Battalion Oil Corp (BATL) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2009 RAM Energy, Incorporated, earnings conference call. My name is Ann and I will be your coordinator for today's call. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to your host for today's call, Mr. Bob Phaneuf, Vice President of Corporate Development. Please proceed, sir.

Thank you, Ann, and thank you all for joining us today on our conference call. With us today from RAM are Larry Lee, our CEO; Les Austin, our Senior VP and Chief Financial Officer; Larry Rampey, our Senior VP of Operations; Drake Smiley, our Senior VP of Land and Exploration; Sabrina Gicaletto, VP of Finance; Paul Homan, VP of Business Development; and John Frick, our VP of Operations.

Our agenda for the call today is pretty straightforward. We plan to have just a review of our financial and selected operating results for the third quarter, as well as provide you with an update on our guidance for 2009. Larry Lee and Les Austin will take care of that, as Ann said, followed by a Q&A.

So let me just read a short preamble about the fact that on the call today we are going to make statements that are other than historical fact, and all such statements that refer to management plans or expectations, including targets or guidance, or such items as annual production, expenses, property dispositions, capital spending, EBITDA, drilling activities, derivative positions, borrowing availability, estimates of our project inventory, as well as other assumptions of hydrocarbon prices and other Company or industry conditions, are all forward-looking statements within the meaning of the SEC Act of 1934. Accordingly the Company cautions that such forward-looking statements are necessarily based on certain assumptions which are subject to risk and uncertainties which could cause actual results to differ materially from those indicated today. Further information on these risk factors is included in the Company's filings with the SEC. Management encourages you to review the disclosure in these documents.

And with that said I will stop and turn it over to Larry Lee.

Thank you, Bob, and welcome, everyone, to our third-quarter call. Our production for the quarter of 630,000 barrels was just slightly down from the same quarter in 2009, but our production for the nine-month period of 1,940,000 barrels equivalent is up about 2%. I think given our lower CapEx that we have been investing this year, plus the fact that the third quarter was impacted by the property sales that took place early in the quarter, we feel like that we had a pretty decent quarter all things considered.

We do expect for the year to meet our production guidance. In fact at this point we believe we will equal or slightly exceed the production volumes that we produced in 2008. Of course that is with about a $30 million capital program that looks like we will be spending for the full year of 2009.

Our free cash flow for the quarter was $8.7 million or $0.12 a share. That obviously more than fully funded our capital program of about $4 million. And we do expect our free cash flow in the fourth quarter to fund the remaining capital program for the year.

As we look at where we stand at the end of the third quarter, we did suspend -- we suspended our drilling program in our mature oil properties in May of this year; and we reactivated those programs in mid-August. So we expect we are seeing the results of the drilling pickup that started in August.

Also in late September we reactivated our drilling program in South Texas. We have completed one well and currently are in the process of completing that well. And we have a second well drilling, so we do see our activity level picking up as we move into the fourth quarter.

In addition to that we see the pricing, as it looks like it will be in the fourth quarter to be significantly better than the third quarter. Clearly the gas market was as bad in the third quarter of '09 as we have seen it in many, many years. Not only although was the NYMEX price curve depressed, but the differentials between the NYMEX and actual field realizations was at a almost historic differential for the period of time, the full third quarter.

So with that I will turn it over and let Les take you through some of the financial metrics of the quarter.

Thanks, Larry. Let me start off by talking a little bit about expenses for the quarter. In the third quarter our production expenses were $15.51 per BOE. That is up from the $13.99 per BOE we experienced in the second quarter, and up also from the $14.95 that we experienced in the third quarter of 2008.

The primary reason for the increase is higher workover expenses. As Larry has previously stated, we suspended the capital drilling program; a lot of those resources utilized in the capital drilling program were reallocated to more LOE workover type activity, causing the increase in the production expenses in the third quarter.

We would anticipate that, now that the drilling program has been reconstituted, that those production expenses per BOE should be down in the fourth quarter from the third-quarter amounts.

Production taxes declined about 57% to $2.10 per BOE in the third quarter of 2009 versus the third quarter of 2008, principally due to the lower commodity prices that we have spoken about previously. We would anticipate that those trends should continue.

G&A was down about 14% to $4.2 million in the third quarter of 2009 versus the $5 million we experienced in the third quarter of 2008, as we continue to focus on our cost-reduction efforts, due to lower employee-related costs and professional fees that we have experienced year to date.

Interest expense was about $5.6 million in the quarter. That consisted of $4.3 million of cash pay interest; about $800,000 of PIK interests; and about $500,000 of deferred loan costs for the quarter. We would anticipate that that trend should continue based on the outstanding debt balances that we have currently.

Let me go to some other comments on the debt. At the end of the third quarter we had $140 million outstanding on our revolving credit facility. That accrues interest at 4.25%. And we had about $110 million outstanding on the term loan facility; that has a cash pay interest of 10% and a PIK interest of 2.75%, for a total balance of about $250 million on the credit facility at the end of the third quarter.

We anticipate that based on the redrilling program that we have implemented that the debt should be around $250 million at the end of the fourth quarter as well.

The Company continues to have ample liquidity, approximately $35 million of liquidity per the credit facility with the reconfirmed $175 million borrowing base that we have previously announced. However the current credit facility would be limited to about $163 million based on some restrictions that we have in our current financial ratios, leaving us about $23 million and change of spendable liquidity.

The only other comment that I will make is that the Company continues to have a very attractive valuation based on our free cash flow through the first nine months and projections through the end of the year. The Company is trading at about 2.3 times its current cash flow, which is significantly less than the 5 times peer average that we currently have. With that I will pitch it back to Larry.

