Q2 2019 Earnings Call
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Evan at Arrow Dotcom.
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Good afternoon, I am Amanda and I'll be your conference facilitator today.
I would like to welcome everyone to the extraction oil and gas second quarter 2019 financial and operating results conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer period.
If you would like to ask a question simply press Star then the number one on your telephone keypad.
Please be advised that the remarks today, including your answers to your questions.
Include statements that the company believes to be forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated.
These risks include among others matters that the company described in its financial and operating results news release issued this afternoon.
And in its filings with the Securities and Exchange Commission.
Extraction disclaims any obligation to update these forward looking statements.
While the company believes these forward looking statements are reasonable.
They are subject to factors such as commodity prices.
General economic conditions competition technology, and environmental and regulatory compliance the company's drilling schedules capital plans and other factors that may cause its results to differ materially.
I would now like to turn the call over to Louis Baltimore Extractions director of Investor Relations.
Thank you and good afternoon to everyone. We're glad you could join US today for our second quarter earnings call.
With us today on the call, we have Matt Owens, our president and acting CEO .
Rusty Kelly our CFO .
Tom Brock, our Chief Accounting Officer, and Erik Jacobsen, our SVP of operations.
I would like to remind you that todays call. In addition to the aforementioned forward. Looking statements also include the discussion of certain non-GAAP financial measures. Please be sure to read our full disclosure on forward looking statements and GAAP reconciliations in our earnings release and in our filing on Form 10-Q , which we provided earlier today after the close of trading.
Ill now turn over the call to Matt I'll ends, our president and acting CEO to go through some of the highlights.
For this quarter, along with an update on Mark's help.
Thanks, Louis Good afternoon, everyone welcome to our second quarter earnings call.
I would like to start off by thanking all of our investors and partners for your continued support for Mark during this time.
His treatments are progressing along and he remains in good spirits.
We appreciate him being in your thoughts and are looking forward to him returning to the team once he makes a full recovery.
Turning to our second quarter results, our upstream operations were executed as planned and the DJ Basin Midstream Buildout continues as scheduled.
As of today Dcps plant 11 is processing gas and remarks plant is expected to come online in mid August .
We also expect Rocky Mountain Midstreams next plant to start up near the end of the third quarter.
Our total equivalent volumes were largely flat to first quarter as we expected and previously communicated.
We turned to sales 36 gross 32 net wells during the quarter with roughly two thirds of these wells beginning production during the first half of May and the remaining during the second half of June .
In terms of midstream optionality the projects associated with the agreements we entered into over the last 12 to 18 months are finally nearing completion.
Starting this quarter extraction will have the ability to sell gas to four different processors in the Wattenberg field, which should provide for increased production efficiency by minimizing downtime associated with plant maintenance and elevated line pressures.
Focusing on operations.
12 of the wells brought online during the quarter were in our North Hawkeye area, bringing our total number of wells in this area to 19 this year.
The remainder of the wells turned to production during the quarter were in our Windsor area.
From a gas processing standpoint, the Hawkeye wells are flowing to Rocky Mountain midstream.
The Windsor wells are flowing to DCP and eventually rimrock, which is why we targeted for these wells to begin production at the end of the quarter coinciding with the plant commissioning.
We continue to be encouraged with the well results in north Hawkeye.
If you turn to page 18 in our Investor presentation, you can see the 19 wells turned to production. This year are tracking near our 1 million Boe type curve confirming the same outperformance we saw from the original six wells completed in this area last year.
This area is strategically important to us for two main reasons.
First is its rural landscape out around the Denver Airport.
Second it provides large repeatable drilling inventory that will compete for drilling capital with our other core areas as demonstrated by the performance of our 25 wells producing to date.
In Broomfield, we're already completing our first batch of wells on the interchange pad, which includes extractions first three mile laterals.
And drilling is moving forward on the Livingston pad.
As for midstream the Buildout of elevations gathering system and facilities also continue on schedule.
We expect the elevation system to be ready to move first production from our Broomfield wells near the end of the third quarter.
On the regulatory front, we successfully entered into a comprehensive operator agreement with the city of Aurora in our Hawkeye area.
This agreement solidifies extractions ability to develop over 65 initial long lateral locations and creates a pathway to develop our remaining acreage in the area.
This further demonstrates our company's ability to effectively collaborate with local governments under the new law and we expect to execute additional local agreements in the near term.
Like our agreement in Broomfield This new agreement with the Royal will last for over five years.
