Battalion Oil Corp (BATL) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 Energy Incorporated Earnings Conference Call. My name is Mirasol and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the presentation over to Mr. Bob Phaneuf, VP Corporate Development. Please proceed, sir.

Thank you, Mirasol and thanks, everyone, for joining us on the RAM Energy conference call this morning to discuss the second quarter 2009 operating results. With us from RAM this morning is Larry Lee, our CEO, Les Austin our Senior VP and CFO, Larry Rampey, our Senior VP of Operations, Drake Smiley, our Senior VP of Land and Exploration, Sabrina Gicaletto, our VP of Finance, Paul Homan, VP of Operations and myself.

Before we get started today, let me read a quick Safe Harbor statement, and we'll get right into our prepared remarks. In our call today, we may make statements that are other than historical facts, all such statements that refer to management plans or expectations including targets for annual production, expenses, property dispositions, capital spending, EBITDA, drilling activities, derivative positions, estimates of LIBOR spreads on borrowings, borrowing availability, estimates on our project inventory and other company or industry conditions are forward-looking statements.

The Company cautions that such forward-looking statements are necessarily based on certain assumptions which are subject to risk and uncertainties, but could cause actual results to differ materially than what is indicated today. Further information on these risk factors is included in the Company filings with the SEC and we encourage you to review these disclosures in these documents.

So at this point, we are through with the preliminaries, I'll turn it over to Larry Lee.

Thank you, Bob and I want to welcome everyone to our second quarter call. But, before I jump in to some of the information pertaining to the second quarter, I think it would be worthwhile when we take just a second and talk about our original 2009 guidance. We had originally projected that we would produce 2.5 million barrels of oil equivalent for the year 2009; we are more than halfway there through the first half of the year with 1.3 million barrels of oil equivalent already produced.

Originally, we had forecast a capital program of $40 million to $45 million in order to meet our guidance; we have now reduced that CapEx estimate for the year to between $30 million and $35 million. The results that we have had particularly in our mature and developing fields has allowed us to not have to spend that capital to achieve the production guidance that we have previously been proposing.

We also said that we were going to have some property sales between $5 million and $10 million and to-date, we are now -- have sold $6 million worth of properties at what we believe are very attractive sale rates. One thing we did not give any guidance on, but we have now accomplished, is we have modified our credit facility to ensure our compliance with it through its term which runs through 2012 on our term facility.

And, with the results that we are seeing for this year, our property sales and excess cash flow is going to allow us to use that excess proceed to reduce our indebtedness. So, we feel like we have had a very good first half of the year and we are very pleased to see commodity prices particularly on the oil side, improving as we move in to the second half of 2009 and look forward to 2010.

For the second quarter, we did produce 652,000 barrels, or up 1.2% over the same quarter a year ago. And for the first half of this year, we are 4% over the production in the first half of 2008, with our 1.3 million barrels of production through the first six months of the year.

We have reiterated and confirmed our 2.5 million barrels of oil equivalent for the full calendar year of 2009. We, like everyone else in our industry suffered from lower commodity prices compared in the second quarter to the same quarter of 2008, oil prices were down 55%, natural gas liquid prices were down 59% and natural gas was down 69%.

But when you look at it on a total BOE basis, for the second quarter, we were down 60% on commodity prices. One thing that helped us is our hedge position which we -- have always have been fairly active in that area and for the second quarter, our hedge positions added $16.37 per BOE to improve our realized prices to give us an average of $52.40 with our hedge position for the full second quarter.

Our expenses in the second quarter were down 5% from the same period a year ago at $13.99 per barrel. As we sell some of these lower value properties, we thing we will be able to continue to hopefully see the reduction in LOE continue on this trend. Production taxes of course, which is tied directly to price, declined 73% to $1.42 compared to last year's $5.19. G&A expenses fell 32% to $3.7 million for the quarter and that compares to $5.5 million in 2008, and this is really related to three principal areas.

We consolidated our accounting function; this was something that we have planned to do after the acquisition of Ascent. And, we also have lower employee related costs and significantly lower professional fees. All of those things contributed to the lower G&A in the second quarter.

