Abraxas Petroleum Corporation
Q3 2016 Earnings Call Transcript

Published: 14 Nov 2016

[Operator:]

Good day ladies and gentlemen, and welcome to the Abraxas Petroleum Corporation Q3 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] I would like to introduce your host for today's conference, Mr. Geoff King. You may begin sir.

[Geoffrey King:]

Thank you, Kevin and welcome to the Abraxas Petroleum third quarter 2016 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, 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 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 turn the call over to Bob.

[Robert Watson:]

Thanks Geoff, good morning. We had a busy third quarter. I had been talking all year about the near-term catalyst and today I’m going to update you on those catalysts and how the results to-date have dictated our future planned activity. Catalyst number one was the completion of six operated Bakken Three Forks drilled uncompleted wells in the Williston basin. The results have very nicely exceeded expectations. The approaching 90 day rigs have exceeded any of our previous 90 day rigs by 10% to 20%. These are the same rocks on the same leases so obviously the changes that we made have had a significant impact. If you go to our website and look at our latest corporate presentation you'll see a new slide which shows the actual decline rates of these six new wells compared to all of our previous completions, as well as the previous 11 wells prior to these last six wells which were completed with the new frac design. The last six wells were completed with a significantly new frac design and obviously since it's the same rocks we feel like this frac design is what is attributable to the - exceeding our expectations. Also shown on the same slide is our current type curve along with our proposed new type curve which if accepted by our third-party engineers will result in a significant upward revision to PUD reserves at year end. With these results combined with increased efficiency and cost controls, we've elected to start up our rig very shortly for a continual drilling program for the foreseeable future. Next year's program should entail the drilling of 11 gross, seven net wells and the completion of 8 gross, 5 net wells. During the past 12 months that our company owned rig has been shut down, our key employees have been working on maintaining and upgrading rig to make it even more efficient than it's been in the past. As an example, we've upgraded our mud system from a 5000 pounds working pressure to 7500 pounds working pressure as modern mud motors work better and drill faster with 7500 foot pounds which should save us considerable drilling time and thus reduce costs even further. Catalyst number two, South Texas Austin Chalk. We announced some early summary results from our 100% owned Bulls Eye well last week. Some analyst said they were disappointed, well don't be. The well continues to surprise on numerable fronts. This past weekend we saw the highest oil rates yet and the highest oil cuts yet. We have a number of commercial reasons to not say anything else at the current time. I hope you’ll understand why in the fairly near future. We had two gross net wells in our budget for 2017. Catalyst number three, West Texas, Delaware Basin. We drilled our 100% owned Caprito 99-101H to a total depth of 15,665 feet and that includes an approximately 5000 foot lateral in the Wolfcamp A. We stayed in our target zone the whole way, we had good oil and gas shows throughout. Our planned 25 stage frac is underway with seven stages complete as of this morning. The frac should be finished this week with cleanout shortly thereafter. We hope to have flow back started before Thanksgiving. We had two gross net wells on our budget for 2017. Catalyst number four is our divestiture program. We have two deals scheduled to close in December, and with these closings we will have sold this year over $35 million of non-core assets, that had minimal impact on cash flow or our borrowing base. We still have some valuable Wyoming assets that we will continue to market. The significance of this program other then cleaning up our portfolio is it get us on the road toward our goal of one-times debt to EBITDA. Now looking forward into 2017, the success of these four catalysts which put production in September, these last two months over 8000 barrels of equivalents per day puts us in a position to grow production, to midpoint guidance for 2017, up 7200 barrels of equivalents per day which will be up 16% over our expected 2016 average production, while spending $60 million in CapEx all funded out of cash flow. Our current budget is approximately 60% in the Bakken, 20% in the Austin Chalk, and 20% in the Delaware with sufficient flexibility to move dollar should conditions warrant. With above market hedges in place, we are certainly looking forward to a very good 2017. I’ll now open it for questions.

[Operator:]

[Operator Instructions] Our first question comes from Welles Fitzpatrick with Johnson Rice.

[Welles Fitzpatrick:]

Good morning. On the Austin Chalk well, can you talk a little bit about the water cut and what does chemical markers, if you have them, might imply? Is that formation water coming back at you, or is it the frac fluid and any details on API or anything else on the crude you've recovered to date would be great.

