Earthstone Energy, Inc.
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Good morning. And welcome to the Earthstone Energy's Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Joining us today from Earthstone are Frank Lodzinski, President and CEO; Robert Anderson, Executive Vice President of Corporate Development and Engineering; Tony Oviedo, Executive Vice President Accounting and Administration; Neil Cohen, Vice President, Finance, and Treasurer; and Scott Thelander, Director of Finance. Mr. Thelander you may begin.

[Scott Thelander:]

Thank you and welcome to our conference call. Before we get started, I need to disclose that the conference call today will contain forward-looking statements within the meaning of Section 47A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934 as amended. For a complete description of disclaimer, please refer to our press release that was issued in connection with our first quarter report on May 8. For a more detailed information about our Company, listeners are encouraged to read our quarterly report on Form 10-Q for the quarter ended March 31, 2017 in its entirety and all other reports and documents filed with the SEC. Our earnings release includes certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable measure under GAAP are in our earnings release. The content of today's call will include remarks from Frank regarding integration and development plans of our recently close business combination with Bold Energy; remarks from Tony regarding financial performance for the first quarter of 2017 and remarks from Robert regarding operational and A&D matters. Neil and I are here to assist with Q&A as needed. I’ll now turn the call over to Frank.

[Frank Lodzinski:]

Okay, thank you Scott and good morning to all the listeners. We're obviously very pleased to report that we closed the Bold business combination yesterday, spent a lot of time coming and we are well underway with the assistance of Bold personnel to effectively integrate our activities and operation. At present we are running one rig in the Midland Basin where we now have 27,000 net acres and about 6,120 Boe a day of production during the first quarter of 2017. To elaborate on that a bit in the Midland Basin Bold has about 4,780 Boe/day and our non-op Midland Basin production we have about 1,340 Boe a day. The results we are seeing – let me clarify one other thing. The 27,000 net acres includes about 21,000 net acres operated through the Bold business combination and roughly 6,000 non-operated in the acquisition we did last year. The results we're seeing have been very encouraging and I'm very pleased with them and we'll look to accelerate that drilling program and bring our second rig possibly by year end. We're also planning a rig in our Eagle Ford properties and plan to keep that rig in place from a 11 gross wells which are about – well 4.4 net wells, 4.4 – 4.8 net wells. Going forward, we continue to focus on our cost structure as we execute our development program and will actively evaluate acquisition opportunities to further expand our operated acreage and production. As many of you know we tend to operate the vast majority of our assets and that is our clear focus while generating attractive economics. I'll turn over the call to Tony to provide a brief summary of our operational and financial results for the first quarter of 2017.

[Tony Oviedo:]

Thanks Frank. And on basis for the quarter ended March 31, 2017 our production averaged 4,735 barrels of oil equivalent per day, which represents a 1% increase relative for the quarter of 2016 and a 32% increase relative to the first quarter of 2016. Production consisted of 60% oil, 25% gas and 15% natural gas liquid. We reported a total revenue of $15.3 million and net income of approximately $0.7 million or $729,000. We also reported and adjusted EBITDAX of $5.3 million inclusive of approximately $803,000 in transaction expenses. Capital expenditures for the quarter totaled approximately $4.2 million. We continue to have a balance sheet with a clean capital structure and low leverage. On a combined basis we currently have approximately $10 million of cash on hand and $70 million of bank debt outstanding which includes debt that was incurred by Bold and assumes our asset closing. In connection with the Bold transaction our borrowing base was increased to $150 million with support from an expanded bank group [indiscernible] as we look both assets [indiscernible] to facilitate future opportunities. On a combined basis our liquidity currently stands at about $90 million. I'll now turn the call over to Robert.

