Amplify Energy Corp (AMPY) 2020 Q2 法說會逐字稿

Welcome to Amplify Energy's Second Quarter 2020 Investor Conference Call. Amplify's operating and financial results were released earlier today and are available on Amplify's website at www.amplifyenergy.com. (Operator Instructions)

Today's call is being recorded. A replay of the call will be accessible until Thursday, August 19, by dialing (855) 859-2056 and then entering conference ID 4185547 or by visiting Amplify's website, www.amplifyenergy.com.

I would now like to turn the conference over to Eric Willis, Senior Vice President and General Counsel 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 2020. We appreciate you joining us today. Martyn Willsher, Amplify's Interim Chief Executive Officer and Chief Financial Officer, will lead the call with comments on our second quarter results and provide updates on our liquidity enhancement initiatives before concluding with comments about our liquidity, hedge positions and outlook for the second half of 2020.

We would like to remind you that some of our remarks may contain forward-looking statements and are based on certain assumptions and expectations of Amplify's management team. These remarks reflects management's current views with regard to future events and are subject to various risks, uncertainties and assumptions. While management believes that the expectations reflected in such forward-looking statements are reasonable, we 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 quarterly report on Form 10-Q, which we expect to file later today.

Also, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our press release or on our website at www.amplifyenergy.com.

With this in mind, I will now turn the call over to Martyn Willsher. Martyn?

Thank you, Eric.

Before discussing our quarterly results, I would like to again express my appreciation for the Amplify team. Despite market disruptions related to the ongoing COVID-19 pandemic, we delivered an outstanding quarter and exceeded our expectation regarding the liquidity enhancement initiatives that were previously discussed during our first quarter earnings call. I am extremely grateful for the dedication and professionalism demonstrated by our employees across the organization and reaffirm Amplify's commitment to operating an efficient and safety-focused company.

During this call, I will provide comments on our second quarter performance as well as updates regarding our previously announced liquidity enhancement initiatives and hedging program.

Production for the second quarter averaged approximately 27,700 BOE per day despite anticipated reductions attributed to the scheduled annual Bairoil turnaround, the previously announced temporary curtailment on our nonoperated Eagle Ford assets and incremental offline wells in Oklahoma due to workover economics.

At Bairoil, we are pleased that the annual plant turnaround in June was completed on schedule and within budget, and the plant quickly returned to pre-turnaround production levels in the first half of July. The nonoperated Eagle Ford curtailment discussed during our first quarter earnings call concluded in April, and production levels have since returned as expected.

Finally, production in Oklahoma experienced minor reductions in the second quarter as a result of the incremental backlog of wells staying off-line as commodity prices remained depressed. We expect to bring many of these wells back online in future periods as prices rebound and workover economics improve.

Lease operating expenses in the second quarter were $27.8 million or $11.03 per BOE. These results reflect quarter-over-quarter savings of $7.9 million that significantly exceeded our savings estimates of $4 million to $5 million for the quarter and demonstrated the outstanding execution by our operations team.

Capital spending for the second quarter was approximately $7 million, which was in line with our internal expectations. A significant portion of the second quarter capital spend were $2 million or 29%, was attributed to the nonoperated drilling and completion activity in the Eagle Ford, which occurred in April as operators finalized previously initiated development plans. The remaining capital activity was primarily related to the Bairoil turnaround, high-return capital workover projects and facility maintenance across our operated assets.

Second quarter cash G&A was $6.2 million or $2.45 per BOE, which was in line with our expectations. We expect that cash G&A expense will continue to trend down to approximately $5.5 million in the third quarter and remain relatively flat thereafter.

Moving on to adjusted EBITDA and free cash flow for the quarter. Second quarter adjusted EBITDA was approximately $21 million, which significantly exceeded consensus estimates and validated the exceptional execution of our cost-reduction initiatives and hedging program. I think it is also important to note that the $18 million of monetized 2021 hedges is not included as part of the second quarter adjusted EBITDA. For purposes of calculating adjusted EBITDA and covenant compliance under our revolving credit facility, the hedge monetization will be allocated across 2021 to reflect the timing of the hedges that were unwound.

