Battalion Oil Corp (BATL) 2012 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Halcon Resources second-quarter 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 follow at that time. (Operator Instructions). As a reminder, this conference may be recorded.

I would now like to introduce your host for today's conference, Floyd Wilson, Chairman and Chief Executive Officer. Sir, you may begin.

Good morning and thanks, all, for joining.

This conference call may contain forward-looking statements intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a detailed description of our disclaimer, see our earnings release issued this morning and posted to our website.

With me on the call today is our CFO, Mark Mize, and our President, Steve Herod.

This quarter represents the final RAM-only report -- RAM Energy-only report and marks the beginning of our aggressive growth and value reporting. Welcome to Halcon Resources. Since February 8, we have made significant progress towards our goal of building an oil-weighted energy company with a substantial drilling inventory. The heavy lifting with respect to acquiring the acreage necessary to achieve our goals is complete. We are now transitioning from lease acquisition to drilling and development. In fact, we have nearly 10 rigs running today.

We have accumulated nearly 1,000,000 acres of highly prospective land, all identified through our research and experience. And this platform is a great one.

By the way, on a pro forma basis, average daily net production for the second quarter was nearly 15,000 barrels of oil equivalent per day. We have eight operated drilling rigs running in our oily resource plays, and we will add several more rigs throughout the year, approaching 15 rigs by the end of the year. We expect to drill over 60 wells during the second half of 2012. All in all, a great start, made even better in that today we are announcing two Wildcat discoveries. In east Texas, in our Woodbine Eagle Ford area, our exploratory well, the Covington 1H in Grimes County found productive intervals in both the Woodbine and Eagle Ford formations. We are currently drilling a horizontal lateral in this well in the Woodbine and intend to produce that zone first in this wellbore. We plan to drill an Eagle Ford only producer as soon as possible on the same location.

Our area of interest here includes Leon Madison Grimes, Brazos, Walker and Polk counties. We'll be running five rigs here by the end of the fourth quarter this year. We currently hold over 170,000 acres in this exciting area and plan to drill at least 20 more wells during the second half of the year.

Our second wildcat discovery that we will mention today was one of our previously undisclosed Wildcat plays and is also a multi-zone discovery. In Austin and Colorado Counties Texas we have accumulated over 10,000 acres on our way to our goal of 50,000 acres or so, targeting the Midway and Navarro formations. Our Kollatschny 1 found pay in both of these areas. This well is drilled to a vertical -- a total vertical depth of just over 17,000 feet and completion operations are underway in the Navarro section between 15,000 and just under 17,000 feet. This is a vertical well utilizing stage hydraulic fracturing.

We will co-mingle the Midway with the Navarro after the Navarro production settles in, or we will drill a separate Midway well on this pad site. We've already spud our second well in this project, the Hillboldt 1, approximately 6 miles northeast of the initial well. And we have a 68 square mile 3-D shoot underway. In both of these discoveries, we expect oil, gas and natural gas liquids production and I'm expecting big numbers.

In the Williston Basin, we are running three operated rigs today and plan to keep this rig count through the end of the year. Recent wells continue to perform in line with our expectations, and our type curve and drilling and completion costs remain below $8 million per well. We are currently evaluating modifications to our completion design up here, which we hope may increase recoveries. And here the prospects for the spread narrowing as compared to NYMEX or WTI looks favorable over time. We may look to add to our position in the Bakken over time and we plan to begin testing the Three Forks on our acreage soon.

Our Mississippian Lime project in Osage County is well underway. We have drilled five horizontal wells and four disposal wells so far. One well recently went on production, another is being fraced today and three more are waiting on frac jobs. It's too early to say much here but we are encouraged by what we've seen so far.

In a recent call, recent press release, we unveiled our entry into the Tuscaloosa Marine Shale play and disclosed our intent to acquire up to 200,000 acres. We have well over 50,000 acres in this play so far and we'll spud our first well there this quarter.

Also in Louisiana in the Wilcox play, we now hold over 80,000 net acres of leasehold and seismic options. We'll complete our first well in this area later this month and will run at least one rig for the balance of 2012.

