Abraxas Petroleum Corporation
Q2 2015 Earnings Call Transcript

Published: 6 Aug 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Q2 2015 Abraxas Petroleum Corporation Earnings Conference Call. My name is Whitney, and I'll be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session [Operator Instructions]. As a reminder, this call is being recorded for replay purposes. I would now like to turn the conference over to your host for today Mr. Geoff King, VP and CFO. Please proceed.

[Geoff King:]

Thank you, Whitney and welcome to the Abraxas Petroleum second quarter 2015 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 Land, Operations, Engineering and Exploration available to answer any questions that you may have after Bob's overview. As a reminder, today's call is being taped and the 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 fact 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'd like to encourage everyone to review the risk factors contained in these filings and in our press releases. I'll now turn the call over to Bob.

[Bob Watson:]

Thanks Geoff and good morning. Several months ago we announced production curtailment due to simultaneous frac operations on offset wells and therefore second quarter production was down a bit. The good news is all of the offset fracs were successful and the new wells are on production and the temporarily shut-in wells are back on at very limited expense. So our gas that being a little bit conservative on setting in more wells probably paid off. Production in July is actually averaged about 6,700 barrels a day. Second quarter we were still having gas capture issues in North Dakota and in West Texas, the flow back on our four wells Jore West pad, the wells were actually restricted to 18 to 20, 64 choke versus our normal 26 to 30, that’s the publish 30 day rates were little lower, but rest assured wells are every bit strong as the offset wells and what our historical wells have done in the North Fork area. Using flexible production rates on a daily basis we are seeing on top of gas capture issues and hopefully that will be behind us now and especially toward the end of the year when our third-party purchase ONEOK has additional profits and capacity online. Unfortunately due to regional pricing issues for natural gas and liquids capturing the gas and selling it doesn’t have much impact on our bottom-line, but by capturing the gas we’re able to sell the oil which does have a significant impact. We’re still struggling with high line pressure in our legacy producing area in the Delaware Basin of West Texas doesn’t appear to be any near-term solution, but longer-term there is a lot of midstream activity going on in the area. Going into forward into Q3, we expect to continue to operate our company own rig in the Bakken. Our last four well pad at Jore West are all-in cost to drill complete and equip these four wells average less than $7 million which is still generating acceptable economics at current prices. The rig is currently on the second intermediate hole on a six well pad. But rest assured if conditions deteriorate even more, we are prepared to shut that rig down at any case in point on this six well pad. Due to some significant decreases in cost for fracing in the Bakken which are now greater than 50% less than what they were last year, we don’t think they are going to go much lower and actually increased frac through efficiency, I think we attribute that to -- they now have time to maintain their equipment. On the lay-off that they sustained have mainly impacted lesser experienced hands. Therefore the rig crews that do show up are more experienced and we don’t think that they will get more efficient going forward. So we’ve made the decision to accelerate the completion on our three well rigs in northwest pad to this month from either later this year or actually next year. The rates that we expect from these three wells should give us a very good cushion to meet or beat our yearly guidance of 6,500 to 7,000 barrels a day equivalent average for the year, which on the high side represents year-over-year growth of 23% and on the low side 14% while spending cash flow or a little more. For the second half we expect generate free cash flow as we’re only planning these three completions continued operation of our Bakken rig and one relatively inexpensive vertical well in Montana. Our business plan is working very well. We have our premiere asset with four to six years of inventory in front of us and in fact that might have gotten better recently as we have a small working interest and two, new wells operated by continental resources directly offsetting us. That are testing the second bench in the Three Forks, and one of these wells as [IPD] for about 1,200 barrels of equivalence per day, the other is not yet on production but certainly we are going to be watching these wells very closely to see the chances of the, second bench of the three forks being a target for our developments on the offsetting the issues, this could result another couple of years of inventory for us if it is a successful target. Our wells in the Bakken are very good and they are very predictable acceptable rates of return at current commodity prices and this one asset alone will allow us to keep production flat or actually grow a little year-over-year for the next several years by spending cash flow or less and to rather enviable position in the small and mid cap E&P land which further puts us in a position to grow externally during this downturn that was the bottling provisions we will not do a deal that jeopardizes our balance sheet and we will not do a deal unless it's accretive to our shareholders. We've been very busy looking look at a lot of deals but no results so far, our focus in the second half of this year is truly cost reduction while we are looking for these external growth opportunities. We don’t like to position our industry again but were not fair to love it either. Considering the conditions that we like where we stand today and to put our money where our mouth is, don’t be surprised to see some form fours and the very near future. I'll now ask for questions.