Our interest expense per BOE also declined 43% to $3.6 million, and this was a result of decrease in average indebtedness, as well as the lower blended interest cost of 5.7% in the second quarter of 2009 versus 11.3% interest cost in the second quarter of 2008. Our EBITDA for the quarter was $20.3 million, and our free cash flow was $16.9 million or $0.23 per share for the second quarter, and it is $0.33 per share for the full first half of 2009.

As we look at our capital program, we will continue to reinvest well within our cash flow. As you can see, with our free cash flow of $16.9 million in the second quarter; that fully funded our capital program of $4.5 million for the second quarter. And during the first half of this year, we have generated $23 million in free cash flow, which has easily funded our capital program of $17.7 million that we have invested in the first half of 2009.

All along, our aim this year have been to offset our production declines while keeping flexibility in these rather uncertain price environment that we find ourselves in. We have also been focusing our spending on our lower risk development projects; these projects have high internal rates of return and quick paybacks. I think that if you look at the way we have been able to maintain our production profile in our mature oil field, that is a result of that. And, we continue to have success in South Texas in our La Copita project.

One of the things we have been spending a lot of time on this year is our projects -- positioning ourselves for 2010. We have completely reworked our South Texas seismic, we have received the joint 50 square mile chute that we participated in with EOG and Devon on our Barnett Shale acreage and we are working that now. And our Osage concession, we are clearing the land and beginning to put the thumper trucks in the field and begin that seismic project. And we expect that concession to begin to add locations to our inventory in the first quarter of 2010.

If you look at our -- sort of our inventory of projects, we now have identified 241 drilling locations within our Electra/Burkburnett Fields. This is up 66 locations this year that we have identified. And Northeast Fitts and Allen, we have now 75 identified drilling locations in those fields, and that is up 25 locations from the beginning of the year.

In South Texas, we now have 75 identified drilling locations in our acreage there, and that is up seven locations as a result of the seismic work we have been doing so far this year. We still have 62 identified locations within our Barnett Shale, and as we begin to work the new 50 square 50 mile seismic chute that we have now access to, we are confident that we will begin to add some additional locations to that. And as I said, the Osage concession which is now underway, we believe will begin to add locations to us in the first quarter of 2010.

So with that, I'm going to turn it over to Les to kind of cover some of the financial aspects of the Company.

Thanks, Larry. I'm going to make some brief comments on our derivative position, our credit facility and our guidance for the balance of the year. If you look at our current derivative position as of June 30, we have for 2009, second half of the year, approximately 552,000 barrels of oil hedged at an average store price of approximately $65 a barrel. This would represent about 80% of our projected second half oil and natural gas liquids production.

RAM also had about 2 BCF of natural gas hedged at an average floor price of $4.55, and this would represent approximately 65% of our projected gas production for the second half of the year. For 2010, we have approximately 957,000 barrels of oil hedged. The average floor price on those 2010 hedges is approximately $58.50. And for natural gas, we have about 3.6 BCF of natural gas hedged; that average store price is $4.70.

Combined, for 2010, we have approximately 1.6 million barrels of oil equivalent hedged and that would represent about 64% of our 2009 production that we're projecting of 2.5 million barrels of oil equivalent.

On the credit facility side, as Larry mentioned, we amended our credit facility on June 26 of this year and effectively loosened the covenant package that we had on our leverage ratios, our asset coverage ratios, we also amended our definition of EBITDA and allowed for more asset sales in the bucket that we had versus the previous amendments.

On the leverage side, the ratio will now be a maximum of 4.75 times versus the four times in the original agreement, on the asset coverage ratio; it has been lowered to 1.5 times versus the 1.75 times in the previous agreement. There was no impact on the tenure of the term notes or the revolver, the credit facility for the revolver still extends through November of 2011 and the term note still extends through November of 2012.

In exchange for these covenant loosening amendments, we did increase the interest rates we pay on the term note and the revolver. Under the old agreement, based on where LIBOR was around June 30, we would have paid 8% on the term note and 2.25% on the revolver. Under the new agreement, the cash pay on the term note is 10% and the cash pay on the revolver is 4.25% for a blended cash rate of approximately 6.8% based on the debt that was outstanding on June 30th.