Free cash flow, defined as adjusted EBITDA less CapEx and cash interest expense, was $11 million in the second quarter and primarily driven by our significant cost-reduction efforts. We anticipate a strong free cash flow profile for the remainder of the year due in part due to the reduced capital budget for the second half of 2020.

Now I would like to update our stakeholders on the liquidity enhancement initiatives we have proactively implemented in light of the current commodity market volatility. As discussed during last quarter's earnings call, Amplify enacted several initiatives to mitigate the effects of market disruptions related to the ongoing COVID-19 pandemic and commodity price volatility. While we completed some of these initiatives prior to the last call, the completion and realization of the remaining projects were critical to our success, and I'm pleased to announce that these remaining initiatives were executed with outstanding results.

First, operating costs and corporate overhead reductions. Our lease operating expenses were reduced from $35.7 million in the first quarter to $27.8 million in the second quarter. The quarter-over-quarter savings of approximately $7.9 million exceeded internal expectations of $4 million to $5 million for the quarter. While we expect that operating costs will increase modestly in future periods, we remain committed to executing additional cost-saving opportunities and exceeding our target estimates.

In addition, as previously stated, the team materially reduced recurring cash G&A, which declined from $8.7 million in the first quarter to $6.2 million in the second quarter. This reduction was in line with expectations, and we expect G&A spending to trend down to approximately $5.5 million in the third quarter and remain flat thereafter.

Second, capital reductions. Amplify's capital spending was $7 million during the second quarter, which was in line with our expectations and represented an $8 million reduction from the first quarter. Amplify's remaining capital expenditure budget for the second half of 2020 is approximately $6 million. We intend to stay prudent on capital allocation, and our activity is focused principally on maintenance projects, which are essential to equipment integrity and operational efficiency and high rate of return workover projects.

Finally, Beta Field royalty relief. Effective July 1, 2020, Amplify qualified for special case royalty relief at its Beta Field. This program decreased the royalty rate of Beta by 50%, which is expected to result in approximately 500 barrels per day of additional net production and associated revenue of approximately $7 million per year, assuming a $40 per barrel WTI price. I would like to emphasize that this royalty relief program provides relief for both existing production and incremental production in future periods when economic conditions allow for additional development.

Moving on to a discussion of our recent credit facility redetermination and our current liquidity position. On June 15, 2020, we announced the successful completion of the spring borrowing base redetermination process. The spring redetermination was particularly challenging with depressed bank price decks and a negative economic backdrop driven by the COVID-19 pandemic. But we were pleased to be able to work with our bank group and deliver a supportive borrowing base solution that provides sufficient liquidity while we work to delever our balance sheet. We expect the next borrowing base redetermination will take place in November 2020. As of July 31, Amplify had total net debt of $259 million under its revolving credit facility and liquidity of approximately $21 million.

Moving on to our latest hedge position. Since our last earnings call in May, Amplify has added to its hedge positions in natural gas for the second half of 2020 and 2022, as well as NGL swaps for the second half of 2020. Inclusive of the new hedges, the company is over 80% hedged for the second half of 2020 based on Amplify's 2019 year-end reserve report forecast, with approximately 83% of those hedges being swaps and the remainder being collars. Our hedge positions allow us to protect future cash flows, while also providing the opportunity to benefit from commodity market improvement. As of July 31, our hedge mark-to-market value was a net asset position of $25 million. Amplify's second quarter 2020 hedge presentation contains additional details on our current positions and was posted on our website earlier today under the Investor Relations section.

This formally concludes our prepared remarks for this morning's call. We would now like to invite analysts to ask any questions they have for the management team. Operator, please open the line for any questions.

(Operator Instructions) And our first question comes from Jeff Grampp with Northland Capital.

