Par Pacific Holdings Inc (PARR) 2010 Q3 法說會逐字稿

Good day, and welcome to the Delta Petroleum third quarter 2010 conference call.

(Operator Instructions).

Please note this event is being recorded. I would now like to turn the conference over to Broc Richardson, Vice President of Corporate Development. Mr. Richardson, the floor is yours, sir.

Thank you, Mike.

Thank you, everyone, for joining us for Delta's third quarter and 2010 financial and operating results conference call. Before we begin, I would like to remind you that we are conducting this call under Safe Harbor. And that this call will include projections and forward-looking statements within the meaning of the federal securities laws, and are intended to be covered by the Safe Harbor provisions protected thereby. In that regard, you are referred to the cautionary statement displayed on Delta's website, which is incorporated by reference, with respect to the information provided for this call. Investors are urged to consider closely the oil and gas disclosures and the risk factors set forth in Delta's Form 10-K for fiscal year ended December 31, 2009, as updated by subsequent, periodic and current reports on Forms 10-Q and 8-K, respectively. Today's speaker from Delta are Dan Taylor, Chairman of the Board, Carl Lakey, President and Chief Executive Officer, and Kevin Nanke, Treasurer and Chief Financial Officer. With that, I will turn the conference call over to our Chairman, Dan Taylor.

Thanks, Broc. Good morning, everyone. I would like to discuss a few highlights regarding our results and efforts in the third quarter, before turning the call over to management. We completed four wells in the Vega area during the quarter. The results of these wells, like the ones before, with the redesigned completions continue to perform as well or better than expected. Carl will discuss these completions in greater detail in his comments. During the quarter, as a result of the asset sale, we underwent another reduction in our employee base. While reductions in staff are always difficult and painful, especially in the current economic environment, we must make the necessary adjustments to efficiently manage our asset base. Kevin will discuss the impact of the staff reduction on G&A expenses.

As discussed in our last quarter conference call, Kevin and our financial personnel have been focused on securing a new credit facility to replace our current one which matures in January. We realize that the progress on this has been slower than we anticipated, but we believe we are very close to having a commitment letter, and expect to have the facility in place by the end of this month. Kevin will discuss the status of our refinancing efforts in his comments.

I would briefly like to add a comment on Delta's direction and strategy. Over 80% of our production is natural gas, and virtually all of our undeveloped leasehold sits on probable natural gas reserves. We monitor the current price and forward curve of natural gas, and are definitively aware of it's recent erosion. We certainly have no control over gas prices, which affect our financial performance and our stock price more than anything else. We have, and continue to focus on controlling our capital spending, and reducing our operating costs in an effort to improve our operating results, with a laser focus on improving the risk reward profile of our primary asset through improved completion methods and testing of additional zones.

We continue to believe that natural gas prices will rebound at some point. We believe that we have an ideal natural gas asset in the Piceance Basin. And we're positioning the Company to excel when this price recovery occurs. I will now turn the call over to Carl for his comments on operations. Carl?

Thank you, Dan. You're exactly right, that we are completely focused on working and changing the things that are in our control, with the knowledge and the confidence that improving the fundamentals of the business will make Delta stronger, in whatever the commodity price of the future holds. With that in mind, the Company closed on the $130 million Wapiti transaction,and successfully worked with Wapiti to finish the post-closing items related to the release of the funds held in escrow.

With that transaction now successfully completed, our undivided focus sharpens further on our core asset in the Piceance Basin. The two additional wells that we completed in the Vega in the third quarter using the new stimulation techniques are performing very well thus far. We have five wells to date that have been completed using this new fracture stimulation procedure, and all continue to support the higher expected reserve recoveries of approximately 1.7 Bcfe per well. We will continue to provide updates on these wells in the future quarters, as they are indicative of the upside potential remaining on the roughly 1,960 undrilled well locations in the Vega area.

It is important to note, that in addition to the two new completed inventory wells in the quarter, Delta also performed two up hole recompletions using the new stimulation techniques. These recompletions are performing well, and appear quite attractive from a cost benefit standpoint. In October, we completed four additional wells of our Vega inventory using the new stimulation technique. That leaves nine remaining wells in inventory for the rest of the fourth quarter, and into the first quarter, depending on frac crew availability.