[Robert Anderson:]

Thanks Tony. We released a pretty comprehensive press release last evening with a fair amount of information surrounding the recent Bold activity along with our Eagle Ford that I won't repeat here but rather just highlight some items. First off we are maintaining our guidance for now, but could adjust both our capital budget and our guidance as our plans to develop further into the year. First within our Eagle Ford acreage in southern Gonzales County, as Frank mentioned, we're utilizing one drilling rig to drill 11 gross wells. We've already finished drilling our two wells Davis Unit pad, where we have 33% working interest. The rig is currently drilling on our three-well Pilgrim Unit pad, where we have acquired some additional acreage and now we have approximately 38% working interest. After this we’ll move the rig to our Cortney pad, which we will have six wells and have 50% working interest. And we expect to complete these wells starting in the third quarter with all the wells online sometime in the fourth quarter of 2017. Moving to the Midland Basin, highlighting some of the Bold activity. We started drilling in late April in Southeast Reagan County prior to close under a contract operating arrangement with Bold. This drilling is on the WTG 4-232 #1H well which is near the WTG 5-234 #1HM well, which began producing in January 2017 and has cumulative production of 126,000 barrels of oil equivalent after only 110 days. So we're pretty excited about this area and thus initiated our program in that portion of Reagan County. We plan to maintain a one-rig program throughout the year with a more majority of locations in Reagan County and a couple of wells planned on our Midland County acreage. This one-rig program would allow us to drill 14 gross wells for the remainder of the year. As Frank mentioned, we plan to add a second rig towards the end of the year. A little bit about Bold’s production. It has continued to grow with successful completions and has increased from 3,340 Boe a day in December 2016 to over 5,000 Boe a day in March 2017. There are also four wells that will have an impact on production in the near term as one well is flowing back, one well is preparing to flow back and two wells are being fracked as we speak. These four wells are expected to be on line and producing by the end of May. Generation for completions are still being used on all of these wells and these consist of approximately 160-foot stage facing, 22,000 pounds per foot of proppant and they continue to show significant improvements in results compared to prior completion designs. For instance in Central Reagan County, the Texaco-Parish Unit 4 #1HU, by November 2016 Gen IV completion in the Wolfcamp A has assumed 70% more in 174 days, compared to the offsetting Gen III Wolfcamp A well. In an Upper B Wolfcamp example in the same area after 169 days the Gen IV Texaco-Parish U3 #1HM, well which was again was completed in November of 2016 has teams over 30% more than the Gen III offsetting well. Moving on to our Howard County, Texas acreage, we continue to be impressed by the performance of our Tubb A well, which is a Wolfcamp A completion where we have 40% working interest. After only 108 days the well has cumulative [ph] 168,000 Boe, 84% oil. For purposes of planning and preliminary guidance our non-op position, we are budgeting four gross 1.6 net wells to be spud and two gross 0.8 net wells to be completed in 2017. As Frank mentioned we have 27,000 net acreage total in the Midland Basin with 21,000 net acreage being operated. Where we have the economic inventory to easily maintain a one to two rig program and our forecast of our budget for the remainder of this year is skewed towards the Midland Basin with approximately $100 million planned. We continue to generate meaningful production in cash flow from both our Eagle Ford and Bakken assets. And with continual inbound calls regarding our plans for divestiture on the assets we are in, however, no hurry based on recent success and current economics to divest of these assets. We are focused, however, on additional growth opportunities in the Midland Basin and have been reviewing several potential prospects that include acreage trades in order to extend laterals, bolt-on opportunities adjacent to our existing acreage, as well as larger acquisitions. Now I’ll turn the call back to Frank.

[Frank Lodzinski:]

Okay, thank you Robert. Full time allowed we want to try to make this short and sweet and get to your questions. And also recognizing the fact that we put a lot of data out yesterday. I hope that you with and the market in general appreciate the fact that our Company has transformed itself into a high growth Midland Basin operator. We're excited to have closed the business combination with Bold and have made progress already in the integration effort in fact will be heading out to Midland again tomorrow morning. Goals of course are to further expand our acreage positions and we can't wait to find the next deal and pull the next one. We appreciate the continued support of our shareholders, and our current lenders on our revolving credit agreement. Operator we’ll now open the line for questions.

[Operator:]

Thank you. We will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Neal Dingmann with SunTrust Robinson Humphrey. Please proceed.