This extended term allows the company tremendous flexibility with respect to development timing and provides the visibility necessary for elevation to undertake its infrastructure build out in these areas.
Its the combination of our strong stakeholder relations and operational excellence that I believe really sets extraction apart.
These two core competencies enable us to develop top tier areas with minimal vertical penetrations, where we can continue to produce many of the best wells in the DJ Basin.
Before I turn it over to Rusty to go through some financial highlights and capital allocation decisions I'd like to close with the three key elements that make up the extraction story.
First we targeted the acreage in the core of the DJ Basin that has minimal vertical penetrations. It's this virgin rock that enables us to drill and complete more productive and more economic wells.
The presence of a thick and productive codell across the vast majority of our acreage enhances our returns and location counts.
Second we expect our diverse portfolio of gas processing options will provide us with unparalleled redundancy and flow assurance in the near future. While our ownership of elevation midstream provides an additional source of potential value.
Third we have repeatedly demonstrated our ability to work successfully at the local level to obtain large scale operator agreements, ensuring our ability to develop this world class resource.
As we stand today is the elements I just outlined for you that give me so much optimism about our company's future.
I'll now turn it over to Rusty Kelly, our CFO to review our financial results for the quarter.
Thanks, Matt I'd like to quickly touch on some financial highlights our liquidity and balance sheet remains strong we exited the second quarter with a 1.1 billion borrowing base with 480 million drawn.
During the second quarter, we executed repurchases of over 25 million shares of our common stock for $100 million, which is an average price of $3.97 per share in total we have repurchased over 38 million shares for 163 million. This represents a 22% reduction in our shares outstanding since we started the share buyback program in November of last year.
We've also been active in the market repurchasing our senior notes during the second quarter, we repurchased $14 million of face value senior notes for $10.9 million since beginning the debt repurchase program. We've retired approximately $50 million senior notes for $39 million, representing a 21% discount to face value.
On the asset sale front, we do not have anything more to announce yet, but we are actively negotiating multiple divestitures. We believe will be executed over the coming months, both financially and operationally extraction continues to execute on its 2019 plans and remains well positioned for the future with that I'd like to open it up for Q and a.
Thank you ladies and gentlemen at this time if you do have a question. Please press star and the number one key on your Touchtone telephone. If your question has been answered are you is to remove yourself from the queue. Please press the pound key.
Our first question comes from the line of Paul Grigel of Macquarie. Your line is open.
Hi, good afternoon.
Definitely the market as well.
I guess, the first maybe starting off with with Capex and Keith.
I'll turn in lines into into year end and the plants come on how should we be thinking about that.
From from the completion do their broomfield or just kind of overall the turn in lines over third quarter fourth quarter and the focus on.
Maintaining the Capex budget.
Hey, Paul.
Capex is is on schedule for what we have planned for the year, we thought we'd be slightly ahead in the in the first half for what we end up spending in the second half with the majority of our turn in lines coming online in the in the second half of the year, mostly towards the end of the third quarter trying to coincide with the two midstream projects that we have working so one would be the elevation system building. The badger facility and that is what we will need online to flow our wells in Broomfield and then the Rocky Mountain Midstream East Greeley lateral is the other big project that we have coming on at the end of the third quarter. So we will have a bunch of wells that are probably turning online in the third quarter, but though they probably won't be up to full production until near the end of the third quarter beginning of fourth quarter.
Okay. That's very helpful. I guess, maybe turning.
To to the divestitures comment how do you think about about Platte River midstream within elevation and then maybe more holistically.
Where to elevations fit within the strategic.
Outlook.
Maybe longer term realize there's still a lot of building going on.
Yes, so for Platte River we.
We look at that kind of the same way that we've been looking at elevation and terms of divestiture. The plan is at some someday to realized gains off of those investments that we've made but Platte River is in a similar situation to extraction, where a lot of the volumes ramp in that system will be coming at the end of this year and through next year. So just like with elevation. We think once the volumes are flowing through those systems they will make them.
More valuable and we should hopefully be able to get better realizations off of those monetizations.
And then maybe how elevation, but then longer term.
As well.
Yes, so same with same with elevation the elevation will be ramping up in its volumes once it turns us versus them on at the end of this year, we will have more more more and more wells in broomfield coming online.
Throughout all of next year, and we'll continue to see a ramp there, but once we get a few quarters under our belt of some solid revenue and cash flows coming in at that at the elevation level. That's when we'll probably look at potentially.
