Battalion Oil Corp (BATL) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and will come to RAM Energy Resources Inc. third quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator instructions). As reminder, this conference call is being recorded.

Before we begin today's call, I would like to inform you that in the call today RAM Energy resources Inc. may make statements that are other than historical facts. Information and dialogue responses during the Q&A and all such statements that refer to management's plans or expectations, including but not limited to guidance on special timing and completion of planned development or exploration activity, amount of timing of capital spending, assuming financial carbon pricing, derivative positions and other industry conditions are forward-looking statements within the meaning of the Securities Exchange Act of 1934. The Company cautions that forward-looking statements are necessarily based on current assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today.

Further information on these risk factors are included in the press release and in the Company's filings with the Securities and Exchange Commission. Management of RAM encourages you to review disclosure in both of these documents.

Now I would like to turn the conference over to Ms. Sabrina Gicaletto, Vice President of Finance.

Thank you for joining us today on the RAM Energy conference call to discuss the third quarter 2011 financial results and an update of operations in our Mississippian exploration play in Osage County, Oklahoma. With us today from RAM are Larry Lee, our CEO; Larry Rampey, Senior Vice President of Operations; Drake Smiley, our Senior VP of Land and Exploration; Paul Homan, our VP of Business Development; Manny Redifer, our VP of Exploration; and I'm Sabrina Gicaletto, VP of Finance and Treasury.

Our agenda for the call today is an overview of the third quarter 2011 results, an update of activities at our Osage exploration project, a review of RAM's financial, results followed by Q&A.

And now I would like to turn the call over to Larry Lee, RAM's Chairman and CEO.

Thank you, Sabrina, and I want to welcome everyone to our third quarter conference call. You probably noticed that Les Austin is not with us this morning. Les is very much under the weather, unfortunately, and so he cannot be here with us this morning and Sabrina is going to fill in for him and cover the financial highlights. And then, I will talk a little bit about some of the operational issues, particularly as it relates to our Osage Mississippian oil project.

So with that, I'm going to ask Sabrina to cover the financial highlights, and then we will go into some of the operational issues. Sabrina?

Thanks, Larry. I will make some brief comments on the financial highlights of the third quarter 2011.

Our net income was $11.8 million, or $0.15 per share for the quarter compared to $1.6 million or $0.02 in the year-ago quarter. Our free cash flow was $9 million or $0.11 per share compared to $7.5 million or $0.10 in last year's third quarter.

Crude oil and NGLs made up 71% of our total production and 89% of our total revenues in the third quarter of 2011. Our production for the quarter was 361,000 barrels of oil equivalent. This is down slightly from the second quarter of 2011 by 5%. Compared to the prior-your third quarter, our production was down 20% excluding asset sales, which occurred in December 2010. Of the decline in production, 56,000 BOE of the decrease is a result of the decline in South Texas gas production. This South Texas production decline was anticipated due to decreased to drilling in this area, and Larry will speak more about this.

10,000 BOE of the decrease is due to the shut-in of a Louisiana well, and the remaining decrease of 26,000 BOE is due to other production declines.

Prices were up 37% per barrel of oil equivalent in the third quarter of 2011. Our average price for oil was up 20% from the prior-year quarter, NGLs were up 65%, and natural gas was up 2% compared with the third quarter of 2010. We had unrealized gains on derivatives of $22.7 million in the third quarter. Of that, $5 million is locked in to be realized between now and June 2014. Our long-term debt was $200 million at the end of the third quarter with $75 million outstanding on our term loan facility and $125 million on our revolver.

Our debt at the end of the third quarter was down $5 million from the second quarter of 2011 and down $46.8 million from the year-ago quarter.

Our borrowing base was redetermined as scheduled on September 1 of this year at $150 million based on reserves. Interest expense was $3.6 million in the third quarter of 2011, down from $5.8 million in the year-ago quarter due to lower interest rates and lower outstanding balances in the third quarter 2011. Our blended interest rate was 6.2% for the third quarter, down significantly from 8.2% at the end of last year's third quarter.

