Amplify Energy Corp.
Q3 2017 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Midstates Petroleum Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would like to now turn the call over to your host, Mr. Jason McGlynn, you may begin.

[Jason McGlynn:]

Thank you, Andrea. Good morning, everyone, and welcome to the Midstates Petroleum third quarter 2017 earnings call. Joining me on the call today is David Sambrooks, our newly appointed President and Chief Executive Officer. David will begin with some opening remarks and a brief overview of the third quarter. I will then provide additional details on the operations and financials. And finally, David 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 in the tables in yesterday’s earnings release. With that, I’ll turn the call over to David.

[David Sambrooks:]

Thanks, Jason, and good morning, everyone. Thank you for joining us today, and thank you for your interest in Midstates. First, let me begin by expressing how excited I am to join Midstates. One of the main reasons, I am here is because I believe that Midstates has an excellent platform for value growth. Our large core position in the Mississippian Lime generates significant cash flow, we have very low net debt and we are in the process of potentially further improving our financial position through executing on strategic alternatives regarding our Anadarko assets. My primary objective is to develop and to articulate our strategy and to execute on that strategy to drive value. Simply stated, our strategy will be focusing activity, reducing costs, generating substantial free cash flow and improving liquidity, all to realize near-term value creation and maximum optionality. Our free cash flow and substantial liquidity are very precious resources, and we intend to be very disciplined and focused with any investments. I’ve only been in place as CEO for a little over a week, but I’m taking a deep dive with our outstanding Midstates team, reviewing our assets and opportunities in detail with a fresh set of eyes. Coming from a technical and operational background, this is a lot of fun for me. It’s early days, but I’m already confident that we will find cost saving opportunities, ways to improve current operations and opportunities for improving capital returns. It’s only the beginning of the next chapter of the Midstates story, but we are urgently moving ahead with concrete actions to demonstrate the full value of our company and the exciting options to drive long-term value creation. So with that introduction, I’d like to move on to the third quarter results. We are on track in the third quarter as we continue to deliver results within or better than expectations. Our average production was approximately 21,500 BOE per day. We generated approximately $30 million of adjusted EBITDA, and all of our third quarter and year-to-date expense items are within or better than the yearly guidance ranges. Additionally, we continue to build our hedge book during the third quarter. Our hedging strategy is focused on reducing downside commodity price risk; protect operating cash flows while still allowing for a meaningful participation in any upside price movement. Currently, we have over 50% of our oil hedged through the second quarter of 2018 and a nice base layer of WTI hedges stretching throughout 2019 all at $50 per barrel or higher. On the natural gas side, we have over 50% of production hedged at a floor of $3.25 per MMBtu through the first quarter of 2018 and approximately 25% of production hedged at a floor of $3 per MMBtu through quarter one of 2019. On the strategic front, we sold our noncore assets in Lincoln County, Oklahoma, and we also hired SunTrust to assist us in exploring strategic alternatives for our Anadarko Basin and Northwest STACK assets. The potential sale of the Anadarko assets at an attractive price, coupled with the completed sale of the Lincoln County assets, would allow us to fully focus on optimizing our Miss Lime opportunities. In addition, the potential increase in liquidity will provide even more optionality to enhance shareholder value. In summary, I’m pleased with the results in the third quarter. We are right on track and we have a strong platform to work from. We’ve already begun executing on our strategy and will be demonstrating tangible progress on the strategy in short order. With that, I’ll turn the call over to Jason McGlynn.

[Jason McGlynn:]

