Amplify Energy Corp (AMPY) 2018 Q1 法說會逐字稿

Good morning, and welcome to the Midstates Petroleum First Quarter Earnings Conference Call. My name is Samuel, and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions) At this time, I would like to turn the show over to Mr. Jason McGlynn, Investor Relations. Please go ahead.

Thank you, Samuel. Good morning, everyone, and welcome to Midstates Petroleum First Quarter 2018 Earnings Call. Joining me on the call today is David Sambrooks, our President and Chief Executive Officer. In today's call, David will begin with an overview of our operational and financial highlights. I will then provide additional details on our operations and financials. And finally, David will make some closing comments, and we will take your questions.

Before we get started, let me read our safe harbor statement. This conference call contains forward-looking statements and assumptions, which are subject to risk and uncertainty, and actual results may differ materially from those projected in these forward-looking statements. Please refer to Midstates' Form 10-Q that will be filed this afternoon with the SEC for a discussion of these risks. Also, please note that any non-GAAP financial measures discussed on this call are defined and reconciled to the most directly comparable GAAP measure in the table in yesterday's earnings release.

Now I'll turn the call over to David for his comments.

Good morning, everybody. Thanks, Jason, and thank you for joining us today, and thanks for your interest in Midstates. The story of the first quarter is that we're on track and very excited about our recent progress. For the first quarter, we were on budget, on target and our production was approximately 19,200 BOE per day with 15,500 BOE per day coming from the Miss Lime assets. And you remember, we have a divestment of our Anadarko assets that we expect to close in a couple of months.

We generated approximately $30 million of adjusted EBITDA and our capital expense and capital items were in line with our budget expectations.

You will remember some background on the first quarter, when I came in November, we took hiatus in completions, and so we expected the first quarter production to be down from fourth quarter. Because of that, we also encountered some weather-related downtime in the first quarter, and all of that was within our forecast and our guidance. But I'm very excited to announce that as of today, we're at 18,000 BOE per day from our Miss Lime production, from our workover operations, which I'll talk more about.

Importantly, we are completing a number of initiatives laid out in our market-focused strategy of targeting activity, reducing costs, generating free cash flow and improving liquidity to realize near-term value creation and maximum optionality.

We continue to operate a 1-rig program in order to prudently develop our Miss Lime assets, targeting flat production and generating free cash flow. And you'll remember that we dropped from a 2-rig to a 1-rig program last December. We announced the strategic sale of our Anadarko Basin producing properties for $58 million. These funds will further bolster an already pristine balance sheet. And as I mentioned, we expect to close that divestment in the next couple of months.

On the expense side, we performed a reduction in force in January to align our staffing levels with our current activity level, reducing our adjusted cash G&A expense by $3 million to $5 million annually, and our headcount will be 83 employees after the close of our Anadarko sale, down from 129 at year-end 2017.

Also during the quarter, we paid down our outstanding RBL balance by $50 million in early March, reducing annualized interest expenses by approximately $3 million. I am very pleased with our efforts to-date to reduce cost and further enhance our competitive margins.

I would like to dig into a few of those items a little bit more to give you a little bit more color. We have been -- when I came in, one of the first things we wanted to do was take a look at the cost structure and get it in as good shape as we can in terms of reducing costs, but also making it as effective as possible. So with the cuts that we've made in January in our staff and getting to an overall staff count of 83 employees post our Anadarko sale, it leaves us with a very lean yet very effective organization. Underneath these numbers, we have made several organizational changes to put the best talent on most critical jobs and our talent level is excellent.

(technical difficulty) in line procedures and reporting to increased accountability and visibility to results, and these changes have allowed us to move forward rapidly on several other (technical difficulty) [overall] results.

We next attacked expenses and have gained meaningful wins there also. These changes have resulted in capturing over $3 million of annual savings. Again, a very meaningful number. And then finally, as I mentioned on the expense side, in the first quarter, we paid down our RBL by $50 million, reducing our forward interest expense by approximately $3 million. And further with our $58 million Anadarko sale, we expect to close -- that we expect to close within the next several months, we'll further reduce that to further reduce our interest expense. So on the expense side, the work is never done, but we feel like we've made very significant progress on (technical difficulty)

Pass the cost side of the structure, we've continued to test our Miss Lime completion program. Again, as I mentioned, we took a hiatus in completing in December of last year to study various alternatives to see if we can get a better result out of the store completion design. To-date, we have completed 6 high-intensity completions. That pilot project to the high-intensity completions is complete. We're evaluating results. The target for the high-intensity completions is mainly to reduce the declines. So it's going to take some time to evaluate that, but admittedly, at the extra cost of those high-intensity completions, we're going to need to see some good results to continue with that program.

