Civitas Resources Inc (CIVI) 2017 Q3 法說會逐字稿

Welcome the Q3 2017 Bonanza Creek Energy, Inc. Earnings Conference Call.

(Operator Instructions)

I would now like to introduce your host for today's conference James Edwards, Director of Investor Relations.

Welcome to Bonanza Creek's Third Quarter 2017 Earnings conference call and webcast.

On the call this morning I'm joined by Seth Bullock interim CEO, Scott Fenoglio, SVP of Financing and Planning and Principle Financial Officer, Curt Moore, SVP of Land and Dean Tinsley SVP of Operations.

Yesterday evening we issues our earnings release, posted a new investor presentation and have filed our 10-Q with the SEC all of which can be accessed on our investor relations section of our Web Site. Some of the slide in the investor presentation will be referenced this morning during our prepared remarks. Please be aware that our remarks will include forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially from the projections in these forward-looking statements.

You should read our full disclosure as described in our 10-Q, 10-K and other SEC filings. Also during this call we will refer to certain non-GAAP financial measures because we believe they are good metrics to use in evaluation performance. Reconciliation to these measures to the most directly comparable GAAP measures are contained in our earnings release.

We'll start the call with prepared remarks and provide time at the end for Q&A during this one hour call.

It's now my pleasure this morning to introduce Seth Bullock, interim CEO.

Thank you for joining us for our third quarter earnings call. This morning, Dean Tinsley, our SVP of Operations is going to go through some of our key operational successes over the last quarter. And Scott Fenoglio, our SVP of Finance will walk through some of our third quarter financial results.

Before handing the call over to Dean and Scott for their remarks, I will quickly summarize some of our successes in the third quarter. First and foremost our enhanced completion program is performing above expectations on our initial wells. Second, we have entered into an agreement with a third party to gather and process a portion our gas.

This is a preemptive move to mitigate increased line pressures in the basin. And lastly, our recently restarted drilling has already set a record pace for the Company with records spud the total depth and spud the rig release times for an SRL well. As for the financial side, the Company continues to identify cost-saving measures that reduce our call structure further setting the foundation for enhanced operating metrics as our activity normalizes.

Before handing the call to Dean, I know many of our investors are interested in hearing an update regarding the CEO search and strategic alternatives process. While we will not be providing a specific update regarding the progress of these two initiatives, I can say it is the intent of the board to make an announcement prior to year end.

Given the nature of these items, we will not be answering any questions or providing any additional color regarding these matters. With that, I'll turn the call over to Dean for his operational update. Dean?

Thank you for joining us this morning.

During my operational comments, I will touch on three important points for the quarter. First, I will cover the strong performance of our enhanced completions. Second, I will discuss line pressures in the basin and what we are doing to mitigate their impact to our production. And, finally, I will touch on the drilling efficiencies that we have gained in the short period since our 2017 drilling program started.

As you know, our four SRL ducts were completed at the end of the second quarter using an increase sand loading of 2,000 pounds per foot and decreased stage spacing to 100 feet. This design essentially doubled the frac intensity utilized in the offset wells and our legacy wells in general.

These four wells have been online for approximately four months and are showing greatly enhance production volumes. These wells are outperforming their offsets by approximately 40% and are showing higher oil cuts resulting in their oil production outperforming offset wells by 60%.

This higher oil percentage has a significantly positive impact on near term cash flows and thus overall well returns. As you can see on slide 14 of our current investor presentation, the offset wells are directly adjacent to the four ducts and have similar geology and well spacing.

So these wells provide a good comparison between the old and new completion designs. We are very encouraged by the results of these wells and look forward to reviewing the results from the remainder of our 2017 Completions Program all of which utilized various enhanced completion designs.

Aside from the increase production we have seen so far from these wells we are very encouraged by the pressures that these wells have maintained. These pressures are a result of increased frac intensity combined with what we call enhanced recovery flowback.

We believe these pressures to be indicative of robust, long-term reservoir performance, enhanced oil recovery and flow assurance. Along with the pressure data on slide 15, we have shown daily production rates as well. As you can see, daily production rates have fattened out and are hovering about 400 BOE per day. As the slide shows, daily production rates at month four are nearly double that of the offset wells for the same period.

Due the fat nature of these wells, we anticipate cumulative production performance to increase. We are very please with these initial results and while we think it is too soon to establish a tide curve of calculate their IRR, it is safe to say that the cumulative impact of all these items should insignificantly enhance our well level returns.

Next I would like to touch on line pressures in the basin which have increase significantly in recent months. These increased pressures coupled with older production resulting from our activity hiatus are leading to production headwinds which have directly led to our decision to reduce our guidance for the fourth quarter.

While basin producers are anxiously awaiting DPC to bring on additional processing capacity in the second half of next year. We have entered into an agreement with Sterling Energy Investments to ship up to 6,500 MCF per day of gas with service to start in the next few days.

For context, the 6,500 MCF per day that we will be able to ship accounts for approximately 20% of the average gas we shipped in the DJ during the third quarter. So this is a material deal for us and it will be particularly helpful as we bring on new well during Q4 and the beginning of 2018.

Longer term, we are in an advantageous position of having a significant amount of our acreage undedicated for gathering and processing. These undedicated acres provide Bonanza with the opportunity to a diversifier gathering and processing relationships and to further reduce production risk due to third part processors.

