Battalion Oil Corp (BATL) 2010 Q3 法說會逐字稿

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

At this time, all participants are in listen-only mode and later we will conduct a question and answer session.

(Operator Instructions)

As a reminder, this call is being recorded for replay purposes.

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

Well, thank you all for joining us today on the RAM energy conference call to discuss third quarter 2010 financial results and updates relating to our recent asset sale agreement and an update on our Osage activity.

With us today from RAM we have Larry Lee, our CEO, Les Austin, our Senior VP and CFO, Larry Rampey, our Senior Vice President of Operations, Drake Smiley, Senior VP of Land and Exploration, Sabrina Gicaletto, VP of Finance, John Frick, VP of Operations, and myself.

And so on our agenda today we're going to have a brief review of our announced asset sale agreement, an update of our activities at Osage on our exploration effort, and a review of our financial and selected operating results for the third quarter, as discussed by Larry Lee and Les Austin, and that will be followed by a Q&A.

So, as you might imagine, in our call today we're going to make statements that are other than historical fact. The information in the dialog and all such statements that refer to management plans, expectations, including estimates of the timing and completion of planned asset sales, exploration efforts, anticipated hydrocarbon pricing, capital spending, drilling plans, derivative positions, future interest expense, G&A and other industry conditions, are all forward-looking statements within the context of the Securities and Exchange Act of 1954.

So the Company cautions that such forward-looking statements are necessarily based on certain assumptions which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today. For further information on these risk factors, included -- are included in the Company's filings with the SEC as well as at the beginning of webcast slides. The management of RAM encourages you to review the disclosure and all of our documents.

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

Thank you, Bob, and good morning to everyone. RAM's pleased to report that we recorded a net income in the third quarter of $1.6 million, or $0.02 per share, and for the nine months of 2010 we have recorded net income of $6.7 million, or $0.09 per share. I'll talk briefly about our strategic alternatives because I know that's something that the market is anxious to hear more discussions of.

RAM did announce that on November the 1st we signed a purchase and sale agreement to sell our North Texas shallow gas Bend Conglomerate and our deeper Barnett Shale properties. These are primarily located in Jack and Wise County in North Texas. They represent about 26.4 billion cubic feet equivalent of proved reserves, or 13% of our year end 2009 total company proved reserves of 204 billion cubic feet equivalents.

Daily production from these properties in the third quarter was about -- a little less than 800 barrels a day, 791 barrels a day equivalent. Or since these are really gas properties, a better way to think of it is probably 4,750 Mcfe equivalents per day in the third quarter.

The effective date of this sale is November the 1st, and it is scheduled to close early in December. Once we close that sale we will put out some additional information about how those proceeds will be applied to our debt. It is our intention to apply all of those proceeds to pay down on our debt facility. And Les may have a little more color on that later in the call today.

Our third quarter we had stronger hydrocarbon prices and we really kind of tried to focus on our cost control. And as a result, we had higher EBITDA and net income compared to the same quarter last year. Oil prices continued to march upwards. We averaged $74.05 in the third quarter versus $65.74 a year ago. Natural gas liquids was also up nicely at $35.71 versus $28.84 a year ago. And natural gas was $4.05 versus $3.10 a year ago.

Year-to-date oil has accounted for 72% of the dollars that are flowing into RAM, even though that our oil and natural gas liquids combined are only 63% of our production and account for 81% of the dollars that flows into the Company. We continue to try to work on our cost controls. We had G&A costs in the third quarter of $2.9 million versus a year ago of $4.2 million. And we continue to try to focus on costs where we can.

Our production for the quarter was 541,000 BOE equivalent. That compared to 549,000 in the second quarter of this year. We continued to experience some natural production declines. Our offline wells, which were weather related primarily in the second quarter of this year, those have gradually returned to production, and the timing and impact were insufficient to offset the natural declines. But we've made quite a bit of progress with the additional workover rigs in North Texas and helped address that issue.

We continue to suffer from shortages of fracturing and stimulation equipment and crews in South Texas. That's continued to be a problem for us in that area and I'll get into it a little bit more in a moment. But for the quarter we invested $8.8 million in CapEx. This is primarily targeted to our lower risk development and exploitation activities. And that compares to $4 million that we invested in the third quarter of 2009. We drilled 15 gross and 15 net wells versus 11 gross and 10 net wells a year ago.

Talk a little bit about South Texas. We have three wells that we had drilled in the late part of the second quarter and the very early part of the third quarter. Those wells have been setting and awaiting fracture stimulation. They are now scheduled for mid November. We do have crews lined up and scheduled to begin that work.

One of the things in South Texas, we've got 29 additional proved locations identified. So we got the potential to expand our drilling program in South Texas, but I think we're going to delay activity in South Texas until we see an improvement in gas prices and some alleviation of this frac service availability in South Texas. We do expect that that will be alleviated as we move into '11.

