Civitas Resources, Inc.
Q1 2018 Earnings Call Transcript

Published: 10 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q1 2018 Bonanza Creek Energy Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-session and instructions will follow at that time. And as a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Mr. James Edwards, Director of Investor Relations. Mr. Edwards, you may begin.

[James R. Edwards:]

Thanks, Sherrie. Good morning, everyone and welcome to Bonanza Creek's first quarter 2018 earnings conference call and webcast. On the call this morning, I'm joined by Eric Greager, President and Chief Executive Officer; Dean Tinsley, Senior Vice President of Operations and Engineering; and Scott Fenoglio, Senior Vice President of Finance and Planning and Principal Financial Officer. Yesterday evening, we issued our earnings release, posted a new investor presentation and have filed our 10-Q with the SEC, all of which can be accessed on our Investor Relations sections of our website. Some of the slides in the May investor presentation will be referenced this morning during our prepared remarks. Please be aware that our remarks will include forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially from the projections in these forward-looking statements. You should read our full disclosures as described in our 10-K, 10-Q, and other SEC filings. Also, during this call, we will refer to certain non-GAAP financial measures, because we believe they are good metrics to use in evaluating performance. Reconciliations of these measures to the most directly comparable GAAP measures are contained in our earnings release. We'll start the call with prepared remarks and provide time at the end for Q&A. Now, it's my pleasure this morning to introduce Eric Greager, Prescient and CEO. Eric?

[Eric Greager:]

Thanks, James. Good morning, everyone, and thank you for joining us for our first quarter earnings call and my inaugural call as CEO. First, I want to express my excitement to join the team here at Bonanza Creek. The concentrated asset base in the Greater Wattenberg provides a tremendous opportunity to efficiently create value through improving well performance and increasing cost efficiencies. Prior to my arrival, the company restarted a drilling and completion program that focused on high intensity stimulations which has resulted in improving well performance. Going forward, our organization will continue pushing these high-intensity completions designs by utilizing data and technology to maximize well performance. We will continue to be focused on better wells and efficient execution to maximize corporate returns and shareholder value. This morning, Dean will be covering the details of our operations for the quarter, where we continue to see encouraging performance from our enhanced completion program. After Dean's remarks, Scott will provide a quick financial update and the remainder of the call, we'll go to answer your questions. With that, I'll hand to call the Dean for his operational update. Dean?

[Dean Tinsley:]

Thanks, Eric and good morning, everyone. We had a successful first quarter of 2018 with a drilling and completion program that remained on-track and production numbers that exceeded our quarterly guidance. During the quarter, we brought online the 8-SRL F-26 pad in our western acreage, which has exhibited strong performance over the first 75 days. Our RMI system, combined with off-take flexibility continues to keep system pressures low, which in turn has resulted in flow assurance for both new and old wells. The better-than-expected new well performance, combined with robust well servicing activity and low gathering pressures resulted in production and outperformance for the quarter. As we are halfway through the second quarter, we are seeing the cumulative effect of these new high-intensity completions take hold, which are expected to drive 9% sequential growth in the second quarter based on the midpoint of guidance. Growth is expected to accelerate as the second rig is added later this year and wells from that second rig are brought online, driving significant growth in late 2018 and through 2019. As Eric mentioned earlier, these increased production volumes will generate scale within our operations and drive down per-unit costs going forward. Next, I would like to further discuss the impact of our RMI system. On slide 10, we have shown a part of system pressures for both our RMI system and prevailing based on gathering pressures. As you can see from the slide, pressures outside of the RMI system have increased significantly over the last year, peaking at approximately 375 PSI around yearend 2017. Meanwhile, our RMI pressures have remained consistently under 100 PSI for the last 24 months. We have accomplished this by strategically adding compression and as I mentioned earlier, increasing the number of off take points to third party processors. During November of last year, we added in our off-take point, which allowed us to move gas through the RMI system through a new processor Sterling Energy, which has helped maintain the low pressures on our RMI system despite adding significant new volumes. Later in the year, we anticipate adding an additional offtake point to (00

[Scott Fenoglio:]

