Abraxas Petroleum Corporation
Q3 2017 Earnings Call Transcript

Published: 9 Nov 2017

[Operator:]

Good day, ladies and gentlemen, thank you for your patience, you have joined the Q3 2017 Abraxas Petroleum Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. It will now like to turn the call over to your host, Chief Financial Officer, Geoff King. Sir, you may begin.

[Geoff King:]

Thank you, and welcome to the Abraxas Petroleum Third Quarter 2017 Earnings Conference Call. Bob Watson, President and CEO of Abraxas, joins me today. In addition, we have various Vice Presidents available to answer any questions that you may have after Bob's overview. As a reminder, today's call is being taped, and a webcast replay will be available immediately after the conclusion of the call. I'd like to remind everyone that any statements made during this call that are not statements of historical facts are considered forward-looking statements, and actual results could vary materially from those contained in these statements. Factors that could cause our actual results to vary are described in our filings with the Securities and Exchange Commission. I would encourage everyone to review the risk factors contained in these filings and in our press releases. I will now turn the call over to Bob.

[Bob Watson:]

Thanks, Geoff and good morning. Our focus at Abraxas has always been and will continue to be financial returns as evidenced by our EBITDA beaten in the third quarter. We hope these will continue going forward and certainly is our focus. Growth is very important to us and we will continue to grow production and very profitably I might add in the future. But it will never be as important as return on shareholders' equity. It's our opinion that if we maximize rate of return on equity then we're doing well on all other metrics as well. We'd also believe in transparency. We talk about field issues, field hiccups while others remain silent and believe me, they happen to everybody. We also expressed our opinions about the severity of a hiccup. I just returned last night from a very well attended conference where I had numerous meetings and I was somewhat frustrated when people really didn't want to discuss our EBITDA beat but instead they wanted to know about our relatively insignificant mechanical issue during one of our Delaware Fracs. So to clear the air and still the relative insignificance, I'll explain what happened. While fracking Stage 10 on our first Wolfcamp B well, the Caprito 83-404, a joint of our seven-inch intermediate casing, which is expect to have a burst pressure in excess of GBP 11,200 and that's with the safety factor. Failed at about GBP 8,000. What caused it to fail? Who knows? Defective pipe, maybe it was damaged during drilling. No one will ever know. But as a consequence, we shut down the frac on that well but we continued to frac the second well on the pad and when that frac was finished, we released the frac's spread instead of paying expenses standby time while we remediated the failed casing. The remediation has been done, the casing tested and the well is now ready to resume the frac but due to frac crew availability, it looks like actual production from this well will be postponed about two months. Not a big deal in the grand scheme of things. It's interesting to note that we recovered a substantial amount of oil and encountered much higher pressures than we anticipated during the remediation work. So we're very excited to get our first Wolfcamp B well finished and on production. But this issue does not impact our existing guidance in any way. Our drilling rig in North Dakota continues to set execution records while drilling our 3-well Yellowstone Northeast central pad due to a permitting issue with the 4s service and know the present administration has not fixed issues there. The remaining two Yellowstone pads are delayed till the future. So our rig will be moving to a 4-Well Lilly Bridge Southeast pad. Hopefully, our plan are these seven wells will be ready to frac when the weather improves in the spring. And speaking of weather, winter weather has arrived early in North Dakota and caught us, while we were fracking our 3-Well Yellowstone Northeast pad, which started this past weekend. Despite the weather these wells should start flowback in December. Down south, where weather is not so much a big problem, we are drilling ahead on a 4-well downspacing pad on our Caprito 99 lease. These laterals are going to be 660 feet apart in the same zone as opposed to 1,320 feet apart from our previous. So success on this spacing actually doubles our number of future locations. The rig move from a two well pad in our Caprito 82 lease, 1 Bone, third Bone Springs test and one Wolfcamp A1 test and fracs on these wells are scheduled to start next week, with an anticipated flowback start in December. Further down south in the Eagle Ford, our shut eye Number 1 was successfully fraced with 27 stages and flowback started last week. It's way too early to tell anything about the well but we are somewhat encouraged by the fact that it started making oil in less than 48 hours of flowing back frac water. With all this near them activity, plus four non-Operated wells in North Dakota starting flowback now, we are very confident with our year end 2017 exit rate guidance of 10,750 Boes per day. And likewise the confidence extends to our previously announced three-year production guidance. And before I ask for questions, I'd like to leave you with one additional note, which we feel is very unique in the E&P space and especially small cap E&P. The capital program associated with our three year guidance and a $50 WTI generates free cash flow starting in 2018. And to the extent oil prices are above $50 and our wells continue to outperform their tight curves as they are all the better. This is a very unique and compelling story. With that, I'll ask for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Will Green with Stephens. Your line in open.

