Amplify Energy Corp (AMPY) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Midstates Petroleum Third Quarter Earnings Conference Call. My name is Grace, and I will be facilitating the audio portion of today's interactive broadcast. (Operator Instructions) Thank you. At this time, I would like to turn the call over to Mr. Jason McGlynn. Sir, the floor is yours.

Thank you, Grace. Good morning, everyone, and welcome to Midstates Petroleum's Third Quarter 2018 Earnings Call. Joining me on the call today is David Sambrooks, our President and Chief Executive Officer. On 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 shortly 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 tables in yesterday's earnings release.

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

Thank you, Jason, and good morning, everyone. Thank you for joining us today, and thank you for your interest in Midstates. We had a great third quarter, one that demonstrated fulfillment of the strategy we put in place a year ago, aimed at focusing activity, reducing costs, generating substantial free cash flow and improving liquidity to create maximum optionality. I'll go into the details on the quarter shortly, but first some comments on the board changes that we announced yesterday. I would like to thank our outgoing board members, Jake Brace, Michael Reddin and Bruce Vincent. I appreciate the input and guidance provided by Jake, Mike and Bruce, and would like to thank them for their contributions. I would also like to welcome incoming directors: Randal Klein, Evan Lederman, and David Proman. The firms these gentlemen represent own 40% of the outstanding shares of Midstates, and we look forward to their insights and contributions.

The new board expects to focus on returning a significant amount of capital to shareholders from forecasted free cash flow generation, while also pursuing strategic and opportunistic mergers and acquisitions. We believe there is great value in our Miss Lime asset, our strong financial position and our clean balance sheet, and we're excited about the future possibilities for Midstates.

Now to the quarter. We performed very well in the third quarter and posted strong results. Importantly, as has been our strategy since late 2017, we generated significant operating cash flow of approximately $10 million during the quarter with adjusted EBITDA of approximately $32 million, and our total capital came in at $22 million. We continue to execute on our market focus strategy laid out late last year. We have enhanced the value of our Miss Lime assets through our substantial workover program, the optimization of our drilling and completion program and improving efficiencies throughout the company. We closed the sale of our Anadarko Basin producing properties earlier this year with net proceeds of approximately $54 million, while retaining our Northwest acquisition to exploit later.

We have paid down $100 million of our RBL so far this year, leaving us at a low net debt at the end of the third quarter of $22 million, which is $10 million less than our third quarter EBITDA.

I'm very pleased with our efforts to date to reduce costs and further enhance our competitive margins.

Moving to our operational performance during the quarter. We continue to reap the rewards from our substantial workover program, which we kicked off early this year. Third quarter production came in at approximately 18,000 BOE per day, an increase of 5% from the second quarter of this year and 16% higher than our first quarter.

A quick recap of the workover program. The workover program consisted of 2 main components: One, focused on extending downhole pump run life; and the second, to increase well productivity through wellbore cleanouts and restimulations. On the extended run life effort, our target is to double the average run life of our downhole pumps. Success on this front will lead to less wells going down per year and thus, lowered average yearly workover expenses.

Secondly, less downhole failures will lead to reduced well downtime, increasing average yearly production. Early results have been extremely positive on this front, and these efforts will continue to reap benefits going forward. In total, this enhanced workover program has been highly economic with very short payback period, so great use of capital.

As we noted last quarter, the enhanced workover program is largely complete, and currently, we're down to only needing to run one workover rig in the field. We saw capital and expense items come down in the third quarter of this year and anticipate these items coming down a bit more in the fourth quarter.

On to our development program. It's still early time, but our 2-mile lateral wells continue to track well economically. The first 2-mile wells brought online in the second quarter continue performing as expected. Additionally, we brought online 2 more 2-mile wells during the third quarter in Quinn, our western expansion area, an area we have not drilled in for some time. The first of these 2 wells achieved our best-to-date initial 2-mile well production rate with a peak 30-day IP rate of 700 barrels of oil equivalent per day with oil at a strong 65%.

Further, we drilled and completed this well for an attractive $3.5 million or only $1.75 million per 1-mile of lateral. Thus, we continue to be encouraged by the early success of our 2-mile program, the combination of significantly lower per-mile costs and from our early analysis, productivity multiples of 1.5x IP and 2x EUR are leading to economic improvements over 1-mile well results within the play.

As we discussed in our release, early in the fourth quarter, we had the opportunity to farm out our drilling rig for a period of time, which allows us to further evaluate the results of our 2-mile lateral tests, generate additional free cash flow and give us time to evaluate reformatting a potential go-forward drilling plan around 2-mile laterals as opposed to our 1-mile lateral schedule that we have in place for our 2018 budget.

