Battalion Oil Corp (BATL) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second quarter 2010 RAM Energy, Incorporated earnings conference call. My names is Yvette and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator instructions)

I would now like to turn the call over to Mr. Bob Phaneuf. Please proceed, sir.

Thanks very much, Yvette, and thank you all for dialing in to the second quarter 2010 RAM earnings conference call. With us today are Larry Lee, our CEO, Les Austin, our Senior VP and CFO, Larry Rampey, our Senior VP of Operations, Sabrina Gicaletto, our VP of Finance, Paul Homan, our VP of Business Development, and John Frick, our VP of Operations.

Our agenda for the call today is we'll spend a little time with some prepared remarks reviewing our financial and selected operating results for the second quarter as well as talk a little bit about our second half 2010 plans and then we'll follow that with a Q and A.

Before we actually begin the call, let me just mention a small preamble here with respect to safe harbor. In our call today we're going to make statements that are other than historical fact. All such statements that refer to management plans or expectations or guidance for such items as annual production, expenses, property dispositions, capital spending, EBITDA, interest, drilling activities, derivative positions and estimates of our project inventory, as well as assumptions of hydrocarbon prices and other company or industry conditions are in fact forward-looking statements within the meaning of the Securities and Exchange Act of 1934.

So the Company cautions that all such forward-looking statements are necessarily based on certain assumptions which are subject to risk and uncertainties which could cause the actual results to differ materially from those indicated today.

For further information on these risk factors included in the company's filings with the SEC, you can refer to those and management encourages you to review the disclosure in these documents. So without further delay, let me turn it over to Larry Lee for a welcome and a short review.

Thank you, Bob, and good morning to everyone. Glad you could join us. We're pleased to report that we recorded $2.7 million in net income in the second quarter, $0.03 per share. Our EBITDA was $12.5 million for the quarter. The free cash flow was $7.2 million. EBITDA for the first half of the year is $28.2 million. That's compared to $32.1 million for 2009.

We continue to benefit from the product mix that's in our production stream with 62% of our production being oil and natural gas liquids and as a result that accounted for 82% of our oil and gas sales in the second quarter. And even though we had lower production in the second quarter, we actually had higher oil and gas sales, $27.2 million versus $23.5 million in the quarter a year ago.

We continue to focus on trying to get our lease operating cost as low, as efficient as we can. We've incurred about $16.6 million of lease operating cost versus $19.2 million for the first half of 2010 versus the first half of 2009. And G&A is down $7.8 million for the first half of the year versus $8.1million a year ago. So we continue to try to work on our cost controls and we're continue to be pleased with the hydrocarbon mix that we're producing.

We did produce 549,000 barrels equivalent in the second quarter. That's down from our 566,000 barrels that we produced in the first quarter of 2010. And it was essentially all in south Texas. We were down in our south Texas production by 30,000 barrels, so that more than accounted for the total decline.

We did suffer some additional weather impacted production losses in our mature oilfields in north Texas and we've addressed that by engaging two independent service units to come in and help us with our work down there. And we're also in the process of acquiring two additional units to add to our fleet of seven units that we currently own and operate in north Texas. Since we've owned that field since 2004 we've drilled over 300 wells in that field and therefore with the increase in well count we just have to expand our servicing fleet to continue to keep those wells tended to.

We did spend $10.8 million in the second quarter on CapEx and as we move into the second half of the year, we will continue to try to keep that same pace, we believe, on a quarterly basis, but we will be directing a little more of the dollars into some of our exploratory prospects in south Texas. And, of course, we're going to continue to be investing money into our Osage project as well. With that, I'll turn it over to let Les kind of talk about some of the specifics in the financial report and then I'll come back and wrap it up at the end.

Thanks, Larry. I'm going to make some brief comments about our debt, our derivative position, and our guidance for the balance of the year. At June 30th, our debt stood at $245 million. That consisted of $132.5 million on our revolving credit facility. It has a borrowing base of $175 million and $112.5 million on our term facility. This balance of $245 million is down approximately $2 million from the first quarter balance of $247 million.

Our interest expense for the quarter was approximately $5.7 million or 8.2% on a blended rate which is fairly consistent with how it has been running sequentially over the last four quarters. The derivative position that we had at June 30th for the balance of 2010, we have approximately 650,000 barrels hedged at a minimum floor price of approximately $57. And we have approximately 820,000 barrels of oil hedged in 2011 at an average floor price of $60 per barrel.

On the natural gas side, we have 1.8 BCF hedged for the balance of the year of 2010 at an average floor price of approximately $470 and then we have 2.3 BCF hedged in 2011 at an average floor price of $5 per McF.

On the guidance side, just to repeat what's in the press release, we have revised our production guidance to 2.2 million to 2.3 million barrels of oil equivalent. That's down from 2.5 million to 2.6 million. We are also revising our EBITDA guidance to $55 million to $58 million from the $65 million to $68 million that we had. That would assume production for the balance of the year of 1.1 million to 1.2 million barrels of oil equivalent and we've used a price of $71.70 for oil for the balance of the year, $4.80 for natural gas, and $36.70 for NGL.