Doing something with it.
Okay. Thanks for clarifying.
Thank you and our next question comes from the line of was Fitzpatrick of Suntrust. Your line is open.
Hi, good afternoon.
Good afternoon.
With you.
Those were obviously pretty active on the on the share repurchases.
You kind of expect that to be re up by the board or have you been focusing a little bit more in the $50 million I think you have left on the debt authorization.
Since mid year.
Hey, Welles this is rusty we have as you've seen exhausted the authorization.
And while we still have some amounts on the bonds that gives us some.
Opportunistic.
Our ability I think what you're what you're seeing from us is going to be continued focus, especially with the volatility in the market on liquidity and just balance sheet strength I think it's going to be our focus going forward.
Okay, perfect and then on on the Aurora La how many acres does that cover and and can you hit a significant portion of unincorporated Adams from those pads.
Yes, we can hit unincorporated Adams from pretty much all of them.
Theres five pads that we have approved now in the Aurora.
Area that are mostly part of this agreement and a lot of those are larger pads. They are capable of drilling both directions.
But we will have the ability to add more pads to this agreement.
As time goes on and we identify more pads, it's kind of be brought to the councils.
Attention and then and then permitted underneath the rules that we agreed to in this agreement.
Okay, and then just one last one if I could sneak it in.
It seems like Badger is is really key to getting these delays, especially the tankless capabilities that all these municipalities seem to want.
How how.
How many opportunities has that presented to you in so much as the vast majority of other folks don't have a badger facility or people coming to you with those types of opportunities.
Yes, I would say that.
It's helped us in several situations so far in.
In blocking up our acreage in these areas where we can.
We have a little bit more leverage on swaps with other operators and.
We are able to consolidate our acreage into one spot, which makes all the midstream facilities more attractive to us because it's less spend and more volumes coming into the coming into what we're already building.
Good to hear thank you guys for the time.
Thank you.
Thank you. Your next question comes from the line of Brad Heffern of RBC. Your line is open.
Hi, everyone I guess, recognizing that you guys don't do quarterly guidance. There is a big ramp for the second half of the year. That's implied in the annual guide. So I was wondering if you could give any broad strokes around how you expect that to play out it sounds like there's some flush production coming out of the second quarter, but then and then there will be sort of a wall and then flush production in the fourth quarter as well, but any thoughts around that.
Yes, Alex like I mentioned earlier, the the two big projects that that coincide with our ramp on the midstream side are the the badger facilities and then the east Greeley lateral that Rocky Mountain Midstream is building in both those are slated for coming online right around the end of the third quarter. So.
Some wells might be able to start coming online slightly before that so you might have them start coming online in cleaning up but the the big ramp in production will be in the fourth quarter versus the third.
So we would expect both quarters to be up.
Over with second quarter was but the largest growth will come in the third quarter as I mean, sorry, the fourth quarter as the wells will all be on line for the majority of that quarter.
Okay got it.
And then in the past you guys have given a number that's sort of like behind pipe.
You know.
Production that's constrained.
Do you have any sort of number like that right now and then by the end of the year would you expect that number to be close to zero because of all this capacity coming on.
Yes, we do have a number.
In mind it it obviously, we hit rate what we wanted to on our production for this quarter.
After the learnings from last year Weve been a lot more conservative in our assumptions on run time for the midstream companies out here and I think that is played out well for our production guidance. So far this year at least.
So.
We do probably have I'd say in the neighborhood of 10000 Boe per day currently constrained but that.
Thats something that Weve been planning for.
And that's something that we would expect to come back online as DCP plant ramps up.
As you heard earlier today, they are commissioning commissioning that right now and it's going to start moving volumes hopefully in the next month in ramp up towards at full capacity.
Okay. Thank you.
Thanks.
Thank you and our next question comes from the line of Brian Downey of Citigroup. Your line is open.
Great. Thanks for taking the questions maybe a quick one on crude differentials I know, we talked about it last quarter, but if you have any updated thoughts on the second half of the year.
Many of the larger projects coming online that you talk about change any of extractions oil gravity or or if that's just broader market dynamics that you mentioned in the release there.
There will be a large change in extractions overall oil gravity, but as far as the differentials go it's kind of the same story that we told last quarter. We saw the quality differentials start to run up in this in the first quarter and peak in the second quarter.
As more and more of that lower gravity.