I know you guys haven't put out anything too firm in terms of forward guidance or anything, so not trying to pin you down. But if we just kind of thinking about 2021 and kind of current strip prices, can you just talk maybe broad level, what kind of capital program would you look to employ in that environment? And maybe talk about what kind of minimum spending that you guys would have to put in for any environment? And then what kind of projects maybe penciled out on the workover front or any facilities, cost enhancement-type of projects that you guys may look to deploy in that type of scenario?

Sure, Jeff. As we've discussed before, there's a certain level of capital spending required under -- with Beta and Bairoil and some of the facilities projects in Oklahoma. So probably $5 million to $10 million is kind of base capital spending, depending on the calendar year. Then you'd layer on whatever level of activity was going to be on the Eagle Ford. Obviously, those wells still economically makes sense in the kind of a mid-40s environment, which is where we're kind of at in Cal '21 year. I think once you get beyond that, it's going to be -- we're going to look very closely at workover -- capital workover projects. If certain projects in California and the Beta Field makes sense, that work is ongoing. And obviously, it's a very dynamic commodity market. Three months ago, even with prices in the mid-30s, you probably weren't looking at a lot of projects. With prices moving into the mid-40s and maybe a little higher, there may be a slightly higher level of activity. But it's still going to be -- unless we get into the mid- to high 50s, then I think it's still going to be a little subdued relative to prior years. And so I think, like I said, that's still to come.

But for the rest of this year, I think we're going to have a very -- we've noted we'll have a very minimal capital budget. We will look closely at workover economics with a focus on cash flow returns, payback periods, et cetera, and we'll see what make sense. So there may be slightly higher level of workover activity with prices being a little higher, but still in line with what we've discussed previously.

Okay. Great. Appreciate that. For my follow-up, you touched on the Eagle Ford a little bit here. Do you guys have any line of sight on second half activity? Is that embedded in the second half budget that you guys talked about? And then more broadly, I know that was potentially a divestiture candidate pre-COVID. Does the stabilization in the commodity market maybe make that something you'd kind of revisit? Or is that still kind of on the back burner to the extent oil's kind of hanging around these levels?

I think right now, we're not projecting a lot of activity in the Eagle Ford for the remainder of the year. Obviously, we don't operate. And there's some DUCs, there are some wells that were proposed and not completed. And so there could be additional activity beyond what we're projecting, but we've deferred most of that into 2021 and our expectations. Like I said, that's something that with prices kind of moving up more recently, maybe there is some level of activity that sneaks back into the latter half of 2020 from some operators.

In regards to it as a divestiture candidate, I think we've put that on hold for the time being. Obviously, we can't stop inbounds. And to the extent that those become attractive, we'll consider anything, but I don't think that's likely for the remainder of this year.

But obviously, from our long-term perspective, that asset still doesn't fit our strategy as well as the operated assets. And so it's something we revisit in 2021.

And our next question comes from Noel Parks with Coker & Palmer.

Just had a few questions. Could you talk a little bit more about the hedge monetization? You mentioned that they were not included in adjusted EBITDA even though, I guess, they're kind of a one-time cash event, but they're actually going to be recognized over time. Can you just go into a little more detail on that?

Absolutely. Thank you, Noel.

So with the hedge monetizations, obviously, these were 2021 hedges that were unwound. The way that we look at this from an accounting perspective, from a non-GAAP perspective. From a GAAP perspective, they were included in earnings and cash flow from operations in this quarter. That's how -- as a realized hedge gain.

From a non-GAAP perspective, obviously, we want to make sure that those gains are reflected in the periods in which they were actually unwound from. And so from both a credit facility perspective and an adjusted EBITDA perspective and a free cash flow perspective, that will all take place in 2021. We do not take -- did not take any credit for that, for those $18 million of proceeds in our adjusted EBITDA, our free cash flow in the second quarter. We were aligned -- that was $18 million spread across the full calendar year 2021. And so call it $4.5 million per quarter, essentially, will be put into 2021 adjusted EBITDA and free cash flow.

And it works the same way in our credit facility. So that value is not lost from a credit facility perspective. That will be adjusted EBITDA in the credit facility calculations as well in 2021. And that matches the hedges with the actual periods in which those hedges were essentially locked in.