Delta has also made progress in it's lease preservation initiative in the Vega area. At the beginning of 2010, Delta had 3,600 acres, or 16% of its leasehold that would term by the end of 2012. As of today, Delta has 720 acres, or 3% of the acreage that is at risk for expiration by the end of 2012. Delta's drilling obligation has reduced from seven wells by the end of 2012 and the completion of one inventory well, to one new well in -- by Q2 2011. And the completion of one inventory well to hold the 2,880-acre difference. This work by the land team will allow Delta greater flexibility to direct future capital to the best returning projects, as opposed to drilling the hold leases.

Also discussed in last quarter's call was a planned reduction in G&A. Anchoring that reduction was a workforce downsizing that left Delta with roughly 50% reduction in salaries from year ago levels. From a personnel standpoint, I now consider Delta a lean operating Company. Other initiatives to tackle initial cost points in the G&A structure do continue.

Finally, as mentioned in our press release, we are reaffirming our production guidance that was provided last quarter. We stated expected production in the third and fourth quarter to total between 6.9 Bcfe and 7.2 Bcfe. We continue to believe that our production will fall in that range, so fourth quarter production is expected to be between 3.25 Bcfe and 3.55 Bcfe. I will now turn the call over to Kevin Nanke, CFO, for a discussion of third quarter financials.

Thank you, Carl. Good morning. For the third quarter, we reported total production of 3.65 Bcfe, and EBITDAX for the third quarter was $8.6 million, a 23% increase from the second quarter. Our lease operating expenses per Mcfe decreased approximately 14% from the second quarter. This decrease can primarily be attributed to lower water hauling costs in the Vega area, due to the reassumption of our drilling plans. The increase in G&A for the third quarter is due to severance costs associated with our personnel reduction that was completed during the quarter, as well as a $1.4 million bad debt write-off that DHS took for an uncollectible receivable.

In the last quarterly conference call, we discussed the over hedged situation on our oil volumes for the fourth quarter. This was a result of the sale through Wapiti. Subsequently, we bought out of our over hedged -- our over exposure on our oil production, and now are approximately 70% hedged on oil for the remainder of the quarter. The $17.75 million held in escrow from the Wapiti transaction, pending the receipt of the third party consents have been released, and those funds were used to reduce amounts outstanding under the credit facility. Currently, we have approximately $20 million of liquidity, and are current on all of our obligations.

As mentioned previously, we have been seeking a new senior credit facility that will replace our existing facility. I am aware that we did not make our initial estimated time frame and have a new facility committed by the end of the third quarter. At the time of our last conference call, we were in discussions with potential lenders, and with one in particular, that was advancing sufficiently to merit the expectations of that time frame. However, another potential lender came into the process a bit late, and this lender has provided a more comprehensive solution. We are very close to the conclusion of the credit approval process with this potential lender. We are optimistic about the process, and expect to have a response shortly. When we reach the conclusion of this process, we will announce it publicly. With that, we will open it up to questions.

Thank you, sir.

(Operator Instructions).

The first question we have comes from Jeff Davies of Waterstone Capital. Please go ahead, sir.

Hi. Thanks for taking my call. Just curious if you might take a moment to discuss what you are thinking about the revolver, the credit facility as it relates to the converts, if there is going to be a springing maturity? Or if you are thinking through the looming put on the converts? And then second question, would be curious if you can talk about any recent Mancos activities near your Vega properties, if there are other operators that are drilling, some of the deeper stuff going on in the Piceance, and what you're hearing, or any plans you have yourself to drill deep? Thanks.

This is Kevin. I will take the first question, first part of that question. We're clearly aware of our put obligation in May of 2012. We had our internal discussions, and probably won't make that information public, until we have had a new facility put in place. But we are well aware of that, and we are working towards solution on that.

This is Carl. I will tackle the second piece of that, which is Mancos activity, and while Delta we'll not comment on competitor activity, and what their plans or results are. Certainly we are aware of Mancos activity in the Piceance Basin, particularly the western and southern Piceance Basin. You may have noticed that Delta permitted a well that actually did spud in mid-October to test deeper horizons for the Williams Fork, the Mancos feed for one of those horizons. We view the incremental costs beyond stand up Williams Fork well of about $2.5 million to be worth the expenditure for Delta and understand the magnitude of the resource that potentially exists underneath the Williams Fork.