[Will Green:]

I appreciate all the color you provided Bob on returns and being returns focused and everything you guys are setting out to accomplish over the next three years. I wanted to ask, being that you guys are now expecting the 50 and above, you guys can be free cash flow positive. Is free cash flow positive the ultimate goal in 2018? Will there be a scenario where you might opt to spend additional money, maybe drilling other well or two, however that may look to adequately use the balance sheet more for growth? Or do you feel at this juncture being a certain level of free cash flow positive is the ultimate goal?

[Bob Watson:]

Well it is nice to be able to say we can be cash flow positive because it does give us options to use that excess cash flow. We can pay down debt, we could accelerate development, we could acquire additional acreage and I would say at this point, we don't know how we're going to use it. But I think the important thing is in a $50 environment, we will be free cash flow positive on the capital program that we have presented. That's certainly not to say that that's, what's going to be actually occurring. Things change, conditions change but at least we'll have the flexibility that maybe some others don't have.

[Will Green:]

Great. It's certainly a good problem to have. You know I wanted to ask on you mentioned additional leasing in M&A, have you seen any change in kind of the landscape there, leasing M&A has the commodity moved? I assume that you guys still have an appetite to tack on additional leases in and around the Delaware position? Has your appetite changed at all because of the move in crude has – have seller's appetite to sell changed at all because of the crude? Any kind of color on that landscape would be great.

[Bob Watson:]

I think things changed before we had this move in crude prices. Certainly, our appetite is still very high to continue doing bolt-ons. We have a number of negotiations underway as we speak and I would certainly hope and expect that at least some of them will be successful. We still have that target of 10,000 net acres. We're getting close to the end of the year. Might make it, might not, don't know. But at least we have the deals and the works that could get us to that mark. Deals are getting more expensive, no question about it but I think it's not because of the movement in crude price, I think it's the success that ourselves and our offset operators have had in the area have kind of opened it up to be someplace of interest to more people. And that means that prices are going up. We're aware of a deal that is very close to us. Maybe not as geologically attractive as our area. That sold for a considerably amount of more money than what we could justify paying. So certainly, is a very nice price point for us to talk about when we can confirm not only the price but the buyer? So I think it's our – we've kind of hurt ourselves a bit because of our success. And I guess that's a good problem to have as well. But our appetite for building on acreage is still very keen and very high.

[Will Green:]

Great, thanks so much for all the color and congrats on what’s going to be – what looks like its going to be a great year for Abraxas.

[Bob Watson:]

Thanks Will.

[Operator:]

Thank you. Our next question comes from Ron Mills with Johnson Rice. Your line is open.

[Ron Mills:]

Good morning, Bob.

[Bob Watson:]

Good morning, Ron.

[Ron Mills:]

Just maybe a follow up on that last question. You've provided a newer map in your presentations showing some offset operators whether its acquisitions, opportunities, which I know you can't speak to but how about acreage swaps and conversations there? And kind of the process because those seem to take longer than I may have thought six, 12 months ago.

[Bob Watson:]

Well, you're right on that aspect but yes, we have a number of acreage swap negotiations going on and I would say that they are actually easier to do than outright purchases because there's always consideration of what's fair value. But in an acreage swap, we've acquired some extraneous leases in couple of the acquisitions that we've done this year. And it happens to be in the middle of other operators’ blocks. That also have acreage nearer or joining or on top of us. So those are pretty easy conversations to have on a net acre per net acre basis and I think there is a very high probability that we'll be successful in doing that, doesn't necessarily increase our net acre position but it's certainly improves what we retain because it will be more consolidated area around us.

[Ron Mills:]

Okay. Great. And then in the Permian on the spacing, I know the 99 CAD is going to be your first downspacing. Just wanted to confirm the 660 foot spacing that you're testing there. That seems to be where most of industry has already moved from a spacing standpoint. So am I fair in assuming that it seems to be pretty low hanging fruit in terms of the 660 foot spacing? And that could lead to the doubling of your inventory?

[Bob Watson:]

Yes. I would say its pretty low hanging fruit and I would say we have a pretty high confidence level that that's where we're going to eventually settle out. But until we do it ourselves and actually have the data, we didn't want to go out and say that 660 is what our ultimate spacing is going to be. So this test is important for us. But if it is successful and we don't have communication or significant communication between wellbores then we'll be pretty vocal about a significant increase in our number of future locations.

