Battalion Oil Corp (BATL) 2020 Q1 法說會逐字稿

Good day and welcome to the Battalion Oil Q1 2020 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to John-Davis Rutkauskas. Please go ahead, sir.

Good morning. I'm joined by a few of my colleagues today, who I'd like to introduce. Battalion's Chief Executive Officer, Richard Little; our Chief Financial Officer, Ragan Altizer; and our Chief Operating Officer, Daniel Rohling.

This conference call contains forward-looking statements. For a detailed description of our disclaimer, see our earnings release issued yesterday and posted on our website.

This conference call also includes references to certain non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement released yesterday. We have also published an investor presentation, which may be found on our website and will be referenced during this webcast.

Now I'll turn it over to our team to present a few scripted remarks followed by Q&A. Rich?

Thank you, John-Davis. I'd like to welcome listeners to Battalion's First Quarter 2020 Earnings Call and our Second Investor Update as Battalion Oil Corporation.

During last quarter's earnings call, we introduced our management team and presented our approach to oil and gas development. You heard me emphasize capital discipline as well as integrity, doing what we say we're going to do. We had already planned to suspend our capital program. And as the market continued to decline, the decisions we had to make in Q1 required agility and an even greater level of discipline. I'm proud of our team's ability to drive down costs and for their quick response time to thoughtfully shut in production across all of our fields.

In Q1, we continued to strengthen our 3-year hedge book with nearly 100% of our PDP volume hedged through 2021, with an all-in price of over $48.50 when taken into account fixed price basis and roll for the entire 2-year period, and we have 75% of our production hedged out into year 3 with an all-in price of $53 a barrel in 2022.

Ragan will touch on more of the specifics later in the presentation. We were also able to work with BMO during our spring redetermination to achieve a modest reduction in our borrowing base. We're now at a level that I'm comfortable operating within until our next redetermination in November. I want to thank BMO for their transparency and their vote of confidence in our business plan and this team's ability to deliver.

We remain focused on creating value levers in the business, such as our AGI well we mentioned on our last call. With the permit now in hand and the well already drilled, we've created more options to further drive down operating costs and potentially have an asset that we can monetize while helping others in the area with their H2S treating capacity. We continue to improve efficiencies as we've seen in this quarter. We brought adjusted G&A down to only $1.50 per BOE versus $5.99 per BOE in the same period last year as well as a number of operational efficiencies that Daniel will touch on in his portion of the presentation.

On our last call, I made reference to the merits of keeping our drilling rig in the face of market uncertainty. Ultimately, we elected to release the rig and we'll monitor the market to determine the best time to return back to the development in the field. With breakeven oil prices in the high 20s, I feel like we could see increased activity along with other operators that possess, what I call, Tier 1 assets. Furthermore, we initiated a well-thought-out campaign to voluntarily shut in over half of our production, with a focus on reservoir maintenance, leasehold obligations and operating expense to determine which wells to shut in.

As our hedges are purely financial instruments and also deepen the money, we simultaneously unwound hedges that are no longer required to offset our physical sales and therefore, eliminating speculative exposure to commodity price. This allows us the ability to significantly pay down debt through the end of the year, regardless of how we produce in our fields.

As far as the COVID-19 update, I'm pleased to report that we've managed to avoid cases of COVID-19 within our workforce. We took immediate action in March to protect the health and safety of our employees by implementing a business continuity plan, including remote work arrangements for our Houston-based employees as well as providing for proper spacing among field personnel. We've been active in the communities where we operate to help support first responders and city officials during this pandemic. We continue to conduct 100% of our work remotely, including processing payments and invoices to our stakeholders. Safety is one of our core values, and we continue to monitor the situation to keep our team out of harm's way.

Now I'll let Danny deliver his remarks on our operations.

Thanks, Rich, and good morning, everyone. As Rich highlighted, we had a busy quarter delivering efficiency gains and savings across our operations. Most importantly, we did so safely in challenging times. I'd like to take a moment to recognize the crews and frontline leadership that has continued to fuel our nation even through this downturn because it'd be easy to lose focus with everything going on in the industry and the world right now.

Instead of that, on Slide 4, you can see the continued improvements in our drilling and completions programs. We drilled another record well in both cost and days on the [Eureka] pad. In true Battalion fashion, that well's record didn't stand long as you can see from the dotted red lines representing our Q2 wells on the graph on the right. Average cost came in just over $200 a foot, which represented a 12% drop versus the fourth quarter.

As Rich said, we laid the rig down after finishing up our last 2 well pad, and we want to thank the crews and leadership from Precision. We went 2 years without a OSHA recordable and have drilled some of the most efficient wells in the basin together. Also in the quarter, we wrapped up our initial 7-well frac campaign ahead of schedule and under budget, while pumping larger jobs and we're excited about the early performance we've seen. We've postponed our next fracs but have 4 DUCs waiting on us in Monument Draw that are offsetting our existing pipelines and facilities. So there'll be some of the most efficient capital we'll spend when the time is right.