There are more crews coming into the market. Hopefully that will be -- not be as big an issue going forward as it has been this past year. But I would like to remind everybody that the great majority of our acreage and our locations that we've identified seismically in South Texas are helped by production. So we've got the ability to drill those when we see the gas market improve and when we can drill them and then reasonably expect to bring them on line for production.

One thing, even with this property sale that we have just announced, we still continue to have a very deep inventory of project locations. We've got 225 identified proved locations in Electra/Burk. We've got 74 in N.E. Fitts and Allen, and 27, as I said, in South Texas. So we've got 326 identified. Drill sites, we've got 109 that we've identified that are not in the reserve report. So even after this divestiture, we still have 435 identified drill sites within the portfolio. And virtually all of this acreage is helped by production and is not at risk of lease expiration.

We did want to give everybody a little bit of an update on our Osage concession. Just to remind everyone, this is a -- we own 100% interest in this concession in Osage County, Oklahoma. It covers 53,120 gross and net acres. It is predominantly an oil play, with the primary objective meaning the Mississippi Chat formation. This formation is prospective at shallow depths of 1,500 to 3,000 feet in our area of interest.

Initial cost to drill and complete these vertical wells is estimated to be $350,000 to $400,000. As we've said before, we're doing quite a bit of testing and we'll continue to do that on these early [science wells]. And we think once we get this into a production mode we can get these costs down to $250,000 range.

We did shoot a 3D seismic over the initial 16,000 acres in the concession last year. We have identified seismic companies to come in and shoot the next 25 square miles, which will take place over the winter of 2010 and 2011. And so far we have drilled the Surber #1 and it is in production. Initially came in at about 80 barrels a day with a 20% oil cut. Continues to produce in kind of the mid 30s. And so that one's moving along.

The Rickets #1 we've drilled and are currently testing the Mississippi Chat formation. We did reenter the Mashunkashey, which was our first well that we drilled out there and that we did not attempt a completion in the Chat formation. But we've come uphole and are testing a shallower Pennsylvania sand that looks encouraging at this point.

We also have a permit to reenter the Rickets #2 and the Surber #2 well is currently being staked. And we're in the process of applying for saltwater disposal permit, which we would hope to get that approved here in the next 30 to 60 days. And of course, as I said, we're evaluating vendors for our second 3D shoot and that's to begin shortly.

The second 3D shoot will actually cover 19,840 acres. It's going to be a little larger than our first shoot. These Mississippi plays are getting a lot of publicity in the marketplace today. As we've said in the past, when we targeted this project, we estimated that what we're looking for is about 40,000 barrels on a vertical well, with a drilling complete cost of about $250,000.

That compares to some of the companies that are working this play in further Western Oklahoma where it's deeper, and they're currently drilling horizontal wells that are in the $2.7 million to $3 million range. And of course they're hoping to find about 300,000 barrels.

So I think that at least as we look at this play going forward, we continue to be very encouraged about it. I guess an interesting point, we have received several unsolicited offers to purchase this concession from us, but we certainly at this point are not entertaining any of those proposals to purchase that concession from us.

With that, I'm going to turn it over to Les and let him talk a little bit about the financials. And then I'll come back later.

Thanks, Larry. Just a few brief comments on the third quarter results. EBITDA in the quarter was $12 million. This compares to about $11.1 million in the third quarter of 2009. Net income was $1.6 million, or $0.02 a share, compared to a net loss of $3.1 million, or $0.04 a share, in 2009. And the free cash flow was $7.5 million, or $0.10 per share, compared to $8.7 million, or $0.12 per share, in the previous year.

One of the points that Larry made, about 88% of the oil and natural gas accounted for our sales in the third quarter of 2010. And our revenues were basically 2% higher due to the higher commodity prices.

In respect to the strategic alternatives and the proposed sale, this sale is scheduled to close in early December of this year, with proceeds of approximately $43.75 million. We are currently working with our existing bank group to determine the impact on the borrowing based assets. And ultimately the disposition of the proceeds between our revolving debt and our term debt. Obviously the Company's bias will be to pay down as much on the term debt as we can.

When you look at the assets that are being sold, they represent approximately 7.6% of our third quarter revenues. They represent approximately 8.4% of our third quarter operating cash flow. And most of the production that Larry has previously referenced is in the gas and NGL. This play only represented 1.5% of our oil production for the third quarter.

When you look at our debt position at 9/30, the revolver had $133.5 million outstanding and the term note had $113.3 million outstanding. So with the proceeds collected in December, the debt should be reduced to somewhere around $200 million to $205 million.

The interest expense for the fourth -- or for the third quarter was $5.8 million, or 8.2%. We believe that that number into the future for the fourth quarter should hold about the same, maybe at $5.5 million for the fourth quarter.

