Battalion Oil Corp (BATL) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Quarter 1 2010 RAM Energy, Inc. Earnings Conference Call. My name is Jeff, and I'll be your operator for today.

At this time, all participants are in a listen-only mode. Later, we will facilitate a question and answer session (Operator Instructions)

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

Thanks very much, Jeff, and thanks to all of you who have dialed in this morning for the First Quarter Conference Call.

With us today, from the RAM side are 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, VP of Finance, Manny Redifer, our VP of Exploration and Rachel Tarantola, our Products Marketing Manager.

Our agenda for today is, following my brief introductory comments and reading of the Safe Harbor, we'll turn it over to Larry Lee to talk about selected operating results from the first quarter. Les Austin will, then, focus in on a couple of our -- certain financial results in the quarter that some of you have expressed some interest in getting additional color on, as well as our borrowing base. And, then, we'll turn it back over to Larry Lee to provide us with an update on some of the recent drilling activity, and other operating events. And, then, we'll follow that with the Q&A.

So, let us begin with the Safe Harbor Statement. In our call today, we may make statements that are other than historical fact. All such statements that refer to management's plans or expectations, including targets or guidance for 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 assumptions of hydrocarbon prices and other Company or industry conditions are forward-looking statements within the meaning of the Securities and Exchange Act of 1934.

The Company cautions that such forward-looking statements aren't necessarily based on certain assumptions which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated here today.

For further information on these risk factors included in -- are included in the Company's filings with the SEC. And the management encourages you to review these disclosures in those documents. So, without further delay, let me pass it along to Larry Lee.

Thank you, Bob, and welcome, everyone. I'm not going to go through the detailed information comparing the first quarter of 2010 to 2009. I think that's self-evident in the release that we gave. But I think some important items are -- even with the production issues that we had in the first quarter, because of the winter weather -- if you look at the oil-and-gas revenue sales in the first quarter, compared to the fourth quarter, we were slightly up from the fourth quarter, even with reduced volumes.

We were down about 38,000 barrels of oil equivalent from fourth quarter to first quarter of '10. But, yet, our revenues continued to actually exceed what we produced from a revenue standpoint in the fourth quarter of '09. And I think that speaks to the quality of the portfolio we have; the fact that it's so heavily weighted towards oil and natural-gas liquids.

Also, our production expenses -- we reduced those by about $600,000 when you compare the fourth quarter of '09 with the first quarter of 2010. And on a BOE basis, we dropped it down by about $0.05. So we're pleased with that result.

Also, we were able to reduce our G&A expenses from Q4 to Q1 by about $0.53 by -- it shooted up $530,000. And our interest cost was also down by about $220,000. So I think, in spite of the lost production with the weather issues, we feel like we had a good first quarter. And as we look at the balance of the year, we're continuing to be encouraged by what we think we will be realizing on our oil prices, and on our natural-gas liquids prices.

In the first quarter, we spent $7.9 million on LOE. And Les is going to talk a little bit about the LOE numbers going forward, as well as G&A, and kind of what we think those numbers should look like for the balance of the year.

As we previously had indicated, we did suffer about 14% decline in our production volumes in Q1 of '10 versus Q1 of '09. That was really two things; but the biggest item was the winter weather; and, then, also, secondly, was the limited amount of natural-gas drilling that we did in 2009, due to the low natural-gas prices there.

In the first quarter, we did spend $7.8 million on our capital programs. We expect that to begin to accelerate. The CapEx expenditures were a little below our initial budgeted targets because of the delay in completing some of our South Texas wells. I'll talk a little bit more about that later on.

We're still sticking with our production guidance for the year of 2.5 million to 2.6 million barrels of oil equivalent for the full year of 2010; EBITDA between $65 million and $68 million; cash interest expenses -- 16.5% to 17.5%. And that CapEx program -- we still are targeting a $50 million capital program for 2010.

With that, I'm going to turn it over to Les to cover a few of the financial highlights. And, then, I'll come back and give everybody an update on operational activities.

Thanks, Larry. I'm just going to make a few brief comments on our liquidity and our cost-reduction initiatives.