Thanks, David. I’ll begin with a discussion of the company’s operational highlights and follow up with earnings and costs from the third quarter. I’ll then provide an update on our capital investments and finish up with discussion on our balance sheet and our updated 2017 guidance. As David mentioned, we achieved average daily production of 21,358 BOE per day during the third quarter of 2017, down from 22,490 BOE per day in the second quarter. Normalizing for the sale of the Lincoln County assets, our production was lower by approximately 3% quarter-over-quarter. The company’s Miss Lime properties contributed approximately 82% of the third quarter volumes or 17,606 BOE per day, with the balance coming from our Anadarko Basin properties. The production mix during the third quarter was 29% oil, 24% NGLs and 47% natural gas, roughly in line with the previous quarter. Third quarter 2017 net income totaled $3.7 million or $0.14 per share. And we generated approximately $30.2 million in adjusted EBITDA during the quarter, up from $29.1 million in the second quarter. The increase from second quarter of 2017 was primarily due to the lower lease operating and workover expenses. I’d also like to highlight our oil differential. We signed a new oil gathering contract in June for our Miss Lime assets. As a result, our oil differential versus WTI has trended down to approximately $0.60 per barrel for the Miss and approximately $1 per barrel for the total company. Turning to expense items. Third quarter adjusted cash operating expenses, which include LOE production taxes and G&A but exclude restructuring and advisory costs, totaled $26 million or $13.22 per BOE, up slightly on a per BOE basis from $26.5 million or $12.95 per BOE in the second quarter of 2017, primarily due to the increase in severance taxes, which we’ll get to in a minute. Our lease operating and workover expenses for the third quarter totaled $15.7 million or $7.97 per BOE, down from $16.6 million or $8.09 per BOE in the prior quarter. The decrease quarter-over-quarter was due to reduced equipment rentals and less chemical spend. Third quarter gathering and transportation expenses totaled $3.7 million, or $1.88 per BOE, compared to $3.6 million, or $1.78 per BOE, in the previous quarter. Severance and other taxes were up this quarter to $2.4 million, or $1.20 per BOE, compared to $1.7 million, or $0.83 per BOE, in the second quarter. In May 2017, new legislation was signed into law in Oklahoma that increase the incentive tax rate from 1% to 4% on wells that were commenced production between July 1, 2011 and July 1, 2015. After the 48-month incentive period ends, the tax rate on such wells increases to 7%. This new 4% tax rate on these wells caused our average production tax rate to increase during the 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 non-cash compensation and certain non-recurring items, the third quarter came in at $5.2 million or $2.64 per BOE compared to $5.5 million or $2.69 per BOE in the second quarter. Operational capital expenditures for the third quarter were approximately $40.1 million, nearly all the capital expenditures were invested in the Miss Lime, where we spud 10 development wells and brought nine wells online. During the quarter, we continued exploring options to maximize well performance in the Miss Lime and initiated a pilot program to increase the number of frac stages from approximately 17 stages to as many as 25 stages on 10 of our wells. The average well cost during this pilot program was approximately $3.4 million per well, increasing the year-to-date average cost per well from $2.8 million in the first half of 2017 to $3.1 million for the first three quarters of the year. Until we complete the full cost benefit evaluation of the results from this pilot program, we have returned to our normal operating standard of approximately 17 stages per completion. On to the balance sheet. At the end of the third quarter, we had approximately $70.6 million in cash and net debt of approximately $51.6 million. Liquidity at the end of the third quarter stood at approximately $116.5 million, consisting of $76.5 million in cash and $40 million of availability on our RBL facility. Additionally, on November 1, we announced our borrowing base had been reaffirmed at $170 million based solely on our Miss Lime assets. This further solidifies the value of our Miss Lime assets and will allow for the sale of the Anadarko Basin assets without triggering an automatic redetermination of the borrowing base. Finally, I’ll finish up with our updated 2017 guidance. We reaffirm our operational CapEx guidance to between $130 million and $140 million for the full year 2017 as well as tightened our expected production range to between 22,000 and 23,000 BOE per day. Consequently, we have narrowed the ranges for the following expense items

[David Sambrooks:]

Thanks, Jason. As I mentioned, in order to get myself fully acquainted with our properties and our team, we have kicked off an extensive internal review of our assets and operations. During this review, we are focusing on high grading our Miss Lime development opportunities, exploring ways of optimizing our production base and looking for avenues to reduce costs to further improve our liquidity and expand our margins. This will be a constant focus of the organization going forward and will be ingrained in our company culture. This detailed grassroots review will serve as a good base for determining our go-forward development activity, especially as we work on our annual budget for 2018. In closing, I could not be more excited about the advantages, opportunities and optionality we have at Midstates to create significant value going forward. We are urgently moving forward with our strategy of focusing activity, reducing costs, generating substantial free cash flow and improving liquidity, to realize near-term value creation and maximum optionality. With that, Jason, we’re now ready to take questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Amer Tiwana with Cowen and Company.

[Amer Tiwana:]

Good morning. Congratulations, David.

