we continue to improve on record drilling performances and completion efficiencies.

And our financial strength only increases in the new year as our weighted average strike price on crude swaps in 2023 improved by nearly $15 per barrel over our fourth quarter 2022 averages.

All of this suggests our story of growth was primed to continue through the fourth quarter and into 2023.

We're a little more color on operational performance, let me pass it off to Daddy now.

Thank you rich I'd like to start by once again spotlighting our performance in drilling and completions on the drilling side I'm happy to say that we remain ahead of plan through the third quarter driven largely by improved efficiencies.

I mentioned last quarter that we have seen a meaningful improvement in our drilling footage per day and that has been a critical driver in our ability to keep cost per foot drilled down because we attempt to offset cost increases elsewhere.

To help drive those efficiencies we've done a lot of work this year, improving our understanding of the subsurface in monument draw.

A major project for geology, and subsurface team has been to study and interpret new seismic data received this year.

These images provide new detail that helped offer a better understanding of regional faulting and its impact on structure and stratigraphy, which ultimately enhanced our well planning landing zone selection and Geo steering.

On the completion side, we continue to improve on our year to date performance as pump efficiency once again increased quarter over quarter as we push to reduce any project downtown.

It's no secret the material labor shortages and other inflationary pressures have wreaked havoc on the oil and gas industry. This year with D&C activities being the area that has arguably been hit the most.

Thankfully, we have a team well suited for those challenges and that has been key in our attempts and successes mitigating cost inflation.

Moving onto a midstream side I'd like to give a brief update on our Agi project construction is well underway surveys and dirt work are complete and the facilities under construction and on time and all major equipment is expected to be received by the end of the year.

The facility has an expected in service date in the first quarter and despite the uncertainty the industry has faced on material shortages and delays we remain on track to hit that timeline.

I'll close with a few comments on EHS, where a relentless focus on safety and responsible operating continues to drive strong results.

Our tier I or remains at zero after another quarter with no recordable incidents, which as mentioned is extremely rare in our industry. We also for the fourth consecutive quarter reduced our flaring intensity and spill rate for oil and produced water. While all three of these markers are impressive standalone well makes it very special is that.

All three were accomplished while we continue in active development mode.

Now Kevin is going to walk you through our financial results.

Good morning, everyone and thanks again for joining us.

Total production in the third quarter increased nearly 8% over the second quarter of the year coming in at 16228 Boe per day as compared to 15000.

44 Boe per day during the second quarter.

As rich mentioned earlier, we brought the first five wells where capital program on line during the second quarter.

And it's the flush production from these wells that drove the production increase in the third quarter.

With a new three well pad recently put online in the second week of October .

Other two well pad beginning fracking in this next week, we expect to continue to ramp production through the end of the year and into 2023.

Total revenue in the third quarter was $99 1 million of which all represented 71%.

We've talked in previous quarters about how all producing our hedges would be an important byproduct of our production growth.

And this quarter really helps illustrate that <unk>.

Despite an overall decline in benchmark prices with average crude oil price has fallen nearly 15% between the second and third quarters, our average realized price net of hedges increased approximately 11%.

Our growing production coupled with this improved realized pricing helped drive a 34% increase in adjusted EBITDA.

From $18 2 million in the second quarter to $24 3 million in the third quarter with additional volumes already online in October we expect to continue this trend of improved realized pricing and growth in adjusted EBITDA for the fourth quarter and into 2023, when the weighted average strike price of our crude oil swaps improves nearly $15 per barrel over a four.

Quarter weighted average strike price.

A few more comments on our financial results.

We reported GAAP net income to common shareholders for the third quarter of 2020 to $105 9 billion or $6.42 per diluted share.

After adjusting for $101 9 million of selected items, including the effect of net unrealized derivative gains.

The company reflected in adjusted net income of 24 cents per diluted share.

For details of these adjustments please refer to our earnings announcement.

On the capital side during the third quarter, we incurred an accrual basis $48 5 million of capital expenditures related to oil and gas assets of which $42 million related to drilling and completion activity in 2.2 million related to the development of our treating equipment of gathering support infrastructure.

This brings our total during the nine months of 2022 to $112 7 billion of oil and gas related capex with $98 1 million related to D&C and $8 2 million related to treating equipment and gathering support infrastructure.

I would also like to provide a few comments on our 2022 guidance.

With eight wells online through October and two more expected to come online in December we find ourselves near the end of our 2022 development program.

Based on what we expect in the fourth quarter, we are reiterating our guidance on capital activity Capex in total production, but.

But we are reducing our estimates for total oil production as a result of slightly lower than planned oil cut. These details can be found in our earnings release.

Now I will close with liquidity and capitalization as well as to provide a brief comment on the recent amendment of our term loan.

At September 32022, the company had liquidity of $48 5 million, consisting of $33 5 million of cash and $15 million in delayed draw term loans available to be drawn under our term loan agreement.

At that time, however, the company was not in compliance with the current ratio requirement under the term loan agreement we have since amended the term loan agreement to modify certain provisions included among other things decrease and the current ratio from 1.0 to 0.9 as of September 32022.

As a result of this amendment battalion was in compliance with the current ratio requirement for the quarter ended September 32022.

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

Thanks, Kevin.

We are incredibly proud of our third quarter results.

Supply chain disruptions midstream curtailments downtime and delays have caused a little bit of chaos in our industry. This year.

But with a little bit of patience and a lot of hard work, we've been able to deliver on what we said we would do.

Our production is building.

That's all of our cash flows and.

And that we find ourselves well positioned to close out the year on a high note.

And then in 2023 from a position of strength.

Once again, thank you for your interest in battalion, and that's going to conclude our scripted remarks.

Turn it back to the operator to facilitate Q&A.

Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypads. Please make sure. Your mute function is turned off to allow your signal to reach our quick.

And again press Star one to ask a question, we'll pause for a moment to assemble that Q.

Yeah.

And again, ladies and gentlemen that is star one if you'd like to ask a question, we'll pause for another moment.

Yeah.

Gentlemen at the moment, we have no questions in the queue.

Okay.

Okay. Thank you.

So with that we'll go ahead and.

In the call, but again I just want to let everybody know that we appreciate your interest in battalion.

Happy with the third quarter results and we're pleased with our progress year to date. We are we do have a lot to be excited about is a big jump in our 2023 realized pricing with the 2022 hedges rolling off.

The progress on our on our Agi project and then continued production growth. So again a lot of good things happening here and we appreciate your interest. Thank you.

Okay.

Thank you and ladies and gentlemen that does conclude today's conference. We appreciate your participation and have a wonderful day.