Abraxas Petroleum Corporation
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2013 Abraxas Petroleum Corporation Earnings Conference Call. This call is -- my name is Whitley, and I will be your operator for today. [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, CFO. Please proceed.

[Geoffrey R. King:]

Thank you, Whitley, and welcome to the Abraxas Petroleum Third Quarter 2013 Earnings Conference Call. Before we get started, I'd like to note one correction to our operational update provided last night. Guidance of 4,400 to 4,500 Boe per day is for the year 2013, not 2014 as stated in the press release. Apologies for that oversight. Onwards to the 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 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 would 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.

[Robert L. G. Watson:]

Thanks, Geoff, and good morning. Well, third quarter has started to prove that our business plan is definitely working. We're focusing on our highest return basins, principally the Bakken and the Eagle Ford. We've been divesting noncore and lower return assets, and yet we're still growing production and cash flow. So despite divesting a significant amount of production over the past 12 months, the third quarter production of almost 4,800 barrels a day is the highest for the company in over 10 years, with the cleanest balance sheet in quite some time. Production was up 16% over the second quarter of 2013. This was achieved by focusing on our high-return basins as we not only had great production growth, but we had a significant beat of the Street on both -- on all 3

[Operator:]

[Operator Instructions] Your first question comes from the line of Steve Berman of Canaccord Genuity.

[Stephen F. Berman:]

Can you talk a little bit more about what else might be in the hopper in terms of potential divestments following this Fairview sale?

[Robert L. G. Watson:]

We still have some extraneous assets. Actually, we're going to auction with them in the month of December. Principally, non-operative properties in Wyoming, one property in West Texas, one property in Montana. This will go a long way to cleaning up our act. We would like to eventually have as close to 100% operated properties as we possibly can. So the WyCross assets will not be that starting in January. So we'll look at what we want to do. These are very high-quality assets, and we're certainly inclined to keep them unless we get a very aggressive bid. So that's all in the hopper. To offset these divestitures, we have a number of bolt-on acquisitions that we're working on in, principally in the Eagle Ford, that we're very excited about. We think we'll have even more inventory here fairly shortly than we have now. So we're pretty excited about what we're looking at on the A&D effort.

[Stephen F. Berman:]

And, Bob, on the Spires Ranch, I know it's the first of a kind well but just any thoughts on what kind of rate, maybe even a range that we could expect for a 30-day rate on a well like that?

[Robert L. G. Watson:]

Well, I think it's too early. We're still getting a significant amount of load water back. Although we are getting a 50% oil cut, this is a sub-pressured reservoir, so it is on pump. So -- I just hesitate to throw out something yet. I would think, at least, initially, the rates look like they will exceed our previous 4 wells, which are essentially unstimulated. But we'll have to just wait and see.

[Stephen F. Berman:]

And remind me what those rates were. Do you have that?

[Robert L. G. Watson:]

Oh, do we have [indiscernible] on those? I don't have it right here in front of me, but I think we're looking at, what, 40,000 to 60,000 barrels of reserves, and probably about half of Bcf of gas on those wells. Something -- I'm getting a few nods around the table, but don't have the exact numbers in front of us. But that shouldn't be too far off.

[Stephen F. Berman:]

Right. And how many locations do you think you have here, if this is successful, just going forward?

[Robert L. G. Watson:]

We have 6 more for sure, and then we'll look and see what those bring us.

[Operator:]

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

[Welles W. Fitzpatrick:]

Can you talk a little bit about the shut ins at Lillibridge East? How much is that? And how long do you think that's going to go on while the fracs are getting done?

[Robert L. G. Watson:]

Well, we had them all set in originally. We're gradually bringing them back on as we've seen no evidence of communication to date. We'll just kind of play that by ear. We're about 1/3 of the way through the fractured job on the West pad, and so we're feeling more and more comfortable bringing those wells back on. Maybe within a few days, all 4 of them will be back on. I'm looking across the table. Yes, I'm getting a positive sign on that.

[Welles W. Fitzpatrick:]

Perfect. And then you talked a little bit about Eagle Ford leasing. But any update on the PRB leasing activity that I believe you guys were engaged in?

[Robert L. G. Watson:]

We're still working. No updates. That's a tough area to put acreage together. As you know, people are pretty tight to the vest with it. But we're -- we haven't given up, and we do expect to have some PRB activity in our 2014 budget. We're pretty excited about reviewing the 3D seismic in our Brooks Draw area in relation to the previous horizontal wells, which we've now determined have not been in zone for very long. So we're feeling pretty comfortable about our experience in steering wells and keeping them where they should be. So we might give that play another shot at it and then plus up in our Campbell County area. Our Hedgehog well continues to way outperform our expectations, so we might be doing some more up there as well.