When you look at our derivative position at 9-30, we had approximately 322,000 barrels hedged in the fourth quarter of 2010 at an average price at about $58 a barrel. And we had about 0.9 Bcf hedged in the fourth quarter of 2010 at about $4.83 per Mcf.

We continue to have about 50% of our production hedged for the next 30 months of our PDP production. And in 2011 that would be represented at about a million barrels of oil at $60 core pricing and about 2.6 Bcf of gas at about $5 core pricing.

As far as guidance for the fourth quarter, we believe that production in the fourth quarter should be sequentially flat, even with the sale of the assets in early December. That would result in about 2.2 barrels of oil equivalent for the year.

G&A for the fourth quarter should average what it has been for the first nine months. So we're projecting about $3.5 million for G&A in the fourth quarter. And as I said before, interest expense should be around $5.5 million in the fourth quarter.

This would result in EBITDA around $54 million for the year and capital expenditures around $36 million for the year. And those capital expenditures are broken out $6 million for geological, geophysical and seismic, $26 million on development drilling, and $4 million on exploration and leasehold.

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

Thanks, Les. And the one thing I would just kind of reiterate on what Les has talked about with our hedge position is that at the end of the fourth quarter of this year we no longer have any ceilings on any of our oil hedges. At that point all of our hedging will be at floor prices only. And so as we expect oil prices to continue to hold at these current levels or march higher, we will be participating in that movement with oil prices.

We continue to think that RAM sells at a very attractive price on a cash flow multiple. Based on stock price as of the 2nd of November and the cash flow estimates for 2011 from Tompkins and Reuters, we trade at about 2.4 times our cash flow. That compares to our peer group of about 4.6. We feel like that as we continue to execute on our debt reduction and our financial restructuring and move ahead with our oil weighting compared to our peer group, that we've got some -- we look forward to some appreciation in our stock price.

Once again, oil prices for the balance of this year are currently at about $87.64 and they're slightly less than $90 in 2011. We think with our oil weighting, that's going to continue to work for us. We do have this continued large inventory of low risk opportunities. Once again, this is a long life asset base so it's fairly predictable in terms of its projections from a production standpoint.

We continue to have a high degree of operating control. In fact, one of the bigger assets that we're selling in this Barnett is the non-operated position that we have there. So our percentage of operating control over our properties will actually increase as a result of this. Our current stock price is about 3.2 times actual cash flow of the $0.47 that we've had over the last year. And we continue to see analyst estimates at a higher stock price than we're currently trading for.

We continue to progress with this deleveraging and look to have some additional targeted assets with our portfolio that we'll be looking at. These are going to, first of all, be in our non-operated property base. And then we'll evaluate any subsequent sales once we execute on those. Once again, we're trying to consolidate our operating control over our asset base and I think that's going to be -- work to our advantage as we move forward.

Once again, the management are substantial owners of this company. And we'll continue to work to align with shareholder interest and improve our stockholder value.

With that, we'll turn it over for some Q&A. and, Bob, you want to --

Great. Jennifer, if you would go ahead and open it up for the question and answer period.

(Operator Instructions). Your first question comes from the line of Leo Mariani from RBC Capital. please proceed.

Good morning here, guys.

Hi, Leo.

So, I think I missed the first few minutes of your call, Larry. I sort of came on when you were talking about well results in the Osage. Did you guys say that you had a second well that you completed in the Chat? I think I may have missed something here.

Leo, we just recently perforated and we're testing a second well in the Chat. We've gone back up to the shallower [pin zone] and the first well we drilled out there, the Mashunkashey, it looks like we're going to make a successful completion in a shallower Pennsylvania sand. And then we've permitted for reentry of a well and also a -- what would be our fifth well out there. And then we've also permitted for a saltwater disposal well.

Okay. So your second well, it sounds like you just completed it and I guess you need to watch this, I imagine, for a period of time before you can determine what you think you got there.

Yes. And we're still doing the same thing with the server. As I think I've mentioned, we want to produce it for a while and then decide whether we want to do some kind of an additional stimulation on it. All these wells so far have just been perforated in very [light acid jobs]. So what we're seeing right now is kind of what's coming at us without stimulation.

Okay. I guess just jumping over to the asset sales, you guys said you were still evaluating. Can you give us kind of what you think the timeline is for you to make a decision as opposed to what you're going to sell here and when you think that sale could potentially get effected?

Leo, we've pretty well identified the remaining assets that we're considering selling. I don't want to be too specific about that, but we've kind of got them sequenced in what we would look at. I can kind of say it this way. Our first preference would be to go ahead and sell the rest of our non-operated assets, non-operated properties because, once again, we don't control timing on any of those. So that'll probably be the next set of assets that we look to.

