Battalion Oil Corp (BATL) 2011 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2011 RAM Energy Resources Incorporated Earnings Conference Call. My name is Jeff and I will 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)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Bob Phaneuf, Vice President of Corporate Development. Please proceed sir.

Thank you Jeff and thanks to all of you who have joined us today. With us today from the RAM side are Larry Lee our CEO; Les Austin our Senior Vice President and CFO; Larry Rampey our Senior Vice President of Operations; Drake Smiley, Senior Vice President of Land and Exploration, Sabrina Gicaletto, Vice President of Finance; Paul Homan our Vice President of Business Development; Manny Redifer our Vice President of Exploration and Vicky Lindsey our Vice President of Accounting and our Controller.

Our agenda today is as follows; we'll turn it over to Larry Lee for a brief overview of our 2011 activity to date. He'll then turn it over to Les Austin to discuss our financial results and a review of our financing and the benefits thereof.

And then we'll go back to Larry for an update on our Osage exploration activity and then open it up for Q&A. Briefly before we get started I'd like to make a few statements that have to do with our Safe Harbor.

In our call today we're going to make statements that are other than historical facts. The information in the dialogue, Q&A and all such statements that refer to management plans or expectations including but not limited to estimates of the timing and completion of planned development, exploration activity, general capital spending, assumed hydrocarbon pricing, derivative positions, interest expense, G&A expense and other industry conditions are 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 actual results to differ materially from those indicated today.

So, we urge you to consider these risk factors most of them are discussed in our filings with the Securities and Exchange Commission and management encourages you to review disclosures in those documents. So, without further ado I'll turn it over to Larry to begin the call.

Thank you Bob and welcome everyone I'm going to give just a couple of brief remarks and then I'm going to let Les talk about the first quarter. We had some unusual activity in that related to our financing.

But the thing that I'd like to point out is that on a production basis 70% of our production in the first quarter was oil and natural gas liquids and that resulted in $0.89 of every dollar that came in from oil and gas sales is coming from oil and natural gas liquids.

We are accelerating our activity in the Osage exploration play and I'll cover that in a little more detail a little later in the presentation. We are very pleased that we were able to complete our new $250 million revolving credit facility as well as our new $75 million term loan in the first quarter and with the impact that those had in our quarter were fairly significant from some non-cash issues.

And I'm going turn it over to Les to let him cover that very quickly and then we'll come back and update everybody on how we're progressing in our Osage Project. Les.

Thanks Larry. Let me talk first about the refinancing of the debt in the first quarter. On March 15th of this year we refinanced the debt into two new facilities. The first facility is a new revolving credit facility $250 million with a $150 million opening availability of which $130 million was drawn on March 31 of this year. The facility is a five year term. We also entered into a new term credit facility second lien term note of $75 million all of which was drawn at closing and at March 31st. And it has a 5.5 year term.

Interest on the revolving credit facility is LIBOR plus 3% at March 31 which is about 85 basis points less than the previous facility. And the term note is at LIBOR plus 9% with a 2% floor which is about 175 basis points less than our old credit facility. For the first quarter the blended interest rate was 6.2% versus 8.1% in the first quarter of last year.

As required under the new credit facility the Company entered into a little more than 1 million barrels of additional hedges the first five days after closing. There were 145,000 barrels in the second half of 2012 with a $95 floor.

There were 600,000 barrels in 2013 with a $95 floor and there were 275,000 barrels in the first half of 2014 with a $95 floor. All of these were cost as collars with a ceiling price somewhere ranging between $99 and $105. We now have 2.3 million barrels of oil equivalent hedged in our current hedge portfolio.

Also under the current credit facility we were required to add a $50 million interest rate swap on our term note. That $50 million swap is for three years at an interest rate of 2.51% fixed.

Part of the impact recorded in the financial statements in the current we expensed $2.7 million in the first quarter as a charge to interest expense to record the expensing of unamortized deal fees related to the previous credit facilities.

And we also will be recording about $1.5 million in the second quarter of this fiscal year as a realized derivative loss related to the novation and unwinding of certain hedge positions under the new facility.

If you look at the financial results we have provided a table in the press release earlier today that provided a pro-forma basis of the 2010 results. That pro-forma basis is our results excluding the assets that were sold in December of 2010.

If you look at our results for our oil and gas sales $25.7 million in the current year versus $26.4 million pro-forma 2010, our derivative activity was a $14.1 million net loss predominately based on the weighted average ceilings that we have in place of $103 that resulted in a $15 million unrealized derivative loss versus the $1 million net derivative activity on a pro-forma basis in 2010.

Our operating expenses were $13.7 million versus $12.7 million on a pro-forma basis to 2010. The $1 million increase was predominately related to the additional work-over activity we are conducting in Louisiana to bring more production on line.

Our EBITDA was $13 million in 2011 versus $12.9 million on a pro-forma basis in 2010. Free cash flow $7.6 million versus $8.5 million in 2010. And production was 387,000 barrels of oil equivalent versus 462,000 on a pro-forma basis in 2010.

