Amplify Energy Corp.
Q2 2017 Earnings Call Transcript

Published: 9 Aug 2017

[Operator:]

Good morning. My name is Ingris and I'll be your conference operator today. At this time, I would like to welcome everyone to the Midstates Petroleum Second Quarter Earnings Conference Call. [Operator Instructions]. Thank you. Mr. Jason McGlynn, you may begin your conference.

[Jason McGlynn:]

Thank you, Ingris. Good morning, everyone and welcome to Midstates Petroleum second quarter 2017 earnings call. Joining me on the call today is Jake Brace, our President and Chief Executive Officer. Jake will begin with an overview of our operations and financial highlights from the second quarter. I will follow with additional details on our operations and financials. And Jake will make some closing comments and we will take your questions. Before we get started, let me read our safe harbor statement. This conference call contains forward-looking statements and assumptions which are subject to risk and uncertainty and actual results may differ materially from those projected in these forward-looking statements. Please refer to Midstates' Form 10-Q that will be filed shortly with the SEC for a discussion of these risks. Also, please note that any non-GAAP financial measures discussed on this call are defined and reconciled to the most directly comparable GAAP measure and the tables in yesterday's earnings release. Now I will turn the call over to Jake for his comments.

[Frederic Brace:]

Thanks, Jason and good morning, everyone and thank you for joining us today and thank you for your interest in Midstates. We've had a very good first half of 2017 despite the commodity prices not being where we would have liked them to be. But even in this commodity price performance, Midstates has been able to deliver results within or better than our guidance. Our average production for the second quarter was approximately 22,500 Boe per day. The production team has done a fantastic job optimizing our base production in both the Miss Lime and the Anadarko Basin. As a result of a number of artificial lift change outs in the Anadarko Basin, production from that asset has actually increased approximately 200 Boe per day from the first quarter. Due to our continued solid performance, we decided to add a second rig in the Miss Lime during the second quarter and we also shifted our drilling program to focus on high-graded opportunities in proven areas that will deliver superior returns in the current commodity price environment. The addition of the second rig, along with our refocused drilling priorities could reverse the production decline we have been experiencing in 2017 and even provide moderate production growth starting in 2018. Over the past 18 months, before we refocused our drilling program, we were focused on opportunistically expanding our Miss Lime acreage and future drilling inventory through bolt-on farm-in opportunities, primarily on the western side of the acreage block in Woods County, Oklahoma. As such, we increased our acreage position by over 35% from year-end 2015 and secured inventory to be exploited in the future. Initial well performance in this Western step-out region was comparable to early results in previous play extensions. And our technical team has a proven track record of enhancing field development through the refinement of our geological model and completion design following the evaluation of the initial results. In that vein, I'm pleased to announce that the first 2 infill wells from the 2016 step-out sections have recently come online and the preliminary results indicate that they may be some of the best wells we brought online since 2015. We will have more information on these wells in our third quarter call. Turning to our financials. We continue to perform well. During the second quarter, we generated approximately $29 million in adjusted EBITDA which outpaced operational CapEx of $26 million by $3 million. In addition, all of our second quarter expense items are within or better than the yearly guidance ranges, Jason will go through these in a minute. Additionally, we continue to build our hedge book during the second quarter. Our hedging strategy is focused on reducing downside commodity price risk to protect operating cash flows, while still allowing for a meaningful participation in any upside price movement. Currently, we have about 55% of oil and natural gas production hedged through the -- through year-end 2017 at attractive prices and have gotten off to a good start on building out positions for 2018 and 2019. On the strategic front, we sold our non-core Lincoln County Oklahoma assets in July for $7 million. Additionally, we recently announced the hiring of SunTrust Robinson Humphrey to explore strategic alternatives for our Anadarko Basin and Northwest Stack assets. Selling the Anadarko assets in an attractive price would allow us to focus on developing and exploiting our premier Miss Lime position. In addition, the increased liquidity would allow us to explore many opportunities to enhance shareholder value which is our overwriting focus. In summary, I'm pleased with our results for the second quarter. We have built a solid foundation on which we can continue to execute our strategy which should help us fully unlock the value of our premier asset. We know this rock very well and truly believe we hold the strategic advantage in the play and that we can generate sizable returns even in a depressed commodity environment. With that, I'll turn the call back over to Jason.