So on a GAAP basis, though, do those show up as a current liability then? As you're...

No, it's a realized gain in the cash. And so we just -- from a non-GAAP adjusted EBITDA perspective, we just back it out. So it isn't cash flow from operations. It isn't a long statement. And obviously, there is a cash -- it is cash on the balance sheet, but it does not reflect in our adjusted EBITDA or our published free cash flow number.

Great. And next, I just wanted to -- maybe could you talk a little bit about, I guess, how you categorize sort of the recurring versus the nonrecurring LOE expenses?

Yes. Obviously, we -- I think from an operating team perspective, they did an outstanding job of finding and executing on longer-term recurring expenses, which was our $4 million to $5 million estimate. We've far exceeded that. But we've also -- they also found some short-term, onetime-type items that were significant value drivers. But at the same time, we're not trying to claim that will be forever. And that's probably in the range of, call it, $1 million to $1.5 million of operating expense.

There's a couple of other moving pieces with some of those cost-savings initiatives didn't come in until May, and -- but we'll also look at a little bit more, potentially on the workover side. So but -- from a, call it, $1 million to $1.5 million of operating expense, that I would call nonrecurring that were just opportunities identified and executed by the team during the quarter that saved us a substantial amount of money.

Okay. Great. And just one thing. I was curious, we did see one of the relatively rare asset sales a few days ago and that was a range of sale. I believe it was Terryville in North Louisiana.

Terryville, yes.

And I was just curious what you sort of thought of the valuation for that transaction? And do you see that as applicable to your position and just an example of how it should be valued?

Obviously, we -- I have a personal, long history knowing that Terryville asset from the old MRD days. It is a little different asset. It's probably got more upside at higher gas prices, and it's got a higher NGL content than our Cotton Valley, which is obviously on the East Texas side. This is in Louisiana. And so it's a little bit more risk and a little bit more reward. And I think there's a little bit paid for that. So I thought it was a pretty decent valuation under the circumstances. But you've also seen gas prices rallying and NGL prices starting to firm up. So I said I thought it was a very reasonable transaction. And I think if gas prices continue to trend in that direction, then they'll do well with the acquisition.

Okay. And just the last one for me. I was wondering, I have been hearing about continued shuffling going on around private equity-held assets. And as some companies get into sort of a distressed state, probably with their bank lenders, I was wondering, in some of your basins that are relatively mature, do you see -- have you been approached by any opportunities to do like a contract operator-type role? I'm aware of -- I've heard of something similar where a bank got some properties they didn't really want to operate them, they didn't want to sell them in this environment, so they looked for that sort of third party to come in.

I think with our platform, we're obviously set up to take on those kind of opportunities as they present themselves. I think right now, I wouldn't say anything is imminent on that front or that that's something that we're actively pursuing. But as you say, there could be more activity as banks getting more involved and don't want to set up operating teams for specific asset areas. Obviously, we have a very strong operations team and I think these quarterly results speak to that. And like I said, if those opportunities present themselves, we'll kind of look at it as -- on an individual basis, but it's not a business model idea that we're going to go out in full force and look to contract, operate for a lot of different groups, but it could make sense in the right circumstances. And so certainly something we would consider, given the platform would allow for us to do that with minimal incremental costs.

(Operator Instructions) Ladies and gentlemen, this concludes today's conference call. I would now like to turn the call back over to Martyn Willsher for any closing remarks.

Thank you. As an organization, the second quarter began with a lot of uncertainty, but due to the outstanding efforts of the Amplify team, we are now moving forward with renewed optimism for the remainder of the year. While COVID-19-related issues are still dampening demand and prices are slow to recover, the organization has demonstrated its resiliency and ability to adapt to the current environment. With strong free cash flow expected for the remainder of 2020, we look forward to continuing to execute for our stakeholders and preparing for future opportunities.

Thank you, as always, for joining us today. And if you have any questions, please not hesitate to reach out to us. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a wonderful day.