[Ron Mills:]

Okay. And then two real other quick ones. The – from a formation standpoint, the Wolfcamp B, I know you had the mechanical issue but pretty good data on what you have been able to see to date in Bone Spring's test. Has there been much offset activity in those zones? Are you confirming what others have done? Or will this help open up that zone for others in your area?

[Bob Watson:]

I guess that depends on what your definition of offset activity is. There is some nearby and third Bone Spring success. Maybe not directly offsetting this but close enough in a shale play to say it's offsetting. The Wolfcamp B, we think has been proven up by an offset operator. We can't say anything about it because we have a CA with them but that's not a surprise to us that we encountered good shows and high pressures. So I think our area is being derisked on a multiple level not only by us but by others.

[Ron Mills:]

Okay. Great. Did I read in the – whether its presentation or the press release, is the thought process of potentially pursuing monetization of the Eagle Ford or Austin Chalk where I guess South Texas assets. Is that new?

[Bob Watson:]

No. I guess it's something that we've always looked at. People would like to see us core up even better than we are. The Eagle Ford is not been as economically successful as we would like for it to be and maybe if someone had more time to spend on it, they can make it that way. We're hopeful that with the frac of this shuteye well, with a modern frac and with modern steering, we will have improved the economics, time will tell obviously. But it's an attractive acreage position and maybe it – might be more attractive as to somebody else than to us as we are extremely focused on the Delaware and our cash count, the Bakken kind of runs itself. So most of our technical focus is on the Delaware and we just haven't been spending much time in the Eagle Ford.

[Ron Mills:]

Okay, great. Thank you.

[Operator:]

Thank you. [Operator Instructions] Our next question comes from the line of John Aschenbeck of Seaport Global. Your line is open.

[John Aschenbeck:]

Good morning, thanks for taking my question.

[Bob Watson:]

Hi, John.

[John Aschenbeck:]

A follow-up on leasing in the Delaware. Just really a point of clarification really. I apologize if I missed it but looking at your November slides it looks like you have a little over 8,100 acres there. You compare that to previous slides, I know there is a little over 8,300 acres. But also seems like the 480 acres that were potentially under dispute. I don't see that in the November slides. So looks like there may be some moving parts there and I was hoping you could just kind of walk us through that?

[Bob Watson:]

Well, we really don't know the exact status on the 480 acres and so until we get active down in that area and spend some time trying to figure out what, who owns what. We just decided to delete it from our acreage count just to be safe. But that does say that we have been successful in picking up more net acres and I would say almost every week, we're successful in signing a new lease from mineral owners. Our area does have a number of very bifurcated mineral ownerships. And when the landgrab started, people would run into that and they kind of bypass it because they didn't want to take the time to run all these people down. Well, it's important for us and so our land department – we've leased it up a bit and we're very much into trying to lease small mineral owners on tracks that could lead to us having a bigger inventory of operated units. So that's a continuing process for us and little by little, we're going to get to that goal.

[John Aschenbeck:]

Okay, got it. That’s really helpful. I appreciate that. And then my second one will be curious if you had any tests of additional zones beyond the fourth that are currently included in your Delaware inventory? Or if your interest in testing those has increased recently, just given what you've seen with offset operators, it looks like one in particular, one of your peers nearby you had a fairly compelling Wolfcamp C test. So it's just wondering – wanted to get your thoughts on that?

[Bob Watson:]

Well, you mentioned the Jagged Peak release which we watched and we know of the wells. They did have a good Wolfcamp C. We started talking about the Wolfcamp C sometimes ago after doing a thorough geologic evaluation of our area. And we do think it has some prospectivity. We don't have any current plans to do it, we also noted that Jagged Peak announced a Woodford completion of note and we certainly have the Woodford under our leases. So we'll add that to our list of targets to investigate. All that leads to additional more future locations but for a company our size that currently has a one rig program, maybe we have 300-plus locations right now at 12 wells a year on one rig, that's 25 years of locations. I – for somebody that's focused on financial returns, I can't see how adding more locations in the future really helps financial returns, granted it might help on NAV calculation of some sort. So we'll continue to evaluate but those are not front burner projects for us right now. We're really focusing on maximizing the four zones that hopefully we'll be very comfortable with here by the end of the year.

[John Aschenbeck:]

Okay, understood. Appreciate the time. Thanks.

[Bob Watson:]

Thanks, John.

[Operator:]

Thank you. Our next question comes from Joel Musante of Euro Pacific Capital. Your line is open.