[Operator:]

[Operator Instructions] Your first question comes from the line of Neal Dingmann with Suntrust. Please proceed.

[Bob Watson:]

I guess we need the next question.

[Operator:]

Our next question comes from the line of Will Green with Stephens. Please proceed.

[Will Green:]

You mentioned 50% reduction in frac pricing and then you actually are starting to see maybe a benefit of the cruise actually being high rate or something of that nature. Can you talk about -- can you quantify any kind of betterment of those crews in terms of performance you are seeing and then what are completion costs currently running at on a well up there?

[Bob Watson:]

Well the last four well at Jore pad which we frac in May, our first stage cost was averaged somewhere between 40,000 and 50,000 bucks last year at this time it was between the 100,000 and 120,000 for stage. We actually increased our sand loading this time, so were getting better than 50% reduction in cost for higher intensity frac. And I guess one thing if you can attribute those lower cost to is very little downtime on the frac equipment, and when you are pumping for three straight weeks 130, 140 stages total downtime can get very costly. So a minimizing downtime I attribute that to the time of these companies now have to maintain their equipment and their yards and the fact that the crews that are out there all know what they are doing there is very few green hands, and that also attributes to a very smooth operations. So all in all I don’t think costs are going to come down much more and I don’t think they are going to get much more efficient from now the time to go forward and frac the three wells that we have in inventory.

[Will Green:]

And then you kind of mentioned that if crude prices continue to fall maybe you would lay that rig down. Have you guys looked at maybe drilling a backlog of wells and then potentially waiting on those to complete or is the cash on hand to higher priority right now and then if you guys did look to drop that rig what would be kind of the pressure point given where prices are for completion right now, whatever it cost to kind of keep that rig running. What will be the pressure point on crude and as building a backlog wells something you guys would potentially look at also.

[Bob Watson:]

Well our current plan is now to build the backlog, we changed our methodology couple of years ago and decided that we weren't going to frac any wells in the winter in North Dakota just because of the added costs and the added risks of doing it. So this current six well pad if we continue to rig working will finish these six wells and then finish another four wells before we frac anymore which will give us a ten well job. And the next four could be a joining these six so we would then have 10 wells fracking at onetime, or there might be in another operated units we haven’t made that decision yet. But if we keep the rig going next spring time we'll be looking at our early summer be fracking it roughly 10 wells at one-time assuming economic conditions warned it. The pressure point we would be looking at is probably a $40 WTI, we would have to really scratch our heads and even though we'd still be making a little bit of money with these wells gets down to burning us through some very good inventories and a low price environment. So we’re watching it very closely and we’re fully prepared to shut the rig down at any point on this six well pad that we've just set casing intermediate casing.

[Will Green:]

And so that would be -- just so I am clear that would be a $40 WTI number assuming all wells equal $40 number that you guys would continue drilling not necessarily completion. So if we were saying the 30 you guys would consider shutting down that rig as well?

[Bob Watson:]

Yes, I would say the $40 would be the strip price, that’s the way we have to look at the flow back production, not going to be just the near-term price, it would be the strip.

[Operator:]

Your next question comes from the line of Steve Berman with Canaccord. Please proceed.