Thanks, Les. I guess a couple things I would like to point out is that we do have a very large inventory of drilling opportunities. In our last corporate presentation we identified those. We've got well over 400 identified drill sites in our portfolio.

We do have a very stable production base. It is long-life reserves with 60% of our reserves and production being oil and natural gas liquids.

I would reiterate Les's comments about the attractive valuation. The management team still owns a big chunk of this Company, almost 20% of it. And we have been in business for well over 20 years, so we feel like we understand how to deal with adversity as well as the times of opportunities. We feel like we are well positioned to finish up 2009.

We will probably be early in December announcing our 2010 capital program and our guidance for 2010. With that, Bob, we will kick it open for Q&A.

(Operator Instructions) Jeff Hayden, Rodman and Renshaw.

Good morning, guys. I know it is a little early on 2010 as far as giving us hard guidance on the budget, production growth, etc. Just wonder if you can walk us through how you are thinking about it right now in terms of staying -- basically spending all your cash flow, spending a little under your cash flow, a little over your cash flow; and roughly where the major deltas are going to be versus the 2009 program.

I will try to take that one, Jeff. We are looking at the price curves for 2010 and setting our budget accordingly. We will, as has been our past history, keep our drilling program within our free cash flow.

Based on looking at the price of oil and nat gas and nat gas liquids for next year we certainly are expecting a reasonably nice increase in capital spending. We would think that that would also result in an increase in production.

I think given the fact that we feel like that out of our $30 million capital program this year, something in the low $20 million of that was really spent on maintaining production; and it looks like that we will as I said equal or slightly exceed 2008 production. So we would expect to see some production growth in 2010.

We are working on quantifying that, and I think we will have something out very early in December as far as giving you some guidance. But clearly even looking at the fourth quarter versus the third it looks like oil prices are going to be $10 to $12 higher on realized pricing for the fourth quarter versus what we experienced in the third.

Looks like nat gas liquids are going to be up somewhere between $5 and $6 a barrel versus what we saw in the third quarter. And of course the fourth quarter it looks like to me that nat gas realized prices are going to be somewhere up about $1.50 over what we saw in the quarter.

So if we continue to see the prices that the NYMEX is telling us that we should be anticipating for next year, plus the hedge position that we have -- where we have a lot of our nat gas hedged at $5 -- we are expecting an increase in capital program and an increase in production in 2010.

Okay. Appreciate it. Then just real quick --

What I think, Jeff, a big chunk of that increased spending will go into our developing fields in South Texas. And we have had some preliminary conversations with our operating partners in Barnett that, if prices do improve, we will begin to see a little more activity in our Barnett play as well.

Okay, thanks for that. Again just real quick, any updates on the Osage concessions?

We have completed the seismic shoot. It is currently being processed. We are anxious to get that. We had a timely shoot within our budget; and once again we are hopeful that we will begin to have some color on that as we move early into 2010.

We are probably going to do an operational update sometime between now and mid-December and talk a little bit about what we are planning on doing. In the Osage concession will certainly be part of that.

Richard Rossi, Wunderlich Securities.

Morning, everybody. Just a couple things. One, you said you are drilling a second well in South Texas. Will you get any more drilling in, in this quarter? Lee.

We might. Those wells take about 45 to 50 days from spud to completion. We definitely will get the first well we have drilled on production here in the next few days, and it will contribute to production in November and December.

I would not anticipate, Rich, that we would get a lot of production in the fourth quarter out of the second well. But it should be coming online right as we're moving into the first part of the year.

We do have some additional -- obviously we have several additional drill sites down there. And if we continue to see the nat gas prices as well as the natural gas prices that we're looking at, we will probably continue to drill in South Texas. And that will probably be a pretty significant component of our 2010 capital program.

Then just on the cost side, what was roughly the workover cost in the third quarter? And can squeeze any more cost out of G&A?

I think that it probably was in the neighborhood of $1 a barrel that we saw in the additional workover costs we experienced in the quarter. So we would expect somewhere in that $14.50 range in the fourth quarter on a go-forward basis.

And on the G&A side we are scraping it down pretty good. There may be another 1% or 2% that we could squeeze out of it. But I think we are pretty much where we want to be there.

(Operator Instructions) [Eric Johnson], Silver Lake.

Good morning, everybody. Most of my questions have been answered, but a quick one regarding potential further asset sales. And then also if you are aggressively pursuing any type of acquisitions, if you could just comment on that, Larry, that would be great. Thank you.

Eric, we haven't identified at this point what we might be looking at selling in 2010. I think we are probably through for 2009.

But we will be evaluating the portfolio in detail once we get our year-end reserve report, trying to identify the lower-end properties that we think we want to sell rather than take to a plug-and-abandonment. So there will probably will be some property sales again in 2010. So I think we will look at that.

As far as acquisitions, yes, we continue to look at them, particularly things that we can fill in around the areas that we have an interest in now -- South Texas, North Texas, our mature oil, and Southern Oklahoma our mature oil. So yes, we are continuing to evaluate that and look for opportunities that we can plug additional properties in.

Probably the ones that we would look at selling, a little bit like what we sold in the third quarter, would be higher cost, higher LOE cost type properties.

Thanks.

Ladies and gentlemen, this concludes today's question and answer session. I would now like to turn the call back over to Larry Lee for closing remarks.

I just want to thank everyone for taking the time. I know it is a busy day.

We are glad to have the third quarter behind us, and we are excited about what we are planning on and what we are currently doing in the fourth quarter. So stand by; look for our capital program for '10 and an operational update probably within the next 30 days or less.

With that, thanks, everyone, for joining us. Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a great day.