Abraxas Petroleum Corporation
Q4 2017 Earnings Call Transcript

Published: 14 Mar 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Abraxas Petroleum Year-End 2017 Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I'd now like to introduce your host for today's conference Mr. Geoff King, CFO. Sir, please go ahead.

[Geoff King:]

Thank you, Liz and welcome to the Abraxas Petroleum Fourth Quarter and Year-End 2017 Earnings Conference Call. Bob Watson, President and CEO of Abraxas, joins me today. In addition, we have our Chief Accounting Officer and our VPs of operations, land and engineering 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:]

Thank you, Geoff and good morning. We had a good year with average daily production up 19% over 2016 proved reserves were up 48% and EBITDA was up 51%. So, I'd like to talk a bit about how these results have set up a very interesting 2018. First, we announced January 2018 average daily production of 11,480 barrels of oil per day versus our guided 2017 exit rate of 10,750 barrels of oil equivalent per day. As of today, we have 10 drilled uncompleted wells, seven in the Bakken and Three Forks. Three and soon to be four in the Delaware. All of these 11 wells are scheduled to be fracked during the second quarter. With no new wells coming online during Q1 production will fall from that January rate and the fall-off rate will actually accelerate in the second quarter as offset wells are shut in for frac protection. But the third quarter should have very robust production. Both rigs will continue uninterrupted even though we are ahead of schedule in the Bakken and a set of additional wells will be scheduled to frac during the fall leading to an even more robust fourth quarter. A very soft growth profile and for a pictorial of this production growth, I point you to our forward production projection graph in our most recent corporate presentation which was posted today on our website abraxaspetroleum.com. You will see a nice production growth projection, but it is not a straight line. We are keeping this curve. Our yearly average production guidance which is up 44% over 2017 and the implied exit rate shown on this graph in place for the time being at least until we see actual second quarter production. With the frac protect impact and the initial results from the 11 completions scheduled for the second quarter, at which time we will revisit our yearly guidance. I might add that this activity on the drilling and completion side will be done at a CapEx rate that generates free cash flow at the current commodity price strip. As far as actual 2018 projects go, we plan to use this free cash flow along with our bank revolver which we should see a very significant increase at the end of this month to fund the bolt on acreage acquisitions in our area in the Delaware that we continue to pursue. Two of which are very close and will put us over our near-term goal of 10,000 net acres in the Delaware. We're currently drilling the fourth lateral on our four well down-spacing tests in section 99. These four wells are scheduled to be fracked in April and we hope the results will help determine the proper spacing between wells and our future development. To-date all of our announced future locations and our book proved undeveloped reserves are related to spacing of 1,320 feet between wells from the same zone. Obviously a proper spacing is determined to be 660 feet between wells as most of our neighbors have mentioned then our numbers come close to doubling. After the four well pad finishes drilling later this month, the rig will move to some of our northern acreage to drill a 200% well on what we call our Greasewood Northwest pad. Then plans are to move the rig south to drill two wells on some of our southern acreage before perhaps returning to our Caprito block where we will have had time to study initial production on the four wells for any interference issues. I might add that both our north and south pad schedule for this summer have been offset with good wells by offset operators. To-date we have tested and booked proved reserves in four different landing zones on our Caprito block, the third Bone Spring, the Wolfcamp A1, the Wolfcamp A2 and the Wolfcamp B. Again, I direct you to our latest corporate presentation on our website, you will find actual production from these wells in each of the four zones versus a different tight curve for each zone and you will see that actual production is beating the tight curves in all four zones. We use these tight curves and booking our proved undeveloped reserves and in our future production projection. Beating these tight curves could imply future upward revisions. Up to the north while our operation the Bakken is running very smoothly, despite the coldest winter in many many years. The guys on our Ravin Rig 1 have had that rig running very efficiently. Deficiency means money as in CapEx money saved, we just completed a four well pad of 21,000-foot wells which include 10,000-foot laterals in less than three months, spud to rig release. Those four wells along with three Yellowstone north central pad wells are scheduled to be fracked when the weather warms and the roads dry out this spring. The rig is moved to our Ravin north central pad and should spud the first of four wells today. With Raven Rig 1's continued efficiency these wells could be ready to frac late summer. The previously announced three wells on our Yellowstone northeast pad have now produced over 100,000 BOE each in about 90 days. The Yellowstone north central pad offsets these wells. At the current drilling pace, it looks like we'll exceed our guided wells drilled in the Bakken, but we don't plan on shutting the rig down, we will just revisit the number of well guidance in the near future. As you can see, Abraxas is firing on all cylinders and we look for that to continue for the foreseeable future. I'll now open it up for questions.

[Operator:]

[Operator Instructions] Our first question comes from one of John Aschenbeck with Seaport Global. Your line is now open.

