Amplify Energy Corp.
Q2 2018 Earnings Call Transcript

Published: 11 Aug 2018

[Operator:]

Welcome to Amplify Energy Second Quarter 2018 Investor Conference Call. Amplify’s operating and financial results were released earlier today and are available on Amplify’s website at www.amplifyenergy.com. During this presentation, all participants are in a listen-only mode. Today’s call is being recorded. A replay of the call will be accessible until Wednesday, August 22 by dialing 855-859-2056 and then entering conference ID number 2058769 or by visiting Amplify’s website at www.amplifyenergy.com. I would now like to turn the conference over to Martyn Willsher, Senior Vice President and Chief Financial Officer of Amplify Energy Corp.

[Martyn Willsher:]

Good morning, and welcome to the Amplify Energy conference call to discuss operating and financial results for the second quarter 2018. We appreciate you joining us today. Ken Mariani, Amplify’s President and Chief Executive Officer will begin the call by updating our stakeholders on the company’s strategic direction and operating results; and I will follow with an update on our financial results. First, we would like to remind you that some of our remarks may contain forward-looking statements and are based on certain assumptions and expectations of Amplify’s management. These remarks reflect management’s current views with regard to future events and are subject to various risks, uncertainties and assumptions. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this earnings call. Forward-looking statements include, but are not limited to, our statements about and our discussion of, our third quarter and full year 2018 guidance. Please refer to our press release and our SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, the unaudited financial information that will be highlighted is derived from our internal financial books, records, and reports. For additional detailed disclosure, we encourage you to read our quarterly report on Form 10-Q, which we expect to file later today. Also, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our press release or on our website at www.amplifyenergy.com. With this in mind, I will now turn the call over to Ken Mariani. Ken?

[Ken Mariani:]

Thank you, Martyn. I truly appreciate our stakeholders joining us today. My remarks on this call will provide an update on our strategic direction as well as our operational performance in the second quarter. Since my first day on the job on May 14, I along with the rest of the executive team have made it a priority to review all of the potential growth opportunities for Amplify both internally and externally. While we have made great strides in this process over the last few months, we are taking the time to ensure that any – our recommendations to our board have been thoroughly reviewed embedded. We intend to make specific recommendations on our overall corporate strategy to the board in the upcoming months and we will update our stakeholders on these plans as appropriate. One important strategic decision that we made shortly after I arrived was the suspended drilling program in East Texas. Since the start of the year, Amplify has completed three wells that were drilled in 2017 and drilled and completed an additional well from the 2018 drilling program. The four wells were completed in the Cotton Valley formation in the Joaquin Field and produced an average IP30 of 5.5 million cubic feet of gas equivalent per day, which was below expectations. Given these results and the recent decline in the natural gas price environment, we determined that it would be prudent to suspend the drilling program to allow us time to re-evaluate those opportunities. In addition, with the strengthening of oil prices, we intend to revisit East Texas development decision in the context of other development opportunities we have with our oil properties. We intend to utilize our capital in the most accretive manner possible for our shareholders. And as such, our considering investing in our high-growth oil-rich projects in California in the Rockies that have benefited from the stronger oil price environment. In regards to our non-operated properties in the Eagle Ford, 13 gross 0.6 net wells were brought online in the second quarter. Initial production rates from these wells were significantly above expectations with IP30 rates averaging 1,631 barrels of oil equivalent per day with 90% liquids. We expect these wells to have rates of return in excess of 100% and payout in less than 11 months at current commodity prices. During the second quarter, we were also able to close the sale of our South Texas properties with cash consideration of approximately $18.4 million, included estimated post-closing adjustments. As a reminder, net production from South Texas properties was approximately 15 million cubic feet equivalent of gas per day, which has been included in the previously issued second quarter and full year 2018 guidance. This divestiture materially reduce the company’s future abandonment liabilities and the proceeds from the sale were used to reduce outstanding borrowings under the company’s revolving credit facility. The company assets continued to perform very well in the second quarter as we generated $45.8 million of adjusted EBITDA, which was known as the high-end of our guidance range of $41 million to $47 million. Production for the second quarter averaged approximately 169 million cubic feet of gas equivalent per day, a reduction of 3% from the previous quarter. This decrease was primarily due to the impact of previously mentioned sale of the South Texas properties. Lease operating expenses in the second quarter were $27.5 million or $0.79 per Mcfe. This result reflects a per unit reduction of 5% from the previous quarter and was in line with our guidance expectations. We expect that LOE per Mcfe will tends to likely up during the remainder of the year due to the reduced volumes from the East Texas drilling program and the suspension of the royalty relief on our California production that Martyn will discuss later on the call. We expect full 2018 LOE to be in the range of $1.82 to $2.01 per Mcfe. Capital spending for the second quarter was approximately $23 million compared to $15 million in the first quarter of 2018 and in line with guidance. The bulk of the capital spend was associated with the previously mentioned drilling and completion activity in East Texas with a remainder focused on the Eagle Ford drilling and completion program and other facility upgrades across the rest of the portfolio. Capital spending for the remainder of the year is forecasted to be reduced to approximately $12 million at this time, but it’s subject to change. The additional free cash flow generated due to the reduction in capital will provide additional liquidity to fund our future opportunities. As we sit here today, our balance sheet is strong with annualized debt to EBITDA metrics of 1.7 times, liquidity of $100 million and forecasted full year cash flow for 2018 of $95 million. The performance of our base asset, along with the strength of our balance sheet gives us optionality as we assess our portfolio of internal and external growth opportunities, and makes strategic decisions that are in the best interest of our shareholders. In closing, I would like to particularly thank our employees for the dedication and commitment to Amplify. I’m excited by what I’ve seen and learned in my first few months with the company. And I thought that we have the opportunity to create an outstanding platform for future growth. Going-forward, we will continue to exercise discipline on strategic decisions and deploy capital in a manner that prudently manages the asset base and enhances the overall value of the company. With that, I will now hand it back to Martyn to walk you through our financials in detail.

