Amplify Energy Corp (AMPY) 2014 Q1 法說會逐字稿

Good morning. My name is Holly and I will be your conference operator today. At this time, we would like to welcome everyone to the Midstates first-quarter earnings 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 session. (Operator Instructions).

I would now like to turn today's conference over to Danielle Burkhart, Vice President of Investor Relations. Please go ahead ma'am.

Thank you Holly. Good morning, everyone, and welcome to Midstates Petroleum's first-quarter 2014 earnings conference call.

Please note that today we have posted on our website supplement financial and operational information to complement our discussion this morning. Joining me as speakers are Dr. Peter Hill, Interim President and Chief Executive Officer, and Nelson Haight, Senior Vice President and Chief Financial Officer.

Before we begin, let's clear one housekeeping matter. As a reminder, this conference call contains certain projections and other forward-looking information and statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ from those expressed or implied in these statements and our filings, including our earnings release which was filed on Form 8-K yesterday, our annual report on Form 10-K, and the first-quarter 2014 Form 10-Q that will be filed shortly. Midstates assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

I will now turn the call over to Peter for his comments.

Good morning everyone, and thanks very much for joining us today. A few words from me and then I'll toss it over to Nelson for a few further words on the financials, and then we'll throw it open to you guys for questions.

Since starting this interim role in early April, the first thing we did was to lay out a reenergized Midstates strategic agenda. That, in short, was that we were now going to be very keenly focused on delivering financial stability and applying very rigorous capital efficiency.

Financial stability is concentrated on preserving sufficient liquidity, managing our revolver while we continue to grow EBITDA and cash flow by delivering our production guidance. Capital efficiency is about improving the value of that production by spending wisely, maximizing our margins, lowering our costs, and paying full attention to the risk profile with regard to well locations and rig count. This is an ongoing process, and we will continue to look at ways to improve our operations and our financial performance. All that said, I'm very pleased with our progress on both of these fronts this past quarter.

At the same time, we will also evaluate all strategic options that are going to be available to us to unlock and deliver the value that we know exists within our asset base. We have completed the sale of Pine Prairie for $170 million and are continuing to examine other non-core sales and joint ventures. We will look at all alternatives, and at the time and ability to be both thoughtful and considerate in how we proceed. So, our strategy and agenda is totally driven by improving shareholder value and with a longer-term of being cash flow positive by early 2016.

So, turning to the first quarter, the first quarter of 2014, we generated an adjusted EBITDA of $111 million with a (technical difficulty) average of 29,004 barrels of equivalent a day. The decrease in production from the fourth quarter was in large measure due to weather. This past winter, we've had widespread snow and ice storms. We've had public power supply outages, compressor and generator freeze ups, oil trucking and frac crew delays, road closures; it just went on and on. It was bloody miserable and bloody cold. And none of us were spared.

We anticipated, for example, 20 new completions in the Miss Lime but we only achieved 11. We estimate that, for the quarter, we lost about 2300 barrels of oil equivalent a day due to that weather. But because of our continuous and sustainable reductions in operating costs, a higher oil percentage of total production, we call these strong price realizations, that allowed us to maintain a robust EBITDA number that was only marginally lower than our record fourth-quarter EBITDAR of $118 million.

And with operating costs improving and in line with guidance and our drilling program focused on our strongest geological locations, we are forecasting strong EBITDA growth in 2014. Our intention is to have capital spend equal EBITDA and both will fall within the range of $500 million to $550 million. This is an intentional shift and I'd like you to note this change in emphasis to our guidance and our performance. This reflects, to me, capital efficiency and minimizes the drain on our borrowing base, it protects our liquidity position, and overall brings more stability to our balance sheet. It also gives us time to bring forward solutions and alternatives to reduce our debt burden and repay our stretched balance sheet.

The first-class results in our operating metrics in the Miss Lime were driven by continued savings and efficiencies from the cost initiatives that we began last summer and that we will continue to reap the benefits of as we pass through the rest of this year. We've implemented similar initiatives in the Anadarko to help reduce overall operating costs, improve margins, and are confident we can repeat and obtain similar results.

So overall through 1Q, we had 10 active rigs, we spudded 34 wells, we brought 25 wells online and fracture stimulated 17 Miss Lime wells. And those are the wells that were drilled initially as open-hole completions.

During our first quarter, our production averaged 29,004, as I said, with the Miss Lime properties delivering 16,381 barrels per day, the Anadarko contributing 8376 barrels of equivalent a day, and our Gulf Coast area adding 4247 BOEs per day.

Recently, we have been catching up on the completion delays we experienced in Q1, and our production in April averaged 32,500 BOE equivalent. It shows you we can play catch-up and repair the damage the year, the winter left us with. So, we believe that demonstrates that we are well on our way to achieving our full-year production guidance of 32,000 to 35,000 post-Pine Prairie. That delivers 37% year-on-year average production increase if you normalize for Pine Prairie and the Panther acquisition. And I think, to me, that shows a very strong growth story.

So, we are constantly evaluating ways to enhance our capital efficiency, and with this in mind, we are shifting a rig from the Anadarko to the Miss Lime, and this will improve our returns while allowing us to better understand the encouraging results we've experienced to date in the Anadarko and build those learnings into our future program.

The latest wells in the Miss Lime performed exceptionally well, and in the first quarter, we've taken all 146 wells. We are averaging a peak 30-day IP of 565 BOE per day.

There have also been some strong, promising results in the Anadarko. The top quartile of those wells that we brought online in the Anadarko since the acquisition have an average 30-day IP of 670 BOEs a day. And the first-quarter results in the Anadarko, excluding those wells that where we had difficulties and problems, gave us an average return of 50% with a few wells hedging over 90% such as the recent Tonkawa well with the 30-day IP of 850 BOE a day.