In summary, for the quarter, we are on budget and guidance for the year and beginning to deliver the operations free cash flow we promised late last year.

With that, I'll turn the call over to Jason to run through the quarterly financials.

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

As David mentioned, we achieved average daily production of approximately 18,000 BOE per day from the Miss Lime assets during the third quarter, up from 17,200 BOE per day from these assets in the second quarter of 2018. The second quarter numbers do exclude roughly 3,400 BOE a day from our now divested Anadarko Basin assets. The production mix during the third quarter was 29% oil, 24% NGLs and 47% natural gas, roughly in line with previous quarters.

For the third quarter, we reported net income of $11.5 million or $0.44 per share, which did include an impact of a $6.6 million charge related to the company's commodity derivatives contracts. We generated approximately $31.9 million in adjusted EBITDA during the third quarter, up from $27 million in the second quarter. The increase from the second quarter of 2018 was primarily due to higher realized pricing for all 3 products and a reduction of workover expenses in the third quarter of 2018.

Turning to expenses. Third quarter adjusted cash operating expenses, which include LOE, production taxes, cash G&A, but exclude restructuring and advisory costs and employee severance costs, totaled $18.6 million or $11.21 per BOE, down from $23.1 million or $13.05 per BOE in the second quarter of 2018. The decrease quarter-over-quarter was due to the sale of our Anadarko Basin producing properties in the second quarter and reduction of workover expenses in the third quarter, as our base production optimization program was substantially completed in the second quarter of 2018.

Our lease operating and workover expenses for the third quarter combined totaled $11.9 million or $7.16 per BOE, down from $17 million or $9.57 per BOE in the prior quarter. Again, this decrease quarter-over-quarter was primarily due to the sale of the Anadarko Basin properties in Q2 and a reduction of workover expenses in the third quarter. Our average expense workover cost in the third quarter was $1.35 per BOE compared to $3.12 per BOE in the second quarter.

Severance and other taxes were up this quarter to $3.4 million or $2.03 per BOE compared to $2.8 million or $1.56 per BOE in the second quarter. As we've noted numerous times previously, severance tax rates have increased from prior quarters due to new legislation being signed into law in Oklahoma during the past year.

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 comp and certain non-occurring items, the third quarter totaled $3.9 million or $2.33 per BOE compared to $4 million or $2.24 per BOE in the second quarter of 2018.

Operational capital expenditures for the third quarter were approximately $21.5 million, all of which was invested in our Miss Lime assets where we spud 3 development wells, including 2 extended laterals and brought 8 wells online, including the same 2 extended laterals.

On to the balance sheet. At the end of the third quarter, we had approximately $6.2 million in cash and net debt of $21.9 million. Liquidity at the end of the third quarter was approximately $146.2 million, consisting of $6.2 million in cash and $140 million availability on our RBL facility.

In October of 2018, our borrowing base was reaffirmed by the lending group at $170 million. The next scheduled borrowing base redetermination will occur in the spring of 2019.

Finally, I will finish up with our updated full year 2018 guidance, which excludes our Anadarko producing properties that were sold in May of 2018. We lowered our operational CapEx guidance to between $95 million and $100 million, while maintaining the midpoint of our yearly production guidance at 17,000 BOE per day. We increased our NGL price realization to approximately 44% of NYMEX WTI from 40% and are maintaining our oil diff at approximately $0.70 per barrel and gas at approximately $1.35 per Mcf. On per BOE expense items, we have updated and tightened our ranges to the following: LOE to between $5.50 and $5.70 per BOE; expense workovers to between $1.90 and $2.10 per BOE; severance and other taxes to between $1.55 and $1.75 per BOE; and adjusted cash G&A to between $2.50 and $2.70 per BOE.

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

Thanks, Jason. With our third quarter results, we feel that we've fully delivered on the strategy we set out in late 2018. We've a lean overall cost structure, we've optimized our drill bit efforts and even with a moderate capital program, we have significantly grown production from the first quarter. Significant workover program has optimized base production and reduced field downtime significantly. We are now able to generate substantial free cash flow and are working on plans to return a significant amount of capital to shareholders in 2019. In addition, we're excited to work with our board in pursuing strategic opportunities, and we feel that our clean balance sheet and strong financial position will lead to opportunities to enhance shareholder value in the near term. We anticipate sharing 2019 plans and projections with you in the near future.

So with that, I'll turn it over to the operator and open up the call for questions.

(Operator Instructions) Our first question comes from the line of Amer Tiwana from Cowen.

First of all, good quarter. My question -- I have a few questions. First, do you have any more workovers planned for 4Q?