There is also a 2.75% PIK interest feature on the term note, resulting in an all in rate on the term note of 12.75%. So, the all in blended rate for the debt that was outstanding at June 30 is approximately 8%.

We still have ample liquidity under our credit facility, approximately $33 million was available to be borrowed at June 30th based on the $175 million borrowing base at that time. And if you look at how we rate based on the reserves, RAM's debt is approximately $7 per barrel of oil equivalent based on the most recent reserve study, and the $255 million in total debt outstanding on June 30th.

If you look at the guidance that we had provided previously; we have updated that guidance and essentially reconfirmed the lower end of our EBITDA guidance that's $60 million to $65 million. This would include the actual results through June 30th, and our projected results at the 630 strip prices for oil, NGLs and gas. That would have oil ranging between $67 and $69, NGLs ranging between $43 and $44, and gas ranging between $3.50 and $4.50 for the balance of the year.

We also project that our interest cost will be at the higher end of our original guidance of $17 million to $18 million. As Larry stated previously, the CapEx would be between $30 million and $35 million. And we still are going to be within the $5 million to $10 million range for our asset sales, as Larry mentioned previously, we already about $6 million here in the third quarter.

And with that, I will turn it back over to Larry.

Thank you, Les. I think just to kind of sum up before we turn it over to Q&A -- is that we are focused on maintaining our value in this rather uncertain commodity price environment. We are focusing on our lower risk, higher return opportunities. We do have a very long life, stable portfolio of assets. I think that is indicative of the fact that we can essentially maintain production or grow it slightly with $30 million to $35 million worth of capital invested in 2009.

Once again, the fact that we have a high degree of operating control over our asset base, allows us to control the timing of this capital and also the direction of where that capital goes. If you look at it from a valuation standpoint, our current stock price is trading for about 1.2 times our annualized free cash flow, and less than one times our annualized EBITDA.

I think in this uncertain time, there has been a lot of questions about small cap companies and who's going to survive or not. I can assure you RAM is going to survive and will be growing in 2010 and 2012.

With that, I'll turn it back over to Bob and we will open it up for Q&A.

Thanks, Larry, and Les, for the comments. And moderator, we can not open it up for questions.

Thank you.

(Operator Instructions)

Our first question comes from the line of Richard Rossi from Wunderlich Securities. Please proceed.

Good morning, everybody, I had some technical difficulty, I came in a few minutes late on the call, so this maybe a question already answered. But, looking at your G&A cost, taking a lot out, is there further cost reductions that you can see in G&A from here?

Rich, I would say that what you saw in the second quarter was probably the end of where we could get the G&A down to based on the accounting function consolidations, the lower employee related costs and the lower professional fees on a go forward basis, I think that we have trimmed it pretty far.

Okay. And just one quick follow up to that and that is can I assume that you can maintain at roughly those levels until activity at the firm starts to pick up again?

I think somewhere between the first quarter results and the second quarter results, we should be able to maintain at those levels.

Okay, thank you.

Our next question comes from the line of Ron Mills from Johnson Rice. Please proceed.

Good morning, guys. Just a question on the mature properties as you walk through, you have 130 or 140 locations remaining. Is the plan just to continue to maintain enough activity in those places to try to offset most of your natural declines from your gas? And at what point would you revisit -- reentering or starting activity in the Barnett in terms of gas price and/or 3D data that you need to have in hand?

Ron, it is Larry. I think that we will continue to identify additional opportunities within our mature properties and continue to spend money there, both drilling as well as recompletions. We have had quite a bit of success in some recompletions in those areas over the last six to 12 months. So those will -- we believe, continue to be flat to maybe slightly up a little bit and help us with our decline rates.

The Barnett, we think that the prices need to be back in to the $6 range. I think we have been consistent about that in terms of feeling like that's the kind of pricing that you need to see out of that geographical area to really justify even the new reduced drilling cost over there.

We probably will reactivate -- and we actually plan on doing a little more work in South Texas later this year and beginning early next year, because those areas are so liquid rich that we do get a nice uplift from our NGL pricing and our condensate pricing down there.

So -- and the Osage concession will essentially be an oil play as well. So we are continuing to try to balance our oil opportunities and our gas, but we really feel like we need to see gas prices on a conventional basis, get back up into the $5 ranges, and we need to see gas prices get north of $6, we feel like, to make the shale plays really make economic sense.