Slide 5 shows our significant progress in LOE and workover expense. In the first quarter, we aligned our operations with a new set of service partners that had initial costs. This kept LOE at $7.30 a BOE but we're benefiting from those changes now and are seeing LOE trend down. The teams have implemented a proactive program that attacked our high failure rate wells and had a well-by-individual-well prescription for artificial lift, chemicals and all other expense categories. This was driven by the well's history and the reservoir. Failure rates in West Quito and Hackberry are down by 50%, which is showing up in fewer workovers, as you can see in the chart. Monument had an increase in the quarter. But again, we anticipate seeing the benefit in Q2 through Q4 by doing the necessary downhole work early in the year. All of this work had us poised for an outstanding second quarter. While we're shutting in production, these efficiencies and team's hard work are paying dividends to our overall liquidity.

Slide 6 is another snapshot of our H2S handling. We're proud of the team's work here and are one of the very few operators that have a solution to sell our gas on the eastern side of the Delaware Basin. In the quarter, we finalized our installation of a third liquid redox train and now have the capacity to keep up with a 1- to 2-rig program. We've put as much as 70,000 pounds of sulfur per day through our facility at some of the lowest cost to date and feel like we have now addressed the capacity issue in Monument Draw and are prepared for growth when the market recovers. As Rich mentioned, we've done a lot to prepare for an AGI well and facility that will allow us to further drive down operating costs. This is a great opportunity and option created by the team that will bring significant value to the company in the near future.

Before I hand it over to Ragan, I'd like to thank our teams for their hard work in these unprecedented times. They set the foundation for us to grow and continue to make a significant impact across all areas of the business.

Thanks, Danny. I'll begin with a few highlights from Q1 and then address our liquidity position. Our daily net production for the quarter was 18,791 BOE per day, of which oil represented 10,297 barrels per day. Same quarter last year was at 10,233 barrels of oil per day, while Q4 of last year was 11,489 barrels of oil per day. We exited the quarter with increasing oil production at about 11,000 barrels per day. The company earned $47.4 million of total revenue for the quarter, of which 88% was from oil sales, excluding the impact of hedge settlements. We realized 98% of the NYMEX WTI during the first quarter and realized a gain on crude oil derivative contracts of $5.1 million.

Net income for the quarter was $114.5 million, resulting in earnings per basic and diluted share of $7.07. Adjusted EBITDA for the quarter was $23.5 million compared to $12.7 million from the same quarter last year, primarily the result of sharply declining operating GTO and G&A cost. Our adjusted EBITDA reconciliation table can be found in our earnings announcement.

Total operating costs were $18.20 per BOE compared to $25.49 per BOE for the first quarter of 2019. This was comprised in part of adjusted G&A of $1.50 per BOE in the first quarter of 2020, compared to $5.99 per BOE in the first quarter of 2019 as well as lease operating and workover expense for this quarter of $8.07 per BOE compared to $10.94 per BOE in the same quarter last year. For additional financial metrics and adjusted financial data, refer to the Selected Operating Data table in our earnings announcement.

During the first quarter of 2020, we incurred capital expenditures of $65.1 million. These expenditures included spudding 3 new wells and completing 7 wells, securing surface acreage related to our recently permitted AGI wells and bringing a third train online in our Valkyrie H2S processing system.

Our original budget for 2020 had the lion's share of capital already slated for the first quarter. And as Rich has mentioned, we suspended our capital program early in the second quarter. We will continue to monitor conditions ahead for the opportunity to reengage in our development programs. Earlier this month, we announced the results of the scheduled borrowing base redetermination process with BMO, which resulted in a reduction of our borrowing base from $240 million down to $200 million. This represents a 17% reduction, which we believe is an excellent outcome considering the current pricing markers and general environment around reserve base lending. I want to take this opportunity to thank BMO yet again for their commitment to our partnership and recognize the valuable role they play in our industry in general and specifically their belief in our team and our assets.

Pro forma for this redetermination as of the end of the first quarter, Battalion's liquidity was $26.5 million based on $900,000 in cash on hand plus availability under our revolving credit facility less open letters of credit.

Finally, I'll mention our hedge book. With $105 million of mark-to-market value at the end of the first quarter, our hedges not only provide a solid price floor on substantially all of our production through the end of 2022, but also provides ample liquidity for us to access at our discretion.

Some specifics on our hedge book. 100% of PDP production for the back half of 2020 and all of 2021 and 75% of 2022 is hedged with plain vanilla swaps and 2-way collars. I'll point out that in addition to hedging the WTI fixed price, we also match those positions with the other 2 key components of underlying market-based pricing, basis differential and nonactual. All-in pricing on our oil hedges for the back half of 2020 are $50.28 per barrel, while 2021 is at $45.51 per barrel and 2022 is hedged at $52.38 per barrel.

Like Rich acknowledged earlier, I'll echo that while the environment we find ourselves in today is one of uncertainty, we have confidence in our path forward because of the strategies we implemented previously in preparation for a downside scenario like the one we're realizing. Between physical sales and financial settlements, no matter what happens next, we are committed to paying down debt and continuing to strengthen our overall financial position. Back to you, Rich.