[Steve Berman:]

Bob, what opportunities are you seeing to add to your position in the Williston on the smaller scale, I think you talked not doing a bigger deal unless it meets certain criteria, but what about smaller opportunities out there to add income it?

[Bob Watson:]

We’re still looking on the small bolt-ons similar to what we were very successful with earlier this year and our Yellowstone units actually looking to acquire some additional interest in that unit which would give us a bigger working interest. But there is some other DSUs up there that we’re targeting, working on small deals that collectively add together and give us the greater than 50% operating interest and that will be an ongoing project for us for the foreseeable future.

[Steve Berman:]

Now moving down to the Eagle Ford couple of questions here, what kind of oil price would you need to bring the rig back to…

[Bob Watson:]

I think we'd be looking at a $65 strip before we get comfortable. We have six more wells that we would need to drill by the end of 2017 the whole all of our acreage. So we’re not in any real big hurry, we’re taking the time to high grade what we’re doing, high grade our geology and geophysics to try to answer some questions that we still have about the variability of results in our Jourdanton area. So don’t expect anything in the near future on that unless for someone for seeing reason strip gets up above north 65 bucks which we don't think is going to happen anytime soon.

[Steve Berman:]

And what about adding to your position there, I know you're not drilling there but there is some distressed selling probably going to be happening there in the foreseeable future if it hasn’t already started, so any thoughts about adding to your position there?

[Bob Watson:]

We’ve actually evaluated a number of deals made one or two offers that we’re not successful, but we think the stress in the industry will create more acceptable projects for us going forward and sellers expectations might be a little bit less which would allow us to make a deal that confirms to our philosophy of not jeopardizing the balance sheet or doing a deal is not accretive to our shareholders.

[Steve Berman:]

One more quick one, you talked a little while back about maybe doing some permitting up in the Powder River any updates there?

[Bob Watson:]

Yes, the permitting is underway. We finally got rid of the sage grasses and the laming sheet to where we get access to our land and the way it stands right now we’re probably going to get those permits and then wait and drill them in 2016.

[Operator:]

Your next question comes from the line of Joe McCarthy with Euro City Capital. Please proceed.

[Joe McCarthy:]

Just got a couple of -- most of my questions have been answered, but I just have one more. On -- you reported working capital deficit of 27 million, 28 million. I was just wondering any of that makes its way to your balance sheet, you talk about keeping cash flow neutral and maintaining a good balance sheet.

[Bob Watson:]

Well I think the working capital deficit in the second quarter was a function of the nine wells we fracked during the quarter and getting those bills paid for which is occurring as we speak. And I think second half we should have a pretty significant under spend and so I think we’ll catch back up, will use our bank line temporarily and then we’ll pay it back down when with the free cash flow in the second half.

[Joe McCarthy:]

So going forward we can model in about 108 million in that kind of flat going forward?

[Bob Watson:]

I would say 110 to 120 is probably a very good guess at where it should be going forward.

[Operator:]

Your next question comes from the line of Noel Parks of Ladenburg Thalmann. Please proceed.

[Noel Parks:]

Couple of questions, in your last operations update you had specified that you had good results lower Three Forks in your second bench; they just fitted in offsetting North Forks. and I think you gave 20 gross well location count if that also work that at North Fork. Can you just give us the sense of what the assumptions are underlying that your spacing and so forth?

[Bob Watson:]

We spaced pretty conservatively by saying four second bench well per DSU, we’re drilling eight middle Bakken and eight upper Three Forks per DSU. So the four is the pretty conservative number and who knows what it might play out to in the future, but that’s just kind of a gas as we’re looking at it right now.

[Noel Parks:]

And then you mentioned that at Jourdanton you’ll be doing some more work, physical work et cetera to get a better hand on just the nature of the variability out there. I was wondering as you head out now with more production history of cost variance while there, I was just wondering has the production curve sort of converged over time or have they vary as much as some of the individual wells hasn’t as well as their IP?