Drilling expenses were $8.9 million in the third quarter of 2011 and were funded completely by free cash flow in the quarter. Our capital expenditures for the full year 2011 will also be completely funded by free cash flow.

We revised our capital budget for 2011 to $27.5 million. Our capital expenditures year-to-date through the third quarter were $19.6 million, leaving $7.9 million for the remainder of the year.

Production guidance has been revised to 1.5 million BOE for the year.

We had a Company-wide reorganization of operating and administrative functions in early October this year. The reorganization included consolidating certain operating, land and exploration functions previously located in our Plano, Texas office to our headquarters in Tulsa and eliminating an executive management layer in the Tulsa office. The reorganization also includes the planned retirement of two Senior Vice Presidents and the appointment of Les Austin as our new Chief Operating Officer.

The reorganization will result in an estimated annual savings of $3 million in general and administrative expense. Estimated total severance expense is a cash expense of $1.8 million and an additional $0.8 million of stock compensation expense related to the accelerated vesting of restricted stock awards.

This completes my discussion of financial highlights. I will now turn back over to Larry.

Thank you, Sabrina, and a couple of things I would like to just reiterate that Sabrina said -- 70%-plus of our production volumes continue to be oil and natural gas and almost 90% of our revenues continue to be coming from oil and natural gas liquids. And our hedged position that we have is certainly protecting that cash flow as we look forward to 2012 and 2013. So I would point to that.

Also, as she mentioned, our South Texas gas declines are starting to slow down as those wells in South Texas are beginning to go more hyperbolic and begin to show a slower decline rate. Our 78 HBPed locations in South Texas are all sort of sitting there, pending improvement in gas prices, at which time we would expect to begin to redirect drilling capital to South Texas. But in this $3 price environment for gas, we think it's more prudent to hold those locations in reserve and look at them at a later date.

Now I want to talk a little bit about the Osage, because I think this is our growth driver as we look forward into 2012. As we have updated, the vertical drilling is largely completed in our Osage concession. We still have another well or two that we may drill vertically for additional science information in the play, but I would say that, by and large, we are through with most of the vertical drilling.

Throughout the concession, we have now become convinced that we do have the Mississippian section, particularly the dense throughout the entire concession, and we now have completed 56 square miles of seismic within our concession, which covers a little over two thirds of the total concession. And as we talked about, we've actually acquired a significant amount of science as a result of this vertical drilling that we've done with our formation micro-imagers, our dipole sonic logs and well bore coring. And we have, of course, incorporated all that into our 3-D seismic set and have begun to identify future horizontal drilling locations within this play. We've actually begun to have some preliminary conversations with our drilling contractor up there for rig availability as we move into the first half of 2012.

I would say that, as we are continuing to test and complete in the most recent vertical wells we've drilled, once we complete that testing, we will probably update the market on those results as we move a little closer towards the end of the year.

Our Surber southern area continues to be encouraging for us. Our Surber 126 is the well that we have fractured and we continue to adjust submersible pumps in that well in terms of trying to make sure we can analyze its productive capacity. At the end of October, that well was producing about 50 barrels of oil equivalent. We did a pump change and some additional modifications, and as of the report for November 4, production was back up over 70 barrels a day equivalent in that well.

The other, the Rickets 2-35, the 3-26, the 1-35 and the Surber 2-T -- we're continuing to evaluate those for potential further completion activities.

Our Central Mashunkashey area -- we have finally begun making some progress at getting the regulatory approval to be able to test both the Arbuckle section that we found, tested gas in earlier with the Mississippi dense formation, which we also tested gas in. So we are looking forward to getting that authority approved so that we can begin to commingle both of those zones.