Thank you, Dean, and good morning, everyone. First I will quickly go through our guidance to actual summary, and provide some additional color. As Dean mentioned earlier, we were off the top-end of our guided production volumes for the quarter. And I think, it is worthy to note that while production was lower than the first quarter of 2017 due to a lack of activity during the first half of last year, oil production grew year-over-year. This can be attributed to a combination of the enhanced recovery flow back method we employ, and the addition of new wells which have higher oil cuts early on. Capital expenditures were in line with expectations, while LOE for the quarter was higher than we forecast due to an accelerated pace of compressor swaps in the Rockies. We began upgrading our compressor fleet late last year swapping out existing compressors for new compressors at a lower rental rate. In our plan, we had assumed that we would swap out one compressor per week to upgrade the fleet, but have found that our field teams have been able to swap out two to three of these units each week. While this has accelerated the timing of the installation costs, we also realize lower compression costs sooner in the year than originally forecast. We still expect our annual LOE to be in the guided range. We have updated our G&A guidance for the year to include the compensation for Eric, which was excluded from our original G&A guidance provided in the first quarter. The effect of adding the CEO compensation increased the midpoint of our annual G&A guidance by approximately 3%. From an accounting standpoint, I would like to point out the adoption of ASC 606 for revenue recognition and the effect that it had on our Q1 financial statements. As prescribed, Bonanza Creek adopted ASC 606 in the first quarter of 2018, and as such has changed some of the presentation of our income statement. Previously, our revenues were reported net of certain gathering, processing and transportation charges. Upon adoption, some of our contracts are no longer recorded on a net basis, but rather we are recording gross revenue with a corresponding gathering, processing and transportation line item in the expense section of the income statement. While the presentation of these numbers is different, there is no effect to net income. Before turning the call over to Q&A, I will touch on our liquidity, balance sheet strength, and the status of our credit facility. We exited the first quarter with liquidity of approximately $180 million. We had cash on-hand of $5 million and $15 million drawn on our $192 million credit facility. We continue to forecast a strong balance sheet and low leverage metrics going forward. Based on strip pricing at the beginning of May, our announced 2018 capital plan and a continuous two-rig program in the Rockies, we are expecting our debt-to-EBITDAX ratio to be approximately 0.5 times at year-end 2018. Further, we expect to stay under one turn throughout 2019 and become cash flow positive in the fourth quarter of 2019. We've continued to add hedges to both oil and natural gas to take advantage of the recent strength in commodity prices and lock in volumes at prices that exceed these assumptions behind our cash flow positive goals. Details of our current hedge position are included in the first quarter earnings release and in the appendix of our May Investor Presentation. With regard to our upcoming credit facility redetermination, we are in discussion with our bank group and we'll have an update when that process is completed. With that, I will turn the call to the operator for Q&A.

[Operator:]

Thank you. Thank you, we do have a question from Irene Haas with Imperial Capital.

[Irene Haas:]

Hi, good morning. Congratulations on managing the line pressure so well. This is truly impressive. My question is for Eric; now that you have been on the job for a little while, what's your assessment? The team has done a remarkable job considering how to – the low head count. What do you think you would do kind of, differently, you know, now that you have been in place a little while and where would you take this company, say, in 20-22, kind of envision sort A and B transactions?

[Eric Greager:]

Thank you, Irene. This is Eric; what I would say is, in terms of focusing my attention and the attention of our team, we're going to continue to focus on the application of technology in our current development programs. We believe there continues to be opportunity to improve our operating efficiencies , to continue to explore economies of scale in our pad drilling and completions operations – high-intensity fracture stimulation and efficient facilities gathering and processing all the benefit of the ongoing development programs. Of course, we do continuously assess and evaluate opportunities for growth and I am really pleased and excited about the posture of growth and the position we find ourselves in today, with a strong balance sheet and assets throwing off (00

[Operator:]

Thank you. Our next question comes from David Epstein with Cowen.

[David Epstein:]

Hi folks; wanted to know if you guys are prepared to talk at all about IRRs, break-evens, say payback periods, those kind of things?

[Eric Greager:]

Thank you, David. This is Eric. I think, certainly from my perspective, what I would say is the company remains focused on continuing to make value accretive investments in the wells themselves. One of the things that we are focused on, on understanding is the interactions between various reservoirs systems, and the fracture stimulation designs, improvements in artificial lift and also clearly the gathering system and the processing systems that the company has in place. With regards to specific IRRs, I've had some opportunity to look at some of the specific pads and wells, but I think it is pretty mature for me at this point to comment on where we stand today. What I would say is, we continue to be focused on making value-accretive investments in the wells and value-accretive investments in the gathering and processing systems. And I do believe we continue to have good opportunities and high-quality reservoir rock with teams that are very capable of executing new technology to the benefit of the company.

[David Epstein:]

Okay, thank you.

[Eric Greager:]

Thank you.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today's question-and-answer session for today's call. I would now like to turn the call back over to Eric Greager, President and CEO, for any closing remarks.

[Eric Greager:]

Look, I want to thank everybody for the time and attention this morning, joining our call and your continued interest in Bonanza Creek. I do look forward to getting on the road in the coming months and meeting both current and prospective shareholders, and helping to explore what's interesting on the minds of the shareholders. And I want to say thank you to James Edwards, many of you may know that James has been with Bonanza Creek now for three years, and this will be James' final conference call. He's moving on to another opportunity, and we just want to wish him the best of luck. So, thank you, James. And thank you for all those who are participating on the call.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. And have a wonderful day.