[Bob Watson:]

Yes, that’s a head scratcher to Noel that some of the wells are declining like a difficult Eagle Ford well would and then the most recent well we announced our Grass Farm’s 2 is actually held flat for about almost 60 days now. So it's actually converging to our type curve. We miss the big steep plus production, but performance has been pretty flat. So we really can’t figure that out yet, but as an engineering based firm as you know we -- engineers don’t like things they don’t understand. So we’re having to find an answer.

[Noel Parks:]

And at the Grass Farm was there any issue of staying in down or anything from as you can tell?

[Bob Watson:]

We’ve studied, and studied and studied, we’re comfortable we were in the right zone, we frac them very similar to our offsetting Snake Eyes well and results were -- Snake Eyes is our best and our Grass Farm’s are worst and we cannot figure out why.

[Operator:]

Next question comes from the line of Welles Fitzpatrick with Johnson Rice. Please proceed.

[Welles Fitzpatrick:]

I apologize I haven’t been able to be on the whole call. So I am sorry if you’ve already answer this, but I know as of late July the issues were partially clear. But any update on the gas processing that hits you last quarter?

[Bob Watson:]

We think we’ve got a good handle on it now. The line pressure has dropped a little bit and we’ve determined the system to look at daily producing rates -- producing rates on a daily basis to make sure we’re not exceeding our gas capture limit. Feel pretty good about it now and I think we’ll muddle through until the next -- I think it's a Grass Land 2 plant if one goes on production here late third quarter, early fourth quarter and they claim and actual face-to-face meetings with us that should alleviate the issue that we have on a permanent basis. So pretty comfortable muddling through until then that’s another reason we decided to accelerate the fracs on the Stenehjem well. We think we got a pretty good handle on gas capture with a permanent handle here on the horizon.

[Welles Fitzpatrick:]

And then jumping to the PRB, if I am remembering correctly the next kind of couple of permits were offsetting the Hedgehog but there were some coal mining issues and maybe it was a target for late during the year, is there any update on that?

[Bob Watson:]

We have met with the coal mine, we do have the locations set on the offsets to the Hedgehog so they're being permitted and we’ll be capable of drilling those when we want, but right now I would say we’re going to target warm weather in 2016 to start those. We’re still dealing with the coal mine over to the east of it to work on acceptable locations for both of us for multi-well pads on our -- we call that our Frazier federal land and until we -- that’s the first project is negotiating with the coal mine once we get a satisfactory resolution to that then we’ll start the permitting process.

[Welles Fitzpatrick:]

And then one more kind of strategic question, I guess year-to-date you guys have mentioned that the bid as per has been pretty wide to make some new larger acquisitions. Have you seen that tighten up any and is there any one of your areas in particular that you would be most encouraged to add on to or is it just opportunistic?

[Bob Watson:]

We’re going to be very opportunistic and we’ve only made a couple of offers and the bid spread was much wider than what we could justify with the provision of not hurting our balance sheet or doing a non-accretive deal. So we’re hopeful that there will be some more stress on the horizon which will drive that bid a little bit closer to reality and maybe some of the private equity money will go to side lines because of current economics I don't know.

[Operator:]

Your next question comes from the line of Kenneth Beyer with Stifel. Please proceed.

[Kenneth Beyer:]

Yes. This is kind of related to the last question. I was wondering if you guys could speak to the possibility of an asset sale and the interest of showing out the balance sheet little bit or using that capital to prefer the development in some of your higher economic acreage.

[Bob Watson:]

We've already got one of the cleanest balance sheets in the small cap land. So we probably wouldn’t consider an asset sale unless it was some crazy practice that we couldn’t justify not selling and we had certainly have the financial capability of the accelerating development if conditions would award it. So don’t foresee the need to sell assets to fund a spending gap for us right now.

[Operator:]

Your next question comes from the line of Neal Dingmann with Suntrust. Please proceed.