On April 1st of this year, our $175 million borrowing base was reaffirmed by our existing lenders. Based on the outstanding balance of $135 million on March 31, that leaves the Company with about $40 million remaining liquidity under the existing credit facility.

The $175 borrowing base represents about 26% of the PV10 of our proved reserves at 2009 NYMEX Strip Pricing for the 36-month period. And the term-loan portion of our facility of approximately $112 million at 3-31, continues to have the same maturity of November of 2012. Also, our weighted-average cost of interest was about 8.1% for the quarter ending 3-31.

On the cost side, LOE was about $7.9 million for the quarter, versus $10.1 million in the previous quarter. We believe the reduction is going to continue into the remainder of 2010, somewhere at the rate of $14 to $14.25 per BOE. We were at $13.99 per BOE in the first quarter. Our average for 2009 was about $14.73 per BOE.

On the G&A side, the reductions from the past-due receivable and lower health and welfare costs that we referenced in the press release accounted for about $400,000 of decreased G&A expense. We do not expect that to be repeated on a go-forward basis. So that should be our run rate -- about $4.2 million per quarter.

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

Thanks, Les. I'll do kind of a brief highlight of the various areas that we're focused on right now. Electra/Burkburnett -- we are fully back operational down there. And we have the drilling rig working full time. We still plan on drilling somewhere between 50 and 60 wells this year in Electra/Burkburnett.

Fitts/Allen -- we've drilled two wells down there on a five-well program. We're just getting to [TD] on the second one. And that rig will continue to work in that field for the next several months. Also, in South Texas, we've got two wells that we have drilled, and are waiting on completions. On the third well, we're within about 500 feet of TD on that well. And we would expect to maybe TD that well within the next week or less.

We have locations built for two additional wells. We've got the rig contracted for two more wells. So we're going to continue our drilling program in South Texas. We do have frac dates scheduled for early June. So we'll be able to begin to complete those wells and bring that production on as we move into the third quarter.

One question that we've gotten is, "Why are we drilling these South Texas gas wells?" Well, it's pretty easy, I think. Internal rates of return on these wells are in the 45% to 46% rate. And 40% of the daily volumes that are coming out of the three most recent wells that we drilled and completed and began producing in 2009 -- 40% of the daily production that's coming from those wells is crude oil at the well site, and natural-gas liquids.

So we're getting the benefit of a nice price uplift because of the amount of oil and natural-gas liquids that that La Copita field produces. So we do plan on continuing our drilling program in South Texas. Another thing is that what we've accomplished in 2009 by reprocessing all of our seismic, and the wells that we've been drilling, is that has allowed us to confirm drilling locations that we had picked seismically that were not in our proved reserve base. But as we continue to drill, we're able to add offsets and additional proved undeveloped locations to our inventory in South Texas.

Also, the rig is moving in, and we hope to spud in the next day or two on our Osage Exploration project. That'll be the first well drilled up there. So the wet spring weather we've had has slowed us down a little bit, but the rig is on location, is rigging up, and will spud this week.

So I think we're continuing to anticipate that we will achieve our full-year guidance. And once again, we still haven't forecast any production volumes coming out of Osage. So if we're successful with that play, that will be a plus for us as we move through the second half of 2010.

I think with that, Bob, we can open it up for Q&A.

Jeff, if you would, take it back.

(Operator Instructions). Our first question comes from the line of Ron Mills with Johnson Rice. Please proceed.

Good morning, guys.

Morning, Ron.

A couple questions on Osage -- you planned on [spending] your first well -- can you just walk through some of the -- like, what your plans are following that well? Are you going to have a certain number of well program, or is it going to be dependent on success of the first well? Just how are you managing the Osage spending this year?

Ron, we're going to drill these first three wells that we've identified. And, I think, the first three are all vertical wells. And those are really our key science wells. So as we've said, we'll get those three drilled probably within the next 60 days -- is kind of the plan.

We'll certainly drill this first one. We're going to look at it, and then -- but we've already identified and are in the process of permitting and getting the archeological surveys committed on the other sites. So we're going to move right ahead with those three.