[Robert Watson:]

Well, all I’ll do is give you a summary. The water we’re recovering does not appear to be formation water, the oil cut as I said over this past weekend has been the highest it's been so far. And the oil gravity is in the gas oil ratio were about as we expected from the history of the vertical wells that are drilled in the Atascosa Trough.

[Welles Fitzpatrick:]

Okay. That's perfect. Just one more, if I can. On the timing of the Porcupine sale, are those negotiations ongoing or is it going to be a new data room? What should we expect timing-wise there?

[Robert Watson:]

Geoff is going to answer that. He's handling.

[Geoffrey King:]

Yes, I would say in general we’re not going to provide too much of update on that. I wouldn’t anticipate we'll get anything done by the end of the year. Maybe announcement was but highly doubtful we’d actually be able to close something by the end of the year. So that’s very valuable acreage. It's right in the core of the core, of the turn development that’s going on. So given some of the permitting that's gone on around it recently, we have pretty high expectations for it and look forward to updating you on that when it's prudent.

[Welles Fitzpatrick:]

That's great. Sorry, go ahead.

[Geoffrey King:]

I said, we’re definitely not going to give it away.

[Welles Fitzpatrick:]

Well, that's good and congrats on that first sale. It was a great number.

[Operator:]

Our next question comes from Will Green with Stephens.

[Will Green:]

Hi. I wonder if we could just follow on on that last point. You mentioned there's some additional permitting going on in the area. Obviously, we've seen a renaissance in that area. Has that increased the interest to a degree? Are you seeing more interest at this point given what's occurred in the last month or two in that area?

[Robert Watson:]

I don’t think that we’ve really gone out and canvassed the people that we’re - that had expressed an initial interest we’ve been focusing on getting Brooks Draw papered up, but during that period Anschutz has permitted four wells directly offsetting us actually in between two of our acreage blocks that offsets one side on the west and other side on the east. So that’s certainly going to enhance exposure for the area. We really haven't been focused that much on pressing ahead with it. As Geoff said, probably nothing before the end of the year but hopefully during the first quarter we’ll have something more favorable to talk about.

[Will Green:]

Great. And there's obviously been a lot of Delaware Basin M&A at pretty impressive acreage prices here in the last several months. It does seem like there's still a lot of privates that are looking to sell. Should we expect more directly offsetting where you guys sit today? It seems like that there is - that activity is moving east more towards you guys. Any comment on that?

[Geoffrey King:]

Well, I think, there’s certainly a lot of industry activity we can see a number of drilling rigs from our leases, so we know they are close by, we’re surprised every day we see an M&A number hit the tape. So I guess we’ll not be surprised to continue to see that. We have been offered some acreage directly offsetting us at an extraordinarily high price that we just can’t see economics of, so we’re going to just sit back, develop our acreage and see what happens.

[Will Green:]

Great. And then maybe one more from me. The forward strip has been under pressure lately along with the front month, but if we are thinking about a low to mid $40 price scenario into next year, does that potentially alter the strategy going forward if prices don't materially improve from here into 2017? How are you guys thinking about flexibility in the current environment with respect to the budget you guys have put out?

[Robert Watson:]

We don't really have any pressing leasehold issues. There is a few in the Austin Chalk that we've been able to extend and put off, so certainly if prolonged low oil price we’ll look at our whole card. I think we’ll continue our Bakken rig just because costs are low and the rate of return that we’re seeing at current prices is sufficient. We also have a nice hedge position in 2017. I don’t like to say we will drill because of our hedges but it certainly gives us some confidence in the cash flow numbers that we’ve been talking about. And so as long as we’re receiving an adequate rate of return we'll continue to spend the capital and stay within cash flow.

[Will Green:]

Great. I appreciate all the color guys. That’s all I had.

[Operator:]

Our next question comes from Steve Berman with Canaccord.

[Steve Berman:]

Thanks, good morning, Bob, Geoff. Bob, you can almost set your watch by how consistently good the Williston basin wells have been and as you pointed out these last six have been even better. Could you talk a little bit more about what you did differently on the completion side with these last six expansion wells and some thoughts on the 2017 program, what enhancements you might look to do then? Thanks.