One thing that has been very encouraging for us is some of our offset operators have continued to pursue horizontal drilling very close to our concession. One of the product companies here in town has drilled a well 3 miles directly west of our concession. In fact, their eastern border of their concession is our western border of our concession. And they did some open-hole testing that was very encouraging, and they are currently expecting to be able to frac that well before the end of the year. In fact, that company, which has been one that we have done a lot of corporative work within this play -- they are now on their tenth horizontal well. They've had some very attractive results from those. Of the 9 wells that they have been able to test, the average oil production out of those 9 wells has averaged just slightly less than 450 barrels of oil equivalent per day on the test. They run anywhere from 60 barrels on the low end to slightly over 1000 BOE equivalent on the upper end. But we are very encouraged by that.

Also, there's another large private operator that has begun to drill directly south of our concession, and then we have also seen a permit approved for a horizontal well in the concession just to the north of us.

So what we are hearing from operators that are being active in the field is that a reasonable estimate of EURs that they are quoting is about 200,000 barrels per location on a horizontal well, and about 70% to 80% of that would come in the form of oil and natural gas liquids, and the balance of it in nat gas.

As I said, I think our scientific phase is largely over with and horizontal drilling will kick off. We're looking at our funding needs for that from cash flow, an Argent-type deal or a JV partner. And we are evaluating all of those potentials but would expect to kick that program off as we move into 2012.

Before we open it up for Q&A, I would like to just highlight a couple things that Sabrina said. We've got our debt down to $200 million, and our average interest cost is 6.2%. It's kind of ironic; we are paying less than Italy has to pay for its debt these days. I would never have thought that would have happened.

But, also, our reorganization that we implemented will save us $3 million on a going-forward basis, and we continue to look at additional things that we can do to drive our cost down and improve our margins. But we feel that with our hedged position and the largest portion of our production that comes as oil and natural gas liquids and the relatively reasonable amount of CapEx that's required to maintain our existing oilfield, that we are well positioned to continue to move forward on our Osage project, which is our growth driver.

With that, we would open it up for Q&A.

(Operator instructions) Leo Mariani, RBC Capital.

Hey, guys, just curious as to what you think these horizontal wells are going to cost you here in the Mississippian?

We have pulled AFEs. The run from about $2.2 million to $2.3 million, Leo, and that is for a 2500-foot horizontal lateral.

Have you guys thought at all about your plans here in 2012 there? And I guess, obviously, you've alluded to the fact that you want to get going. When can we expect you guys to start flowing the horizontal well there next year?

Leo, we are in discussions with the rig contractor that we've used up here to see when his rig will be available. He is currently under contract through I think the end of the year or maybe early in January, so we are hoping that we could maybe land our hands on that rig sometime in the middle to the latter part of the first quarter, if possible.

Also, Leo, we have got to get this disposal well drilled, which we do have that rig under contract. It's expected to show up about the middle of December. So there's a sequencing of -- with these horizontal wells, you really have to get your disposal well drilled first and then get your production facilities essentially set and in place. Because one thing we've found that watching some of our neighbors is, once you frac these horizontal wells in the Mississippian, you want to go ahead and immediately put them on production. You don't want to treat them and then shut them in.

Okay. And what's the update on this Argent deal from you all's perspective? Obviously, the market has kind of bounced recently, and so has oil price. What's the status of that offering?

We've continued to watch the market. We had a conference call as recently as Monday of last week with the Argent people and the bankers. While the market is still a little bit soft, it has certainly recovered. And so we're just watching it, Leo, for advice from those guys at what point will the market get to a position that it would make sense for them to consider launching.

Okay, thanks, guys.

Chad Mabry, Rodman & Renshaw.

To follow up on, Larry, on Leo's question on the JV, what's the status of discussions with the potential partner there? Also, kind of what structure are you looking for, kind of cash and carry, etc.? And then, are you looking to maintain operatorship there?