[Neal Dingmann:]

Just a question when you are looking I guess at lot of these acquisitions I guess is there any, I guess when you look at your deals just a pure acquisition farm in, there is a lot of different ways you can structure it. Are you preferential to one of these or is it just come down just simply what the cost back and then there is something like this.

[Bob Watson:]

I think we're just going to be opportunistic, I don’t think we would back off from a deal and the Bakken, Eagle Ford to Permian or in the Powder, probably would not proceed with the deal that was in the midcontinent or somewhere else like that but certainly those four areas would be of right area for us to look.

[Neal Dingmann:]

And then just about the last one I had just I know you are indifferent and maybe you can in today's environment as you mentioned if you can buy things cheaper than you can organically grow it. How do we think about that if you look at let's say today's M&A market stays about constant how much do prices I guess right now is it sort of 50-50 or as far as were the pricing is we're how much lower would the prices have to go or your preference would be to ramp all that existing acreage you already have?

[Bob Watson:]

We are going to run our economics on the strip whatever it is with the philosophy that we can hedge that at that price at that time to lock in whatever return we feel like we need to generate. We don’t understand where some people have made some of the offers that we have looked at recently they must be using a very aggressive forward looking strip on oil prices, we're probably not going to do that because that I think that attributes too much risk to Abraxas going forward. So we're going to be patient and wait for deals to come back to us instead of us coming up to deals.

[Operator:]

[Operator Instructions] Your next question comes from the line of Curtis Brewer with BLBB Advisors. Please proceed.

[Curtis Brewer:]

So Bob a couple of years ago maybe three, I know lot of the early stage of Abraxas in the Bakken I think. You indicated that the there was a quite similarities in this conference call so having to do with the fact that any initial production from the wells were being drilled in that you are employee is rather low choke number and I'm pointing out that even with that lower choke that the many of our wells were producing at better rates and somewhat competition that had more open choking of processors or utilization and the indication was that I guess while engineering if we will had anticipated that in doing so that the life of the well would be extended and that the wells overall productivity would be enhanced. And so my question is has that turned out to be a good theory in practice and our engineering people continuing to -- we've been able to maintain our engineering team and are they able to continue to enhance the efficiencies of our overall operations.

[Bob Watson:]

I think we're one of the most efficient operators out there already and have been, I think we're still incline to say that choking the wells back does enhanced the ultimate recovery what that doesn’t address is rate of return and there is a camp out there that says open up wide open get there oil out as fast as you can to capture a higher rate of return and don’t worry about tomorrow. The companies that are generally doing that have got such a large inventory they don’t need to worry about tomorrow and they just continue to drill and blow their wells down because they've got so much to do it doesn’t matter but I think from an engineering perspective being conservative like we are is by far the best for long-term growth in a small cap company like us and I think we’re going to continue to do that. We studied very closely two companies Murphy and EOG and the Eagle Ford may have marked different philosophies on choke size, Murphy chokes their wells way back, EOG opens their wells wide open, consequently the IPs that you see are misleading because of that, but we’ve looked at production a year and two years down the road and Murphy’s production rates are considerably higher than EOG’s average production rate. So that in effect tells you that choking them back early does prolong the life of the well and perhaps increases the ultimate recovery as well. We’re not going to have a real good handle on that until we have many more years of production behind us, but at least right now we’re pretty comfortable sticking with what we’re doing.

[Curtis Brewer:]

Bob just an editorial comment, I think that you and your management team out there have done actually superb job unanticipated and nearly disastrous period with price of wells, permitted -- it seems to me that management will approach to these challenges has been well above what might be expected what company size of actual I guess we to continue to manage as you currently are because I think the time will come prices in hand enhance in the world market that we actually will see or actually shareholders will see the enormous benefits of your management skills.

[Bob Watson:]

Thank you too and appreciate your comments and I would say that our philosophy is very well aligned with yours.

[Operator:]

That concludes our Q&A. I’ll now turn the call back over to Mr. King for closing remarks.

[Geoff King:]

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

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.