[Robert Watson:]

We are fortunate to have the author of our new frac recipe sitting right next to me. So I am going to give him his time in the limelight to talk about what we changed on our frac jobs and then I’ll talk about what we’re looking at in 2017.

[Peter Bommer:]

Yes, we did a pretty thorough study of current techniques when we were down in the first part of the year and some of the positive correlations that we saw were increased sand which is typical, everybody sees that. And also increased fluid loads. So we up more sand and more water so we had kind of a more water remix. We also changed our viscosifier. We went from cross-linked gel to high-concentration friction reducer, which is more of a cost savings but it also is a less damaging fluid. So we thought we might get some benefit from that. And then the third thing we did which was significantly different is that we went to a multi-ramp design in our stages where we could diverters. And we aggressively used that diverter technology, the polylactic acid diverters, got a lot of good results pressure-wise as we pump those stages and we think that really did us some good. So those three things were our highlight changes.

[Geoffrey King:]

And Pete's Group loves the data mine, so they’ll continue to look at what has happened in the industry. I would say right offhand that we probably will not see any significant changes in our frac design for the next group of wells. We’re rigged up on a four well pad that actual drilling will start hopefully in the couple of weeks and carry us through the winter time and to where we’ll be ready to complete these wells when good weather arrives in the spring time. We won’t rush the frac treatments to do those in the winter. We’ve learnt from experience that does not pay. But the rig will continue going. There’ll be some road band issues in there that will have to slow down or shut down in but we expect the rig to continue drilling throughout the year and on into 2018. We've got 60 more locations that we’ve identified to date to drill at 11 a year that give us five more years of drilling and that's assuming we don't do any acquisitions of additional drilling spacing units up here which we are always actively looking and trying to do but we got to do them on our terms that would generate a sufficient rate of return.

[Steve Berman:]

And Bob, what are you budgeting just for a completion costs for 2017 on the wells out there?

[Robert Watson:]

I think we’re keeping them pretty flat, what we've experienced, we haven't seen any price escalation in the Williston like you've seen say the Permian, but we did this so cheaply this past time even if we get a little bump in price it's not going to have a significant impact on economics.

[Steve Berman:]

All right. That's all I had. Thanks.

[Operator:]

Our next question comes from Bryan Dutt with Ironman Energy.

[Bryan Dutt:]

Congratulations, gentlemen. Keep working hard for me.

[Robert Watson:]

Absolutely Bryan. You are our number one guy.

[Bryan Dutt:]

I like being number one. On the rig, how much CapEx are we talking about?

[Robert Watson:]

We put in about $300,000 into it and that’s going to pay out probably on this first four well pad.

[Bryan Dutt:]

And correct me if I'm wrong, but aren't contractors going out at cash cost? Did you look at the market? That was the economically viable way to go?

[Robert Watson:]

It was, and we will be drilling basically at cash cost. So Raven Drilling, we don't expect it to make any money, but it's going to be drilling wells on the other side of the fence for us at very low rates and anytime you can pay out even at today's costs a CapEx investment in about four wells it's certainly worthwhile doing.

[Bryan Dutt:]

And I'm assuming the CapEx, this is going to be even - the pumps are going to last three or four years at least, or am I mistaken on that?

[Robert Watson:]

No, with liner changes and things like that just normal maintenance, they should last for longer the rigs map.

[Bryan Dutt:]

And on the sand, not to get too granular, pun intended, is there any preference for higher mesh sand size, 50, 70, 100 mesh and is there any fear of any kind of shortages or delays getting it?

[Robert Watson:]

That's a Pete question. I’ll let him answer.

[Peter Bommer:]

Yes. We don’t have any evidence of supply chain problems at this point for the types of masses we’re using. As per ship sizes we prefer larger sand everywhere because we've always kind of been high conductivity people but the trend is certainly towards smaller ship size and we’re using more 100 mesh these days everywhere we’re fracking, whatever basin it is.

[Bryan Dutt:]

Okay, gentlemen. Thank you very much. Appreciate it.

[Operator:]

Our next question comes from John Aschenbeck of Seaport Global.