We believe that these results validate the potential that lies within our acreage, and we fully expect to duplicate and even improve on these results. We are going to work to high-grade our inventory and avoid some of the early problems we encountered on a few of our first wells. And we believe, through improved asset understanding and drilling efficiency, the Anadarko rates of return will complete with those of the Miss Lime. And it's kind of a nice problem to have when you are really addressing capital allocation.

We continue to closely monitor industry activity around our entire acreage portfolio to better allow us to apply best practices, improve economic viability and develop new production horizons. While we believe that our Miss Lime acreage is among the best in the play, and our continued results demonstrate that point, there's always room for improvement to increase our margins and grow our revenues.

We have over 400 gross Upper Miss potential locations identified and believe that the other horizons offer significant upside in location count and value that is currently not reflected in our math. Similarly, in the Anadarko, we have over 700 gross locations identified across the Cleveland, Marmaton, and other play types. We have started a rigorous internal review on high-grading and valuing our entire contingent resource base and already see a significant increase in gross well locations in both the Miss and the Anadarko acreage.

We're going to host an analyst day in the fall to fully demonstrate that potential value growth that we see, but we will also keep you advised of our progress as we go through the balance of the year.

So, in summary, I am pleased with our first-quarter results and proud of the job the guys have done under some very difficult circumstances. We've got some very solid growth ahead of us in our core areas. Our focus is operational execution, and that will allow us to grow our EBITDA production and, importantly, our value in a very fiscally responsible manner. We believe this will allow us to meaningfully repair the balance sheet and provide us with a firm platform going forward. With that, I hope that investors will develop for confidence and belief in the story that we lay out.

And with that as a segue, I now turn the call over to Nelson, the CFO, to give you some financial detail on the first-quarter performance. Nelson?

Thanks Peter. As previously disclosed, the sale of Pine Prairie went smoothly as we closed exactly as we expected. We used $131 million of the net proceeds of approximately $150 million to reduce the outstanding balance on our revolver and retain the balance as working capital.

Post the pay down on May 1, our liquidity totaled approximately $200 million, comprised of about $164 million of undrawn capacity on our revolver and roughly $36 million in cash. Our borrowing base is now $475 million, and we terminated the arrangements for the $125 million Bridge facility that we put in place in case the transaction was delayed. The next regular redetermination date for our revolver is October 2014.

Our first-quarter adjusted EBITDA of $111 million was in line with our expectations and down marginally from $118 million in the fourth quarter of 2013 despite the lower production volumes due to the winter weather. As you saw, our liquids volumes were not impacted as much as natural gas volumes which were reduced due to gas transportation and processing problems encountered with third parties. That resulted in relatively higher oil revenues.

We also benefited from stronger NGL realizations in natural gas pricing during the period. For instance, compared with the fourth quarter of 2013, we experienced a 29% increase in propane pricing in the Mid-Continent area, which represents about 30% of our NGL stream. Additionally, our absolute cash operating costs were below the fourth quarter and well within our expectations, although they were up slightly on a per-unit basis due to the lower volumes discussed earlier. In sum, this means that we are still on track with our estimated 2014 adjusted EBITDA range of between $500 million and $550 million. As Peter discussed, going forward, we plan to balance our capital program with our expected EBITDA and will adjust that capital spend if our EBITDA expectations change. Our growing cash flow, along with availability under our existing credit facility, give us confidence that we have the financial resources we need to execute our planned capital budgets and service our debt through at least the end of 2015.

We continue to believe that we are not required to execute any further transactions or raise additional debt or equity in the foreseeable future. Nevertheless, we continue to look at other options so that we can add cushion to our balance sheet and enhance liquidity.

Adjusted net income for the first quarter was $8.3 million, or $0.13 per share, compared with $1.4 million in the same period a year ago, and $5 million in the fourth quarter of 2013. This excludes the impact of unrealized gains and losses on derivatives, acquisition and transaction costs, and a non-cash oil and gas property impairment charge along with the related tax impact.

Our reported first-quarter 2014 GAAP net loss of $83.6 million before preferred dividends compares with a net loss of $7.9 million in the same period in 2013, and $315.8 million in the fourth quarter of 2013.

Production in the first quarter totaled 29,004 BOE per day after accounting for the weather impact of about 2300 BOE per day. We continued to experience significant downtime and well completion delays through March, which caused a greater impact from weather than our original estimate of 1000 BOE per day. Our current production has more than rebounded from those weather disruptions and grown to roughly 32,500 BOE per day for the month of April.

56% of first-quarter volumes came from our Mississippian Lime properties, 29% from our Anadarko Basin assets, and 15% from the Gulf Coast area. The product breakdown was weighted more towards liquids during the quarter as we made special efforts to keep the oil flowing when we experienced third-party issues with our gas production.

Effective May 1, we no longer have production from Pine Prairie in Louisiana, which averaged about 1900 BOE per day in the first quarter. We still have production from our Dequincy assets in the western part of the state. For the second quarter, with Pine Prairie out of our estimates, we expect our production to be in the range of 32,000 to 33,000 BOE per day. Our full-year 2014 guidance is 32,000 to 35,000 BOE per day, which, despite the weather impact of the first quarter, is the same as what we guided for in 2014 on our last call after adjusting for the impact of Pine Prairie being removed as of May 1.

Turning to the Mid-Continent, we recently executed a new crude oil purchase contract for a portion of our Mississippian Lime production that will improve realizations in that area. Beginning with the second quarter, we expect the differential from WTI on that production will average about $5 per barrel compared with $6.50 per barrel in the past. That contract revealed as much is $6 million in additional annual revenue for us. The regional breakdowns, as well as the revised realization differentials, including transportation, are all reflected in the first-quarter 2014 supplemental information packet posted on our website.