Chad, We would like to maintain operatorship. We think we've spent a lot of time and money and effort understanding the play. I think, as far as the JV structure, I think we would be interested in one of similar nature that we've seen in the marketplace where we might be able to recover our upfront cost that we have invested in it and maybe some additional capital, and then a drilling carry for some amount of additional capital to cover a drilling carry.

But that's sort of the format that we are doing it, that we would expect to try to do it. And we are just now beginning to explore some of those possible discussions with various people that we think would fit what we want to do and would be interested in this play. So that process is just really beginning.

We wanted to make sure that we had sufficient scientific information on the play throughout the area, both with our 3-D seismic and the vertical drilling we've done. So now that we have got our second phase of our seismic done and we've got the drilling done, we feel like we've got the science that's necessary to be able to have those kinds of serious discussions with a potential joint venture partner.

Okay, that makes sense, appreciate that. And then I guess switching over to CapEx, it looks like those cuts were pretty fair across the board. It looks like most of it came at Fitts. But looking into 2012, can you walk us through what you are thinking there? Are we thinking more of a maintenance CapEx level into next year? And would this, I guess, keep your oil volumes flat?

Chad, I think that we are looking at next year being more of a maintenance CapEx. We are going to be drilling two wells in Fitts/Alan in the fourth quarter. In fact, I think the rig may be on location, or it should be showing up very soon. But I think -- as we look at 2012, I think it takes probably $8 million to $10 million of reinvestment in our two major oil fields to largely keep those fields flat. And as I know you will remember from some of our earlier conversations, we are continuing to make progress on our ROR work in Electra/Burk, and that is starting to show some real promise.

But that's sort of -- as I look at '12, I think we will probably have $8 million to $10 million going into those two fields. I don't really see us spending, unfortunately, much money in South Texas. The price for nat gas doesn't really look all that encouraging for 2012. So I think what that will do is leave most of the remaining free cash flow that we'll generate next year available to us to go into our Osage project.

Okay, great, that's it for me, thanks, guys.

Ron Mills, Johnson Rice.

Just a quick follow-up on what you just said to Chad in terms of a majority of the remaining cash flow above that maintenance level heading into the Osage. From a logistical standpoint, would you be lined up where you could end up drilling 7 or 8 wells there next year? I'm just trying to back into, from my cash flow estimate, what that incremental cash flow would be. Is that the kind of activity levels that you would hope for, or would that be dependent on potential joint venture proceeds?

Well, as we look at -- we haven't yet completed our guidance for 2012. We hope to get that wrapped up and release that to the market by the end of this year.

As I said, I think $8 million to $10 million is probably what we will be looking at going into our big oil field. We will probably spend another $3 million to $5 million on G&G and leases, another area that we are working on. And I think the balance of the cash flow, most of that would be available to go into Osage. And I've seen your models; that would allow us to, certainly, even without a joint venture partner, to kick that program off and begin horizontal drilling in the Osage next year at a fairly decent clip. And either with or without a JV partner, we are moving forward on our horizontal drilling program up there.

Okay, great. And we talked about this on the field trip last month, but any update versus what some of these offset operators in terms of how those test results have continued to hold up or any -- I think there were a couple new tests that were lined up. I assume everything is still showing promising results to the west. But can you also talk about a little bit of activity both to the north and south of your concession in terms of the targets?

The one to the north has just been permitted. It has not yet been drilled, so we're kind of anxious to see what that well drilled and see what it tells us. We're hopeful it will be a good one. It is a private operator that this will be his first horizontal in the play. So we will have to hope he's got the operational capacity to execute it well.

The wells to the south of us -- I think actually there have been two of them now drilled. It is a large, independent private company. And they are very operationally skilled. So I know that the two wells they drilled -- one of them came in at a very nice rate, and the other one they did experience some kind of a mechanical issue down-hole that they are still wrestling with. So I would say everything so far that we are seeing from the private guys that -- some of which you met on that field tour, continues to be very positive.