[John Aschenbeck:]

Hi. Good morning Bob and Geoff and thanks for taking my question.

[Bob Watson:]

Good morning, John. First question is just a follow-up on the 2018 production outlook and Bob your prepared remarks were really helpful there. Specifically, in terms of just your pace of drilling activity does seem like you are ahead of schedule. You alluded to in the Bakken, but also to me it looks like you maybe a little ahead of schedule in the Delaware. I was just curious as it stands today how far ahead of schedule you are tracking versus the underlying assumptions in your current 2018 guidance? And if you continued at this place, potentially how many additional net wells you could have in both the Bakken and the Delaware? Thanks.

[Geoff King:]

Two. Two more in the Bakken and what about the Delaware?

[Bob Watson:]

I think we're just right on schedule in the Delaware right now for what we're seeing. If you remember from our last update, we moved our assumed well count up with the increase in the CapEx budget to 12 wells for the year and the thinking there is you will get those 12 wells but obviously there's a delay in bringing those volumes on given their slower flow back. So, pretty comfortable with where we are in the Delaware, but Bakken is definitely well ahead of schedule.

[John Aschenbeck:]

Okay. Great, that helpful. And then my follow-up here is on the new type curves. And Bob you, kind of alluded to this but it does appear that you are pretty handily beating those new tight curves which were just revised upwards. I was curious if you could potentially maybe quantify by a percentage mark or by some other metric, the outperformance you are seeing there versus the new tight curves?

[Bob Watson:]

Well, you know us John we are pretty conservative. Those tight curves are generated using as an old reservoir engineer I like to have more production data than always then is available. But those are pretty near-term production data well. So, we're inclined to keep those tight curves there until we're overly convinced that an upward revision is justified. We did upwardly revise a couple of those curves as you mentioned, at the end of last year for this year's reserve report. If the upbeat continues, then I would say that an upward revision would also be justified at the end of this year. But probably not, we probably won't address that because we don't have an official reserve report and again until the end of the year. So, we probably won't address that until early next year.

[John Aschenbeck:]

Okay. Understood. That's helpful, I'll jump back in queue. Thanks for the time.

[Bob Watson:]

Thanks John.

[Operator:]

Our next question comes from the line of Joe Allman with Baird. Your line is now open.

[Joseph Allman:]

Thank you. Good morning everybody. I understand that you are drilling ahead of scheduled. In terms of your completion schedule, you had a mine when you laid out the first quarter production guidance and the full year production guidance. Is the completion schedule still on track or has there been any slippage there?

[Bob Watson:]

It's still pretty much on track. The wild card there is weather in the Bakken, we typically don't like to frac wells in bad weather conditions. So, we have one frac crew scheduled to do all seven wells. So, they'll move from one pad to the next. We're not going to frac them all at the same time obviously. So, just for conservatism sake we're saying we start the fracs on one pad in June and the other one in July, that could move up a little bit depending on weather. But no one can predict that.

[Joseph Allman:]

Okay. That's helpful. And then any update on the sale of your Eagleford assets?

[Bob Watson:]

Bids are due tomorrow. So, we have a pretty good number of people still working in the data room. So, we will find out.

[Joseph Allman:]

Okay. That's helpful. And then just lastly, your DD&A rate increase in the fourth quarter from the prior quarter. Any color on that?

[Bob Watson:]

That's just probably deal mostly with the [indiscernible] is not going to be moving up all that much given the on a per unit basis the reserves we book. So, it's most likely going to be driven by the future development cost assumption that goes in there and we had not a significant jump, but as you can see from our curves that increased just due to cost inflation on our well assumptions in both the Delaware Basin and Bakken.

[Joseph Allman:]

Great. Okay. It's very helpful. Thank you, guys.

[Bob Watson:]

Thank you, Joe.

[Operator:]

Our next question comes from the line of Ron Mills with Johnson Rice. Your line is now open.

[Ron Mills:]

Good morning, Bob. Just on the inventory commentary, I know you're using 1,320 spacing versus a lot of guys at 660. You got any idea of what that break down of new inventory could be between the four different zones or all four zones pretty ubiquitous over your relatively concentrated position?

[Bob Watson:]

Well, you could guess that. We have not booked or counted future locations in all four zones overall the acreage until we get a little bit more activity to prove them up or at least get a less or more proven in our mind. So, that number will continue to be visited as we drill and offset operators drill. I guess the most important driver that we see in the near term is what our ultimate spacing decision will be and we want to see activity when we're fracing these wells. See if there is any significant interference between wells and then certainly when we put the wells on production, we will gauge production rates over first 30, 60, and 90 days compared to the parents well just to see if there is any degradation in that. So, I would say just stay tuned on the number of locations, I would say that another impact would be our success and continuing to add bolt on. We have listed a number of non-operated locations right now. Our goal is to convert most of those into operated locations by doing these bolt on acquisitions and we see some light at the end of the tunnel towards achieving that goal. So, all in all I think this year will certainly generate more additional locations than what we're talking about in our presentation now.