During the first quarter, we did not add any new hedges ass the forward curve did not appear favorable. A summary of our current hedge positions was included in the release and is posted on our website along with all the guidance I am providing today. Our hedging strategy remains to be as aggressive as possible to protect our operating cash flow in order to fund our development programs going forward.

I will now review our first-quarter expenses and provide guidance for the second quarter and full-year 2014 updated for the sale of Pine Prairie. First-quarter cash operating expenses, which includes LOE production and cash G&A but excludes acquisition and transaction costs, totaled $40.9 million compared with $42 million in the fourth quarter of 2013. Absolute costs fell but on a BOE basis rose to $15.67 per BOE due to the weather impact at lower production volumes. Our cost efficiencies remained well in place during the quarter.

Our lease, operating, and work over expenses totaled $20.1 million, down slightly from $20.2 million in the fourth quarter. First-quarter LOE of $7.71 per BOE was within our guidance range despite the lower production volumes. For the second quarter, we expect LOE and work over expenses to be in the range of $7 to $7.50 per BOE, which reflects the exclusion of Pine Prairie volumes which had higher average lifting and work over costs than our Mid-Continent assets.

LOE for our Miss Lime properties alone averaged $5.55 per BOE during the first quarter. For the full year 2014, anticipate LOE and work over expense to be in the range of $7 to $7.50 per BOE. Gathering and transportation expenses associated with our gas processing arrangement in the Mississip Lime totaled $2.8 million, essentially flat with our fourth-quarter cost of $2.9 million. For the second quarter and full-year 2014, we expect those costs to continue to range between $2.5 million to $3 million per quarter.

Severance and ad valorem taxes were about 5% of sales revenue before derivatives and within our guidance range. For the second quarter and full-year 2014, we are maintaining the same guidance of 5% to 6% of revenue.

First-quarter general and administrative expense was $11.7 million, down $1.3 million from the fourth quarter and within our guidance range. Non-cash G&A totaled $1.5 million during the first quarter. And we expect G&A in the second quarter of 2014 to be in the range of $10 million to $12 million with about $1 million to $2 million being non-cash. For the full year 2014, we anticipate G&A to range from $44 million to $50 million with about $6 million to $8 million non-cash.

Our DD&A rate in the quarter of $25.63 per BOE was within our guidance of $25 to $27 per BOE. For the second quarter and full-year of 2014, we expect a range of $25 to $27 per BOE.

During the quarter, we recognized a non-cash before tax full-cost ceiling impairment on oil and gas properties of $86.5 million. This charge resulted partly from the strategic decision to focus the Q1 drilling program on converting proved undeveloped locations to proved producing in order to enhance our near-term cash flow. Additionally, during the first quarter, we continued to rationalize our unproved leasehold acreage, and that involves targeting our land capital expenditures on preserving those undeveloped leases which present the best near-term development potential and that are subject to competition from other operators. Going forward, we will continue to allow undeveloped leasehold acreage that currently does not meet our revised hurdle rate to expire with the plans of cost-effectively adding back that acreage if and when circumstances warrant.

Total interest expense incurred in the first quarter was $38.5 million of which we capitalized $4.6 million. We expect to capitalize about $4 million to $6 million per quarter in 2014.

The tax rate utilized for the quarter was a benefit of about 3%, which was substantially lower than our combined historical rate of between 35% and 40%. During the first quarter, we generated a net operating loss carry forward for tax purposes, but due to the company's short history as a taxable entity, we were unable to record that benefit in the income statement. We currently have about $75 million of net operating loss carry forwards that have not been recorded in the income statement but that are available to offset future taxable income. To the extent we generate financial taxable income in future quarters, we will recognize a portion of these net operating loss carry forwards to offset the related expense. As a result, for the foreseeable future, our tax rate will be between 0% and 5% with all being non-cash.

During the first quarter, excluding capitalized interest, we invested approximately $135 million in capital expenditures with $86 million in our Mississippian Lime properties, $46 million in the Anadarko Basin properties, and the balance of $3 million in the Gulf Coast. For the second quarter of 2014, we expect to invest $130 million to $140 million with $80 million to $85 million in the Miss Lime, $40 million to $45 million in the Anadarko Basin, and the balance in the Gulf Coast. These figures reflect the movement of one rig from the Anadarko to the Miss Lime during the second quarter.

The capital plan for Louisiana is primarily for acreage retention. For the full year 2014, we have not changed our initial capital budget of $500 million to $550 million. Additional detail is available in our supplemental information packet posted to our website.

In summary, we believe the Q1 results, particularly on the expense side, illustrate the progress we have made in improving capital and operating efficiency while maintaining a growth profile. Additionally, the closing of the Pine Prairie sale and the restructuring of our revolver represents significant steps in our goal to deliver improved financial stability and liquidity through 2015. With that, I will now turn the call back over to the moderator so we can take any questions.

(Operator Instructions). Neal Dingmann, SunTrust.

Good morning Peter, Nelson. Say, Peter, your thoughts with this 565 BOE, the kind of peak rate average IP on this Miss that you're putting out there, what's your thoughts on that? I mean going forward, is that something that you'll be able to improve on in the near term? Is that just going to be kind of a grind out and push that higher? So I guess what I'm wondering is, when I model this out, what these wells are doing now. Are you assuming significant improvement quickly, or just as a ramp?

Good morning. Good question, I think there's about five or six questions in there. The Miss Lime is starting to lend itself to sort of some understanding. If I take you through it, then you perhaps -- then I'll get to your answer.