[John Aschenbeck:]

Good morning, Bob and Geoff. I had a question on the timing of 2017's activity. You have the five net wells in the Bakken; you have two a piece in the Delaware and the Chalk. Is the plan to go after the Delaware and the Chalk first then move to the Bakken in the summer when the weather is more favorable, or how should we think about the timing of the activity in all the plays?

[Robert Watson:]

I’ll let Geoff answer that.

[Geoffrey King:]

We have scheduled now is of course we don't like to complete wells in the Bakken in the winter so I have those completions starting in May so the wells will be coming on in June and then the second batch in October and coming on in November. And then I staggered the CapEx out there on the Austin Chalk as well as the Permian so that it starts up in the February-March timeframe and we go back-to-back there. So all of that is subject to change depending on activity. We've also risked those type curves and coming up with our guidance. So there is plenty of maneuverability around there. And like Bob said it’s a CapEx budget that’s been designed to move around so should we drill some rock start 3,000 barrel a day wells in the Wolf Camp, we'd certainly move more capital there. So we’ll see how it goes.

[John Aschenbeck:]

Got it. That's great. That actually touches on my follow-up. If that is indeed the case, you get some nice results either in the Delaware or the Chalk, would that CapEx be additive or would you scale down activity in the Bakken?

[Robert Watson:]

I think we'll keep the Bakken going as it is just because of the efficiencies with that keeping the rig running. To stay within cash flow we’d have to move capital between Delaware and the Austin Chalk depending on which way we would go. Other than that we could look at the capital markets for an expanding program that’s going to be dictated by all sorts of different conditions that we can’t predict right now. But we certainly don’t want to jeopardize the balance sheet by expanding anything beyond what we're capable of doing out of cash flow and potential capital markets transactions that would exclude that.

[John Aschenbeck:]

Okay, got it. That’s helpful. Congrats on the update guys.

[Operator:]

[Operator Instructions] Our next question comes from Mike Scialla with Stifel.

[Mike Scialla:]

Hi guys. On your 2017 guidance, your 16% year-over-year growth, it sounds like - I just wanted to - I don't want to pin you down to quarterly guidance here, but just in general it looks like your fourth quarter production is going to be up pretty nicely from third quarter and then if you're going to be bringing on a batch of wells in June, should we think that the first half of the year production maybe decline some and then you ramp in the second half?

[Geoffrey King:]

That would be roughly correct. Obviously first quarter and second quarter with the lack of activity you’re going to have natural declines in there and then comes 3Q, 4Q, you are going to have full volumes coming from the Bakken as well as these other wells. So again it is a capital budget where we could bring forward some Austin Chalk wells or Wolf Camp wells in the first quarter, have this come on. So 2Q could look different but the way we’ve modeled it now would be as you outlined.

[Mike Scialla:]

Okay, thanks. You talked quite a bit about the completion design in the Bakken. Just curious, I think that last batch of wells you are getting the really nice rates on, you are using 760 pounds per foot, is that correct and if so, that's a fair bit lower than what some other folks have advertised up there. You said you are going to keep that design consistent for your next set of wells, but any thoughts about using higher sand concentrations in the future?

[Geoffrey King:]

Yes, we are studying that all the time. The sand usage correlations we’re updating continuously. I think our pounds per foot was a little higher than that on our super pad wells but yes, in that range for sure. And that is now low to some of the higher usages that are being talked about. The Bakken has always been behind in terms of pounds per foot compared to other basins but it’s kind of catching up now and I know some operators are talking about what, as much as maybe 2,000 a foot. So we’re certainly looking at that and we do try to mine the data and watch results and when we find results that work, we certainly pay attention. So I am not quite sure where we’ll be come next spring but we’ll be looking at it.

[Robert Watson:]

I think Pete would agree with this but some of the things you hear executives talking about in their press releases in their corporate presentations don’t always follow through on actual results and we spend more time on actual results versus what we hear at a conference.

[Mike Scialla:]

All right, I appreciate that. On the Permian, any decision there on the second location? I think as of the last update, you were hoping to get some title work done to give you some more flexibility there. Any thoughts on where that second Permian will be located?