[Martyn Willsher:]

Thank You, Ken. I’d like to start by discussing our financial results for the quarter followed by a discussion on our debt liquidity, hedge position and revised guidance for the year. Net Cash from operating activities was $42.1 million for the second quarter, which was consistent with the first quarter which was also $42.1 million. Adjusted EBITDA for the second quarter was $45.8 million which in higher end of the guidance range of $41 million to $47 million. That’s our performance was due to stronger production levels from all weighted properties and more favorable realized commodity pricing. G&A in the second quarter was $16.9 million, which included $8.5 million of one-time expenses provided primarily to executive departures and the South Texas divestiture along with 200,000 of non-cash compensation expenses. Excluding the one-time expenses, cash G&A was $8.1 million for the second quarter. This is a material reduction from $9.3 million in the first quarter of 2018 and we anticipate further reductions resulting in quarterly run rate of approximately $6.8 million for the remainder of 2018. This forecasted run rate is a reduction of more than 25% from 2017 levels or approximately $9 million on an annualized basis. Free cash flow which we define as adjusted EBITDA less cash interest expense and capital expenditures was $17 million for the quarter and within the guidance range of $40 million to $20 million. These proceeds were used to pay down our revolver and enhance liquidity. As of August 6, Amplify’s borrowing base on its revolving credit facility was $400 million with $203 million outstanding. Liquidity was $101 million, consisting of $6 million of cash on hand and available borrowing capacity of $95 million, which includes the impact of $2.4 million in outstanding letters of credit. I’d like to add that through strong free cash flow generation and the receipt of transaction proceeds, we have paid down our revolving credit facility by $110 million since the second quarter 2017 earnings release. In addition our total debt to adjusted EBITDA metrics have gone from 3.2 times to 1.7 times during that same period. With the expectation of significant additional free cash flow generation for the remainder of 2018, we’re having increasing flexibility to execute on our future growth strategies. Moving on to our current hedge position. Amplify has not executed any additional hedges since our most recent hedge update on May 9, and due to recent increases in oil prices Amplify’s hedge mark to market with a net liability position of $24 million as of July 27. It is integral to our hedge strategy that we intact downside risk with periodic hedging and as such Amplify is laid on oil and NGL hedges over time that are now in a liability position. It is important to note that while these hedges lock in prices on approximately 75% of our proved developed producing reserves through 2019; our revenues and the value of our reserves have been positively impacted by the recent oil price improvements. In addition, any incremental oil and NGL volume for future development would also be realized at higher prices. An updated hedged presentation with our current positions was posted on a website today under the Investor Relations section. Before discussing our updated guidance of 2018, I wanted to write an update in regards to our California properties. In July 2016, due to low oil and gas prices these properties were granted royalty relief by the U.S. Department of the Interior. This relief reduced the average royalty rate on the Company’s California production from 24.8% to 12.4%, subject to certain production and price tests. One of those tests stipulated that if trailing twelve-month weighted average prices exceeded $55.16 per BOE, or 25% above the prices when royalty relief was granted, the royalty relief would be suspended. Through the period ending June 2018, the average price for the trailing 12 months exceeded the threshold, and as such the royalty rate for the Company’s California properties as now reverted to 24.8%. This increase in our California royalty relief had been anticipated in our previously issued guidance, but our third quarter and revised full year 2018 guidance issued earlier this morning now include the impact of the South Texas divestiture and suspension of East Texas drilling. The resulting drop in capital spending significantly increases free cash flow from the midpoint of $70 million previously to the current estimate of $95 million. And we expect to utilize the additional cash generated to increase our liquidity for future growth projects. While production for the rest of the year is expected to decline in the scenario, please note that adjusted guidance could change materially as we evaluate our development opportunities. I will now turn the call back over to Ken for closing remarks.

[Ken Mariani:]

Thank you, Martyn. As we’ve said earlier in the call, we are enthusiastic about the path forward for Amplify and the internal and external growth options available to us. The company’s strategy going forward will be driven by strong alignment with our shareholders to generate significant value, while managing cost effectively. This concludes our prepared remarks for today. As always, please do not hesitate to reach out if you have any questions. Thank you for interest in Amplify Energy.