[Welles W. Fitzpatrick:]

Okay, perfect. And then just one last one in the Eagle Ford and I understand if you want to keep this tight. Is it fair to say that the bolt-ons that you talked about are probably going to be up in Atascosa, Bob, at Blue Eyes well?

[Robert L. G. Watson:]

No, not necessarily. And I think we've -- we're pretty excited about we're finding around our home in McMullen County.

[Operator:]

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

[Noel A. Parks:]

Actually, just going back to Brooks Draw for a bit. Could you just expand a little bit on what you were saying before about, I guess, you discovered that you weren't in zone as much in the past wells as you thought?

[Robert L. G. Watson:]

That's correct. We've reprocessed and redone our 3D seismic and used that to kind of do a check on how we steer those wells. And the bulk of them were drilled in the year 2000, so the industry didn't have the capabilities that we have now. And yet, some of those wells have been very good producers, so we're hopeful that if we can get in there and steer and keep in the main target zone for most of the entire well board that we can achieve some exceptional results.

[Noel A. Parks:]

And what sort of lateral length are those going to be?

[Robert L. G. Watson:]

Those are about 4,000 feet and that's pretty much limited by lease lines.

[Noel A. Parks:]

Okay. And do you have a sense of -- I mean, does it look like your past tries were only maybe half of the well barren zone or...

[Robert L. G. Watson:]

Well, actually, less than that.

[Noel A. Parks:]

Really? Okay.

[Robert L. G. Watson:]

Yes, and they weren't stimulated either. So steering the wells and then giving it a stage frac with -- I don't think we've decided whether we're going to cement the pipe in place and do plug-and-perf or use sleeves. But we're pretty excited about what that opportunity might present for us. And we own 100% of it at HBP acreage, we've got about 18,000 net acres, so it's not an insignificant asset for us.

[Noel A. Parks:]

Okay. Well, great, that's interesting. And just in the Bakken and Three Forks for a second, what do you feel comfortable as far as setting expectations for alternate spacing there? We keep hearing more and more about people getting increasingly aggressive. And in your main areas in particular, though I actually realize that it does vary across the basin, do you -- what do you -- are you thinking it's possible maybe you could have more locations out there than sort of the benchmark we've been using?

[Robert L. G. Watson:]

Well, we're at 1,300-foot spacing. There are a lot of people that are dropping down to 600 feet, which is an easy additional location but in between each of our wells. We're monitoring that very closely. We're watching all of the guys that are testing those pilots. We'll be watching our -- the NDIC for actual production and results. We don't have to make that decision on spacing anytime soon. But if we do, and turn out that 600 feet is more appropriate than 1,300 feet, then we've got a heck of a lot more locations to drill with our drilling rig.

[Noel A. Parks:]

Great. And actually, what's the -- at 1,300, what's the location count you're now assuming?

[Robert L. G. Watson:]

Well, we're drilling on 1,300-foot. Is that...

[Geoffrey R. King:]

320.

[Robert L. G. Watson:]

That will be 320-acre spacing. So we would be dropping that down to 160.

[Noel A. Parks:]

Okay. And your total locations at your current spacing, can you just refresh my memory what that inventory...

[Robert L. G. Watson:]

I think we have 22 more. Geoffrey?

[Geoffrey R. King:]

20.

[Robert L. G. Watson:]

20 to 22 more.

[Geoffrey R. King:]

Plus the unit lines.

[Robert L. G. Watson:]

Yes, plus the unit line wells. So we've got maybe closer to 25 wells. And if we decrease the spacing, it more than doubles that because you would be decreasing the spacing between the existing producers, as well as the future wells. So that maybe gives us 55-or-so or 60 wells to drill in North Fork, which has been very good production for us. And that's a lot of years of drilling for our drilling rig.

[Noel A. Parks:]

Great. And just one last thing, any spacing differences you'd anticipate between the -- what you can do in the Three Forks versus the Bakken? I haven't heard people distinguish much between them but I just wanted to check.

[Robert L. G. Watson:]

I don't think we see a whole lot of difference. Three Forks seems to be a little tighter, so it might be a more amenable to tighter spacing than the middle Bakken. But we just don't have the data yet. I don't think the industry has the data yet to make that differentiation.

[Operator:]

Your next question comes from the line of Mike Scialla with Stifel.