Once we complete that we've got a couple of smaller, what I call somewhat outposts, where we do operate that we'll consider for sales on those. And those are in East Texas and West Texas because we do operate some properties out there. But they're not significant in the grand scheme of things. So we'll kind of continue to look at that.

And with our slowdown in gas drilling in South Texas, we actually think we'll begin to see some cash flow that will also go to debt reduction. So kind of we're on the balance of -- between asset sales and internally generated cash flow that would be available for debt pay-down to kind of work our way through the next three or four months. But you should continue to see follow-up announcements from us on activity in these areas I've just described.

And is there any visibility at this point as to when you think you're going to get some of those South Texas wells fraced or is it still just kind of --

No. You may have missed that part. We've got those scheduled for fracing mid November, so we're going to get those fraced here in the next couple of weeks. And we'll begin to see those contribute to some production volumes we're expecting as we move into December. So once again we -- that's partially alluded to what Les said about fourth quarter production being, I think, sequentially flat. Even with the sale of these assets we should get a pickup in South Texas as a result of getting these wells fraced.

Okay. And what is your backlog of wells there in South Texas, Larry?

We currently have three pending.

Three pending. Okay. Thank you, guys.

Your next question comes from the line of Jason Wangler from Wunderlich Securities. Please proceed.

Morning, guys.

Morning, Jason.

Just kind of following up with Leo there, could you give me the exit rate of production maybe net the Barnett plays at September 30th?

That was -- for the quarter it was [47.61] I think I said. But I don't have the exit rate at the end of the quarter. I'm sorry I don't have that in front of me, Jason.

That's okay. And then the other thing I was wondering is just like you were saying as far as some internally generated cash flow for next year, and obviously there's a couple of moving parts now with some potential asset sales, but do you have an idea of what CapEx is going to look like for next year?

We're putting that together. We don't have it for you today. We're anticipating that once we close this sale we'll come back to the market, hopefully before the end of the year, and kind of give you some guidance for 2011 once we kind of get that nailed down. I apologize, we don't have it for you today, but we'll be getting it to you fairly shortly.

No problem. Looking forward to it. Thanks, guys.

Thanks, Jason.

Your next question comes from the line of Chad Mabry from Rodman & Renshaw. Please proceed.

Thanks. Good morning, guys. Going to -- back to Osage, appreciate the update there. Can you give us a little more color on when you expect some of these results as far as when you might report results from these next wells? And just I guess other kind of milestones in that process.

And then looking into 2011, I know you don't have the full budget out there, but is it plausible that maybe you'd get a rig kind of full time at work out there next year?

Yes, Jason, as I think I said in our last chat, the initial seismic indicated that about one-third of that 16,000 plus acres is prospective for what we're looking for. So we're [high grading] that seismic work and believe we'll have a fairly active drilling program up in that concession next year.

So I think as far as announcing results on these initial four or five wells, we're probably still honestly 45 days away. I'm hoping we'll have something that we can announce as we move into either the end of the year or the very first part of January.

Our plan is once we kind of feel like we've got a handle on what's going on up there, we're going to offer to have an analyst meeting, probably sometime early in 2011, to kind of show you what we think we're seeing up there, and then also talk about what we're seeing from some of the other players. Once again, it's a fairly active play, this Mississippi Chat [line play] is getting a lot of attention in Oklahoma right now. So we're anxious to move ahead with it.

Great. I appreciate it, guys.

Your next question comes from the line of Don Crist from Johnson Rice. Please proceed.

Good morning, guys.

Morning, Don.

Larry, can you give us a little update on what your Burk Burnett. I know you had some issues there with weather related going last winter. Are you back to a fractional rate now of downtime there?

Yes, we are. We acquired a seventh rig -- we have nine now, don't we? We have nine rigs now, so we acquired an eighth rig. We had one rig that we had in a previous acquisition of a little small operator down there we had that was in the yard that was not really working, but we've reconditioned it. And so now we have nine rigs working fulltime. We've got that -- downtime from the wells that are pending workovers is down to a more normal rate of 35 to 40. We were up as high as 90 there for a while. And we've got it back pretty well under control we feel like.

Okay, great. And just one for Austin real quick. Can you talk about the G&A decrease from the second quarter and what drove that and where you think it should be for the fourth quarter? I know you think it's about an average, but around $3.5 million, give or take?

Yes. In the third quarter the decrease is primarily a result of lower employee related costs and professional fees, some of those onetime. And therefore we think that the average that we've had for the nine months, which is about $3.5 million per quarter, is a reasonable estimate for what G&A should be in the fourth quarter.

Okay. Thanks a lot, guys. That's all I had.

Thanks, Don.

There are no further questions at this time and we'll now turn the call over to Mr. Lee for closing remarks.

Well, I just want to thank everyone for taking time to join us today. And we will look forward to visiting with you in the future. Thank you very much.

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