[Geoff King:]

Just to add to that the one thing I've mentioned, our geologist did risk all of those from what Bob was just saying. We have five locations but not all of them are present, five zones I'm sorry but not all of those are present or it's not like we took a blanket five zones across 9,000 net acres. So, they're all fairly well risked.

[Ron Mills:]

And you still went under a little bit on the acquisition. You mentioned that you're pretty close on a couple potential deals and I'm sure there's still more smaller deals. Any characterization on the kinds of sizes or you know your recent deal was about 900 acres or so. Are they more in that size where you're starting to get into the kind of 500 to 1000-acre blocks given you have tightly [indiscernible] started to be out?

[Bob Watson:]

I would say the average in all the deals we're working on right now is probably in that 500 to 1000-acre range. Some less, don't know of any that are more. But just little by little we chip away and we're booking these acreages at a very nice cost. Which certainly helps our long-term return on equity which is our over-reaching goal.

[Ron Mills:]

And then one last one as it ties into those two questions. With one rig out there and with your current 190 plus locations and potentially 360 plus on spacing and as you continue to add acreage you know bigger picture what do you think about future development plans and ability to develop that inventory in a more timely fashion given would you be talking about 25 or 30 years of potential inventory?

[Bob Watson:]

I would say that there's a very good probability that we will add a second rig some time. It will depend on commodity prices obviously. And more importantly, there's still a lot of horse trading going on between acreages, acreage owners. We traded some of our -- for some years both of which would contribute to truing up our acreage block. And so, we really don't want to commit to another rig right now until all that horse trading is done and our footprint is more set in concrete at that time. But that time is fairly rapidly approaching, so we'll certainly be revisiting a second rig off and on for the foreseeable future.

[Ron Mills:]

Great. Let me have someone else jump in. Thank you.

[Bob Watson:]

Thanks, Ron.

[Operator:]

Our next question comes from the line of Sam Roach with Canaccord Genuity. Your line is now open.

[Sam Roach:]

Sorry. My questions have been answered. Thanks.

[Bob Watson:]

Thanks Sam.

[Operator:]

[Operator Instructions] Our next question comes from the line of Mike Ziola with Stifel. Your line is now open.

[Michael Ziola:]

Hi, good morning Bob and good morning Geoff. I wanted to ask you on the - you obviously had very good success with the short lateral wells. Any ability or desire to try some longer laterals at this point?

[Bob Watson:]

That's our ultimate goal. It's trying to put together our acreage which will allow us to drill longer laterals. We do it every day in the Bakken, we're quite adept at doing so and I have no problem doing it. Texas and specifically West Texas is a different ballgame from an acreage ownership perspective and not all leases allow you to cross the lease line which is pretty much required to drill a two-mile lateral. So, we're continuing to work on that. We've got a great land staff. They know that's one of our goals and I would say that ultimately, we would like to have a large inventory of two-mile laterals to drill. But in the meantime, everything that we're doing at least through the end of the summer is going to be well maybe not, we might have a 7,500-foot lateral well sometime in the summer. But at least the next two on Greasewood are going to be lease line limited to one-mile laterals.

[Michael Ziola:]

Okay. And when I look at your acreage. When I look at slide five, with your acreage position. It looks like you are fairly well land locked I guess by your competitors there. You mentioned the two deals that you're working on. Would those be contiguous to your existing position of would they take you outside of your current footprint.

[Bob Watson:]

No, the two deals that we're working on - there is a little bit outside the current footprint, but most of out is bigger interests in our existing gross acre footprint.

[Michael Ziola:]

Great. Okay. Last one just curious on, any sort of issues getting cruiser equipment anything there that is worrying you any kind of constraints in the play at this point?

[Bob Watson:]

Well, so far it hasn't been a huge issue. We scramble very fast and very hard for frac crews but we've got great relationships with a number of frac companies and we've been able to get crews when we really needed them. We've got a frac crew for mid-April for the four well pad that we're just drilling the fourth well right now. So, we probably couldn't use a crew any faster then we're going to get it on that one. So far, no issues. Frac crews are a little bit more available in the Bakken. Consequently they're scheduling is a little bit easier, but we have tentative frac dates throughout the year for the Delaware, so hopefully we won't have any issues.

[Michael Ziola:]

Very good. Thanks Bob.

[Bob Watson:]

Okay.

[Operator:]

[Operator Instructions] I'm not showing any further questions in queue at this time. I'd like to turn the call back to Mr. King for any closing remarks.

[Geoff King:]

Thank you, Liz. 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, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.