[Michael S. Scialla:]

As you mentioned, Bob, the WyCross area goes non-op here pretty soon. I'm wondering, have you had any discussions with the new operator there to get a sense of what their plans are? And do you think they will continue -- I mean, you guys have obviously drilled some tremendous wells there. Do you think they will change the completion style? Or do you think they'll continue to run with what you've proven as a pretty effective completion style?

[Robert L. G. Watson:]

Well, we don't know what their exact plans are. We have seen what they've told the Street where they plan to keep one rig drilling continuously in WyCross. I would hope they would not change our drilling and completion techniques because you're right, it is a winner. But time will tell. We've not have -- we have not had definitive discussions with them all along those lines, mainly because for the next 2 months, we're still the operator and we're still going to be drilling and completing wells ourselves. So time will tell.

[Michael S. Scialla:]

If you were operator, I guess, hypothetical here, would you be looking at -- given the success you've had on 40-acre spacing there, thinking about testing tighter spacing next year?

[Robert L. G. Watson:]

Well, I don't know that we'll be comfortable with tighter spacing yet. We don't want to be out in the leading edge. We'll let somebody else with a bigger balance sheet prove that out for us. I think we're very comfortable in WyCross now drilling 300-foot offsets. In fact, we're drilling one right now as we speak. Whether that's going to be applicable across the entire play or not, again, time will tell. But we've -- we did not see any interference on our first 40-acre zipper frac between wells, which would indicate that the fracs did not extend more than 150 feet either way. But they might have gone right through that. I don't know. I don't think there's any way of knowing.

[Michael S. Scialla:]

Okay, got you. And then in that Cave area, how does that compare to WyCross? Is it -- I know it's a -- it looks it's a little further south. Would you expect more in the gas condensate window there? Is it going to be similar to the kind of oil cuts you're seeing in WyCross?

[Robert L. G. Watson:]

We think it's going to be pretty similar on oil cuts. The gravity might be a tad higher, 43 as opposed to 40, something like that. But the rocks look very similar. We feel very confident with it. We also feel very confident that our drilling and completion techniques down there will be top percentile of the surrounding wells, just like they are in WyCross. So we must be doing something correct, and we think we can continue it down there.

[Michael S. Scialla:]

Great. Last one for me. In the press release, you had mentioned that you were pleased with the drilling of the Atascosa well. Can you elaborate on that at all?

[Robert L. G. Watson:]

We had very significant shows while we were drilling that well. Much better than we saw in our Grass Farms well, which is the first well we drilled up in Atascosa. We also shot 3D seismic after the Grass Farm well was drilled and we used the 3D to steer. Because with the 3D information, we found out that the Grass Farms well was pretty much out of zone most of the well bore and, in fact, with possibly even an upper Eagle Ford test. So that, combined with the gas shows that we saw, we're pretty excited about what we're seeing.

[Operator:]

[Operator Instructions] Your next question comes from the line of John (sic) [Ryan] Oatman with SunTrust.

[Ryan Oatman:]

It's Ryan Oatman. Seeing improvement in operating costs on a per unit basis down about $12.50 a barrel, can you talk about what drove that? And how you feel about that number moving forward?

[Robert L. G. Watson:]

Two pretty interesting concepts have occurred. One, most of our divestitures, including our non-op Bakken were very high LOE-producing barrels. So we're replacing high LOE barrels with very low cost, new flush production in both the Bakken and the Eagle Ford. That combination drove our overall down considerably, and we think that trend will continue going forward.

[Ryan Oatman:]

Okay, very good. And then with the Fairview Prospect in the Western Williston Basin, can you talk about the decision to divest that and plans for any proceeds there? Do you think you'll redeploy in the Bakken or look more towards the Eagle Ford?

[Robert L. G. Watson:]

The -- we studied Fairview very, very closely, and it is an area that is getting more and more attention. We looked at our position being completely surrounded by a larger operator and thus, our ability to grow would have been extremely limited. We looked at the fact that the Three Forks has not been proven productive there, so we're just looking at one zone. We're looking at the overall results to date -- actual results to date even with the new completion procedures that several companies are talking about and just felt like that we could take a pretty good price and redeploy that money in either both the Bakken or Eagle Ford in our core areas and generate a higher rate of return. I think you're going to see, very shortly, that we're -- we've been successful in doing that and that was our decision process.

[Ryan Oatman:]

That's helpful. And then one last one for me before I hop back in the queue. Any updates on Canada?

[Robert L. G. Watson:]

That process is proceeding. We hope to have something to talk about before the end of the year.

[Operator:]

[Operator Instructions]

[Geoffrey R. King:]

No more questions?

[Operator:]

There are no further questions in the queue at this time.

[Geoffrey R. King:]

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

[Operator:]

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