[Robert Watson:]

I think we’re in agreement now for all sorts of various reasons to move up into Section 98 which would be a direct north section, directly north of the current section. We’re still working on title. We’re still hopeful that we can potentially buyout some partners and that also figures into the equation. So we’re preparing to go into Section 98 and getting the ball rolling on that so we’ll be ready when conditions dictate we need to get ready.

[Mike Scialla:]

Okay. Any update on the - you had some third-party processing issues. Has that been resolved or still ongoing?

[Robert Watson:]

To a degree it’s still ongoing on our existing gas production. We continue to get more than 50% reductions in deliverability. This well however it’s already been tied into a different system. And as of this morning they’ll be ready to take all the gas we can deliver out of this well as soon as we’re ready to deliver it. So that’s good. Our operations people really hit the ground running on this to make sure that the production facilities were in place and the gas line was in place so we won’t have any delays when we start flow back.

[Mike Scialla:]

That's good news. Then last one from me. It sounds like your second Chalk well will be next year. I think at one point you were thinking maybe Angel Eyes would be drilled before the end of this year, but is that actually going to be one of the two wells you are planning for next year?

[Robert Watson:]

Yes. A rig up in the air garners too much attention.

[Mike Scialla:]

Okay. Well, anxious to see the results there. Thanks, Bob.

[Operator:]

Our next question comes from Neal Dingmann with SunTrust.

[Neal Dingmann:]

Hi guys. Say, Bob, I just want to make sure I have this right. With that $60 million CapEx for next year, what's the - I guess, rig-wise, you mentioned a number of wells and waiting obviously through the winter with the Bakken. So how many rigs does that assume? Can you just let me know where those are to plan for next year?

[Robert Watson:]

Well one continual rig our rig in the Bakken and then a one rig program for two wells anyway in the Chalk and one rig program for two wells anyway in the Delaware. We’ll probably work on drilling those back-to-back just to garner some savings but starting late first quarter early second quarter.

[Neal Dingmann:]

Okay. And then just the last one I had was just more - you touched a little on M&A earlier - on just bolt-ons. Are you guys seeing the way the market is now - we haven't seen as many deals; what's your thoughts, Bob? Just is there little bolt-ons you could do, either Bakken, Del and some of these areas right now just to provide so you all could do longer laterals and such? Are you continuing to look at that and is there opportunities for that?

[Robert Watson:]

Well in the Delaware we can't justify the prices that are being paid. We would be a seller rather than a buyer at those prices. But as far as being able to drill longer laterals we’ve made the decision. Our leasehold on in the Delaware are old 1970 vintage leases they call for 1/8 royalty. And also being that old of a lease no one has ever heard of drilling the well across the lease line so it does not provide for pooling. So in order for us to pool to drill longer laterals which we could do, we would have to go back to the lessors and the first thing they’re going to say is, yes, but we want to a quarter royalty. So if you run the economics on drilling these wells with an eight royalty versus a quarter royalty, and considering that our existing production would also go from a eight royalty to a quarter royalty it becomes a no-brainer. We just drill short laterals and be happy with the economics that we have associated with 1/8 leases. So probably not a whole lot to expect in the Delaware. Good chance that we could have some organic growth in the Austin Chalk that would not require an M&A type transaction. And then certainly in the Bakken we're always looking for opportunities there. We’re trying to create some of our own opportunities. We have a number of initiatives underway as we speak. We like the results up there, we like the fact that prices haven't just gone crazy. And so if we can do a deal in the Bakken in good acreage, we're not interested in Tier 2 acreage that just doesn’t work for us. We would certainly transact on an economic basis in the Bakken.

[Neal Dingmann:]

And Bob, you guys mentioned on the completions on the Bakken, how far out would you take the laterals in the Bakken ideally?

[Robert Watson:]

Well those are all two-mile laterals. Those are all kind of set in stone. We don’t have any operated 640 acre units. All of them are 1,280. So we'll have two-mile laterals and the cost that we sustained on these last six but certainly indicated to very economic venture for us.

[Neal Dingmann:]

Very good. Thanks for the details Bob.

[Operator:]

And I am not showing any further questions at this time. I would like to turn the conference back over our host.

[Robert Watson:]

Thanks Kevin. We appreciate your participation today in Abraxas' earnings conference call. As I mentioned at the start of 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 does conclude today's presentation. You may now disconnect and have a wonderful day.