Our guidance for 2011 currently remains unchanged with the capital budget of $35 million. Our Osage Concession has been accelerated somewhat and we will be evaluating that capital spend at mid-year.

Production still remains at 1.7 million to 1.8 million barrels of oil equivalent pending a review of our work-over related outages that we occurred in the first quarter. EBITDA remains at $52 million to $55 million and interest costs remains at $14 million to $15 million excluding the non-cash write offs I previously mentioned. And with that I'll turn it back over to Larry.

Thanks Les and let me update everybody on what's going on in the Osage Play for us. As most of you know we had scheduled to drill 11 wells this year and one salt water disposal well. And that activity has been accelerated.

Through April we have actually drilled seven of those 11 wells. We drilled all of the wells that we had previously scheduled for Q1 and Q2 and because we had permits in hand for the two wells that we had previously scheduled for the fourth quarter the Surber 1-35 and the Rickets 2-35 we have now drilled and set casing on the Surber 1-35 and we are currently drilling on the Rickets 2-35.

So we've accelerated that drilling. The wells that we had scheduled for Q3 of this year the Jones 1-33, the Farmland 1-20, [Kendrick] 1-27 and the [Stuart] 1-28 are in various stages of being permitted.

The locations for those wells have all been staked and as soon as we get our permits we will then get our drilling rig back on location and proceed with those wells as reasonably as soon as we can.

We have contracted for the second phase of our 3D seismic shoot which will cover just shy of 20,000 additional acres. That has been permitted and surveyed and the trucks are expected to show up on location sometime around May 15 and that will take us depending on the weather somewhere between 30 and 45 days to complete the shoot in the field and then we'll begin the processing of that.

So we obviously are hoping that the second shoot will identify some similar seismic signatures that we have found in our first 25 square mile shoot and we would hope to begin to look at the opportunity to drill in the second phase shoot sometime late this year or certainly early in 2012.

As Les said we will be evaluating this Play at mid-year and deciding whether or not we will able to add additional wells to be drilled in it during 2011. We continue to be much encouraged by what we're seeing with the drill bit. We continue to confirm our seismic model and we continue to be very pleased with the zones that we're cutting in terms of what we're seeing with the drill bit.

One thing that we intend to start doing is we're going to probably update the market on our Osage more frequently than once a quarter which has been our historical pattern. We'll probably start going to updates on what's going on in the Mississippi in about every 45 days because the program is accelerating faster than we had previously anticipated.

So, I think that really wraps up the main thing I wanted talk about and Bob I think we can go ahead and open it up for questions and answers.

Yes great. Jeff please go ahead and do that.

(Operator Instructions)

Management has asked that you limit yourself to one question and a follow up and if you have any further questions to jump back into the queue.

Our first question of the day comes from the line of Chad Mabry with Rodman & Renshaw. Please proceed.

Thanks good morning guys. Larry I'll pick up where you left off on Osage. Obviously, if leverage were not provided on the release today but clearly you guys like what you're seeing in the Play due to the acceleration there. Can you shed any light on maybe what you're seeing so far in the Play that's causing you to accelerate here?

Chad as I've said before we have been confirming our seismic model and that's been very encouraging to us. As we've drilled and [logged] these wells and we've cored how many of them Manny, we've cored two of them at this point.

And we're analyzing that core information and so we're very encouraged by the [velocity] that we anticipated and what we're actually seeing when we cut the rock. So we're seeing shows and we're moving ahead with testing on some of these wells on an actual basis.

We've just recently fracced our first two wells and we're in the process of trying to get the frac fluid and the fluid in the reservoir off to the point where we can give good test data and announce that. I think that'll be coming fairly shortly but is still a little bit premature for us to give specifics about it Chad.

But it's like any exploratory Play you develop your models, you come up with your seismic picture that you are anticipating to see when you cut the rocks. And then when you drill it and if the logs and the samples and the coring confirm your seismic model that's about as good as you can ask for in exploratory project at this point in time.

So, we will be definitely updating you on it and we wouldn't be accelerating our drilling program if we weren't pleased with what we're seeing at this point in time.

The nice thing about these wells is they only take about three or four days to get them drilled and so the cost to get to this point and get the casing point set has been fairly reasonable.

And with the higher prices that we've experiencing on our oil production we've been able to accelerate the drilling as a result out of internally generated cash flow. We haven't had to go to our credit line for that activity.

Okay, and just as a follow up bearing in mind that there will be variability among well results what kind of expectations do you guys have out there for these wells?

Well, you know Chad our model that we use that 780 wells I've referred to several times. The EURs for those wells on average was 30,000 barrels per well from the Mississippian. And they had an initial start rate of seven barrels a day.

So the - and we've released this too the Surber which came in with just a light acid job came in with 80 plus barrels a day. It declined down to the mid-20s and then that's one of the wells we've fracced and we're in the process of flowing it back and are looking forward to being able to update everybody on that as soon as we can.

But the model would say seven barrels a day and [30,000 EUR]. As we've said all along I think the way that we're going at this Play our feeling is that we can accelerate and hopefully get a higher initial rate but we're not yet saying that we're going to recover more than 30,000 barrels per location. And that's on a ten acre vertical location.