What we hope is by the time we drill these first three wells, we'll know whether or not we've got a successful play. If we do, that certainly would impact the capital program for the second half of the year.

So, then, your capital program -- you're not necessarily accounting for success -- i.e., your $50 million budget would be even higher in the success case?

Correct. I mean, if it's successful, we would direct more capital to that program.

Okay. And, then, my second question -- the South Texas frac delays -- you -- sounds like you have (technical difficulty) in June. Is that -- are you -- do you have enough time with the frac crews to get all three of those wells completed? Are they going to have to be done in stages? And what's the latest in (inaudible) --?

Ron, we're expecting -- we think we've got the frac crews lined up to do all three of those. And, then, what we're doing is we're getting back in the queue for frac dates for the next two wells that we will be drilling, so that, hopefully, those could come on production as we moved into the beginning of the fourth quarter.

Okay. Let me jump back in and --

All right.

-- someone else.

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

Good morning, everybody.

Good morning.

Just coming back on the fracing -- are you seeing cost increases on fracing at this point? How is that setting up?

Not too much at this point. I mean, it's been more a question of just the availability of getting the crews. With what's happened in South Texas as the Eagle Ford has kicked off and you've got a lot more drilling -- and, then, you've got people that are drilling at us in these Vicksburg plays because of the high liquid content -- it just put a strain on the frac crews down in that part of the country.

And we would expect that we might begin to see some additional crews moved into that area as we move throughout the year. If not, you may begin -- we may begin to see some price pressure. But right now, we haven't seen very much of that in terms of price pressure.

But -- this is part two of my first question -- the contracting that you have on that -- on this first group -- you've got prices set on that, right?

Yes, we do.

Oh, okay. Just another on Osage -- any information from other wells in the area where you are on the Osage concession that makes you encouraged?

Well, there is certainly production in and around, and, in some cases, actually on the concession in a few spots. So we're encouraged by that. And some of the other private operators are continuing to drill and have some success.

There was a presentation at the local geological society about that. But since it's a private company, I probably shouldn't comment on their activity. But they're continuing to move forward with their program. So I think we're -- we like what we see on the seismic. We know there's production in the area. And we're just going to see if we can find it on our concession.

Okay. Thanks very much. I'll get back to queue.

Our next question comes from the line of Jeff Hayden with Rodman & Renshaw. Please proceed.

Good morning, guys. This is actually Chad -- had a follow-up to the questions on South Texas.

And, actually, it might be a question for Drake or Larry Rampey, there, in the room. But, talking about the liquids'[ridge] location and 40% ballpark -- how many locations have you identified with that kind of liquids content?

(Inaudible)

Another 10 or so. And, of course, what we're doing as we drill -- that field had about --

Well, we didn't expect this one to be (inaudible) --

Right.

(Inaudible)

Yes. This was a -- this well that we're currently drilling -- the [Hurt] 12 -- is appearing to be a lot more liquid ridge than we had initially anticipated. So we've got quite a bit of running room down on this particular play.

Okay -- appreciate that. And then, I guess, just looking at -- you guys had talked about M&A -- maybe looking into Barnett -- some other areas. Any updates on that?

We're continuing to look at opportunities there. We're seeing some. We haven't come to terms on any. But we're continuing to look at those and evaluate them. And we like the fact that we're seeing some players abandon the play, basically, and try to monetize their position so they can meet capital commitments elsewhere. So I think -- if the gas market plays out somewhat similar over this summer, as to what it did last summer, we do think that there may be a few more of those opportunities, Chad.

Okay, great. I appreciate it, guys.

Thank you.

(Operator Instructions). Our next question comes from the line of TJ Schultz with RBC Capital. Please proceed.

Hey, guys. Can you give me an idea on any of the weather-related issues in the first quarter, if there would be any impact into April or May, or any impact in the second quarter?

I think we probably will have a little -- you've got these large fields. You know, Electra/Burk's got 500 wells that we're dealing with there every day. And Fitts has got 400?

Yes, I mean -- so, anyway, it takes a while to get them going back up. We saw a little bit of that lag in April. But we're starting to see it coming back in. I think the second quarter will be better than the first on a production basis, but I don't think we're going to be fully back to where we would want to be.