Okay. And I missed a couple of things, Les. Can you give me the oil pricing again that you had in your EBITDA estimate, and then what the second half '09 hedges are on the oil side?

Sure. We had oil projected at the 630 strip, somewhere between $67 and $69 for the balance of the year. And then as far as the 2009 hedge position, we have about 552,000 barrels for the second half of the year, with an average floor price of $65 a barrel.

Okay. All right, guys. Thank you.

Our next question comes from the line of Christina Pluta from RBC Capital Markets.

Hi, good morning. I was wondering if you could just provide more color on asset sales you have completed, and what reserves in production were related to those assets?

Yes, the two sales that we publicly announced in our operational update were producing about 145 to 147 barrels of oil equivalent a day, and so that is the production that we will lose from those sales.

We have actually sold those two property packages at about 125% of escalated PV-10 at midyear, so we felt like we got a pretty good pricing on those sales. But in our guidance, Christina, we have taken that into account that the lose of that production in the second half of the year, we still will need our overall guidance for the year, the 2.5 million barrels.

Okay, thank you. And then just a quick follow up, I noticed it looks like your shares declined in the second quarter, could you just give a brief explanation to that for shares outstanding?

Yes, that is a result of the settlement that we announced last quarter; that was a settlement that resulted in about 2.8 million shares being bought back into our treasury in satisfaction of a class action suite.

Okay, thank you.

(Operator Instructions)

Our next question comes from the line of Mr. Richard Rossi, with a follow up from Wunderlich Securities. Please proceed.

Do you have what the -- your banks used as a gas price in their last redetermination?

Rich, I don't know that we do. I think all we have had access to is the kind of the general surveys that most --. You have seen them I'm sure; there are two or three shops that kind of survey the bank on a blind basis and then publish that.

And from what we have been led to believe or understand to believe, is that the gas price deck is probably going to not change dramatically from what it did for the first quarter redetermination, but most of the banks, I understand, are beginning to move the oil deck up some from where it was at the first quarter redetermination.

Yes, the last I saw actually was banks are up to upper $60 level now.

Yes, and a lot of them were in the $45 level in the first quarter. So you never want to be too confident, but given where oil prices has gone, how much of our portfolio -- 60% of it is priced off of liquids, we think we are in pretty good shape going into the fall redetermination period.

I'd certainly agree. Okay, I'll get back in queue.

(Operator Instructions)

Our next question is a follow up from the line of Mr. Richard Rossi. Please proceed.

I'm back. Just one other thing, any thoughts about Appalachia -- what you are doing up there if anything at this point?

Rich, all we are doing up in Appalachia at this point, we have been moving some compression around and kind of working on our gathering system up there. We laid some of that pipe and then we bought that little system at the end of last year, so really, we have been working on that. I think given gas prices, neither we nor Penn Virginia have really expressed much interest of drilling anything else up there right now.

We have been approached by some private independents about possible some farm out opportunities, but we don't have any real capital associated with that. Once again, we think gas prices got to get back up to justify -- kind of reactivating activity up in that particular play right now.

Okay -- a little follow up to that. Let us say that happens, let us say six months from now and everybody has got somewhat of a smile of their faces; you have added some people up there, et cetera, et, cetera, maybe you have taken them away again, but can you start up fast up there if the price deck is right?

Yes. What we did, Rich, is we used the engineering talent out of the Tulsa office to oversee that, and we used consultants and contractors for all of the kind of on the ground work. So given the slowdown, we feel like that -- right now, there is a lot of talent floating around the industry at those levels, so it would be pretty easy to reactivate that.

Okay, that's all I have. Thanks very much.

Thanks, Rich.

(Operator Instructions)

And I show no questions in the queue at this time, we'd like to turn the presentation over to management for any closing remarks.

I think we are done. Thank you very much everybody for joining us this morning. If there are any follow up questions or anything, please give Dona Murry or I a call at 918-632-0674. So thanks again for joining us. Bye-bye.

Thank you for your participation in today's conference. This concludes today's presentation. You may now disconnect, and have a great day.