We've now got a 3-D cube over the key area that we are looking at and focused on. That allows us to not only see the areas of increased and enhanced rock storage and porosity, and it allows us then to target those wells. That means we can be much more efficient. We can be much more organized. We can start pad drilling. And it means we can start to really target those intervals and focus on the completion to deliver the best wells we can. We are starting to see those rates and the diagrams you can see on our little hand out in the website there on Page 5 show that level of improvement. And I think we can continue along those lines. We've learned a lot of lessons from those open-hole completions and we're learning a lot of lessons as we go through those wells.

So, yes, I think we can get better through both the cost side of the equation, and through the well performance side of the equation. How high, I don't know. But you can see, I think if you look at our peers and others, we are way up there at the top in terms of our performance, along with what some of the -- I think Sandridge are doing, and I think we can continue that.

So, where does the ultimate limit lie? I don't know. All I know is it gets better, we can see other identifiable intervals that carry the same porosity and rock storage, and we see other ways in which storage and porosity is enhanced. So, we are gaining understanding, we are developing better wells, and I think we will grow that production and grow that efficiency.

All right, great answer. And just last follow-up if I could. Just on over in the Anadarko Basin, now if you move a rig out of there, will you just focus on sort of one prominent area or will you still continue to look at the majority of your property? I'm just wondering how you're going to tackle that kind of the remainder of the year and going forward. Thank you.

Yes, sure. What I'd like to do is sort of slay a few dragons here, if we can, is that where we are in the Miss Lime in Woods County and Alfalfa is we can see in that whole area an awful lot of potential. We talked in the past about this core of the core. I don't see it that way at all. I see it that now that we've got this 3-D, we can start to see lots of potential in lots of different places around that whole area and indeed across our whole Miss Lime position. And on that basis, we will sequentially go out there and try some of these things and test some of these things. But primarily the thrust of the drilling effort will be all about picking these target areas, making these things work and look a lot better, and improve that position considerably.

That said, what we also do in terms of bringing that rig into the Miss Lime is it's back to this concept of capital allocation. And the best -- or one of the best bits of paper I've got since I started this job is coming from the operations guys with input from everyone else that takes every single location we are contemplating drilling, both in the Miss Lime and the Anadarko, looks at the cost, looks at the EUR, looks at the 30-day rate, looks at the return on capital, and high-grades that to that program. And when you do that, you get to the point of being able to say that, hey, the majority of these wells that we are looking at sit in the Miss Lime, and on that basis, by putting another rig to it, you get far more benefit from the capital you employ and the dollar you spend. It doesn't mean that the Anadarko is any poorer; it doesn't mean that Anadarko is any less, quite the opposite. We quite like it; we very much like it. But what we've got to do is a lot of work to high-grade that acreage to bring it to the same level of benefit and profitability as the Miss Lime.

So, it's a combination of looking at where our scarce dollars are going to be spent and how they can be spent to best advantage. And that's why we look at it in that light. I've got nothing against the Anadarko, quite the opposite. I really like it, and there's plenty of opportunity there. We've just get the high-grade it and bring it forward. Does that answer your question?

That caller has withdrawn. Ron Mills, Johnson Rice.

Good morning, Peter. I'll try not to get disconnected. A couple of questions. You talked, in the Miss Lime, you talked about 400-plus I think Upper Miss Lime locations, but you also followed up with commentary about the 3-D seismic and showing rock storage/porosity. How does that filter into your expectations about multiple zones, whether they be shallower in the Chester or just different benches of the Miss Lime, and what's your thought process in that testing process?

I just think it's a matter of time before we get there, before we get down there and test some of these intervals, before others start doing the same thing. We know -- we're talking to other people -- that they see this potential, and as time goes by, you will see those intervals tested and I'm sure be successful.

The days of blanket bombing the Miss Lime are over. Too much money has been spent, too much failure has been drawn up and too many conclusions of incredible variability have been drawn from it. People are now becoming much more focused on where to attack this lime. It's a very thick the system. It's, what, 400, 600 feet thick, and it contains many different intervals of potential which through time we will confirm and develop. A bit like anything else, a bit like what you can see in the Bakken with the Three Forks, a bit like you can see elsewhere in other plays in the Permian and the like. These resource plays lend themselves to that understanding and development. And I have no doubt in my mind that the Miss Lime will fall into similar position.

So I guess I should read into that you're really going to remain focused on the Upper Miss with this five to six rig program.

Well, primarily, yes, but we will spend some time and some wells looking at other opportunities and develop and see what these things bring. I mean it does -- it further allows you then to down-space and you can use pad drilling and lower your costs and improve your margins that way. So it allows all of those things to take place.

And it looks like, from your new present or supplemental slides, that the well performance there, your average 30-day peak went up 20 barrels a day, which, considering that's off of a base of 146 wells, that's pretty good performance. But a lot of that seems to be really in the wells that have come on between 500 and 1,000 BOEs per day, which now represent 36% of your wells versus 31% in your prior presentation.

Yes, it's --

What's driving that kind of --

When that green shifts to the right and you start see that benefit, and those are the ones that really give you very strong and very handsome rates of return. I mean, bearing on what went on here is that some of these wells, you recall we drilled 17 wells that we open-hole completed initially. And now we've gone back and completed those wells. Some of the benefits you see from that are demonstrably -- at the top end, we had wells that flowed tremendously that we've not had to bother with any recompletion, and those wells, call them home runs, have now been converted into grand slams.

At the bottom end, we saw a number of wells that failed to deliver. They ought to perform well, and we save money by not having to fracture complete them.

Those in the middle we recompleted, and we found that they gave a significant benefit. And if you take those wells and add them to the additional wells that we drilled, that's where you start to see this shift to the right.

