Abraxas Petroleum Corporation
Q3 2015 Earnings Call Transcript

Published: 4 Nov 2015

[Operator:]

Hello everyone and welcome to the Third Quarter 2015 Abraxas Petroleum Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions]. And as a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Vice President and CFO, Geoff King.

[Geoff King:]

Thank you, Lauren and welcome to the Abraxas Petroleum third 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. The third quarter for Abraxas was relatively quite operationally but we did maneuver our sales to enter a position for a strong finish for 2015 and more importantly we positioned Abraxas to maintain our drill production slightly year-over-year and generate significant free cash flow in 2016. Now let me explain. In August, we planned to frac our three well raven in Northwest pad up in the Bakken where we own about a 75% interest in the three well to take advantage of low frac cost, efficient crews and good weather. If you'll remember crude oil crashed during that time period into the high 30s, we saw no reason to bring clutch production on those prices so we postponed the fracs and we reduced our yearend guidance. Fast forward to October, crude oil is up about $10 a barrel, frac costs are still low, crews are still efficient and probably North Dakota is still okay to work in. So last week we finished 99 stages on the three wells, out of 99 planned, we pumped a 100% of our planned crop, which was about 800 pounds per foot of lateral at a very efficient average cost of $36,000 per stage. Now that just includes the hydraulic horsepower, the props and the chemicals. But still a very-very attractive price. We're currently drilling out these wells and they should be on production next week along with eight wells that we had shut in for frac protection. Third quarter, our production averaged about 6000 barrels a day which was up 10% over the second quarter and our fourth quarter should be higher than our third quarter. As far as the setup for 2016 goes, raven rig 1 continues to operate very efficiently on our six well [indiscernible] superpad which will eventually be a 10 well pad. Two wells are down in lateral case at about 21,000 feet or currently drilling a lateral on the third. The other three await laterals with intermediate casing set through the curve at 90 degrees in the Bakken at about 11,000 feet. These six wells in which we own about a 75% interest will be completed next summer assuming conditions warrant and should be sufficient on our model to show maintenance or slight production growth year-over-year in 2016 while greatly spending under cash flow. Yesterday, our board approved a 2016 CapEx budget of up to $40 million including a minimal amount in the Bakken of $25 million which allows us to show this maintenance or slight growth and also positions us for the same in 2017. If conditions warrant an additional $15 million can be spent on other identified projects including additional Bakken completions, all of which generate additional growth with no associated balance sheet stress. Don’t think there are many names out there that can say they can maintain or slightly grow production over the next two years and generate free cash flow that can be spent on additional growth rather than just repaying debt. While the pace of our operations in the relatively near future is very measured, but does include two low cost high upside projects here in Texas which we started talking about yesterday and enhanced oil recovery project in our [Portilla] field in South Texas and a residual oil saturation test in one of our West Texas fields. But other than that we are very busy evaluating acquisition opportunities in hopes of finding one or more transformative deals during this downturn where we can use the relative strength of our balance sheet for the long-term advantage of our shareholders. To-date we have evaluated many opportunities and pursued some to the point of making an offer but also to-date we have not come close to winning a bid. There appears to be a lot of private equity backed management teams out there with cash burning a hole in their pockets and to them I wish them good luck on higher oil prices. For Abraxas we will be patient. We will find something that makes sense in this market or we won’t do a deal. We are not going to jeopardize our balance sheet and we will not do anything that is not accretive to our shareholders. I will end this by saying there is a lot of more pain on the horizon and Abraxas will be patient. Now we will open for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of Neal Dingmann from SunTrust.

[Unidentified Analyst:]

Hey good morning, this is Will for Neal. First question I guess would be in terms of 2016 in your current plan, what oil price would you all need to see to accelerate beyond your current plan?

[Bob Watson:]

Higher than the current strip. Our budget was set on the current strip. So anything significantly higher than that we would have that additional cash flow available to spend.

[Unidentified Analyst:]

Okay, thanks. And then in terms of kind of along that same line, what would -- what price would prompt you to return to the Eagle Ford?