We have an additional 6 wells in our pilot test program that we begun completing now, where we've taken the approach of a more focused and lower cost completion. And so those wells are underway. With the completion of those 2 pilots, we'll have a very good view of the optimum way to go forward with our completions in the Miss Lime.

The other thing that I really want to emphasize, and it's recent events during the first quarter, but when we came in and evaluated the opportunities at Midstates, one of the things that we really attacked were looking at the downtime of our base production and the opportunity to increase the production from our already producing wells. The most economic capital and expense that you can spend is getting more out of what you already have, and we've taken that effort on with great resolve.

The -- we've reviewed all of our base production wells. We've looked at our downtimes. We've revised procedures on how we increase the sub-surface pump run times and increase well productivity. The program has been highly successful and we've worked diligently to increase production. So I think you can see from our first quarter average production of 15,500 BOE per day compared to our current rate of 18,000 BOE per day in May, that this program has had a very significant effect.

We have increased our workover rig account from 2 to 10 rigs. We are actively attacking the downed wells. We worked over 90 wells year-to-date. We are doing more than just replacing pumps. We are also restimulating our wells and finding excellent results from doing that work. We're generally finding that we can bring a well back on and get a 30% increase in production from when it previously went down initially. And we're finding those production increases from restimulation to be sustainable in the 10% or 15% range.

So we're very excited about what we're seeing there. And with the result of the production increase, we're in very good shape for this year in terms of our production forecast.

So with that, I'd like to turn it back over to Jason to go over some of the details. And I'll look forward to answering your questions.

Thanks, David. I'll begin with a discussion of the company's operational highlights and follow up with the first quarter earnings and costs. I'll then provide an update on our capital investments and finish with a discussion on our balance sheet and 2018 guidance numbers.

As David mentioned, we achieved average daily production of 19,235 BOE per day during the first quarter of 2018, down from 21,217 BOE per day in the fourth quarter of 2017 due to the planned deferral of new well completions in the fourth quarter of 2017 associated with the company's completion optimization pilot program and weather-related downtime experienced during the first quarter.

Our Mississippian Lime properties contributed approximately 81% of our first quarter volumes or 15,518 BOE per day, with the balance coming from our Anadarko Basin properties. The production mix during the first quarter was 30% oil, 24% NGLs and 46% natural gas, roughly in line with the previous quarters.

During the quarter, we generated net income of $4 million or $0.15 per share. Adjusted EBITDA came in at approximately $30 million during the first quarter, down from approximately $34 million in the fourth quarter of 2017. The decrease from the fourth quarter 2017 was primarily due to lower production in the first quarter of 2018.

Turning to expenses. First quarter adjusted cash operating expenses, which include LOE, production taxes and cash G&A, that exclude restructuring and advisory costs and employee severance costs, totaled $21.4 million or $12.37 per BOE, down from $24.9 million or $12.77 per BOE in the fourth quarter of 2017. The decrease quarter-over-quarter was primarily due to a reduction in gathering and transportation expense related to the company's implementation of the new revenue recognition standard on January 1, 2018. As a result, gathering and transportation and a portion of lease operating expenses are now being presented net against oil, NGLs and natural gas revenues. Please refer to yesterday's press release and Form 10-Q for additional information on ASU 214-09.

Our lease operating and workover expenses for the first quarter totaled $14.8 million or $8.56 per BOE, down from $15.2 million or $7.80 per BOE in the prior quarter. The increase quarter-over-quarter on a per BOE basis was due to lower production and increased surface maintenance costs in the first quarter of 2018. Severance and other taxes were up this quarter to $2.9 million or $1.65 per BOE compared to $2.7 million or $1.38 per BOE in the first quarter of 2018. In November 2017, new legislation was signed into law in Oklahoma that increased the 4% incentive tax rate to 7% for wells drilled between July 1, 2011 and July 1, 2015, effective with December 2017 production.

Further, in March 2018, new legislation was signed into law in Oklahoma to amend the gross production incentive tax rate for wells drilled after July 1, 2015, from 2% to 5%, effective with July 2018 production.

With respect to adjusted cash G&A, which is a measure of cash G&A before any capitalization to oil and gas properties and excludes noncash compensation and certain nonrecurring items, the first quarter came in at $4.4 million or $2.52 per BOE compared to $4.1 million or $2.12 per BOE in the fourth quarter of 2017. The increase quarter-over-quarter was primarily due to higher employee expenses during the first quarter of 2018.