So, the lessons we've learned from that open-hole program is that, yes, there are some great wells that we don't need to touch. There are some bad wells that we can ignore. There are some wells in the middle there, a goodly number, that we've gone and completed, that we will now complete from day one because it's a bit cheaper and it wins you real benefit. And that gives you those wells that throws you into that higher end of profitability and takes you into those greater than 500 barrels a day after 30 days.

And then lastly, the guidance numbers that are out there, obviously to maintain that full-year guidance, that suggests a stronger ramp in the second half than had been initially provided. A, Am I reading that correctly?

And B, a similar question on the EBITDA guidance. I think you, on your last call, talked about $500 million in recent presentations, $500 million to $550 million. I just want to make sure. Are those apples to apples in terms of having already netted out the Pine Prairie sale?

The Pine Prairie sale allows our cost base to fall and our improvement in margins to continue, so that's what that provides. Yes, we will get better Miss wells because we've got a lot of locations we feel very comfortable with. And a lot of those locations we think can deliver very good numbers. We've got juxtaposed wells very nearby. There's no reason to suspect that, if we operate properly and execute properly, that we won't deliver very good wells.

I think the way we look at it and the way we take it forward, it's not linear, but it does allow us to grow into those numbers to give you both improved margin and make sure we hit the target between 32,000 and 35,000 barrels a day.

I guess on the EBITDA question, I didn't ask it very clearly. Did your prior numbers -- maybe this is for Nelson -- of $500 million to $550 million, was that already net of the Pine Prairie sale?

Yes, Ron, it was.

Okay, great. Thank you. I'm going to let someone else jump in.

Chad Mabry, MLV.

Thank you. I had a question on the cost side, curious what you're budgeting going forward on your well costs in the Miss and specifically if you help us reconcile Q1 CapEx in the play coming in kind of at the high end of your range versus the fewer completions that you had planned.

I'll let Nelson have a go at that and I'll come back.

On the Miss Lime, we are targeting or we have planned to spend on D&C about $3.4 million per well. It was a little bit higher in Q1 because of the weather. Q1 also included the cost of the recompletion or the stimulation of the 17 open holes that Peter referenced earlier. Those ran at -- those probably added another $17 million to $18 million to spending in the quarter. So, I think if you back that out, I think we were at $138 million was the hard dollar number before cap interest. If you took the $17 million out, you were at $120-ish million.

And as a back -- that's the numbers. There's a backdrop to that. What we are going to be doing increasingly is be looking at pads, and that is going to add a benefit and is going to lower your cost. You'll be nearby, so you won't have such logistical issues. You'll get some savings on the fact that we're going to be doing some completions that allow us to save money because we do the completion instantly. And we've got the mobilization issues of being very close and close around and you can backtrack these things and get a lot of savings there.

So we are hoping that we can drop the numbers that Nelson talked about. We've not embraced it, have not included it, but we see there's going to be benefit in doing that from that sort of density and that sort of saving of scale, if you like. And we are definitely very keen on that.

Plus the additional benefit. We look at what our competitors are doing. We look what we do over on D&C, and we know there's areas where we can do things better and slicker. And we're always constant striving to get that price down and that benefit and margin up.

Okay. Very helpful, I appreciate it. And I guess just as a follow-up, as far as your EUR range, you guys have had that 300 to 460 MBOE out there for a while. Given that you've drilled 146 wells now in the play, any reason you can -- we can see that tightening here in the near term?

Just don't forget what EUR is. It's a mathematical regression. And all we are doing is best fitting dots. What we're trying to do is put a bit of science, more science to this, not that there's nothing wrong with the regression. It's a mathematical solution. But what we're looking at and what I am very focused on with the guys is we look at the first 30, 60, 90, 120 days, and we try and benefit as much as we can from that accelerated production without doing vast damage to the pressure of the regime and the ultimate recovery. And so we are focused very much on that.

And whilst EURs are useful to us, the way we look at them is we (technical difficulty) families of the EURs, we actually look at the 9 and 10 wells round about, and we take the best fit we can in what we think we're going to achieve and what is going to occur. We have seen increases. We've seen better numbers, we will show you all of that when we get to our analyst day, but we've run, we've had wells that we anticipate have got 400 EURs. We've got wells that I think have got 500,000 EURs. And who knows what we're going to see when we get into the future and into our program. There will be continuous improvement. I can tell you that now.

Understood. Keep up the good work.

We are going to try.

Sean Sneeden, Oppenheimer.

Thank you for taking the question. Nelson, just for you on the liquidity front, I know you guys have previously talked about exiting this year with $100 million or so of liquidity. I guess, number one, is that still the plan for the year? And then maybe more to the point, number two, can you talk about funding for next year? For instance, you've got a similar plan on CapEx, maybe kind of walk us through how you feel you're comfortably funded through 2015?

Sure. Thanks, Sean. The plan is still to exit the year between $100 million and $120 million of liquidity. That's the target. I think in that supplemental information pack we had a recap on one of the pages, I think it was Page 8, that gets us to where we are today. And if you kind of work through the numbers like we have in the past, just taking out the interest expense and adding in the adjusted EBITDA, we should be -- we should exit the year with between $100 million and $120 million without any increase in the revolver.

Heading into 2015, we still feel like we will be able to -- we'll have the same rough capital expenditures. We think we'll have some EBITDA growth on top of what we had projected for this year, which will help bridge part of the shortfall that we are experiencing in 2014.

We are not planning to have any borrowing base growth in 2015. That's not underpinning our statement that we are comfortably funded, but we would expect the production growth to impact the revolver in April of next year. So, I think our projections are showing us exiting the year around $60 million to $80 million in 2015, and that does not consider any aggressive revolver growth.