I think we're going to see that production increase pretty significantly in Q3. Originally, we thought we would have had these first couple of wells that we drilled in South Texas on production in the second quarter, in our initial forecast for the full year. And that's -- we're not going to get any appreciable production out of those wells in Q2. But it'll come in in a pretty big flurry in Q3.

So, from a remodeling standpoint, I'd model the production volumes up in Q2 versus Q1. And, then, I'd take them up fairly significantly in Q3 and Q4.

Okay. But, kind of too early to kind of quantify what impact the second quarter that would have? I know you had said 45,000 to 50,000 BOE in first quarter. So it just -- starting to get some of that back in second quarter, so --?

Yes, but I don't really have a good feel for it or what it'll look like for the entire quarter yet, TJ.

Okay.

As we know better -- I think when we get through May, we'll probably have something along those lines that we can share with the market.

Okay, great. Just one other thing -- back to Osage -- can you give me your gross net acreage there -- and just trying to get a feel for what the deal you've cut with the tribal lands there, and if there is requirements on drilling or royalties you pay there?

Well, we pay the tribe a 20% royalty. So we have 80% net leases. We've got 80 square miles, which is about 55,000 acres -- 52,000 acres.

One of the nice attributes of dealing with the tribe is we do not pay severance tax to the state of Oklahoma. And so that makes these leases almost equivalent to about an 85% net revenue lease, when you compare them to any other lease within, say, the state of Oklahoma, or even Texas.

Okay, great. Thanks, guys.

Yes.

Ladies and gentlemen, our next question comes from the line of Ron Mills with Johnson and Rice. Please proceed.

I'm just -- a follow-up on TJ's question on -- either Larry or Les. In terms of second-quarter production levels, up versus the first quarter -- you think you all can approach the fourth-quarter levels before (inaudible) net growth, or -- I'm just trying to get order of magnitude. And, then, secondly, I just want to confirm that -- your production guidance, I would assume, does not include any success or contribution from Osage, since your budget is not in continued development there.

Yes, I'll cover that. We have budgeted and forecast no production from Osage in any of the numbers we have given to the market. Les is --

So we did 566,000 barrels in the first quarter. We did 605,000 barrels in the fourth quarter. If we assume that we were 45,000 barrels short due to weather, and we're going to get some of that back, I think reasonable expectation would be -- what percent? If we got half of it back, we'd still be a little short in the first quarter. If we got all of it back, we'd be at or slightly above the fourth quarter.

Okay. And, then, in terms of your CapEx ramp to get to your $50 million -- you spent $8 million in the first quarter. Is the remainder of (inaudible) spread pretty evenly over the remaining three quarters, or is it going to be -- even more back-end loaded?

You certainly will see an increase in Q2 over Q1, Ron, because, as I said, we've got the wet -- the rig working in Northeast Fitts. And we've got the rigs now working in the Osage. So the rate that we're going to pick up in the second quarter will exceed the first quarter. But because of the delay in the frac jobs, you probably will see it ramp up even more in Q3; although, with that early -- I think the date is June 11 -- is when we're expecting -- that's our date for the frac crews. If they're on schedule, we'll certainly get one or two of those frac jobs in, which will also kind of ramp up the CapEx in Q2.

So I see it going up. I don't want to quantify it for you, but I certainly see it going up in Q2 over Q1, and, then, going up again in Q3; and, then, kind of leveling in Q4 with what we have in Q3, and get to our [$50 million].

Okay; all right, guys. Thank you very much.

Okay. It looks like there are no questions. So I'm going to turn the call back over the management for closing remarks.

Well, I just want to thank everyone for joining us. And, as we look at the balance of this year, given the fact that oil prices are currently forecast to be $92 a barrel for the balance of 2010; and even gas prices are going to be $4.44 this -- forecast for the balance of the year. We will certainly meet or exceed, I believe, our financial projections for the year. And we do expect the capital program to pick up speed, and then the production to begin to catch up as we move into Q2 and Q3 and Q4.

So, once again, thanks, everyone, for joining us. And we'll look forward to talking to you later.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.