As David mentioned earlier, in January 2018, to better align our G&A expense with our current activity level, we completed a reduction of force that results in annualized adjusted cash G&A expense savings of $3 million to $5 million.

Operational capital expenditures for the first quarter were approximately $32.2 million, with all CapEx being spent in the Mississippian Lime, where we spud 4 development wells and brought 6 development wells online. Average well cost in the first quarter of 2018 trended higher to approximately $5 million per well due to the testing of high-intensity completions. In addition to our drilling and completion programs, we brought approximately 90 wells online during the quarter under our highly economic workover program.

Onto the balance sheet. At the end of the first quarter of 2018, we had approximately $8.4 million in cash and net debt of approximately $69.7 million. Liquidity at the end of the first quarter was approximately $98.4 million, consisting of $8.4 million in cash and $90 million availability on the RBL.

In early March, we made a $50 million pay-down to our RBL facility with cash on hand, which will reduce our annualized interest expense by approximately $3 million. Additionally, on April 19, our borrowing base was reaffirmed by our bank group at $170 million based solely on our Mississippian Lime assets.

Finally, I'll finish up with our 2018 guidance, which excludes our Anadarko Basin producing properties as we have entered into a PSA and anticipate closing on that sale shortly.

I would like to point out that we have provided an actual -- 2018 actual [to] guidance reconciliation in the May 2018 Investor Presentation on our website to easily break out the Mississippian Lime standalone line items [versus] our 2018 guidance for the investors. It's on Page 21 of the deck. If you are -- we are reaffirming our full year 2018 guidance released earlier this year and have added additional guidance around pricing differentials.

The new pricing differential guidance include gathering and transportation expenses to be consistent with its presentation under the new revenue recognition standard I described earlier. We previously showed gathering and transportation as a standalone cost item on a per BOE basis. Our differential guidance is as follows: oil, we expect to be approximately $0.70 per barrel off NYMEX WTI; gas, which is inclusive of gathering and transportation expenses, we expect it to be about $1.35 per Mcf off NYMEX HENRY HUB; and for NGLs, we expect to realize approximately 40% of NYMEX WTI pricing per barrel of NGL.

To recap our previously disclosed full year 2018 guidance, operational CapEx of between $120 million -- $100 million and $120 million. Production is expected to be between 16,000 and 18,000 per -- BOE per day. Lease operating and workover expenses between $6.50 and $7.50 per BOE. Severance and other taxes between $1.50 and $2 per BOE and adjusted cash G&A between $2.50 and $3.25 per BOE.

With that, I'll turn the call back to David for closing comments.

I wanted to make a few more comments about our drilling program going forward. We're very excited by the opportunities that we're seeing with the drill bit now in the Miss Lime. We can continue to move forward with the 1-rig program, focused on the best rock in our portfolio. We're making excellent progress on drilling and completion cost reductions, and we see real time decrease in the D&C cost for a 1-mile lateral from about $3.2 million to current $2.9 million. Further, we are targeting a forward 1-mile lateral cost of $2.5 million to $2.7 million. We also started the drilling of our first 2-mile lateral test. We have AFE-ed the well for $5 million, which obviously is an equivalent of a $2.5 million per 1-mile lateral. So again, this is an effort to result in the lowest possible cost per 1,000 foot drilled.

On the first well, we are 2 TD, and we're significantly ahead of our days to TD, so we're excited by the early operational successes that we're (technical difficulty). With the significant increase in commodity prices that we've realized, our targeted well cost and our focus on our excellent core Miss Lime area, we are very excited about our go-forward drill bit economics.

Finally, I like to thank our Midstates employees. I've asked a lot of them in a very short time and they've performed admirably. I'll close by saying, I look forward to the future of Midstates, and Midstates is moving forward. Thank you.

All right, operator, we're ready for questions.

(Operator Instructions) And your first question comes from the line of David Beard from Coker & Palmer.

Couple of questions. Just first, when we look at the sort of fourth quarter to first quarter declines, is that a good indication of your internal decline rate? Or should we use something different? What are your thoughts there?

No. No, it's not. I think what you have to do is -- you got a couple of data points that they're right. You've got fourth quarter, obviously, where we averaged for the first quarter and then where we are today, which is fully back up. So the effects in the first quarter that we described that brought production down fourth quarter to first quarter were an intentional hiatus in completions to study alternate possibilities going forward. And we've begun to complete those wells in the first quarter and catching up, so that production is going to start coming into the system, call it, the second quarter we're on. So we had that kind of designed downtime, so to speak. We also were hit pretty hard with weather in the first quarter. With our electrical system out there, the high winds and freezing, we have a fair amount of downtime that we traditionally see. Usually it is in January and February, which is where it hit us this year. So I think one thing that we can kind of quantitatively say is that we're back up to 18,000 BOE per day for the Miss Lime, and we're strongly reconfirming our guidance. So I think what you saw there was not a base decline rate, it was due to completion hiatus and weather downtime.