Sorry, $60 million to $80 million of liquidity?

Yes, I think in 2015.

Okay.

I'm sorry. This year, it's still $100 million to $120 million is the target.

Got you.

And we should be pulling closer together, in 2015 the EBITDA and CapEx should start -- be very close to aligning as we exit next year.

Okay. And just to be sure, when you guys are talking about EBITDA and CapEx, you're not necessarily talking about like operating cash flow of CapEx, so there would still be an outspend for interest expense and working capital, right?

There is an outspend for the interest expense, yes.

Okay. The $60 million to $80 million for 2015, that doesn't include anything on the asset sale front, right?

No. Anything we do beyond what we have done with Pine Prairie would all be incremental to that.

Okay. Great.

And there will be some.

All right. No, great. That's helpful. Thank you very much.

Kyle Rhodes, RBC.

Just kind of following up there, in terms of your discussions around your JVs or asset monetizations, can you provide us an idea of which these discussions gets the furthest?

No. We are in discussions with a number of parties, and it wouldn't be prudent for us to say who's in front, who's behind, who's doing what and what expectations we've got. We are going to do best we can for our shareholders and get the best possible price for the assets we have in mind.

Sure, that's fair.

Curtis is working darn hard to do it.

And then I guess you guys mentioned a rationalization of unproved leases earlier. Can you give me the ballpark of what the expiry potential is for 2014 and then what it would cost to release that acreage?

Gosh, I would have no idea. Just let me tell you what we are trying to do here is -- leases, as you know, saw -- they cut off at a primary term and they (technical difficulty) be renewed, they can be top-leased. There's a whole host of other things you can do if you can get the arrangement and agreement of the owners.

What we are doing, because we are so fixated now on capital allocation, I say to the guys, okay, tell me the benefit of these acres. What are they worth? And if they don't meet a certain hurdle, if we don't think they've got potential from the work that the guys have done to look at them, we start to put them in the pile and say okay, we will let those lapse, and if we can get them at a lower price a little later, or a different price, or we can put them into a different package, then we would contemplate taking them back. It's good practice. It's good management. It's good management of your portfolio, and it's a good process to follow. We've got plenty of acres and we look at them from the point of view of strategic benefit, holding by production, etc., etc., and we go through that whole exercise. So, it's not a casual exercise of just instantly renewing every acre we've got. We look at it very hard. There are areas where there's very little competition where we think we can pick these leases back up for a much lower price and that's in our best interest. And that's what we do. How we then treat that from an accounting principle is something that we are working through with Nelson and the auditors and the guys, because it says that if you just drop a lease, then that in essence is an impairment, is a write-down. If you then go and pick it up, it just comes out of your capital allocation. How you then treat that on your balance sheet and the rest of it is stuff we are still working through, but there will be, every quarter, 5000, maybe 10,000 acres that we look at that come under that sort of regime that we're going to look at and review and come to a decision on. Is that a fair statement?

Yes. I think -- and the key point there I think is the focus is on the cash spend going forward, not what we had in these acres in the past. So, the accounting is the accounting, but the key is to optimize the capital that we have available for land.

Sure, that makes sense. And then just one quick last one for me. I think you guys have mentioned in the past some infill pilots in the Miss Lime. When should we expect those this year?

You've seen them already. We've done them. We've got all sorts of things going on. We've got a couple of bilaterals. We've got one trilateral where we are looking at three wellbores open-hole right now that are some 40 to 50 feet apart, and we're just seeing what they do vertically, what they do and how they perform. And we've got other things where we down-space to the fourth well in a section, and we've got other areas where we contemplate doing the same thing. And we will see what those results bring. We can look at interference; we can look at performance, look at the whole range of items that -- then look at what would then be a practice in terms of what we would follow going forward. Plenty of locations, plenty.

Thank you.

Pearce Hammond, Simmons and Company.

Just following up on some of the earlier questions on portfolio optimization as you are redirecting the rig from the Anadarko Basin to the Miss Lime, what would be the minimum number of rigs that you think you would need to run in the Anadarko Basin to achieve your objectives there, either to better understand the geology and what you have or to hold acreage, etc., while maximizing as much you can your Miss Lime acreage?

Sure. Actually a hell of a good question. You are always looking at it. It's dynamic. It doesn't stand still because as you get understanding and you get attractions and you get prizes that you think you can see, the overarching number I think is four. That's sort of a gut feel thing. We've talked about it a bit, but I think four is the number that makes good sense to us.

In any organization, in any program, over the years and years I've been doing this, organizations can cope with a certain rig count. And you get to a certain level and you can't cope with it, and then you become inefficient. You're running around being responsive to rigs and rig locations, and you make some terrible decisions.

I think our number for where we are today and what we are about in the Tulsa office and out in the field there, I think four is a good number. That said, there is plenty of potential here and plenty of opportunity. And you've got to put it in a high order and you've then got to be reflective and thoughtful about how your balance sheet, how your flow of cash, and how it plays out into your company structure.

You can have hundreds of wells, and we do have, and you can have years and years of inventory which we have. At what pace do you attack that really is reflective on what your capacity to both pay benefit and see your balance sheet there not to be stretched, struggle, and you bring value to your shareholder base.

So long story short, I think the answer is four. A good example of how that might work is this Tonkawa well has given us a huge amount of encouragement. It's an order of magnitude -- not magnitude, it is significantly better than what we've seen in the Cleveland today, and it offers a goodly number of locations that would allow us to start thinking that we can repeat what we've done on this Misko well that I told you about earlier that gives you the best part of 1000 barrels a day of IP and 800 barrels of 30-day IP, a tremendous well which we can repeat. And if we found the same thing in the Marmaton, the Cottage Grove and maybe even the Cleveland itself, that would start to attract attention, it would start to bring rigs back in the focus and we would start to look at capital allocation. But back to your story, I think the number is four.

