Abraxas Petroleum Corporation
Q4 2015 Earnings Call Transcript

Published: 16 Mar 2016

[Operator:]

Good day ladies and gentlemen, and welcome to the Q4 and YTD 2015 Abraxas Petroleum Earnings Conference Call. My name is Ashley and I will be your operator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Geoff King, VP and Chief Financial Officer. Please proceed.

[Geoff King:]

Thank you, Ashley and welcome to the Abraxas Petroleum fourth quarter and year end 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, 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 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. Abraxas is going to build on our past record to become better in 2016 and beyond despite of 64% decrease in capital expenditures and a substantial proved undeveloped reserve right down due to prices in 2015. We still increased our proved reserves by 2% to 43.2 million barrels and we replaced production 136%. We also grew production grew year-over-year 4%. Importantly we set ourselves up for very capital efficient growth in 2016 by simply completing 7 gross that's 5.1 net drilled but uncompleted well in the Bakken and we would still generate free cash flow to pay down our revolver. I might add at this point that the current commodity prices were probably not inclined to complete these wells we’ll wait for better times. But simply by spending about $17 million on completions, we can grow production slightly year-over-year, generate free cash flow to pay down debt and make Abraxas better. But that’s not enough. We are in constant communication with our Bank Group and we expect about a 20% reduction in our borrowing base around April 1. Last Friday we crystallized some hedges and on April 1 we'll crystallize some more that will bring our borrowings down underneath the new borrowing base by $7 million or $8 million which gives us plenty of room to meet our stated objectives. We also used last week to run-off an oil prices to lock in more hedges to where we are now about 90% of our existing reserve report, PDP, oil production for 2017 hedged at $55 a barrel. We’re also about 87% of our existing reserve report, PDP, oil production for 2018, hedged at about $46.40 a barrel. The 2017 hedges will create an opportunity to have a modest cash flow neutral drilling program in 2017 that keeps production flat. Importantly, we have the ability to ramp up CapEx very quickly with subsequent significant production growth that should conditions warrant. For instance, our company-owned Bakken rig up in North Dakota can start up in a matter of weeks as it is actually rigged up on the next of four wells to be drilled on our 10 well superpad McKenzie County. But we want to get even better. Abraxas has a substantial amount of assets, mainly real estate, and our drilling rig that are outside our bank borrowing base. They are not included in any analyst calculation of NAV so I’d argue they are not represented in our stock price. But these can be readily converted to cash to pay down our revolver which is in everybody’s NAV calculation and consequently is reflected in our share price. We have about 5,200 net acres in the Delaware basin at the edge of the Bone Spring/Wolfcamp Horizontal Play both of which are present under our leases and are over pressured. And these leases are all held by production by our deep gas wells. We are currently marketing to a targeted group that shall arise from the base of the Wolfcamp to the surface, while keeping the deep gas production which has considerable measured upside. If someone wants to pay up the going rate for HPP, Bone Spring/Wolfcamp rights, we will sell these assets with the proceeds going to paying down the revolver. We've had some offers to date, they don’t meet our expectations, and we’re not going to give these assets away. So we’ll keep the marketing process going. We also own about 12,000 to 13,000 acre ranch in Pecos County, West Texas that we acquired a number of years ago on pursuit of the minerals which we did end up drilling but as gas prices did not warrant further drilling, we have listed the surface and half of our minerals with an area ranch broker at $550 an acre. If anybody out there who wants to a great meal there and out cutting ranch, let us know. If we are successful in selling these properties, the proceeds will go to paying down our revolver. A sale and leaseback of our office building and drilling rig could also create liquidity in a very short period of time as needed although we have no plans at the present to do so. Although we are justifiably criticized for our liquidity and reliance on bank debt, I’d like to point out the following. We are unquestionably solvent today with substantial equity value unlike many of our peers whose obligations outweigh the current value of their assets. Our peers obligations also come at a much higher expense, whereas we are paying a little bit under 3% on our credit facility last quarter, many of our peers are struggling to hit 10 plus percent interest payment. More importantly, we enjoyed long term constructive relationships with our bankers and our Bank Group and all these together leads to us to having numerous options in the current severely depressed commodity price environment. In our spare time, which is substantial these days, we are looking at acquisitions to make Abraxas even better. We are concentrating in our four core areas. We will not look at anything that will jeopardize our balance sheet and we will not make a deal that is not accretive to our existing shareholders. This accretion limit sets a limit on the price that we can pay for an asset, but it does set us up to do a transformative transaction with a sizable equity component that’s good for our existing shareholders. We have one new offer out this week and hopefully we'll have another one out next week. And finally on our previously announced desire to form a joint venture to test and develop the Austin Chalk in our Jurgenson Eagle Ford acreage Atascosa County, South Texas, it is progressing. Little slower than I hope but I expect to have an executed letter-of-intent any day. I'd hope to have it available to announce on this call, but we are not quite there. But this does put us on schedule to drill the first of two wells in the May time frame using principally our partners' money. So you can see we got a lot on our plate, we're not spending much capital but we have lots of projects in the work all of which have the same objective of making Abraxas better going forward. With that, I’ll open it up for questions.

[Geoff King:]

Ashley, we are ready for questions now.

[Operator:]

Your first question comes from the line of John Aschenbeck of Seaport Global Securities. Please proceed.

[John Aschenbeck:]

Hi, thanks for taking my question. At what point in 2016 would you look to get back to work, I appreciate the detail that at these prices right now you are not so inclined to spend towards the high of guidance but I was wondering if there was a certain oil price you had in mind where you would be inclined to spend towards a high end or get back to work. Thanks.

[Bob Watson:]

Well I think higher the better obviously, before we would start building again, we would need a well head price in the Bakken that has a five handle on it. We might complete those wells a little bit less than that but we would have to have a pretty good gutsy link that fundamental of changed and we run an upper territory of oil prices before we pull that trigger. If we don't do it then we just pay down debt that much faster.

[John Aschenbeck:]

Okay, great. Appreciate that. And then on the potential M&A transactions what you are looking to hop into, I understandable you’re looking at your four core areas right now but I was wondering if there is one specific area where you'd be more inclined to go after right now or if one looks more attractive to you?

[Bob Watson:]

Well I would say pricing has a lot to do with it. Permian transactions are very pricy in our opinion. So we feel better in the Northern Rockies were better economics for us anyway are available we think South Texas deals are still a little pricy as well. So if we had to prioritize it's probably in the Northern Rockies but we will certainly consider anything in our four core areas that appropriately priced.

[John Aschenbeck:]

Okay, great, perfect. Then one more if I could just sneak it in on the liquidity front, seems like you blocked and tackled there relatively well going to be $7 to $8 million under our pro forma borrowing base. Just curious as to where current cash stands or where it would stand once the borrowing base is re-determined.

[Bob Watson:]

We generally don’t keep lot of cash on our balance sheet. We’ll pay down our borrowing base when we have extra cash which we did this week when we got the proceeds from crystallizing our first sort of hedges. And we've done a very good job of getting our working capital back to neutral. We are not quite there yet but very shortly we will be. So we are very comfortable that we are in control of our own destiny. I know it sounds tight but we are comfortable with our existing liquidity and if we’re successful within any of these property sales, which are not going to be far sales. Don’t get us wrong, we are not stressed to where we feel like we have to sale anything, but if we do get the price we expect and pay down the borrowing base even that much more, we’ll have considerably more liquidity to expand our options on what we do when conditions warrant.

[John Aschenbeck:]

It's great detail. I appreciated that Bob.

[Operator:]

You next question comes from line of Neal Dingmann of SunTrust. Please proceed

[Neal Dingmann:]

Good morning, Bob. Bob I think you might have said this, on the sales, what are you thinking - I mean again you’re not certainly not going to far sell those but the 5200 and the 12, if they’re done what are you thinking timely wise on those?

[Bob Watson:]

Well timing wise could be fairly shortly or fairly longly. We are going to wait until we get our price. It just depends. I think we’re comfortable with our existing liquidity and existing conditions until that happens. So we are not going to jump at the first offer. We had some offers on the 5200 acre block at least parts of it, we are not inclined to accept them so we’ll keep that process going until we get our price.

[Neal Dingmann:]

Okay. And then what timing - can you talk little bit on the completion timing what you're thinking about this year and how those - I know which you mentioned on the drilling side but just ones on the completion side and the timing.

[Bob Watson:]

In our model we are expecting it mid-summer but if commodity prices haven't recovered by the end it would be postponed.

[Neal Dingmann:]

Okay. So those are all - I mean as you much like your drilling those going to be price dependent as well?

[Bob Watson:]

Correct.

[Neal Dingmann:]

Okay. And then just lastly, any change I guess what you are seeing it's not going to be real relevant near term if you too have much coming on. But just if you look - two questions here in Bakken. One, just on differentials I have noticed for most companies they continue to come down. Are you seeing that as well, just any comments you can make on what you are seeing on this into play?

[Bob Watson:]

I think crude oil, the net differentials have gotten better slowly over the time and maybe that continues, who really knows. I don't see any release in gas prices or NGL prices up in the Bakken for the foreseeable future but if oil differentials improve than that certainly improves our bottom-line that much better.

[Neal Dingmann:]

Okay. And then lastly just takeaway or infrastructure anything to talk about up in the play you find I assume.

[Bob Watson:]

Finally, we can say we are fine. We're essentially selling 100% of our gas line pressures are good. We don't foresee any problems going forward, facilities are in place and they are operating as planned.

[Neal Dingmann:]

Great to hear. Thanks Bob.

[Operator:]

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

[Noel Parks:]

Good morning. Also on the topic of the gas takeaway in the Bakken. As the result of the new capacity will we see any uptick in gas overall and the gas percentage in the first quarter numbers do you think?

[Bob Watson:]

Yes, I think you'll see it's a little bit higher of gas percentage because of that but you're also going to be seeing a little bit higher production in what we were anticipating as well.

[Noel Parks:]

Okay. And that's from Bakken.

[Bob Watson:]

Correct.

[Noel Parks:]

Okay, great. And you mentioned that it starts looking an acquisition at South Texas was still looking a bit pricey which start surprises under the circumstances. Can you talk a little bit about the sort of market dynamics down there?

[Bob Watson:]

It's kind of curious to us because Eagle Ford economics are probably more difficult than anything right now. But people are still proud of their properties and they are still plenty of private equity money that wants to get in the play. So transactions are at - don't happening at - we feel unreasonable values though until values become reasonable we are not a player.

[Noel Parks:]

Okay. And for a potential seller I guess still not enough pressure for the folks that are out there on the debt side sort of force people to the table.

[Bob Watson:]

Well, you don't see it on the surface. But I think under the surface there is more pressure everyday and we are sitting back and waiting for those opportunities to present themselves. The offers that we are making this week and maybe next week are driven by stress. So we think those opportunities will be more and more as time goes on.

[Noel Parks:]

Sure. And just thinking about the Raven drilling rig. So essentially now do we look at sort of the cash flow going down to essentially sort of flat or neutral out of Raven drilling while the rigs down or is there little bit of maintenance or G&A or something that that's still going to be consuming.

[Bob Watson:]

Yes. There is a little bit of maintenance side. I'm not an accountant sitting here, I don't know how the maintenance and the upgrades are going to be handled from a balance sheet perspective. I suspect that will be capitalized. Some of them will be capitalized and some of them will be a drag on earnings. But probably it's not a substantial amount.

[Noel Parks:]

Okay, great. That's all for me.

[Operator:]

Your next question comes from the line of Welles Fitzpatrick of Johnson Rice. Please proceed.

[Welles Fitzpatrick:]

Hi, good morning. You said that you are going to sell some more hedges on April 1st or are you guys looking at selling even more above and beyond that, specifically the stuff that you don't necessarily get credit in your revolver for, which I think a six month rolling timeframe?

[Bob Watson:]

Yes. Those are the hedges that we'll be selling at April 1st or the next six months work. And those have substantial value and there are kind of three-way caller, so there are the same value regardless of where oil prices are between now and $45. So we are really not risking anything by holding up for three weeks, but it helps our bank arrangement to wait until April 1st to do it.

[Welles Fitzpatrick:]

Okay. Perfect. And then in the Delaware, if someone comes see you with instead of just the straight purchase of the assets with more of a carry-type arrangement, will that be something all are open to or do you want to get that out of the door?

[Bob Watson:]

No. We don't necessarily want to get it out the door. In fact when we first started looking at this, we were thinking about a joint venture. And that was our preference then and it would our preference unless we can get some of the crazy prices that people are paying, which would have more value to us than a joint venture. But we would certainly consider an offer on a carry on the joint venture.

[Welles Fitzpatrick:]

Okay, perfect. And then just one last one at the risk of asking something that makes sense and excel and not the real world. Does it make any sense to bring the Raven rig down to South Texas for that joint venture, is it -- do you know just too costly and time consuming?

[Bob Watson:]

Well, that's one expense the Raven rig is probably a little bit too powerful for what we need down here and wouldn't be as efficient. It's perfect for the Bakken. And we have now, I think, 70 more locations to drill there in front of it. So that's a lot of activity for that rig and it's going to be more efficient when it comes -- when it start to back up again. So we are inclined to keep it up there.

[Welles Fitzpatrick:]

Okay, that's perfect. Thank you.

[Operator:]

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

[Steve Berman:]

Good morning, Bob and Geoff. Just one clarification Bob, I think I heard you say on the Ward and Reeves stuff for sale year. You had given some associated production with a net acreage back in the Feb 29th have updated. Sounds like you -- I think I heard you say you're looking to keep the production, but only sell to shallower rights unless with the acreage unless somebody is willing to pay for the production as well. Did I hear that right?

[Bob Watson:]

Well, no. We are keeping the deep gas production, because it has a considerable amount of upside. But the shallow production, we expect to go along with the shallow rights. And those numbers that you saw in our ops update it’s about 70 barrels of oil and 130 mcf of gas. It's not a whole lot or 300 mcf of gas. I think it's a 130 Boes a day. So that's what we would expect to sale with the shallow rights.

[Steve Berman:]

Got it. And I think Neal asked earlier about infrastructure and stuff up in the Bakken. There was also in that ops side -- ops of 358 Boe a day of curtail or shut in production. Is that all back on?

[Bob Watson:]

It is all back on now more or less and we'll contribute to a modest increase in production in the first quarter.

[Steve Berman:]

Got it. You had also given I think a 6000 Boe a day number for January. Is that kind a still a good number for where you're at? Any updates for that?

[Bob Watson:]

We actually have a little cushion in that. So that's why I made the statement about the first quarter. We were above 6000 Boes in the first quarter.

[Geoff King:]

For January.

[Bob Watson:]

In January. Yes. Bakken, yes.

[Steve Berman:]

Okay. That's it from me. Thanks.

[Operator:]

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

[Will Green:]

Good morning, guys. So you kind a mentioned the completion timing being price dependant. If for whatever reason we don't get above say five handle, I think that's what you mentioned is being kind of the threshold of where you guys would pull the trigger on those. Is the low end of the CapEx range that $17 million, is that what we will be looking at if you guys didn't complete or would it be perhaps even lower than that? And then the other thing I wanted to kind a learn about is how there is a legacy decline look like if you guys decided not to complete any wells this year?

[Bob Watson:]

If we don't complete those wells, our CapEx budget would be minimal. It won't be zero, because we hope to have a small interest that we pay for in our Austin Chalk joint venture. But we would see obviously a decline in production, we have to come out with new guidance. And we actually have our reserve report decline rates in our 10-K. Geoff, is it released yet?

[Geoff King:]

Yes.

[Bob Watson:]

It's released. So somewhere in there it shows that first year decline 33%, second year is – and I don't remember. So I better not to say. But I think overall, our first five years average decline is about 19%. So if you use those numbers in your model, you're not going to be too far off. And then it starts leveling out pretty flat.

[Will Green:]

Great. And if that was the case, where would you guys be say exiting 2016. If that was the situation, where would you guys be exiting on kind of a frac backlog that would help you guys kind of resume that growth next year?

[Bob Watson:]

Yes. We'd still be north of 5000 barrels a day, probably in the 5100 barrel a day range. And that's assuming no additional new production coming on this year.

[Will Green:]

And then how many wells would you guys have that would be kind of in the queue to quickly bring on?

[Bob Watson:]

We still have the 7 gross, 5.1 net. We actually have some non-op wells that would be in the queue, but they are not material in the amounts and the size. And then it depends on what we're doing in the Austin Chalk joint venture as well. And that could be substantial or it could be minimal, we just know yet.

[Will Green:]

Great. And then on the LOE cost. I know you guys talked a little bit about this last quarter. Making some strives there on reducing those costs, some initiatives and maybe shutting in some high cost production; how are those efforts going? Do we expect those are going to bare some additional fruit in the first quarter? How should we think about that LOE cost trending either on an absolute basis or unit cost basis if things go according to plan?

[Bob Watson:]

I'll let Geoff answer that since he deals with it on a daily basis.

[Geoff King:]

LOE in general has been trending a lot better. We've gotten actually on some months subject $8 a barrel. That's obviously a goal for us as to continue to drive that out. I think as we've shut in a lot of our higher cost production and that is certainly been a benefit. And then some of the other work we've done. January is a little bit higher than that $9 or $9.48 barrel we put out. That was really due to the fact that we had a lot of work over is going on in the Bakken to bring wells back online. Heading forward we had very smooth production, limited work-over activity and everything is been going quite smoothly. So we feel very confident. We can get to the lower end on that. And then the other thing is just G&A. We've been -- we obvious did great things year-over-year fourth quarter to fourth quarter from a G&A per BOE. But as you guys saw on our 8-K, we've all taking some solid cuts to keep our team in place and over here which has the same net effects. And by doing that you'll see those effects in the first quarter as well.

[Will Green:]

All right. And then do you guys expect anything additionally restrictive, maybe from the covenant side if you guys do get the bar base cut by 20% or so like you expect. Do you see anything any restrictive? I know there was a time when you guys were kind of restricted on a quarterly basis so much that you can spend in CapEx wise. Would you expect anything like that?

[Geoff King:]

I would not. We have very good relationship with our bankers. We’ve kept our balance sheet in order. A lot of our peers are pushing 10x debt-to-EBITDA. We can still manage quite well below our existing covenants. We have excellent coverage on EBITDA at interest, net EBITDA, and the current ratio is really dependant on their borrowing base. So I don't see why they want to put on additional restrictions on us. And again, I think we're hit at the golden child in that perspective as far as managing the business prudently and properly.

[Will Green:]

All right. Great to hear. Thanks guys.

[Operator:]

I will now hand the call over for closing remarks.

[Bob Watson:]

Thanks Ashley. We appreciate your participation today in Abraxas's earnings conference. 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.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.