One of the things we'll be evaluating and are evaluating is at what point in this project do we execute and drill a horizontal in these zones. And I don't an answer for you on that but I can tell you that we're certainly evaluating that option as we speak.

Okay great that's helpful I appreciate it guys.

Thanks Chad.

(Operator Instructions)

Our next question comes from the line of Neal Dingmann with SunTrust. Please proceed.

Good morning guys.

Hi Neal.

Hey give me an idea you're looking down these Osage wells. Again this might be a little bit nave but just wondering what type of spacing do you general see on those well locations. How many identified well locations do you see going forward for the block that you all have?

Neal the vertical wells we think will only drain about ten acres and that's --

Wow

What we've seen up in the area because you're just not going to get a lot more drainage we don't think than that. Maybe ten or 12 but we think on average it will be ten acres and that's the drainage pattern that I referred to in the wells that were used as our type well to generate the 30,000.

As we've said before somewhere between one-third and 40% of the first 25 square mile seismic shoot gave us a seismic image that we think has the [velocity] and the zone thickness that we're looking for. So if you take 35% to 40% of the first 16,000 acres we think that's the potential.

Now, one of the nice things about this play is a single vertical well bore will hold a 160 acre lease so our pattern is probably going to be to drill as many of these prospective quarter sections as we can and then talk about coming back and increase density within that quarter section.

Interesting okay and then just wondering given the locations and everything that you're seeing there everybody else around you is seeing the rising costs that we now are hearing more and more about.

What's your thought as far as on the completion side, will you -- I guess given its smaller again you don't really have to frac. But just given the typical completion activity do you have cost concerns going forward? Will you lock things in? What will you do around the cost side?

Well we're seeing costs go up as well. We started out we were paying about $16 a foot and now we're paying $20 but you're talking about 2,300 or 2,400 foot well so that's not really -- getting the wells drilled and cased has not been that much of an issue for us.

We do think we will have some issues as far as timing of issues for getting frac jobs. And Neal one of the things we were wrestling with is whether or not this Play will end up being a natural completion where we'll just go in and perforate and lightly acidize and produce it.

If we get into the horizontals those will definitely take large frac jobs more staged frac jobs so we'll have to wrestle with that when we decide to consider a horizontal.

But right now we are both looking at natural completions and we did frac the Surber 1-26 and the Rickets and the reason we did that is that we think that by fraccing them we may be able to accelerate the recovery. As I said I don't know that we know enough yet to declare that we would get larger ultimate recoveries but we think we'll get a higher initial rate.

And that's been our operating theory for these Plays is that if the frac jobs pay off in terms of that additional initial higher rate than the seven barrels for our model then we'll want to do frac jobs.

The completion cost on these wells is the biggest component of it. There's - these frac jobs even on the small vertical wells are $125,000 to $150,000. So that would be the bigger component of the cost for us in this.

And there is somewhat of a scarcity of that kind of equipment but the frac companies are bringing in additional smaller frac equipment to meet our needs and the needs of other people that are also working in and around Osage and in this Northeast Oklahoma area.

Got it solid got it thanks guys.

Thanks Neal.

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

Good morning guys how are you?

Good morning Don.

Can you talk a little bit about the timing of when you should get those cores back on the third and fourth wells and when do you think that you could frac those other Mississippians?

June for -- Manny's telling me -- June for the Farmlands and July for the Surber 2-T.

We've already fracced the two initial wells Don and we're working on getting those results back so that we can comment on -- and what I'll think you'll hear from us is whether we think that fraccing these wells is worth the investment cost. And that's what we hope to be able to tell you fairly quickly.

I think we will be able to shed some light on that probably by - certainly sometime during the month of June.

Okay great and just one other housekeeping question. I know you had the market offering out there. Can you have any update on that? Have you all sold any shares yet? Is that still all the way out there? (inaudible - multiple speakers).

We have not sold any shares. We'll be disclosing that today when we file our 10Q that we have not sold any shares in the ATM.

But obviously this is too low a price that you don't want to sell them down here I'm sure?

Exactly.

Okay, all right that's all I've got thanks guys.

(Operator Instructions)

All right gentlemen this will conclude the q-and-a portion of the call. I'd now like to turn the presentation back over to Mr. Larry Lee for closing remarks.

Thank you very much and I appreciate everyone joining us today. I would just like to say that I think if you can adjust the unusual items that relate to the financing I think we had a pretty decent first quarter given that we did have some production issues because of weather and a couple of other things.

So, I think with the flexibility we have under our new facility, the price that we're receiving for oil and the fact that our oil and NGL volumes are now up 70% plus of our daily production and I see that number certainly holding in those ranges as we go forward.

We should continue to benefit from these higher oil prices. And I know the market's traded oil down today but the last time I looked it was just slightly under $105. I've been in this business a long time. I haven't sold much oil over $100 so I'm quite happy with these prices.

And we will keep you very much posted on our Osage project as it evolves. And we look forward to talking to all of you at the next conference call. Thank you very much.

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