Fair enough. And will you able to quantify some of the weather impact? Or is there any way to bracket that?

Yes. It's a little bit tough to bracket that, but I mean -- I think I've put the roundabout figure. Your decline from Q4 to Q1 was about 10% in the Miss Lime. I would say, probably 2 to 3 of that was weather-related and the rest of it was more related to the hiatus on well completions, as David mentioned.

Okay, that's helpful. And then switching a little bit next to acquisitions and M&A. We'll start with the easy question. Is there some infill opportunities to lease acreage or acquire acreage? And do you feel you need to do that with the program you're ramping?

I think the quick answer is yes, and not really -- not necessarily. So yes, there is -- we feel like there is continuing opportunities to bolt-on to our acreage position. We are -- the best deals that you can do are the ones that are kind of adding into what you're doing now and moving opportunities up to the top of the stack. And yes, we're happy with the inventory that we have and we have picked out targets for the next -- many, many months, 1 year, 2 years easily and kind of what we currently have. But we're always looking around and seeing if there is something that can be added in that would compete with that and move up in the stack. So I think there definitely is opportunities nearby and in the basin for us.

All right, good. And then when you look at larger or corporate acquisitions, are you really sticking in your geographies and looking for synergies that way? Or are you kind of evaluating every and any basin out there?

No, we're -- I mean, it's a step-wise process, and I would say discipline is the kind of word to apply to it. We've done a lot in the short time here, and that's been where our focus is. And only after we're gaining all that we think we can gain out of doing that, which is we still have more to do. Do we start getting more outward looking? And I think the outward looking kind of begins with what's around this and what makes sense to bolt-on. That's going to be something we can convert to cash as quickly as possible. Obviously, we made our statement pretty clear earlier this year with the offer for SandRidge. And we continue to remain interested in that deal and deals that have the same sort of sense around them that does, where there is the opportunity to consolidate like-kind assets, reduced costs in terms of the overall cost structure and really gain the ability to generate enhanced free cash flow. So that theme applies to what we're really kind of focused at looking at for a next step, if there is a next big step that we could make.

Next question, Amer Tiwana from Cowen.

I wanted to ask you a couple of questions. The first one is on one of your slides you show that the sales price is $58 million, adjusted EBITDA for that transaction is $4.6 million and you show that the current adjusted EBITDA multiple of $2.6 million. That's post that sale price and getting that cash in? Or is that -- how do you get to that? Because it seems like our numbers are a little bit higher.

Yes. So really how we get back to that is we take -- the first one is just saying what's the adjusted EBITDA multiple would be at that sales price versus what we would be forecasting that asset to produce EBITDA. That's where you get the $4.6 million. And $2.6 million is roughly what the trading multiple was of the company on the stock exchange whenever we put that out. So it's just showing that we're capturing a higher multiple than what we are getting credit for within the market today.

Sure. Moving onto opportunities. Clearly with the higher oil price at this point in time, are there any opportunities where you get a higher return as a consequence, that may be worth pursuing at this point in time? I know you haven't really increased your rig count at this point in time, but any thoughts around that?

Yes, it's a good point. Like I mentioned, we are excited about where we're seeing the drill bit economics in our Miss Lime. Like the rest of the things that I talked about, we are urgently but in a disciplined manner, kind of evaluating how best we can optimize really all aspects of the business, and the drill and complete is still underway. So we're very -- we just dropped the rig count late last year to allow us to gain that focus, and that's the mode that we're in right now still. But I do think, when we look forward on some of our targets on drill and complete, where -- as an example with the 2-mile laterals, we're significantly bringing down the per 1,000-foot cost of these wells and maybe even better than what we're kind of currently estimating right now. You couple that with the increased oil price going forward and we certainly get very excited about where we're seeing the economics. And it's too early really for us to prognosticate that there is a ramp-up that make sense, but we are certainly excited about where we are right now and looking at those opportunities.

There are no further questions at this time.

Well, thanks, everybody. We appreciate your time and interest at Midstates, and feel free to follow up with us if you have any further questions. Thank you.

And this concludes today's conference call. Thank you for your participation. You may now disconnect.