Thank you for the detailed answer there. And then for the remainder of this year, the drilling in the Anadarko Basin, can you provide a breakout on the composition of the horizons or locations that you will be drilling for the remainder of the year? Is it primarily concentrated in the Cleveland?

I don't have any idea right now, and we will be very thorough on this allocation. Back to my nice piece of paper that I was given where you can go down that list and where you draw your line on your per capita, you've got what wells sit above it and what wells sit below it, and that's always changing.

Cleveland is a very solid, steady performer. It gives you good rates of return as long as you keep your well costs down and you deliver the EUR in the 30-day IP. And there's hundreds of locations to us.

Marmaton is a bit of a wildcard right now. We are learning about it. We've seen some good results. Tonkawa I've just talked about, gives us some spectacular results, and so we go on. How you then put that into an onward program is dynamic. And I wouldn't -- right now I could not give you an answer. I can get back to you and tell you what my best thoughts of it will be or what the guys' best thoughts are, but right now I couldn't tell you.

Okay, thank you. And then one last quick housekeeping one for me. Do you have the exit rate production for the Miss and for the Anadarko basins at the end of the first quarters on March 31, what they were producing?

The exit rates on March 31. We'll get back to you. I don't want to give you a bad number. I've got so many numbers in front of me here, I wouldn't know where to start.

Okay. Thank you very much. Appreciate it.

It's not a bad number, I can tell you.

Thank you.

Michael Rowe, Tudor, Pickering, Holt.

Good morning. Thanks for taking my question. At the beginning of the call, you mentioned sort of you had some I guess specific well problems in the Anadarko with some new wells you brought online recently. What was that related to specifically? Was that just weather related or was that something else that happened?

It's the usual stuff. You differentially stick, you twist off your bottom hole assembly, you can't get your pipe down to the depths that you drilled it to. It goes on and you get into those things. You come out of the -- you try and drill along a particular curve and a particular target and you come out of zone, so you come back and sidetrack. Those take days and add days.

We've got fairly tight tolerances to try and drill these wells in the 20 to 25 day drilling range, and if you get deviation from that, it encroaches on your valuation and your IRR. So, it's a combination of those things and fine-tuning your methods and fine-tuning your program, no real major train wrecks, but just ongoing operations. It's why it's called operations. This stuff happens.

Okay, great. And then --

There's no common theme, I would say. Sometimes you get individual problems that would keep repeating themselves. We seem to run the gamut and catch a few other things.

Understood. (multiple speakers)

And it's early, so we're still getting our learning -- our program down pat and getting our consistency in place.

Do you think I guess the Anadarko consistency is one thing that you all are going to be trying to focus on more going forward to see whether or not this play ultimately competes I guess with the Mississippian Lime. I guess what I'm going with that, I'm just trying to get a sense for how the variability by zone you're seeing compares to your initial expectations and whether that has something to do with you all deciding to shift a rig from the Anadarko to the Mississippian Lime? Thank you.

Yes, sure. Hey, we started operating in Ezanger in the Anadarko from December. And here we are now in early May, so it's not been that long. The Anadarko has been around for, gosh, 100 years down here in terms of oil production, in terms of history. There's a large number of producing horizons, and we are just systematically working our way through it.

I don't rate the Anadarko any less than I do the Miss. I'm further on in the Mils because we've got better understanding and the guys have done a terrific job in unlocking the potential and cracking the code. I am very confident we'll do the same in the Anadarko. It's just going to take a bit of time. And an interim, we are going to be very, very careful and ruthless in where we allocate our capital.

And I say to you guys I wouldn't worry about where we produce our barrel from as long as it's a valuable barrel. And at the end of the day, if we are producing 33,000, 34,000, 35,000 barrels a day, and we've got a runway as long as your arm for 9 or 10 years, you shouldn't worry where we are getting it from. Just trust us that we're going to do it from the best possible target to get the best possible profit and to get the highest possible margin for the dollar invested. Should I do any different?

That's helpful. Thanks.

David Heikkinen, Heikkinen Energy.

Hi Peter, along those lines, as you think about the assets that Midstates owns, you've looked at a lot of other assets, whether or not they would be the Williston or other areas. How did the Miss Lime in the Anadarko stack up for the most profitable barrels?

You asked a good question, David. Just on a personal thing, one of the reasons I joined the board of Midstates was I wanted to understand the Anadarko and the Miss Lime. I was fascinated by it. Particularly the Miss Lime being a carbonate, I was really interested in how that would perform and how that looks.

Resource plays are complex. They are not just simple sponges that you just drop a straw into and suck, as you well know. And you've got to learn about them and understand them as they go on.

What surprised me about the Miss Lime is it is such an inefficient carrier of a source system from the Woodford and then distributes it around the Basin towards the basin margins that it's incredibly difficult to work out what is the capping mechanism, what is the release mechanism, and how do these rocks behave and work?

Again, what I found very interesting is -- talking to the guys out there in Tulsa and with the guys around here -- is how we are growing and learning about how limestone -- resource play limestones work. They're very different to caustics. And I'm very surprised and very pleasantly surprised about how good the Miss Lime is turning out, particularly where we are and where we are developing and understanding on the basis of that 3-D seismic.