[Bob Watson:]

That kind of probably require about a $65 strip.

[Unidentified Analyst:]

Okay, thanks. And then also can you kind of talk about the completion timing for Bakken and what that’s based on?

[Bob Watson:]

One, it’s based on crude oil prices. Two, it’s based on weather. We are definitely not going to accelerate into cold weather just until they are economic. And three, it happens to slide into our model and give us sufficient production at that time of the year to show year-over-year slight production growth or at least maintenance. If we wait any longer, it detracts from our year-over-year production. If we go any sooner, then we accelerate production. So midyear is just a good time for everything.

[Unidentified Analyst:]

Okay, alright. That’s great. Thanks.

[Bob Watson:]

You bet.

[Operator:]

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

[Will Green:]

Good morning guys.

[Bob Watson:]

Good morning Will.

[Geoff King:]

Good morning Will.

[Will Green:]

Good morning. So the stuff in South Texas with the enhanced oil recovery is interesting to hear about. Can you guys provide some additional color on that? What’s the structure of that deal? Is there some initial trial phase? And then beyond that, if it does work out, what’s the cost of applying that technology? And then finally, when would we expect to hear something on the results there?

[Bob Watson:]

It’s designed as a pilot. We think we will have final results within about eight months. We own a 100% of it. We are just buying the services from Glori. There is no -- they retain no interest in the field or in the enhanced production. There is going to be one injection well and one producing well. And we are very excited about it. We have done a lot of research. Obviously the Glori people are very excited about their technology. And if it works, then we will start working on a full field expansion which for a enhanced oil recovery project is very inexpensive on a capital expenditure basis because all the wells are there, and they are usable. So you will keep you apprised of what’s happened. But certainly don’t expect anything before about eight months.

[Will Green:]

Alright. I don’t know if you guys mentioned it or not. But that said in the CapEx budget already existing does that get tucked in the other item next year.

[Bob Watson:]

Both. We've been remediating the well, not remede, remediating the wells, we've had to drill out some plugs and squeeze from existing perforations, that work is essentially completed so that's in this year's budget. And next year's budget will just include the services of glory which is really the minimus amount in our overall budget, so you could say it’s in the other but it's not a lot whole of cost next year.

[Will Green:]

Okay, and then you guys have done pretty impressive job on the unit costs. Can you talk about any other big ticket items you guys are looking at maybe on the LOE side that you potentially push those down further you know into next year.

[Bob Watson:]

I think the biggest impact is going to be, I think we said on our last call that we've started an initiative to take care of our high LOE cost wells. Either shutting them in or selling them or plugging them. And that project is ongoing, we really haven't seen the full impact of that as it just started towards the end of the third quarter. So we'll see a bigger impact from that in the fourth quarter hopefully and other than that we're just watching every dollar we spend to make sure it's justified both from a safety perspective and a long term economics perspective.

[Will Green:]

Great, I appreciate the color guys.

[Unidentified Company Representative:]

Thanks Will.

[Operator:]

Our next question comes from the line of Welles Fitzpatrick from Johnson Rice.

[Welles Fitzpatrick:]

On the eight wells that were shut in for the frac protection can you tell us how long or actually what time frame and how much was shut in just help us out on the modeling side.

[Bob Watson:]

We probably started shutting in 1st of October, probably how many wells are back on now.

[Unidentified Company Representative:]

Four of them are back on now, the other four should be back on by next week. So one month we lost production from eight wells, for one month basically.

[Welles Fitzpatrick:]

Okay perfect and you know I guess 70 to 80% working interest is a fair assumption.

[Unidentified Company Representative:]

Yes, 75 is a good number throughout, really.

[Welles Fitzpatrick:]

Okay, perfect and then on the $24 million to $40 million in '16 is there anything in there for lease renewals or, and do you imagine that that'll be able to hold your acreage positions at least in your kind of big three projects.

[Unidentified Company Representative:]

Well most of our acreage is held by production do we have very little lease renewals to worry about. Most of them will be what we have, most of that is in '17. So '16 is very-very minimal.