How many of those wells have you permitted beyond this one?

Multiple wells. I will say it that way.

And then I don't know if you can talk, or maybe comment as well, on what your thoughts are on a JV or some other structure where you can bring in another party? Obviously, we have gone down this path once already, but if that has continues to be something that you are striving for?

I think at this stage Delta will consider all opportunities to better the shareholder's position, and JV is one way to do that, but we're certainly not foreclosing or pre-supposing what the answer will be for Delta.

The next question we have comes from Andrew Shapiro of Lawndale Capital Management.

Hi. Good morning. From the last conference call you discussed how the salary and benefits were expected to be down by about one third ex severance costs. And I think the figure discussed was maybe around $4 million. And from what I can tell with your reduction in your G&A, adding back your $1.4 million of this non-recoverable write-off, that's still a bit shy of the $4 million. So can you tell me what reductions from last quarter levels have yet to occur, and what amounts in this quarter's $10.3 million line item are one-time non-re occurring in nature, in addition to that $1.4 million of write off?

Yes, Andrew. The savings on the reduction in force really won't take -- won't go into effect until the fourth quarter.

Okay.

And we are -- I think we do estimate those payroll savings, salary savings at approximately $1 million a quarter. So we'll still stay by that number. There is a number of items that are running through there, the G&A, which includes like I said, the DHS receivable, and then severance costs relating to the general staff of about almost $600,000. And then you have John Wallace severance package, which is actually recorded in the separate line item.

So what will be -- can you provide a normalized cost range investors should use for your G&A once this is all flushed out? Is it as low as $7 million or lower?

We probably are not comfortable giving a normalized G&A rate as of this time, but probably will have something that can be supported at year-end.

Okay. Great. Thank you on that one. A follow-up here on the financing. On the last call you expected the new loan agreement in closing obviously by the end of September, and that was with a particular lender who seems has been out bid by more aggressive or broader thinking lender that you're now talking to. You were looking for $50 million to $75 million from a borrowing that you could get off your borrowing base, with the less aggressive or the smaller thinking lender. What's your current range you think is realistic with this new lender you're going down the road with?

I would say that we are looking at the same size facility as we discussed in the last quarter.

And this lender is attractive to you because it is, what, less collateral required, more aggressive rate margin?

No. Like I said, they kind of bring a more comprehensive approach and also the terms are more reasonable, and in line with expectations.

Okay. Great. And last quarter you said Delta had tight service availability. Do the problems remain and getting crews and things to get the remaining wells completed as planned?

Andrew, we're still -- this is Carl. We're still working through that. Crew service availability continues to be tight, primarily due to at least in the Rockies, due to activity from oil operators in the Bakken who have sucked up the frac crews, and drawing rates to a material extent. So we're working through it. We're able to get our program executed. And so far so good, but it remains a day-to-day battle.

Okay. I will back out into the question queue. I have a few more, so please try to come back to us and we'll get back in line.

The next question we have comes from Kevin Cabla of Raymond James.

Good morning, guys.

Good morning.

I know you had an variety, a total inventory of about 15 wells to complete. But guidance kind of only included, I guess 13 completed wells for the second half. I guess with carryover you have of the $8.5 million for the fourth quarter coming in this quarter, could you actually complete all 15, or are you guys just going to stick with the 13 total, so nine for this quarter?

I think we're still going to stick with the numbers we put out there previous. Frac crew availability and the addition of this additional test well may impact that positively or negatively.

Okay. And so I guess could you give a little bit more color on the completion costs? I know last quarter you guys said it was like around a little over a $1 million per completion. Is that still in the range?

I think we have been running about $1.2 million per completion, based on the last numbers we have been tracking.

And then, do you have an idea of -- or I guess an AFE for how much this Williams Fork well is going to cost?

Again, I guide you to about $2.5 million over what a stand alone Williams Fork well would be.

Okay. Well, that's all I got. Thanks.

This concludes our question and answer session. I would now like to turn the conference back over to management for any closing remarks.

Thank you very much for attending Delta's conference call for Q3 2010. We appreciate your participation, and look forward to providing future updates. Thank you.

And we thank you for your time, gentlemen. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines.