Civitas Resources, Inc.
Q3 2017 Earnings Call Transcript

Published: 11 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2017 Bonanza Creek Energy Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to introduce your host for today’s conference, James Edwards, Director of Investor Relations. Sir, you may begin?

[James Edwards:]

Thanks, Heather. Good morning, everyone, and welcome to Bonanza Creek’s third quarter 2017 earnings conference call and webcast. On the call this morning, I’m joined by Seth Bullock, Interim CEO; Scott Fenoglio, SVP of Finance and Planning, and Principal Financial Officer; Curt Moore, SVP of Land, and Dean Tinsley, SVP of Operations. 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 section of our website. Some of the slides in the 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 disclosure as described in our 10-Q, 10-K 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 during this one hour call. It’s now my pleasure this morning to introduce Seth Bullock, Interim CEO. Seth?

[Seth Bullock:]

Thanks, James. Good morning, everyone. And thank you for joining us for our third quarter earnings call. This morning, Dean Tinsley, our SVP of Operations is going to go through some of our key operational successes over the last quarter, and Scott Fenoglio, our SVP of Finance will walk through some of our third quarter financial results. Before handing the call over to Dean and Scott for their remarks, I will quickly summarize some of our successes in the third quarter. First and foremost, our enhanced completion program is performing above expectations on our initial wells. Second, we have entered into an agreement with a third party to gather and process a portion of our gas. This is a preemptive move to mitigate increased line pressures in the basin. And lastly, our recently restarted drilling has already set a record pace for the Company with record spud-to-total depth and spud-to-rig release times for an SRL well. As for the financial side, the Company continues to identify cost saving measures that reduce our cost structure, further setting the foundation for enhanced operating metrics, as our activity normalizes. Before handing the call to Dean, I know many of our investors are interested in hearing an update regarding the CEO search and strategic alternatives process. While we will not be providing a specific update regarding the progress of these two initiatives, I can say it’s the intent of the Board to make an announcement prior to year-end. Given the nature of these items, we will not be answering any questions or providing any additional color regarding these matters. With that, I’ll turn the call over to Dean for his operational update. Dean?

[Dean Tinsley:]

Thank you, Seth. Good morning, everyone, and thank you for joining us this morning. During my operational comments, I will touch on three important points for the quarter. First, I will cover the strong performance of our enhanced completions; second, I will discuss line pressures in the basin and what we are doing to mitigate their impact to our production; and finally, I will touch on the drilling efficiencies that we have gained in a short-period since our 2017 drilling program started. As our know, our four SRL DUCs were completed at the end of the second quarter, using increased sand loading of 2,000 pounds per foot and decreased stage spacing to 100 feet. This design essentially doubled the frac intensity utilize in the offset wells and our legacy wells in general. These four wells have been on line for approximately four months and are showing greatly enhanced production volumes. These wells are outperforming their offset by approximately 40% and are showing higher oil cuts, resulting in our oil production outperforming offset wells by 60%. This higher oil percentage has a significantly positive impact on near-term cash flows and thus overall well returns. As you can see on slide 14 of our current investor presentation, the offset wells are directly adjacent to the four DUCs and have similar geology and well spacing. So, these wells provide a good comparison between the old and new completion designs. We’re very encouraged by the results of these wells and look forward to reviewing the results from remainder of our 2017 completions program, all of which utilize various enhanced completion designs. Aside from the increased production we have seen so far from these wells, we’re very encouraged by the pressures that these wells have maintained. These pressures are a result of increased frac intensity combined with what we call, enhanced recovery flow back. We believe these pressure to be indicative of robust long-term reservoir performance, enhanced oil recovery, and flow assurance. Along with the pressure data on slide 15, we have shown daily production rates as well. As you can see, daily production rates have flattened out and our hovering above 400 Boe per day. As the slide shows, daily production rates at month four are nearly double that of the offset wells for the same period. Due to the flat nature of these wells, we anticipate cumulative production performance to increase. We’re very pleased with these initial results and while we think it is too soon to establish a type curve or to calculate their IRR, it is safe to say that the cumulative impact of all of these items should significantly enhance our well level returns. Next, I would like to touch on line pressures in the basin, which have increased significantly in recent months. These increased pressures coupled with older production resulting from our activity hiatus are leading to production headwinds, which have directly led to our decision to reduce our guidance for the fourth quarter. While basin producers are anxiously waiting DCP to bring on additional processing capacity in the second half of next year, we have entered into an agreement with Sterling Energy Investments to ship up to 6,500 Mcf per day of gas with service to start in the next few days. For context, the 6,500 Mcf per day that we will be able to ship, accounts for approximately 20% of the average gas we shipped in the DJ during the third quarter. So, this is a material deal for us, and it will be particularly helpful as we bring on new wells during Q4 and the beginning of 2018. Longer term, we are in an advantageous position of having a significant amount of our acreage undedicated for gathering and processing. These undedicated acres provide Bonanza with the opportunity to diversify our gathering and processing relationships and to further reduce production risk due to third-party processors. In addition, our RMI system which spans five townships, provides us with the flexibility to easily move gas to the most favorable off-take points. We’re adding three additional compressors on the system in November to serve our 2017 and 2018 volumes and to direct these volumes to the most favorable points. This system also allows for short hookups to other third-party processors both now and in the future. With all of this in mind, we continue to actively seek out additional gathering and processing options. Lastly, I will touch on our drilling efficiencies over the year -- over the past year. Despite taking well over a year off from drilling and completion activities, our drilling program is off to a great start with record-setting drilling times. During the quarter, one of our SRL wells was drilled from spud-to-total depth in 3.4 days and spud-to-rig release in 4.6 days, both of which were Company records. In all, our 2016 program averaged approximately 2,225 feet per day and our 2017 average thus far has been 2,530 feet per day, a 14% increase in overall drilling efficiencies. As we continue our 2017 program and kick off our 2018 program, we will continue to look for areas of improvement to make these numbers even better, making the Company incrementally more efficient with capital. To summarize my comments, we have engaged capital activities and are already drilling wells, faster and more efficiently than we ever have. We’re executing completions that are outperforming nearby wells by 40%, while maintaining pressures that will benefit ultimate recoveries. We’re leveraging our RMI system together with our undedicated acreage to mitigate basin-wide system pressures. And finally, we’re doing this with a vastly improved cost structure. We’re proud of the efforts of the operational team’s delivery of these results and are confident that we’re positioned for superior results in the coming quarters. With that, I’ll turn the call over to Scott for some commentary on our third quarter results and financial position.