[Welles Fitzpatrick:]

Okay and then one last one. The Portilla Project works that go envision it, are there any other candidates in your existing portfolio or would you look to acquire things that might be amenable to that process or will it more likely be a sort of one off deal.

[Unidentified Company Representative:]

That was a one off deal right now and in our portfolio we don't see anything where it shows to be an attractive project but certainly means that we would go out looking for acquisitions that might be amenable to it. We have looked at a couple of deals already. We've determined that they weren't amenable to it but that was the sole purpose for looking at them because they were kind of a little bit out of our normal area. But we want to do the background work on this process just in case it does work we want to take advantage of the knowledge we gain use it some other places.

[Welles Fitzpatrick:]

Okay, that's perfect, thank you.

[Unidentified Company Representative:]

Thanks Welles.

[Operator:]

Next question comes from the line of Steve Berman from Canaccord.

[Steve Berman:]

Bob, the 25 to 40 million or if it's something in between sounds like it's going to be very-very heavy backend loaded for next year, is that fair. I mean what you going to be spending.

[Bob Watson:]

Absolutely fair, I don’t see us spending anything for the first five maybe six months of the year, we'll just be generating cash.

[Steve Berman:]

Okay and then you said earlier you probably would need $65 oil to get back active in the Eagle Ford again, what about the Powder River, I guess what I'm really asking is which might get incremental dollars first if oil prices do rebound from here.

[Bob Watson:]

Well we are in the permitting process for a couple of wells in the Powder and they are in our tier 2 projects which have been approved by the board, that we could spend that incremental $15 million on it if we should, should we decide that that's the place to go. The economics up there are okay. They're similar to what we're seeing in the Bakken. Better than what we would anticipate in the Eagle Ford so it would be high on our list. Again there's no hurry that the land is all held by production. We're not being drained by anybody but it is, it is pretty high on our list.

[Steve Berman:]

Okay, and then one more if I may, you've done a good job over the last call it couple of years monetizing some noncore assets that's helped improve the balance sheet. Is there anything in the portfolio now that could be a source of funds as we move through the end of this year into next.

[Unidentified Company Representative:]

We have a couple of small deals that we are actually working on, but they don’t really move the needle, a couple of million dollars here or there, of course that’s -- I guess that’s important in these days. But our portfolio is pretty clean, so we don’t have a whole lot that we would consider divesting here. But there are still some extraneous small properties that we might.

[Steve Berman:]

Alright. Perfect. That’s it from me. Thanks Bob.

[Bob Watson:]

Thanks Steve.

[Operator:]

Our next question comes from the line of John Aschenbeck from Seaport Global.

[John Aschenbeck:]

Hey good morning guys. I know …

[Bob Watson:]

Hi John.

[John Aschenbeck:]

… last time we had mentioned -- you had mentioned that you would start to see maybe some potential interest in a JV partner, it looks like potentially maybe on your Edwards gas position. Is that still the case where it sounds like from your commentary on M&A that maybe the bid ask spreads a little too wide?

[Bob Watson:]

No actually that we are actively talking to some joint venture partners, not only on the Edwards but some of our West Texas gas which we don’t get any credit for currently and possibly the Austin Chalk portion of our Eagle Ford play. So that’s work in progress. Hopefully we will have some news out on something along those lines within the next quarter.

[John Aschenbeck:]

Okay, great. And kind of keeping with the similar thing on the Chalk, I know you also mentioned last time we talked that a few private guys have seen some success, customers chalk around your Jourdanton area. Have you gotten an update on that?

[Bob Watson:]

Yes, we are watching that very closely. The wells are actually not close to Jourdanton but they are in a very similar geologic setting in Karnes County. And so we are just inferring the geology from one area to the other which is very, very similar and that’s the basis of potential joint venture opportunity that we see in the Austin Chalk is to try and replicate what Blackbrush has done in Karnes County.

[John Aschenbeck:]

Okay, great. Appreciate that clarification there. Thanks.

[Bob Watson:]

You bet. Thanks.

[Operator:]

Our next question comes from the line of Kenneth Beyer from Stifel.