In the Northeast up in Pennsylvania and Ohio, we hold over 160,000 acres targeting the oil and condensate rich areas of the Utica and Point Pleasant shales. We'll spud our first two wells there in September and we'll quickly built a three-rig program. Industry results continue to be highly attractive and successful in this play. We're planning some 3-D seismic and with a likely start in the fourth quarter. So more to come on that. In all of these areas, Halcon Field Services is on the job and staying ahead of the rigs.

The last drilling area to talk about today is our Eagle Ford drilling project in Fayette and Gonzales Counties Texas. This excellent 24,000 net acre property will be divested this year due to a noncompete agreement. We have hired a banker to work with us on this process and will open a data room in the next couple of weeks.

It is important to note that the newer wells continue to outperform the 325,000 barrel oil equivalent type curve. This is due to changes in the completion design. This is a great project. We won't be happy to sell it but it will be worth a lot of money. This area is currently producing 2700 net barrels of oil equivalent per day, and we have two rigs running around-the-clock.

Additionally, we have made substantial progress in deciding which of our other assets to target for early divestiture and which to target for improvements. More news on that in the next few weeks.

Mark Mize will now discuss second-quarter financial results and provide some additional information on liquidity and capitalizations.

Thanks why. In mid-June, HK completed a private offering of senior unsecured bonds in the amount of $750 million with a coupon of 9 3/4. There was strong demand for the paper and the deal upsize from the original offering of $500 million. Proceeds from the bonds initially closed into escrow but (technical difficulty) yesterday and used to fund the cash portion of the GeoResources acquisition as well as a portion of the East Texas Woodbine deal.

In addition to the bond financing, we amended our senior secured line of credit concurrent with the closing of the GeoResources acquisition. The borrowing base was increased from $225 million to $545 million and we can now hedge up to 85% of projected production from total proved reserves. As a result of these financing activities and considering the GeoResources and Woodbine acquisitions, we ended the quarter with pro forma liquidity of just over $600 million.

Moving onto the financial results, as Floyd has already pointed out, this is the last quarter that will be largely driven by standalone legacy RAM operations. Beginning in Q3, our production and financial results will include contributions from Geo and the East Texas acquisitions in addition to drilling activities in our new plays.

Production for the quarter came in just over 3900 barrels equivalent a day for a total of 356,000 barrels. But more importantly and as Floyd touched on, if you take a pro forma look at the Company, it was 15,000 barrels equivalent a day.

As mentioned in the first-quarter earnings call LOE and normalized G&A continue to run above previously published annual guidance but we expect these metrics to be within our guidance range for the full year ended 2012. This per-BOE improvement in LOE and G&A over the remainder of the year will be driven by increased production levels as well as continued operational efficiencies.

All-in G&A this quarter was $13.1 million, which includes the significant amount of acquisition and merger related costs. In total, there was $3.6 million of selected items reflected in G&A. Generally speaking, these were nonrecurring in nature so they will not be reflected in future periods and we have removed them from EPS in the selected items table.

Turning to the selected item table, we have disclosed several items in this table which you can find on the last page of the press release. Some of these items require no explanation. The two that I'll touch on are the recapitalization restructuring charges and the non-cash preferred dividend. There's a total of $5.1 million of charges reflected in the table that relate to the recapitalization and the acquisition of RAM and GeoResources. These represent charges such as professional fees, financing costs, and other transitional employee-related expenses.

The second item is the preferred dividend. The nature of this item was addressed on the first-quarter earnings call and as you may recall it's related to the issuance of the privately placed stock offering earlier this year. This is the last quarter it will be reflected in quarterly earnings and this is a non-cash item and really has no economic impact on the Company. If you eliminate the impact of the selected items, we reported net income per share of $0.02 versus the Street consensus loss of $0.01.

From a capital point of view, we spent $444 million this quarter on oil and gas capital expenditures, $425 million of which was related to leasehold acquisitions. $164 million of that related to the previously announced 27,000 net acre acquisition in the Utica Point Pleasant play, and then most of the remaining $260 million was spent in the Utica and the Woodbine plays.

We ended the quarter with share count of about 144 million shares outstanding. However, after this week's acquisitions, Geo and the other Woodbine, we have approximately 216,000,000 shares outstanding.