[Jason McGlynn:]

Thanks, Jake. I'll begin with a discussion of the company's operational highlights and follow up with earnings and costs for the second quarter. I'll then provide an update on our capital investments and finish up with the discussion on our balance sheet and our updated 2017 guidance numbers. As Jake mentioned, we achieved average daily production of 22,490 Boe per day during the second quarter of 2017, down from 23,562 Boe per day in the first quarter. The company's Mississippian Lime properties contributed approximately 81% of the second quarter volumes or 18,278 Boe per day with the balance coming from our Anadarko Basin properties. The production mix during the second quarter was 29% oil, 25% NGLs and 46% natural gas, roughly in line with the previous quarter. Second quarter 2017 net income totaled $13.7 million or $0.53 per share and we generated approximately $29 million in adjusted EBITDA during the quarter, down from $35 million in the first quarter. The decrease from the first quarter of 2017 was primarily due to lower commodity prices and lower production which negatively impacted our oil and gas revenues. Turning to expense items. The second quarter adjusted cash operating expenses which include LOE production taxes and cash G&A, but exclude restructuring and advisory costs, totaled $26.5 million or $12.95 per Boe, up slightly from $26 million or $12.28 per Boe in the first quarter of 2017. Our lease operating workover expenses for the second quarter totaled $16.6 million or $8.09 per Boe, up from $15.9 million or $7.47 per Boe in the prior quarter. The increase quarter-over quarter was due to a non-reoccurring $1.9 million reduction in LOE during the first quarter 2017 related to an insurance recovery settlement. After moving the impact of that insurance recovery settlement, our first quarter LOE would have been approximately $8.40 per Boe. Second quarter gathering and transportation expenses totaled $3.6 million or $1.78 per Boe compared to $3.7 million or $1.74 per Boe in the previous quarter. Severance and other taxes were down this quarter to $1.7 million or $0.83 per Boe compared to $2.1 million or $1 per Boe in the first quarter. With respect to adjusted cash G&A which is a measure of cash G&A before any capitalization to oil and gas properties and excludes noncash compensation and certain nonrecurring items, the second quarter came in at $5.5 million or $2.69 per Boe compared to $5.3 million or $2.48 per Boe in the first quarter. Operational cash expenditures during -- for the second quarter were approximately $26 million, most of the $26 million was invested in the Miss Lime, where we spud 7 development wells and brought 4 wells online. We invested approximately $400,000 in the Anadarko Basin during the second quarter before consideration of a $700,000 credit related to acreage acquisitions under the farm-out agreement we have with an operator in Western Oklahoma, where we're assessing the Northwest Stack. On to the balance sheet. At the end of the second quarter, we had approximately $86 million in cash and net debt of approximately $42 million. Liquidity at the end of the second quarter stood at approximately $126 million consisting of $86 million in cash and $40 million of availability on our RBL facility. Additionally, we amended our credit facility in May to remove several key nonstandard covenants such as the $40 million liquidity block on our borrowing base availability and certain limitations on capital expenditures, along with various other restrictions in the credit facilities provisions. Finally, I will finish up with our updated 2017 guidance numbers for our two-rig program. We increased our operational CapEx guidance to between $130 million and $140 million for the full year 2017 as well as increased our expected production to between 22,000 and 24,000 Boe per day. Consequently, we have narrowed the ranges for the following expense items; lease operating and workover expense between $8 and $9 per Boe; severance and other taxes between $0.85 and $1.10 per Boe; gathering and transportation between $1.75 and $2 per Boe; and adjusted cash G&A between $2.50 and $3 per Boe. Our updated guidance numbers do exclude the Lincoln County Oklahoma assets following the sale on July 26. Those assets were producing approximately 700 Boe per day with the minimal impact to the expense items. With that, I'll turn the call back over to Jake for closing comments.

[Frederic Brace:]

Thank you, Jason. In closing, our performance in the second quarter was very solid and right where we wanted it to be. As we move forward, we will continue to focus on capital cost discipline and operating cost optimization, increased returns as we continue to exploit our premier Miss Lime asset and knowledge. We have reoriented our drilling activity to focus on high grade development opportunities and we expect to be able to continue to opportunistically add acreage as well. Our outstanding technical teams know how to do all of this very well and they will continue to operate and drill consistent low cost wells day-in and day-out. They have performed exceptionally well and I want to take this opportunity to thank all of them and the entire Midstates team for their outstanding contributions to our company's success. With that, Ingris, we're now ready to take questions.

[Frederic Brace:]

Okay. Thank you, Ingris. And thank you, everybody, again, for participating in the call and we thank you for your interest in Midstates. We look forward to talking to you on our third quarter call. In the meantime, we're just going to continue to -- as I always like to say, keep hitting singles and delivering on what we're telling you we're going to do. So thank you very much and we'll talk to you next quarter.

[Operator:]

This concludes today's conference call. You may now disconnect.