In an addition our IMS system which spans five townships provides us with the flexibility to easily move gas to the most favorable points. We are adding three additional compressors on the system in November to serve our 2017 and 2018 volumes and to direct these volumes to the most favorable points.

The system also allows for short hookups to other third party processors both now and in the future. With all of this in mind, we continue to actively seek out additional gathering and processing options.

Lastly, I will touch on our drilling efficiencies over the past year. Despite take well over a year out from drilling and completion activities, our drilling program is off to a great start with record setting drill times. During the quarter one of our SRL wells was drilled from spud to total depth in 3.4 day and spud to rig release in 4.6 days. Both of which were Company records.

In all, our 2016 program averaged approximately 2,225 feet per day. And our 2017 average thus far has been 2,530 feet per day, a 14% in overall drilling efficiencies. As we continue our 2017 program and kick off our 2018 program, we will continue to look for areas of improvement to make these numbers even better making the Company incrementally more efficient with capitol.

To summarize my comments, we have engaged capitol activities and are already drilling wells faster and more efficiently than we ever have. We are executing completions that are outperforming nearby wells by 40% while maintaining pressures that will benefit ultimate recoveries.

We are leveraging our RMI system together with our undedicated anchorage to mitigate basin wide system pressures and finally, we are doing this with a vastly improve cost structure. We are proud of the efforts of the operational team's delivery results and are confident that we are positioned for superior results in the coming quarters.

With that, I'll turn this call over to Scott for some commentary on our third quarter results and financial position.

I'll start this morning by summarizing our third quarter results. As Dean mentioned in his comments, we had some production headwind from increase line pressures that resulted in production of 15.8 MBOE per day.

That's at the line of our guidance range for the quarter. Considering the third quarter results in conjunction with our expectation for higher line pressures throughout the fourth quarter, we are reducing our full year guidance by approximately 4% to a range of 15.7 to 15.9 MBOE per day.

On the cost side of the equation, the Company continues to cut cost while maintaining safety standards for our employees, the environment and the communities in which we work. Our review of LOE during the quarter identified several areas of improvement that will lead to an estimated annualized cost savings of $8 to $9 million.

The implementation of these cost saving initiatives will take place throughout 2018 and are expected to be fully realized by the beginning of 2019. These savings combined with the GNA savings that were identified and reported during our second quarter call, have made a significant improvement in our operating call structure by reducing forward looking GNA and LOE by over $20 million annually.

As we get back into a normal pace of activity, with increasing volumes we fully expect our operating metrics to dramatically improve on a persona basis, as we will continue to strive to have pure leading operating margins.

From a financing perspective, our balance sheet remains clean with an underline revolver and approximately $30 million of cash on hand at quarter end. We had an active quarter with regard to hedging, adding additional hedges to both loyal and natural gas. Details on our hedge book are included in both our press release, and at XQ. We are currently working through our budgeting cycle, in plan to announce our 2018 drilling and completion program by the fourth quarter earnings conference call.

Although, I don't have any color to add regarding the 2018 program today, I am confident in saying it will be focused on maximizing corporate level returns and the further use of enhance completions across our acreage position.

With that, I'll return the cal to the operator to begin the Q&A session.

(Operator Instructions)

David Beard, with Coker Palmer.

My question really relates to the thought process of relative to line pressure out through '18 and '19. What's your best guess of how this may play out, relative to the confidence and timing to building new plants, and additional drilling help filling those ahead of time? If you could just give us your thoughts, that would be helpful.

In time DCP brings on additional capacity in late 2018. Line pressures on their system could be high, no doubt about it. As we said not only us but all our operators are anxiously awaiting that. However, as mentioned earlier, by off loading gas on the other third party processors, including sterling this month, we feel that we are well positioned to remediate this issue. Additionally my strategically place in horsepower on my system, and redirecting gas to more favorable off tippets gives us that additional flexibility.

(Operator Instructions)

David Epstein, with Cowen.

Just wanted to get your sense of how inflation or lack of inflation is shaping up in the base versus I say, what you are expecting the quarter to go and as you look out to 2018?.

We're getting off to somewhat of a late start in 2017, created some challenges. However, now that we are up to drilling and completing again. And now preparing if for 2018 program, we have approached many of our service providers and so far, we're very encouraged with what we are seeing so far. We feel like we're on a pretty good position, going into 2018 on the cost side.

Do you think it will tick up from with another on current cost further. It would be with like CPI or is it going to be another 5%, 10%?

It's really hard to say at this point. Again so far it feels like with the numbers that we're seeing on both the rig and on the frac side that the numbers are comparable or better to what we've assumed in the past.

(Operator Instructions)

And I'm showing no further questions at this time, I'd like to turn the call back over to Seth Bullock, interim CEO for closing remarks.

Thank you again for joining our call this morning; we hoped you found it informative.

As noted, prior in previous comments, there continues to be significant progress made in bolstering our corporate returns at Bonanza Creek both by increasing well productivity and reducing our cost structure. And we really think this sets the stage for a strong 2018. And we look forward to providing updates on our CEO search and strategic processes as soon as possible. And again, expect to have that announcement by year end.

And in the meantime, feel free to reach out to James Edwards for any questions you may have.

This does conclude the program, and you all may disconnect.