Thanks, Ragan. I share that same confidence with you. We're certainly far more accustomed to bringing new wells online than we are to strategically shutting in over half of our production. Nevertheless, while these times are challenging, they do reinforce the notion that sound business principles, such as long-term planning, remain the best way to make what could be difficult near-term decisions. Our team has done a commendable job of preparing us for circumstances such as the one we find ourselves in, building long-term relationships with key stakeholders, such as mineral owners and vendors, for actively creating optionality in our development strategies and simply treating each other with respect. I'm hopeful that the market will turn around before the end of the year, but regardless, we'll continue to look for more ways to enhance our competitive advantage and further strengthen our balance sheet.

Thank you for your time and interest in Battalion Oil Corporation. With that, we'll now open the call up to questions.

(Operator Instructions) We'll take our first question today from Noel Parks with Coker & Palmer.

I just had a few things I wanted to run by you. With the shut-ins, do you have an idea of roughly where LOE might end up for the period that you have shut-ins, either percentage or sort of unit figure for what that might look like?

Well, I think you're asking about unit cost, no, and the problem with giving unit cost of this is that in the denominator, we're looking at the barrels per day. And so we don't know yet how long will be shut-in for the quarter. And so I can tell you that we've shut-in from May, will assess the market in June and again in July. And so I can't give guidance. And I think you're asking for second quarter because you're asking a shut-in period. So we shut in, in May. So giving guidance on an LOE unit cost will be difficult because we're not aware of what our production is going to be for the quarter. But we'll continue to assess the market and share things and make the right call. So sorry, I can't give you a unit cost because I don't know what the production is going to be.

No problem. Fair enough. And also on the cost side, just looking at G&A, I noticed that the absolute dollar level this quarter is similar to what it was a year ago before the filing. And I'm just wondering, going forward, is there anything much less -- much left as far as restructuring costs, either that you expect will be reported separately or items that are now going to fold into recurring G&A?

We still have a little bit. I think one of the things that we did -- we mentioned in the last call, Noel, was that we consolidated the offices. So we shut down the Denver office. There's nobody working there. We are -- we still need to get out for month of that lease, and so we're working those agreements today. And so I think short of that, that might be the last thing we've got to deal with on the restructuring cost.

Okay. Great. And just looking at the larger environment in the basin, do you have any thoughts on what consolidation might look like, either for assets that might come on the market that might be attractive to you? And is there any thoughts you had on that? And I guess I'd be curious about what would be the most attractive trait that would help you decide one way or the other about maybe looking at other properties?

Sure, Noel. And I think that's an easy one right now. When you look across the landscape, there's not a lot of value being given for undeveloped. So we're being realistic about. Deals that we would look at is probably going to be PDP heavy, but we'd also want to be able to continue our efficiencies, which means that we're going to be looking in the Permian basin because that's where we operate. So we're going to be looking to that as well. And of course, we have done a good job of delevering our balance sheet. We've got a strong balance sheet, and we're not looking at doing a leveraging transaction. So those are the kind of deals that we'd be looking at doing for us.

Okay. Great. And just last one for me. When you've been looking at just planning for the rest of the year, sort of the slowdown we have now and hopefully, some recovery later. Do you have any thoughts about the NGL market? And any -- I'm not so familiar with what's available for those products as far as hedging, but is it anything on the horizon, looking at maybe getting back into hedging NGLs?

No, no, to be honest with you. And I think Ragan even alluded to in his comments that we're looking at 88% of our revenue coming from oil. We're going to be looking for an improvement in NGLs and gas pricing before we're going to look at doing any kind of hedging for those products. We're mainly focused on what drives our business, and that's oil.

Next, we'll hear from Emily Holden with The Guardian.

I wanted to ask about a reference that you had in an SEC filing to a PPP loan. It seems to say that you have taken a loan but it doesn't disclose the amount. Can you provide more information about that?

Yes, sure. We didn't disclose the amount, but we took about $2.2 million of PPP loan. We think that, that was the right thing to do. We felt like the PPP loans were set up for businesses our size. And I do think it helped us to further our operations. So yes, we did.

That will conclude today's question-and-answer session. I will now turn the conference over to Richard Little for any additional or closing remarks.

Okay. Great. Thanks. Again, I want to thank everybody on the call and your interest in Battalion Oil. I hope on this call, we're able to convey to you that we will continue to be opportunistic, and we're going to find ways to create value. While at the same time, we're going to protect our business for our stakeholders. So while we recognize we're in better shape than most in the downturn, it's not lost on us that there's a lot of workers out there in our industry facing an uncertain future. And our hearts go out to them. This pandemic has definitely lasted a lot longer than what we were expecting. But we'll continue to put the health and safety of our workforce and our families first.

Like everyone else, we're not sure when the market will turn around or how quickly we'll recover, but I assure you that we'll keep our eyes on the ball, and we'll prepare ourselves in this company for responsible growth when the opportunity does present itself. Again, thank you for your time today.

And that will conclude today's conference. Thank you for your participation. You may now disconnect.