The final area to touch on is our hedging program. Our strategy is consistent with what we had previously announced. We're going to look to hedge up to 80% of our (technical difficulty) production over the next 18 to 24 months. Accordingly, we have been actively adding oil hedges to our portfolio over the last call it 30 to 45 days as opportunities have arose. So far, we have not been active with gas or NGL hedging given the continued to press price environment. We're going to continue to monitor market conditions.

With regards to the current hedge portfolio -- and by the way, my comments on hedge levels are pro forma for the positions that were [novated] over to HK from Geo. But we now have approximately 4800 barrels a day of oil hedged for the remainder of 2012, with a floor right at $93 a barrel. In 2013, we have just over 5600 barrels a day hedged at $89 a barrel. That represents about 25% of our published production guidance.

On the gas side, we have about 7.2 million cubic feet a day of hedges in place for the second half of '12 at $4.74, and about 1.3 million cubic feet a day in '13 at $4.18. So clearly, we still have a ways to go to achieve our overall hedge targets, so we just will continue to monitor the market later and position it as we deem it appropriate.

With that, I'll turn the call back over to Floyd.

I guess I was so excited thinking about the growth we've had down in the Eagle Ford play, I -- a minute ago I reported 2700 barrels a day. That number is correct, but that's gross production. The net production from that property to us is 1100 barrels of oil equivalent per day. Remind you that that property was producing less than 200 barrels a day in the fourth quarter of 2011. So it's really going great down there.

As we look forward to the next several quarters, let me remind you that we have guided for strong production increases and radically improving cost structure. We see no reason to change those aggressive projections at this time and feel quite comfortable with them. We've built a formidable land position in just a few months and we now have begun to develop these holdings.

Our balance sheet is in great shape and we have no current need or plan to raise any additional equity. We are doing extremely well operationally and positioned for significant growth. We have built and sold companies before and intend to improve on those past successes. Operator, we're ready for our questions now if there are any.

(Operator Instructions). Leo Mariani, RBC.

Just looking for a little bit more color on the Navarro Midway formations you guys are targeting in Austin and Colorado counties. Just any more kind of detail on the geologic concept there and any detail on potential, potentially historical production in that area as well would be great.

Leo, this is one of the first projects that we started working on when we began Halcon. There is no Navarro production nearby. There's some, quite a bit in East Texas that is very similar to what you find in [Almouth] in areas but this is a pure wildcat discovery. There is Midway production in the area a few miles away, but nothing near where we are. So, our expectations are quite high here. This is a deep over-pressured, very rich pay zone in both of these sections, and we expect big rates out of this. We are just now completing a five-stage frac in the Navarro section, and we will test that and I am basically assuming that it will be too strong to go to the Midway at this time. And we will have some additional news on the actual production rate within the next few days.

Got you. Is that something you guys would announce with another update prior to the next quarter's earnings? I know you said there was a bunch of potential well results and update on some of the A&D activity coming. Is that something we should look for in the near future?

I don't think I said anything about A&D activity, but on this drilling, I think we will be in a position to announce prior to the next quarter release some of these results just because we are getting first a lot of calls about it, and second we have a lot of people out watching these well sites and trying to figure out what we are getting so we would just as soon make those announcements ourselves than have others do it.

Makes sense. Obviously, you guys are involved in a ton of different plays at this point. If you guys had to kind of think about sort of top three, would that be something you guys could enlighten us with?

Well, we certainly have high regard for everything that we are doing at this time. The data points that are strongest involve the Woodbine and Eagle Ford play in east Texas. This -- what we call our Cat Springs project, which is this Navarro Midway, is of course high on the list right now. And the Utica Point Pleasant, every single data point that the industry has been coming out with over the last several months has done nothing but anchor our own analysis and provide us with a high level of confidence. So while all of our other projects are extremely interesting to us, including a couple of undisclosed Wildcats at this time, of course those three would be top of the list. The Mississippi Lime, it's just a little too early, but we've seen some great beginning there indicative of other operators' results in the areas. So we are not unhappy with anything that we're doing.