[Joel Musante:]

Hey, Bob. Hey, Geoff.

[Bob Watson:]

Good morning, Joel.

[Joel Musante:]

Just had a question on the production guidance. The range – what's driving the ends of the range?

[Bob Watson:]

I’ll let Geoff answer that, that's his question.

[Geoff King:]

Yes, Joel. Obviously we gave a wide range. Some of it's to get towards the high end would be we get everything on, on time. Everything hits our type curve. We don't have any pipeline delays, pipeline issues whether or anything else that can go wrong. That would be the high-end. The low-end would be, we do get hit with some delays. Things get differed and I don't think really the type curves at this point are actually much of a risk, given what we've built in and how we've risked it. So I hope that gives you some idea of why we put that range out there and how we came up with it.

[Joel Musante:]

Okay. So it seems like your Bakken wells were probably beyond and towards in the summer or towards the latter end of the year?

[Geoff King:]

Yes. [indiscernible]

[Joel Musante:]

Okay. So, I guess, what should we expect for kind of well completions through the year from the Permian?

[Geoff King:]

Sure. We have four well completions that will probably start in the March, April time frame. That will be the down spacing test that we have ongoing the Caprito 99 pad. After that, we'll move to units or one of two units. One is 100% working interest unit. The other one is a 50% working interest unit. So those will over overlap one way or another. Then we'll probably head to someplace like 355, 58 and those will be right around at 50% working interest wells. And that's really the program for the year. We'll probably head back to some of our newer sections that we've been acquiring as well to get those held and see activity there.

[Bob Watson:]

We really don't want to give those four well downspacing pad some time, just to give us a good handle on whether there is any effective communication between the wells or not. So we'll probably move off of the Caprito area and let those well produce for a while. While we're developing some of our other acreage, up and down the trend.

[Joel Musante:]

Okay. So just kind of visualizing this. It seems like you would be sort of flattish in production throughout the year or on the low-end or it would – kind of buildup from the beginning towards the end of the year? Is that –

[Bob Watson:]

Those Bakken completions are such high impact wells and they all come on in that summer timeframe. So you're probably having wells come on in June, July timeframe. That first quarter, second quarter for us will always be lower production and then it will be biased towards the second half because you're bringing on Bakken wells. So just due to the seasonality of our completions up there.

[Joel Musante:]

Okay, great. That’s helpful. I appreciate it. Thanks.

[Bob Watson:]

Thanks, Joel.

[Operator:]

Thank you. Our next question comes from the line of Josh Young of Young Capital. Your line is open.

[Josh Young:]

Great, thanks. Good morning, Bob.

[Bob Watson:]

Good morning, Josh.

[Josh Young:]

So I wanted to ask, I guess it sounds like you guys might be moving away from the Eagle Ford. Is that a reflection of most recent well that you guys drilled and completed recently?

[Bob Watson:]

Absolutely not. We just put it online last week. We have no idea what's it going do. We just felt like the Eagle Ford was worth it, some of the incremental investment to hopefully give us an idea of what that Eagle Ford is worth. We've got a lot of undeveloped locations there and we would love to say that they're worth a whole bunch of money. None of the analysts out there are giving us any credit for it. So we felt like it was a good risk waited return for us to go on and do that. That being said, we recognized as I think most of the people do that Eagle Ford is one of the tougher shale plays to make work for a small cap company. The decline rate is just so steep, you have to have a lot of capital and a big balance sheet to have enough rigs running just to keep even. So we just decided that we're achieving but economics in the Bakken and the Delaware, so that's where we ought to focus.

[Josh Young:]

Okay, great. That's helpful. And have there been other modern well results in the area that Abraxas is active in Eagle Ford that might be helpful to gear off of?

[Bob Watson:]

There have been a few wells, we do not have results from them yet. And I don't know that they're totally relevant to our play because of the geology involved. It's been a fairly quiet area as far and as far as Eagle Ford and Austin Chalk development go. Other than what we're doing. But that doesn't mean that it's not worth some pretty good money and we're hopeful this new well will allow us to say that.

[Josh Young:]

Got it, great. Thank you very much.

[Bob Watson:]

Thank you, Josh.

[Operator:]

Thank you. And now I’d like to turn the call over to Mr. King for any closing remarks. Sir?

[Geoff King:]

Thank you, Lateef. We appreciate your participation today in Abraxas' earnings conference call. As I mentioned at the start of the call, a webcast replay will be available on our website and a transcript will be posted in approximately 24 hours. Thank you and have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day.