Crude from the Permian was slowing up towards Cushing and getting that better price, but we still see on the forward month strips for the quality differential in Cushing starting to fall back down dramatically at sometime in the third quarter or second half of the third quarter, when those cactus and epic pipelines in the Permian are slated to turn on and divert that crude from the Permian over towards the coast.
Got it so you'd expect something in line with what Youre realizing call it back half of last year.
As a reasonable run rate as you approach the end of this year.
Yes, I would think so it's probably not going to fall right. All the way back down there in one quarter, but but we would expect it to fall back down into something with a seven handle and then hopefully eventually over quarter to get back down to maybe the mid sevens.
Okay I appreciate it.
Thank you.
Our next question comes from the line of Jeffrey Campbell of Tuohy Brothers. Your line is open.
Hi, good afternoon.
Good afternoon, I was wondering do you anticipate any recovery and the DJ Nat gas and NGL prices as these midstream projects come online and if so.
Over what time period.
I think we do expect there to be some sort of a release once we get white cliffs conversion running and the Fracs expansion that will open up the capacity that the basin has to get to Bellevue right. Now so I think with those lines being full or the space being full going to Bellevue. Some people have had more of their ngls diverted the con way, which is I think have been one of the main reasons all of US have suffered on the NGL side price realizations anyways.
But those projects are underway right now, though becoming on on the next quarter or two and I think that will help the differentials that we all see across the basin in terms of Ngls.
Okay. Thank you and regarding the overall the Aurora.
Permitting.
Does that have to go to the state level now for some kind of approval or is the local agreements physicians began operations.
So the way that it works with the Senate Bill 181 is.
The goal is to have operators get these sort of local agreements in place first.
And before submitting their permits to the state just to try to get the state out of being the mediator in between the two parties and so now that we've got this agreement done we'll just go about the normal state permitting process and submit our premise to this day just the normal way that we had in the past and since we already have the local approvals they should flow through the state at a reasonable pace.
Right I was just a follow up on that last part I was just wondering.
My understanding is there is still some kind of.
Ongoing rule, making going on at the state level, but whatever that is you don't.
Anticipate that that's going to.
Great any real headwinds to getting this done.
Did you have a local thing in place.
We don't think that will happen because the the governors said in the past is.
If unis apologies wanted to enter into operator agreements before waiting for the rule, making and then the administration is going to take that is them, saying, they're fine with the rules that they were able to get or negotiate with the operator and that certain agreement.
Okay, great. Thanks for the clarity.
Thank you.
Thank you and your next question comes from the line of Betty Chen of Credit Suisse. Your line is open.
Thank you.
As we get closer to the midstream de bottleneck can you talk about your confidence level in the timing of the really critical midstream expansion in late Threeq you like what are the key milestones that we should be watching any risk of slippage there.
We've been very active.
With with Rocky Mountain midstream.
We meet with them very regularly to make sure that the timing of the pipeline.
For East Greeley is on track with what we have assumed in our budget. So far we are comfortable with with where they're at we're also comfortable with where.
Elevation midstream is at in terms of its badger facility, but we're not there yet it's still there's still another couple of months before those are supposed to be online and we'll continue watching them very very closely but.
We we do have some contingency plans on on on on how to reduce some capital spend at the end of the year or something like that needs to happen, but right now we're confident with where the timing looks for both of those systems.
Great. Thanks.
And then can you talk about how much production benefit do you see from DCP plan 11 Rand in the third quarter.
Any estimate on the volume behind pipe when will you be at.
Like how many new production, we could expect.
Be tie into that plant.
So.
We didnt have a lot of wells or we don't have many wells left to drill that go into the DCP system. We did have some that we turned online at the end of the second quarter trying to coincide with the win when we thought the.
O'connor to plant was initially going to start up so since that is running behind by a couple of months right now.
That's the production I was mentioning earlier that seems to be constrained right now so that would be somewhere around that 10000 BOE a day number of brand new wells. So just remember that that wouldn't be a 10000 barrel a day flat number that will turn on and it doesn't decline, but once the plant does come on and gear ramps up to full capacity I should say, we should be able to open up pretty much all of the constrained production we have from those new wells that we turned on.
Sorry, just a clarification the 10000 barrel per day of constrained volumes is that.
Is that baked into the production guidance or is that.
New to us.
Yes, because it would have a you know we had a baked in in a in our second quarter and we actually modeled a slightly slower startup than.
Then what as a fairer than what was initially thought for that plant. So right now we're still comfortable with where we sit in terms of our production on DCP.