We'll do some more workovers in the fourth quarter, but basically what we're doing now is just triaging the well. Well, there's 2 things we're doing. We're triaging the minimum number of wells that go down, so we have a short list of those. So the 1 rig has been -- getting those back on production rapidly. And we have done a series of preemptive workovers where the wells are not down yet, but in our view underperforming. We've done a handful of those and had some really good results on those so far. So I think those 2 buckets are kind of what the continuing workover program looks like. But kind of going back to what we were saying, the vast majority of the significant workover effort was finished in the second quarter, and now we're -- the workovers are focused on just keeping the wells back on, getting wells back online that go down and selective preemptive workovers on wells that are still producing.

Got it. Just to focus a little bit on your capital expenditures. You've obviously outperformed on -- you've reduced the CapEx guidance, yet production starting to grow. And I'm just trying to get a better sense of what is your production trajectory going forward? Is $100 million type of CapEx enough for you to sustain or grow production? If you can just talk broadly about without -- I know you haven't given guidance for '19 for CapEx, but if we can get a sense of where you -- what's the number you need to have to keep production flat and maybe we can get a better sense of when you announce the numbers of your going to grow in '19?

Yes. I don't know if we can be too specific on that right now. In terms of '19, we're going to have -- I mean, we're in a lot of discussions. We'll have further discussions about what that plan lays out to be. If you think about 2018, yes, production has been great, with the work that we've done year-to-date, I'd say, we are ahead of schedule. Keep in mind, what we've announced is that we farmed out the rig kind of early in the fourth quarter. So we really don't anticipate any new wells coming on for the rest of the year. And on the workover front, like we were just discussing, we'll be -- we're definitely tailing down, which is good thing because we don't have as many wells down anymore. So we hit 18,000, we're right at 18,000 BOE per day for the third quarter, which is a really good number. But we'll have pretty limited new production coming online in the fourth quarter. So we'll -- you can kind of put those -- that guidance together to think about where we'll be at exit. And then '19, we just have the work to do to figure out what the capital program is going to be and what projections are going to look like. So we'll have to get back with you later on that piece.

Understood. One of the things you talked about was a potential share buyback program and/or a cash dividend. So when you think about your free cash flow profile, is there an ability in addition to that to return capital to shareholders? Meaning, you have a revolver, can you draw down upon it for that purpose? Or what's your ability there?

Some of those specifics, we probably can't answer for you right now, but I think the fundamentals that we're -- we're kind of laying out the ground work for here. The value that we're at right now, it's really hard for us to see a better investment than buying back our shares or returning capital to shareholders. And yes, we've been moving the company to where -- it's finally tuned to where we can generate substantial free cash flow. So those 2 things are coming together. And what we can be very firm about is that we're going to have the opportunity, substantial opportunity to return capital to shareholders in 2019. The format for that and how quick and what are different levers are for that are all TBD right now. We will be talking with our board very quickly on just those subjects, and so we think that in the fairly near future, we'll be able to lay out a lot more detail and quantification of that. But we're poised to be able to make substantial capital returns.

Excellent. Last question on, you talked about the strategic opportunities that you may have. Any update? Are we done with the process with SandRidge for now? What other things are you looking at? Are they potentially big, small? Any color there would be helpful.

Yes, just generalities, right? So in terms of SandRidge, I mean, they had their call yesterday. I think you probably heard from that. I'm just paraphrasing that they're kind of moving forward at this point. I can't -- you never know. I mean, we obviously were very interested in that deal, thought it make a lot -- thought it made a lot of sense and continue to. But we're moving on too and looking at what other options that we have. I think the market is starting to, I think, turn in our favor. I think the consolidation story is gaining some momentum, which is basically what the premise of that Midstates SandRidge effort was. Certainly, I think there's other opportunities out there, big and small, that are either kind of like kind to the strategy we were pursuing with SandRidge or very incremental. There's not a lot of players in our basin, and so there's kind of smaller deals that may be attractive. But I'll just leave it with a company that has very, very low net debt, high liquidity, good cash flow, public listing. All those things, I think, put us in a very favored position to see if we can make something happen. And we can't really say much more about it until we do the work and see what all the opportunities are.

(Operator Instructions) We don't have any questions at this time. I will now turn the call over back to the company for any closing remarks.

Thanks, Grace. Well, thank you, everyone, for joining us on the call today. We appreciate the interest in Midstates and all the support we've gotten for the last year. We look forward to talking to you all here in the near future. Thanks very much.

Thank you.

Ladies and gentlemen, we thank you all for your participation. That concludes our conference. You may now disconnect. Have a great day.