[Scott Fenoglio:]

Thank you, Dean, and good morning, everyone. I’ll start this morning by summarizing our third quarter results. As Dean mentioned in his comments, we had some production headwinds from increased line pressures that resulted in production of 15.8 MBoe per day. That’s at the low end of our guidance range for the quarter. Considering the third quarter results in conjunction with our expectations for higher line pressures throughout the fourth quarter, we are reducing our full year guidance by approximately 4% to a range of 15.7 to 15.9 MBoe per day. On the cost side of the equation, the Company continues to cut costs while maintaining safety standards for our employees, the environment and the communities in which we work. Our review of LOE during the quarter identified several areas of improvement that will lead to an estimated annualized cost savings of $8 million to $9 million. Implementation of these cost savings initiatives will take place throughout 2018 and are expected to be fully realized by the beginning of 2019. These savings combined with the G&A savings that were identified and reported during our second quarter call have made a significant improvement in our operating cost structure by reducing forward-looking G&A and LOE by over $20 million, annually. As we get back into a normal pace of activity with increasing volumes, we fully expect our operating metrics to dramatically improve on a per unit basis, as we will continue strive to have pure leading operating margins. From a financing perspective, our balance sheet remains clean with an undrawn revolver and approximately $30 million of cash on hand at the quarter-end. We had an active quarter with regard to hedging, adding additional hedges to both oil and natural gas. Details of our current hedge book are included in both our press release and the 10-Q. We’re currently working through our budgeting cycle and plan to announce our 2018 drilling and completion program by the fourth quarter earnings conference call. Although I don’t have any color to add regarding the 2018 program today, I’m confident in saying, it will be focused on maximizing corporate level returns and the further use of enhanced completions across our acreage position. With that, I’ll turn the call to the operator to begin the Q&A session.

[Operator:]

[Operator Instructions] And our first question is from David Beard of Coker Palmer. Your line is open.

[David Beard:]

Hey, good morning, gentlemen. Thanks for the information. My question really relates to the thought process relative to line pressures, through 2018 and 2019. What’s your best guess of how this may play out relative to the confidence and timing to building the new plans and the additionally drilling, filling those ahead of time? If you could just give us your thoughts that would be helpful.

[Dean Tinsley:]

Yes. This is Dean Tinsley, thank you for the question. Until DCP brings on additional capacity in late 2018, line pressures on their system could be high, no doubt about it. As we said, not only us but other operators are anxiously awaiting that. However, as mentioned earlier, by offloading gas on the other third-party processors including Sterling this month, we feel that we’re well-positioned to remediate this issue, additionally strategically placing horsepower on our RMI system and redirecting gas to more favorable off-take points, gives us that additional flexibility.

[Operator:]

Thank you. [Operator Instructions] Your next question comes from David Epstein with Cowen. Your line is open.

[David Epstein:]

Hi, folks. I just wanted to get your sense of how inflation or lack or inflation is shaping up in the basin versus, say, what you were expecting a quarter ago, and as you look out to 2018?

[Dean Tinsley:]

Hi, David. This is Dean, again. We, getting off to a somewhat of a late start in 2017, created some challenges. However, now that we’re up to drilling and completing again and now preparing for 2018 program, we have approached many of our service providers. And, so far, we are very encouraged with what we are seeing. So far, we feel pretty -- feel like we’re in a pretty good position going into 2018 on the cost side.

[David Epstein:]

Do you think it will tick up from current costs further? Will it be with like CPI or is it going to be another 5%, 10%?

[Dean Tinsley:]

Yes. David, it’s really hard to say, at this point. Again, so far, it feels like with the numbers that we’re seeing on both the rig side and on the frac side that the numbers are comparable or better to what we’ve assumed in the past.

[Operator:]

Thank you. [Operator Instructions] And I’m showing no further questions at this time. I’d like to turn the call back over to Seth Bullock, Interim CEO, for closing remarks.

[Seth Bullock:]

Thanks, Heather. Thank you again for joining our call this morning. We hope you found it informative. As noted prior -- in previous comments, there continues to be significant progress made in bolstering our corporate returns at Bonanza Creek, both by increasing well productivity and reducing our cost structure. And we really think this sets the stage for a strong 2018. And we look forward to providing updates on our CEO search and strategic processes as soon as possible, and again, expect to have that announcement by year-end. And in the meantime, feel free to reach out to James Edwards, for any questions you may have. Thanks, thanks again.

[Operator:]

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