That's great. And obviously you guys talked about no changes to your robust put option outlook the rest of this year. I assume that's also the same for 2013 as well?

Yes. We see no change at this time. I will say that we will update either year as soon as we feel the need to. But right now we view those as conservative. While they are strong, we view those as conservative, achievable targets.

All right, thanks.

Chad Mabry, KLR Group.

Thanks, good morning. I appreciate the update on your leasehold acquisition. Kind of looking out to the Utica point Pleasant, can you comment on whether you are leasing all rights there? I've been hearing of some other operators taking various depths of the play, just curious what you're thinking there.

The general sense across our entire acreage block, we hold all rights beneath the Clinton which is the shallow productive zone that's historically been drilled for almost 100 years up there. Hopefully, that would answer your question.

Sure, that helps. And then as far as the drilling plan for this year, you're going to be targeting the Utica, the point Pleasant up there?

We are targeting the Utica, the point Pleasant. We will be looking at the [Rhine Street] of course in certain areas and anything else that would come up, but the area that we are leasing in is most highly prospective for the Utica Point Pleasant.

That's it for me. I appreciate it.

Rhys Williams, Johnson Rice.

Hey guys, it's Ron Mills. A question for you on Midway Navarro. Is this a more conventional play? Is that why you're shooting 3-D seismic, or do you think this is a play that exhibits more resource play characteristics? Just trying to think about how you think about the geologic setting here.

Well, it's conventional and definitely in the Midway, in the Midway, these are sands. The Navarro is conventional at this time, but you might remember that some of the most heady successes in South Texas and the [Olma] zone have been in these areas where they had drilled vertically and are now drilling horizontally. So, the Navarro is a more evenly distributed section in this area, so it certainly will be something we'll be looking at. At this time, the section is thick enough. As I said, we have a five-stage frac just finishing up in the Navarro over about -- somewhat less than 2000 feet. So it's quite thick enough to do a really interesting vertical, multi-stage hydraulically fraced completion.

The Midway has a similar number of sections in it, and so this first group of activities will be vertical, but we are certainly going to be looking at the ability to access these zones horizontally. I think the -- we're shooting 3-D seismic to delineate how much leasing we really intend to do, and there is certainly not a -- it's not a structural play, but we can certainly track these sands and the Navarro section with 3-D seismic better than we can with 2-D.

Is the -- the Navarro thick enough? It sounds today more like a Wolfberry type play in the Permian, although the Wolfcamp people are starting to talk about multiple benches and going horizontally. Is the Navarro -- it sounds thick enough. Does it have similar characteristics where you may have separate benches that you would have to target in individual horizontals if it became a horizontal play?

That's certainly a possibility. I just have to point out the tremendous difference between where we are and at these depths relative to the Permian. This is an over pressured reservoir. We've done some coring and it has great porosity and high TOCs and all of this, so it's an unknown about drilling a horizontal well at this depth for us and at these pressures. We are stepping our way into a Wildcat discovery like this fairly conservatively because, as I said, it's an over-pressured reservoir that it's got strong promise. I wouldn't -- I don't think I would liken it to the Wolfcamp play out in the Permian just yet.

Okay. And just I think I got all these. You were talking about I think the Woodbine going to five rigs by year-end, the Williston to three rigs, Mississippian I assume you're going to complete the wells before you determine what you're doing there. And then are going to have one rig in the TMS and one rig in the Wilcox, is -- and I guess one rig in the Midway Navarro? Is that kind of the rig count as you see it today to allow yourself to drill those wells in the second half?

We would probably have an additional rig in the Tuscaloosa Marine Shale before year-end. I don't know that we'll have an additional rig in this Midway Navarro, just because we are doing the seismic work. We would have a couple of rigs maybe building to as many as three in the Utica Point Pleasant area. So I think our current -- of then course if you add the rigs we are running in the Eagle Ford and the Bakken area, our eight rig count would grow to 13, 14 or thereabouts pretty soon here.

Okay, great. Thank you guys.

(Operator Instructions).

Operator, I think we've taken the questions and we appreciate everybody's interest this morning. We'll end the call now and feel free to give us a call if you think of something that wasn't covered on the call. Thank you.

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