And for the benefit of a couple of people who weren't on that tour, can you talk a little bit about the quality of the denser lime, as you call it, versus the chat and where you are targeting your wells versus the private company combined with, also, the structural component that we talked about that day?

Yes, I think it probably would be good to revisit that for everyone just briefly. Originally, our plan was to view seismic, identify the porosity section of the Mississippian, which we refer to as the chat. There's three sections within the Mississippian, generally speaking. You have the high-porosity chat, you have that mid-level porosity, the 12% to 17%. The high-porosity chat is 30% to 45%, in some cases. And then you've got the dense that runs, in some cases, as little as 2% to 4% on the low end, as high as 8% to 12% on the upper end.

So you've got this fairly thick section. Based on our vertical drilling and the well analysis we've done surrounding the concession, we are very comfortable we've got the dense section, which is most of what the western Oklahoma guys have been drilling, throughout the concession. We probably, I think -- originally, I thought we had about a third to maybe as much as 40% of the high porosity chat in the first 25 square miles we shot. In the second phase of the shoot, we had an even a larger percentage of high porosity chat, probably more like maybe 60%.

And then also what we have running through our concession, which we've always felt like was going to be a real plus for us, is a fairly well-known fault called the Whitetail Fault. And what we think that fault has done is really busted up the Mississippian, which is then -- we are going to be the beneficiary of the natural fracturing that already exists as a result of that fault running up through our concession. Most of the success that the product guys immediately to the west of us -- they have really been focusing on the dense. But when they have the high porosity chat above it, that basically tells them where to land their horizontal in terms of the overall section because, if they have the high-porosity chat, they are lending it at a point where they can frac into the higher section. If they don't have the high porosity, then they are usually going a little bit lower in the section and then fracking the dense as well as the intermediate; they have that as well.

One thing that's important, I think, in our areas that we do have the Woodford seal underneath us. Some places in Osage County do not have that. As you move further north, you don't really have that frag barrier underneath it. So we are convinced that we've got the Woodford pretty much throughout our concession as well. So anyway, all of that telling us that it's time to move forward with the horizontal sections and the horizontal portion of this play.

Is that kind of responsive, Ron?

Yes, it did. And I would draw from that that, more than likely, some of your early horizontal wells will probably be testing more towards the lower section of the dense, just to follow on with private company has been doing.

Clearly, absolutely.

Okay, great. And then last one, just in the southern Surber area, with the other four wells, the Rickets and the other two Surbers, any thoughts of going back in and stimulating those wells? Or, would that just have to be one just open hole completion rather than just as acidization, or what are the plans with those?

All we've done with those wells up to this point is just perforate them and acidize them. And then we are just producing to see what we are getting out of, once again, the high porosity chat. So I don't know. What we're wrestling with is, does it make sense for us to spend capital going in and frac jobs on those Mississippi chat wells, or are we smarter to take that capital and go ahead and invest that into our horizontal program as we move into next year? That's the big question though we are wrestling with right now.

Okay. And just one more -- on the Argent process, is there some sort of process in terms of how long the filing remains effective, similar down here in the US with quarterly financials needing to be updated? Or how does it work up in Canada? Is there a --

It's very similar, Ron. In other words, what will take place -- and we did this at the end of the second quarter and we will now do it at the end of the third quarter -- is both we and the other company, Patara, will update this field information and we will have PricewaterhouseCoopers, who is the auditor for Argent, look at those numbers. And then those numbers will be put into the prospectus and it will be updated and it will continue to be an active prospectus under the Canadian rules.

As I understand it, the Canadian securities authorities are actually a little easier to deal with in this area than what we typically experience in the United States. So the prospectus is still active and will be updated in a timely fashion. In fact, after we file our Q later today, that information will go to Argent. And I'm sure, as soon as they get the Patara information, then they will be updating that prospectus.

The prospectus is really theoretically good all the way until February of next year before anything other than just financial updates have to be incorporated into it.