[Kenneth Beyer:]

Yes, hi. Can you guys talk about what you expect for fourth quarter price utilizations and then also into 2016?

[Bob Watson:]

Well everything we use in our modeling is the current strip when we run the model. So those differentials are running about what?

[Geoff King:]

I would say 6 to 7 bucks overall across the portfolio for crude, NGLs continue to be weak. So I would expect kind of 3Q to look -- or 4Q to look a lot like 3Q. And then gas realizations …

[Kenneth Beyer:]

Okay.

[Geoff King:]

… should actually be a touch better.

[Kenneth Beyer:]

Okay, thanks.

[Operator:]

Next question comes from the line of Noel Parks from Ladenburg Thalmann.

[Noel Parks:]

Good morning.

[Bob Watson:]

Good morning Noel.

[Noel Parks:]

I had a few questions. You mentioned lease expirations and said that that’s not really an issue into 2017. Is that the south part of Jourdanton that’s on the table?

[Bob Watson:]

That’s correct. We got until late ‘16 to drill six more units to HBP, all of our acreage there. And if something does come up of our Austin Chalk opportunities, we would expect new wells to be drilled on those units to HBP then.

[Noel Parks:]

Okay, great. And just wondering in the Eagle Ford or I guess also in the Powder, have you seen any signs of exit or people letting leases go in any of the offsetting activity or any offsetting folks drilling out there?

[Bob Watson:]

I am not seeing any available acreage come up in the Powder. That’s very tightly held as it always has been. I would expect that there is some acreage coming available maybe on trend with Jourdanton which we would -- with some success we would be in a position to pick up. But we don’t have any plans to do so at this point.

[Noel Parks:]

Okay. And is there anyone else drilling currently in the Jourdanton vicinity at the [moment]?

[Bob Watson:]

Actually, yes, Cabot has drilled some wells recently, EOG has drilled some wells recently. So maybe they were in a lease preservation mode, I don’t know. But we look at that area of the Eagle Ford as pretty marginal at this crude oil price level.

[Noel Parks:]

Right, right. And thinking about the Bakken, it sounds like as you commented on this already, I’ve been on a little late. But as you go forward, what do you think about around sort of the best use of the rig up there? You had talked about moving it to the Powder if you started drilling there?

[Bob Watson:]

Well, we -- if we had a multi-well program in the Powder, maybe five wells minimum if we could justify moving it for just the two that we are permitting right now, there is plenty of iron available up there, the capable contractors, that really doesn’t make sense. So our highest and best use of that rig right now is to continue to drill in the North Fork area on our existing operated DSUs.

[Noel Parks:]

Okay and for some [indiscernible] what are day rights looking like in the Powder these days.

[Unidentified Company Representative:]

We're seeing 19,000 a day which is probably down from about what 25.

[Unidentified Company Representative:]

Yes, so that's about the same as the Bakken.

[Noel Parks:]

Okay, great, and just kind of a general question about commodities, I don't think it's something I've asked you about in a while. Where do you stand as far as being a believer in Gulf Coast industrial demands for gas, whether that's actually going to materialize, you know whether the prices for gas is enough to keep producers, you know generating volumes that would continue to draw the industrial demand.

[Bob Watson:]

Well, I would say that I want to be a believer, I don't know that I'm there yet. I think we're going to see more demand come out of power generation as more and more heat is put on the coal fired units. I think they're going to be retired a little bit sooner than they would have planned to do so maybe a year ago and consequently the alternative there is to burn natural gas in these peaking plants. You know the best hope I have is a cold winter. I think you'll see a very strong demand for natural gas there because I think some of the coal fired plants will be sidelined. So who knows? If anybody knew the answer to that they could be a billionaire pretty quick.

[Noel Parks:]

Right. That's all from me thanks a lot.

[Operator:]

[Operator Instructions] All right I'd like to turn the call back over to Mr. King for closing remarks.

[Geoff King:]

Thank you Lauren, 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 the transcript will be posted in approximately 24 hours. Thank you and have a great day.