[Neal Dingmann:]

Good morning guys. And Frank thanks for all the details because [indiscernible]. This question maybe starting to Robert, Robert that now you’ve take a range of Bold is we’re now looking at Reagan County starting in more northern part of the northern well, they are down at Southeast. Do you see that with that one rig this year is it – will that be the exclusively both Wolfcamp A and B. And then as you turn to a second rig do you anticipate going after a few other ventures? How do you anticipate that hovering that?

[Robert Anderson:]

Neal I think well enough that we're not going to go out there and explore. We've got plenty of offset operators doing some good research drilling for us and we'll take the cue from some of their results. But generally in Reagan County we've got two benches that are proven in the B and A obviously has proven also and we’ll continue to watch how the C performs early results were super encouraging to say the least. In other areas both Houston and Midland County the Lower Spraberry looks very good as well along with both of them A and B depending on where exactly are. So we'll stick to the proven targets and continue just to develop both on a one and – one or two-rig program under that model for now.

[Neal Dingmann:]

It make sense I’m not showing that looking them. And then just lastly Frank probably could you give a bigger picture not M&A to add that second rig or accelerate it leaves that at much remorse, would you have to divest something or not necessarily if prices are right you'll bring that second rig.

[Frank Lodzinski:]

Well a lot of those kind of questions have come up repeatedly Neal and in fact some prior ones from you and others. We really need to sit down with the Bold personal, refine the drilling program, refine our forecasts and consider where we're going and have more of a strategic discussion with our Board. So while I wouldn't rule out any divestitures and we're getting a lot of inbounds, we have partners, and shareholders and other things that are involved we're not going to lose anything radical without talking to them first. So when we take a look at it if commodity prices go trash it looks like the growth in production that we can achieve will give us an enough to – and a growth and a borrowing base will give us enough to bring on that second rig. But like I always tease [ph] with you Neal, give me a price deck and I'll be a little more definitive on what we're going to do. We just closed the transaction, we’re having the Midland, we need to shift down with those good folks out there. We fine our plans and we fine our focus and that's why I think I've said that when we do we'll get out revised guidance on production. Costs kept the budget. So I'm sorry to be mealymouthed but we're just working through all that right now.

[Neal Dingmann:]

No that makes sense at this point Frank. Thanks for the details guys.

[Operator:]

Thank you. Our next question comes from Jason Wangler with Wunderlich. Please proceed.

[Jason Wangler:]

Hey good morning guys. Robert you talked about the I believe it’s four near-term wells that will be coming online and you had a bit of a few months there where you were running a rig. Should we expect a little bit kind of a lag in between kind of the turned on line wells that maybe into the middle of the summer or something like that just because of that that slowdown on the rig where you were getting the transaction done.

[Robert Anderson:]

Yes Jason you got it. We're probably not going to start fracking again until we get in enough of an inventory keep the frac crew busy for awhile. So we don't have it exactly planned out yet when we would start, but yeah we won't have any completions in June or July for sure.

[Jason Wangler:]

Okay and that's kind of what I was wondering about is just your plan is to kind of get enough scale so to speak to get frac or running for a significant period of time it won't be kind of one-off thing so there will be there should be some, I guess, some scale there as you look forward.

[Robert Anderson:]

Yes I wouldn’t say never that we would do a one off frac but generally speaking that's what we like to do. We get enough line of sight of work that we can keep a frac or employee for 10 wells or something like that. No that number you got it.

[Jason Wangler:]

Great. I’ll put it back. Thank you.

[Robert Anderson:]

Thanks.

[Operator:]

Our next question comes from Chad Mabry with FBR. Please proceed.

[Chad Mabry:]

Hey thanks. Follow-up question on your new operator position in the Midland. Just curious how many wells you're planning to drill down in southeast Reagan before you move to Midland County? And how much of that drove by, I guess commitment during this year.

[Frank Lodzinski:]

Chad we're going to drill one well down there which is a commitment well and then we're going to bounce around a little bit at Reagan County before we go up to Midland County and if not all in Southeastern Reagan, it'll be Central Regan for some of it as well. So it's driven by obligations and pad drilling but we're going to do one well here, and then we've got three well pad up North, and the two well pad in Central Regan, and so forth.