Now, the cash interest and the asset del guidance remains the same, [16.5 to 17.5] cash interest expense for the year and asset sales of $1 million to $2 million. We have also revised downward our capital budget from $50 million previously now to $40 million to $42 million The original budget of $50 million had $6 million for geological, geophysical and seismic. We anticipate that same $6 million to be spent in the revisions.

On the exploratory side, however, we had $6 million in our previous budget. We have moved that up to approximately $9 million in the revised budget and the balance of the difference comes out of our developmental drilling, which we've revised downward from $38 million to $26 million. And with that, I'll turn it back over to Larry.

Thank you, Les. I'll comment briefly on our strategic review that we are going through. That process is moving along nicely, but we certainly don't have anything to announce in regards to that at this point in time. Once we have something to announce, we certainly will provide that timely to the market, but at the moment that process is just underway and moving along at the speed at which we would expect it to. Our Osage project, we are continuing to drill. We're just drilling the second size well on that project and we'll be drilling addition size well sometime probably later in this quarter.

As Les talked about, we're increasing our emphasis on exploratory activities. This primarily is in south Texas with the gas price continuing to be where it is, we feel like that it's appropriate for us to invest some money into these exploratory prospects that we've identified by seismic identification in and around our existing production in south Texas, so we think that can allow us to move some of the probable and possible reserves that we have into proven categories and so we're going to be working on that as we move throughout the balance of the year.

We currently have two wells pending completion and are getting ready to start a third well, so we continue to move along and we think that we've made some progress in identifying some service providers that can help us with the completion activity in south Texas.

I know that it's certainly true for us and I've noticed that a lot of the announcements of other companies this quarter that completion services continue to be tight, particularly in south Texas, and so -- but I think we've made some progress in terms of identifying people that can provide those services for us.

Once again, I think, just to wrap it real quickly, is that, you know, we continue to benefit from the above average oil weighting in the portfolio and oil prices continue to be very attractive price range where we are. We do have, you know, continue to have this large inventory of low-risk opportunities.

You know we -- and a high degree of operating control so we can sort of determine when we want to drill these wells and by postponing some of the development drilling into 2011, that doesn't create any issues for us on, you know, control of the [lease] situation.

We continue to trade at a very attractive multiple on a cash flow basis and I think that as we work our way through this strategic process we intend to try to be able to unlock some of the value that we believe is in the company that the stock price is not currently reflecting. So with that, Bob, if you want to, we'll open it up for some Q and A.

Right. Operator, if we can go to the Q and A now, please.

Sure.

(Operator Instructions)

Your first question comes from the line of Leo Mariani with RBC. Please proceed, sir.

Yes, good morning here, guys.

Good morning, Leo.

Hey, with respect to your new production guidance of the 2.2 million to 2.3 million barrels for the year, can you give us some indication of what you guys assume and in terms of south Texas in terms of availability to frac crews and when some of those wells are going to come online?

Leo, like Les was saying, to get that number we're looking at probably about -- a little over 1.2 million barrels in the second half of the year and we think that will continue to ramp up from our current levels. Don't have specific numbers for you for the second quarter because there still is some question about the timing of the completions, but one of the things we're doing is while we're going ahead and getting them drilled so that as soon as we get the frac crews available to us we can get them down there and hit the wells.

We do have a commitment to come back and frac two wells for us in August. And so, like I said, we got two wells currently pending and we're getting ready to spud in a third well. So what we're hoping is the delay that we really experienced in the second quarter of the year is now somewhat behind us and that as we continue to drill these wells we'll have them sitting there and we'll be able to get two or three frac jobs each quarter in south Texas. So that's kind of what we're -- what we're projecting.

Okay. In terms of the Osage, it sounds like your first well is drilled and you're finishing a second well there. You guys seeing good oil shows in that first well, or what?

Leo, we're moving ahead. We, obviously we didn't announce it. We drilled a second well. We've not -- we're not releasing any information about the results on those wells at this point in time. Kind of hopeful that we might be able to share something with everyone maybe in 30 or 60 days, but we've still got some additional science work that we're doing up there and but we're continuing to move ahead and invest money in that project.

You're next question comes from the line of Chad Mabry with Rodman & Renshaw. Please proceed, sir.

Thanks. Good morning, guys. Quick question on production. Looks like you had completed some of those south Texas wells and kind of started ramping up things in Electra/Burk last month. Can you give a current run rate or maybe a July production number for us?

Chad, I can't at this point. I know that, as I said, we've contracted for the two in Electra/Burk and I think we'll begin to see the results of those. The well we're in the process of trying to buy a rig. I think we've got one identified and then we're reconditioning another one, so those two rigs will just now be going into service sometime later. Well, one of them, hopefully go in early in August and the other one probably go in service maybe towards the end of August.