Okay, great, thanks, Larry.

(Operator instructions) Dan Morrison, Global Hunter.

Just a quick question, kind of housekeeping; everything else has been covered pretty well -- your CapEx to date, how does that split out between your legacy oil properties and your Osage work?

Just a second -- don't we have that broken down, Sabrina? I think we do, Dan; give me just a second.

Okay, we had spent -- today, I don't think we have that immediately available to us. I apologize.

I can follow-up off-line. That's fine, thanks.

We'll follow up and get that to you, Dan. I think what you're going to see is probably about $8 million or $9 million, maybe $10 million of that has gone into the legacy properties. We have spent a fair amount of money this year in Louisiana. In fact, one thing I forgot to comment on -- the well that were shut in for the third quarter down in Louisiana is now back on, and we had worked on that. And we also are expending some additional rig completion money in Louisiana this year on some up-hole zones that we are working on, and we will follow up and get that to you.

One thing that just dawned on me that kind of follows up a little bit to Ron's question -- one of the things we've got to have is additional saltwater disposal capacity, which is why it's important that we are drilling that second saltwater disposal well and we're looking at actually permitting some additional disposal wells so that we can both handle the water that we are currently producing as well as handle additional water if we were to do any fracture stimulation of any of those -- okay, Sabrina just found it.

Yes, Larry; we have $5.4 million allocated to exploration in the third quarter out of the $19.6 million.

Okay. Yes; $9.2 million of it was development and drilling and recompletion. So that would have been Elektra/Burk, Fitts/Allen and a little bit of money in South Texas on some production strings and the recompletion work we have been doing in Louisiana.

Okay, perfect.

Thanks, Dan -- sorry you missed the trip.

Oh, I am too.

(Operator instructions) Ben Mackovjak, Rivanna Capital.

I'm certain I missed this; I had to hop on the call late. But is there an update to the Argent deal?

It's still pending market improvement in the Canadian market. The prospectus is still active, and it will continue to be updated with our third quarter numbers as well as Patara's as soon as they become available. And we had a conference call with Argent a week ago, in fact, on Monday, to get an update on market conditions. While they are not aware Argent would like for them to be, they certainly have improved significantly from late August or really throughout September. So they are seeing some improvement in the Canadian market, as we have seen some improvement in the US market as well.

But was there any talk of changing the purchase price that they had originally agreed to when this was first announced?

Ben, we never really disclosed or talked about the purchase price. And it certainly -- the market conditions will have to get into a position where they can meet our expectations for valuation. And the market is not there at the moment, but we continue to be hopeful that it will get to where it could be, something that Argent could take to market.

Okay. And if for whatever reason this doesn't get done, is the plan just to pay down debt? It looks like you've been doing that for the last few quarters anyway.

Well, we have. I think that, given where we are at the moment from a total debt outstanding and the cash flow we are generating, I think that our feeling is -- the Argentina deal obviously was a transaction that, if it's successful or when it's successful, it would do tremendous things to improve our liquidity and our overall leverage. But if for some reason that transaction is not to be, we still will be moving forward with our Osage project within our own cash flow and then also, as we've previously stated, we have been approached by some potential joint venture partners and we have identified some that we're going to talk to as well about a possible JV in that concession as well.

Okay, great. And then a reserves update? We could expect that next month?

We normally announce reserve updates in February, after we closed out the books for the year.

Okay, great, thanks a lot.

I am showing no further questions at this time. I would like to hand the conference over to Mr. Lee for any closing remarks.

Thank you very much. I just want to thank everyone for taking time to join us today on our call, and we look forward to, if you have follow-up questions, call Sabrina or I. Hopefully Les will be back into the office tomorrow or Wednesday at the latest, and feel free to follow up with any of us if you have any additional questions. Everyone have a nice day. Thank you.

Ladies and gentlemen, thank you for participating today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.