Okay great.
Thanks.
Thank you.
Thank you and our next question comes from the line of at Marshall Carver of Heikkinen Energy Advisors. Your line is open.
From your commentary on focusing on building liquidity that they for manager could be using any sort of free cash flow to.
Pay down your credit line that will be the primary use of.
Any additional cash next few quarters.
Yes. This is Rob again, thats going to be a focus I don't want to give a complete playbook that will be dependent on commodity prices revolver capacity et cetera, but that's certainly.
Making sure that we preserve our liquidity and is definitely in our balance sheet strength is a definite focus of the company right now.
Okay. Thank you and then a follow up regarding the commentary around potential asset sales.
Is that.
Acreage to.
Pay for your land budget or would that be some actual producing.
Assets whatsoever.
Yes, it could be used to pay down debt or something like that.
It's been a combination.
Of what we looked at and what Weve executed in the past for instance, the.
Divestiture that we did in the first quarter or had closed in the first quarter of this year that was a combination of some acreage in some production. So it's not as easy nowadays to sell just.
Non producing acreage but.
We do have some packages that were marketing right. Now that include just acreage then we have some other ones that do include a little bit of production and those are the ones. We're pursuing as at this time.
Thank you.
Thank you and our next question comes from the line of Leo Mariani of Keybanc. Your line is open.
Hi, guys, just hoping you could give a little bit of color around potential other new operator agreements that maybe you guys are hot and heavy on from a negotiating perspective in.
Maybe you thinking kind of come here in the near term.
We are working on on other operator agreements currently we've been working on them for a while.
It's not something that we really want to point out exactly who it is at this time, but as you can probably guess they're down in the southern Hawkeye portion of our acreage and we feel fairly confident that we will have at least another one of those exited executed hopefully in the next quarter or so.
Okay, and I guess have you guys see anything thus far now that.
Some of the new local regulations have been implemented in terms of any type of cost increases and the need to counties or municipality business in.
Nothing that I can see or that I can point to that's that's of any significance.
Our midstream facilities that we've been building so that we will be building down in these areas.
Seemed to have covered most of what would have been an incremental costs had a midstream facility not been built to the spec that we're planning to build it.
Okay. Thank you.
Thank you and our next question comes from the line of Irene Haas with empirical capital. Your line is open.
Yes, hi, so I mean, you guys have spent a lot of time really trying to build our alternative ways of gas processing. So now you have options and if everything kind of come in on time save full quarter of 19, what's the implication for 2020 would you be able to pretty much produce unimpeded and and we probably looking at a pretty high double digit ramp for fourth quarter or is this something that we should assume full first quarter of 2020.
The production that is coming on in fourth quarter will be of a pretty significant ramp.
That will carry into the first quarter kind of like you saw probably this year we had some.
Some decent sized pads that we turned online at the very end of last year that had most of their flush this year, but for 2019, Thats really happening kind of at the end of the third quarter is when we're really going to start turning those new pads on but then their first full quarter production will be there in the fourth quarter.
And yes, if everything is online and.
Or once it all gets online.
The midstream facilities, we should be able to flow for the most part unconstrained.
Besides the normal.
Downtime assumptions that and maintenance assumptions that we just use in our model when budgeting.
And for 2020 are you looking at of free cash flow type situation and also.
Could we have a little update on the midstream spending for 19, and 20 casino kind of move things around there is a lot going on so just a little more clarity as to.
How much you might end up spending in 2020 could it be a little lighter than we might have expected.
I wouldn't expect to 2020 midstream spend to be as great as 2019 is.
In 2018 is really a year, where all a lot of are pretty much all of the costs associated with building that whole badger facility hit pretty much in this year. That's why our number has been that up to $250 million.
The rest of the midstream facility builds will come for the Hawkeye acreage and we're still.
Debating internally when exactly that is going to start because that obviously, we'll have to do with the pace of development that we choose moving forward. So we don't have an exact time of when that capital was will start flowing but I can.
I can assure you won't be as much next year is what it was this year in that in terms of midstream spend.
And free cash flow 2020.
Yes that is that as our target is to be free cash flow positive in 2020.
Great. Thank you.
Thank you.
Thank you and at this time I am showing no further questions I would like to turn the conference back over to Matt Owens for any closing remarks.
I'd like to thank everybody for joining us on our second quarter earnings call today.
We look forward to updating you at the end of next quarter at these midstream projects begin to turn online have a good afternoon. Thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.