[David Sambrooks:]

Thank you very much. I appreciate it.

[Amer Tiwana:]

I have a couple of big-picture questions. The first one, as you look at this portfolio, do you think strategically – how do you see the portfolio strategically? Do you think we can go back into a growth phase in the Miss Lime region? Or are there still opportunities to buy assets in the region? That’s my first question.

[David Sambrooks:]

Right, right. Well, I mean, I think, really kind of all of the above are definitely options that we have. I think the steps that we’re taking to focus on the Miss Lime and do the deep dive that we’ve talked about, really everything is still kind of on the table. We’re really looking at the basics all the way through what the opportunities are. So it’s really early days. I could say that we’re kind of attacking first things first, looking at the next wells we’re putting in front of the rigs and making sure that [Audio Dip] possible returns that we can generate. And from there, we’ll get a little bit deeper. But I think, everything is still kind of on the table right now. It’s an exciting asset. We certainly have all the dry powder we need to be – to make it into a growth story if we feel like that’s the direction that is best [Audio Dip]. And it’s kind of early days, but we’re kind of looking at everything right now.

[Amer Tiwana:]

Got it. And as far as your new completion techniques are concerned, when can we expect some results or when can you share some new data with us?

[David Sambrooks:]

Right. Yes. I’m looking at that right now. Typically which – what Midstates has done is really the way you want to attack any change on completion, you do a certain number of the new completions or the changes, and then you stand back and evaluate for that – for a period of time. You can probably appreciate it’s more than just kind of what the initial rate is. It’s how does it affect the decline, so that takes a little bit of time. So the team, step back to the old completion design so that we can take a look at what the [Audio Dip] have done over a little bit longer period of time. Just the thing I would also add is that’s subject again for our deep dive, and we’re taking a fresh look at everything we’ve done in the past and what we need to think – what we need to do going forward on completions. And I think that the – we’ll probably see what the next steps are going to be on that as we start to complete the inventory of wells that we’ve got.

[Amer Tiwana:]

Understood. Thank you very much.

[David Sambrooks:]

Thank you, I appreciate it, Amer.

[Operator:]

And your next question comes from the line of David Beard with Coker Palmer.

[David Beard:]

Good morning, gentlemen. I know we’ve covered some of this. But initially, how are you thinking about allocating capital between internal growth and acquisitions and what criteria you might use?

[David Sambrooks:]

Well, you’re going to hear me say this a few times. I only get one chance to say I just got here, but I just got here. And we’re – I think as we’ve kind of laid out on the near-term strategy, we’re really focused on near-term steps to increase our liquidity. I think we’re well underway on several of those. And then the other kind of tenet of that near-term strategy is to focus our activity, make sure we’re getting the maximum return for it. So we’re going to step through those pieces and then we’ll see in terms of allocation. The tagline on the strategy is for maximum optionality and we’ll have options in front of us here in the very short future.

[David Beard:]

Okay. No, that makes sense. And again, a more a difficult question, but how do you think of acquisitions in basin or out of basin or, said another way, the risks or opportunities going outside the basin on an acquisition?

[David Sambrooks:]

Yes. I mean, I think we’re going to definitely study over time all the potential paths that we can take. I think for me, the first thing before we start to think about those paths is to really optimize what we’ve got and that’s really what I’m focused on near-term. I think there’s – I think [Audio Dip] has done a great job, I think, with the potential strategic alternatives on the Anadarko that allow us to even focus more in on the Miss Lime, have great liquidity. And we’re going to first see what we can do with the asset and how we can even optimize it more. And then I think in the medium, longer term, we’ll have more robust discussions about what’s next, whether it’s more on the asset, more in basin or something else.

[David Beard:]

All right. I appreciate it. I’ll look forward to seeing the strategy unfold.

[David Sambrooks:]

Thanks, David. I appreciate it.

[Operator:]

And thank you, ladies and gentlemen. I would like to now turn the call over to management for closing remarks.

[David Sambrooks:]

Okay. Well, thanks, everybody. Thanks, Jason. Thanks, everybody, for calling in and your interest at Midstates. Again, we’re just getting started, but it’s exciting times for us. And we look forward to communicating more to you very soon. So thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, this does conclude today’s conference. You may now disconnect.