So we'll begin to see some benefit on that and what we're hoping we're going to do is pick up maybe 100 to -- 100 barrels a day or something there and maybe a little better than that, but we're kind of looking for that. And we're just getting these wells fraced and getting on in south Texas. So we were probably about 6,100-plus barrels a day and in July it looks like the best estimate I have, at this point it's not final, and we expect to see that rate climb as we move into August and September.

Okay. Appreciate that. And then I've got just one question. It looks like you're taking up the exploratory portion of the budget, have some things slated in south Texas. Can you give any additional color on any of those projects?

They're basically seismically identified projects that we have identified. We've got a large inventory of 3D seismic in south Texas around our Vicksburg plate in Starr County. And we've identified some additional seismic bright spots.

We've leased them and we're -- we had planned to drill those probably early in 2011, but we just feel like it's prudent to save some of that development drilling in south Texas for 2011 and go ahead and get these wells -- get these wells drilled. We think we can feel pretty confident about them, based on the seismic evaluations that we have and so we think it'd be a good time to try to get those wells drilled and get that production and those reserves into the -- into the reserve report.

(Operator Instructions)

Your next question come from the line of Ron Mills with Johnson Rice. Please proceed, sir.

Good morning, guys. On the strategic alternatives process, can you just give us some of the parameters in terms of the timeline, where you are right now? Is the data room open? Just trying to get a sense, in terms of what some of the milestone dates would be.

Ron, I think that we probably would be -- would expect to be in a position to make some decisions and therefore be able to share those with you and the rest of the market probably by the -- towards the end of September, I think. We're moving through that process very nicely, we think and -- but we don't think that decision points will be reached any earlier than probably the third or fourth week in September.

And would those give you a chance to -- assuming whatever method you decide, that if it was a full process, is that enough time to close by year-end? Is that part of the thought process?

Yes.

Okay. And then secondly, on the Osage concession, I know you have 80 square miles there. Can you refresh our memory, just in terms of what you think of the potential opportunities that, in terms of whether it's oil in place and average recoverabiliites and compare, contrast that with your other mature fields, the Electra/Barnett or the Allen/Fitts area?

Ron, I think it's -- well, what we did is we looked at some recoveries of other operators in the Osage when we did our preliminary evaluation looking for what we might find. I think what we kind of zeroed in on looking at the other players up there that have -- that have had some success in these plates, about 40,000 barrels for a successful well is kind of what we've targeted.

It'll probably be 250 or 300,000 if we drill those vertically. It's probably more like 450 to maybe 500 if we drill them horizontally. Certainly these first science wells or vertical wells and -- of course, what we're trying to do is get the subsurface information and then tie it back in to our seismic interpretation. That's the way the purpose of these three science wells.

And then if that all works out like we hope it will, then we'll begin and we'll have a better sense of the size of the opportunity there. At the moment I can't really define that, but I mean I think it's fair to say that if we're successful, 40,000 barrels per well is kind of a target number we think is pretty reasonable. And it is an oil play. It probably will have some associated gas with it, but what we're looking for up there is oil reserves.

Your next question comes from the line of Richard Rossi with Wunderlich Securities. Please proceed, sir.

Good morning, everybody. Just a couple of things. On the development CapEx, could you break that down in the various places you're working on?

Yes, let me -- let me take a stab at that. I think we're still targeting to have about $14 million of the development drilling in south Texas, about $9 million in the Electra/ Burkburnett area.

That's for the whole year.

For the whole year, yes. About $1 million in Oklahoma, $2 million in other.

Okay. And as far as completion costs are concerned down in south Texas with the new people you've hired, has there been or how much of a change in cost has there been?

Larry might be able -- Larry might be able to better answer it. I know the costs have gone up a little bit, but Larry, can you speak to that?

The costs have gone up, I think mainly due to the number of frac jobs we did. We did have one well that overran for other reasons, but the thing that we're doing right now, we're changing our drilling program a little bit.

We think we'll get back down into 2.2 million, 2.3 million per well. And we did have some that ran over that, but I think for -- we do know why and, like I said, the main reason, I think, that due to the number of frac jobs (inaudible) 250,000 to 300,000 per stage. So anyway, I think that 2.2 million, 2.4 million is still a reasonable number.

Rich, I think we're seeing a little bit of inflation, but these are vertical rigs, so we're not seeing, I'd say, the -- quite the competitiveness for the rig part of it, as you might with some of the horizontal rigs and certainly the frac jobs have creeped up a little bit, but not dramatically higher cost.

Okay. Thank you.

Thank you, Rich.

(Operator instructions)

With no further questions in the queue, I would now like to turn the call back over to Mr. Larry Lee for closing remarks. You may proceed, sir.

Thank you very much. Well, I'll just leave everybody with as soon as we can we'll share decisions on our strategic review and -- as well as the Osage exploratory stuff and obviously we'll continue to share how exploratory activities in south Texas go and our ability to get those wells completed timely. So with that, I'll just wish everyone a nice day and we'll look forward to talking to you when we do our third quarter call.

Thank you for your participation in today's conference. This concludes the conference. You may disconnect. Have a great day.