The Anadarko is a bit more ancient and a bit more cloudy in my head because it's been around so long and it's more of a classic old oilfield. But we are learning, and certainly some of the other horizons of these delta top sands are really starting to interest me and starting to show that if you can understand the rock storage and what's holding the oil in place, you can start to get at it a lot better and a lot more efficiently with your wellbore interface. Long-winded way of saying that the Miss Lime to us is terrific and we are getting better at it, and I think the Anadarko will follow, but it will take a bit of time.

And then obviously you are working within the limitations of your balance sheet and stock price but as you think about assets, are these the assets you want Midstates to own assuming you get a joint venture done on asset sales or would you go into other basins?

Hey, if we had our druthers, we would like to be in the Permian Basin, wouldn't we, and wouldn't a lot of other folk? And the Bakken is not at all bad, I can tell you. But that said, I think the Mid-Continent offers a lot of potential. I think it's slightly different. Your cost bases are a lot different and it's a lot easier to get at them, and they are a lot shallower. There's a lot less pressure and there's a lot more margin if you can get at it. So, I'm kind of interested in the Mid-Continent in a different way, because I think the industry can do great things here. And one of the pleasures of being able to live over here is it's only in the US onshore that you see this stuff. There's nowhere else in the world that's doing this. And the guys you meet and talk to in the field, whether they be Midstates' guys, whether they be competitors or peers, it's a pleasure, it's an honor, and these guys are really working at the edge and are doing great things. No doubt about it in my mind.

I should've been more specific around Oklahoma. You want to stay focused in that area obviously, but thinking about any extensions of where you are already looking at, whether or not that be the Merrimack section or any of the hunting that's going on in and around you, just those type of thoughts.

Yes, I think some of the work Greg and Curtis have been doing with the guys up in Tulsa has opened up a lot of other intervals. Oil is really find it, you know? And there's lots of things going on in the Woodford, the Viola, some of the shallower horizons and not just the Miss Lime that I think are potentially quite attractive. And I think, as time goes by, we will pick those up, and we will find ways of making them valuable.

Yes, look forward to talking to you more. Thanks.

Yes, me too.

Gregg Brody, JPMorgan.

Good morning guys. Just two questions for you. The first one, the liquidity bridge you gave, could you remind us of what your commodity price assumptions are for 2014 and 2015?

And then the second question is just for Peter. I don't know if I missed it. Obviously, you gave us your view on how the business is going to be run differently. It was incurred to me that you were permanent CEOs, so I was curious if that is the case, and is there process ongoing to put someone permanent in place?

Do you want to go first?

On the forecast prices for the liquidity bridge we talked about, we used a WTI of about $98 a barrel, Henry Hub gas of $4.70 with a NGL price of around $44 per barrel for 2014.

And that's 2014. What about for 2015?

We used the strip for 2015.

Perfect.

The current strip, yes.

The other question you asked, I serve at the behest of the board, of which I am a member. I certainly call very true and very principled in terms of what my response abilities are in terms of a board member, which is a duty of care and a duty of loyalty. When John stepped down, then I was asked to step in. We have started a process of looking for a new CEO; that is ongoing. One of the issues around that is where is this company going and what is it going to do? And until there is some more clarity on that, and that's what we are working on, then I will continue to hold this job. How long is that? One month, two months, three months, don't know. It means interim because I'm not going to do it forever. At 67, I've got a lot of fishing to do and a lot of things to catch up on. But I'm very committed to this. There's a great group of guys here, and one of the jobs is to enable this team to be able to come forward and show what they can do in terms of taking Midstates forward. There is an organic way out of this, and I have indicated already that I think we can be cash flow neutral by 2016 or cash flow positive by 2016. That is one way of getting there. Is that the best, the most secure, the most risk-free, or are there other ways of being able to deliver the value to shareholders? And until we have laid those options out clearly in our mind, then I will stay running this thing and trying to help out as best I can.

And just one follow-up, on the 2015 commodity price assumptions -- by the way, thank you very much. That was very helpful. Just one follow-up. The strip for 2015, what's the NGL realization you're assuming?

We are using the 45% of the strip price.

Okay. Can you just remind us what it was for this quarter?

For this quarter, it was about $47 -- 47%.

Perfect. So do you think the propane advantages that you achieve this quarter will likely carry through?

It's hard to say.

(multiple speakers) a piece of string.

They were hopeful. There is a bunch of activity, as you know, around exporting some of these NGLs and hopefully that will help firm up price as well.

Yes. It's still hanging in there, isn't it?

Yes, it's been very strong.

Have you got a crystal ball? Can you tell us?

I don't. I often ask around to see if somebody does.

It's as muddy as our crystal ball then.

I appreciate it. Thank you guys.

Ron Mills, Johnson Rice.

Nelson, just a couple maybe modeling ones. The 0% TO 5% tax rate you talk about for the foreseeable future, is that something through 2014, or how long do you think that tax regime lasts? And then Peter, the 2016 commentary about cash flows exceeding CapEx, are you still at that point talking about EBITDA or are you talking about discretionary cash flow?

I'll take the first question on the tax rate. I think that 0% to 5% range is appropriate through the rest of this year, certainly, so I would just continue to use that one.

And in 2015, do you think it reverts back to a statutory rate, or is even that too soon?

It just depends on what our tax and book losses -- our book income is for the rest of this year. I would say that rate probably holds through the middle part of 2015, but we'll just keep updating that guidance every quarter.

Okay.

That is EBITDA and we will start digging into the interest.

All right. Everything else has been asked. Thank you so much, guys.

I'm glad you're still awake, Ron.

Good night.

I would now like to turn today's conference back over to management.

Just thanks very much, everyone, for being patient, listening, and asking what were a good set of questions. Have a good day and we'll talk to you again soon. Thanks very much.

Once again, we would like to thank you for your participation in today's Midstates first-quarter earnings conference call. You may now disconnect.