[Chad Mabry:]

Okay and then moving over to, I guess, the non-op position or lending position I didn't see much commentary in Middle East. I appreciate the color on the Tubb A, but what’s the status of the rest of this year's program may be what data point should we look for in the near-term.

[Frank Lodzinski:]

Yes we're drilling some vertical wells from an HBP standpoint and we have a very large acreage position at Mitchell County drilling a couple wells there that are, I’ll call them developed cats [ph] and they're very small in reserve and cost standpoint. On a horizontal standpoint we're still talking with CrownQuest and our other operator out there to see what the plans are for this year, but we've got four wells budgeted and that's kind of what we're leaving it for the time being.

[Chad Mabry:]

All right. I appreciate it. Congrats on the closing.

[Tony Oviedo:]

Thank you.

[Frank Lodzinski:]

Thanks.

[Operator:]

Our next question comes from Mike Kelly with Seaport Global. Please proceed.

[Mike Kelly:]

Hi guys good morning.

[Robert Anderson:]

Good morning Mike it’s Rob.

[Mike Kelly:]

Robert I was hoping to read this in the question of the Wolfcamp sheets, it seems to get a lot of attention now. Then just from a geologic perspective your Reagan acreage, you think the C’s perspective across the central and the southeast block, may be if you can just kind of you orientated way you see that the best opportunity there for the C.

[Robert Anderson:]

It's definitely there across the entire block that even go into the southeast how economic it is and what kind of results we haven't seen too many wells drilled in the C in the southeast corner. So we're going to focus our attention when we get to it to drill C wells not far from where other people have and there's been some very successful wells drilled in the, not too far just north of our block of kind of in Western Reagan County.

[Mike Kelly:]

If you at our presentation where the map is we actually show the Taylor well which is, I think, that's right the Taylor well that is fantastic well.

[Robert Anderson:]

Yes and we also show – we also show in there the cross-section and target I’ll say look as Robert indicated our style is kind of watch what the other guys are doing because we have plenty of inventory in other ventures of the A and B, and so forth. We're encouraged by the C. And we're going to look into that. We need to sit down further with the Bold team and I need to get a little more educated on all the geology there, and so forth and sit down with the Bold team and with our geoscientists and get a good feel of it. But the bottom line is where we’re encouraged and we hope to be adding locations in the C going forward.

[Mike Kelly:]

Okay great. And Frank you mentioned you are already looking forward to close in the next deal. And I’m curious if you can give any color on that in the terms of your are rolling this to venture out the Midland Basin may be look at some Delaware deals or really where you see the best potential opportunities. Thanks.

[Frank Lodzinski:]

Well Mike you know Robert and I, and you know we never stop looking for new opportunities. I wouldn't say that we made a concerted effort to build in the Delaware, although we've been studying and seeing where the opportunities are. We hope that there’s further opportunities in the Midland Basin where we have established operations. And we feel pretty good with the folks out there in Midland further on that we can add to our position, do acreage trades that will add additional locations, do bolt-ons, and so on. So we're formulating kind of a go forward effort. So that the team our Land department, their Land department our G&G departments they are, I got to start saying we and they because we are a big lean out. But the Midland personnel and the Houston personnel are working together to do the bolt-on, the trades, and so on that are such a big part of the business out there in the Midland Basin. So that Robert and I can focus in on bigger transactions. So that's what we're doing. I mean more in the Midland Basin and start looking around more specifically on the Delaware to see if we can pull off anything else. As you know we have a lot of M&A in our background. So all the way from the base land positions and doing what I said earlier to acreage acquisitions and M&A we’re going to try to keep all of that going. I'll be disappointed if we don't expand our acreage position appreciably in the next year.

[Mike Kelly:]

Got it. I appreciate it. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Joel Musante with Euro Pacific Capital. Please procedure.

[Joel Musante:]

Hey guys most of my questions have been answered. But I did have one on production. You gave first quarter average, I was just wondering where you are compared to that now that the acquisition is closed?

[Robert Anderson:]

Well, I'm not so sure I understand your question. The business combination that we put out here, I think, the combination to make sure there's no confusion. I think the combination of the two companies was about 9,500 Boe a day for the first quarter.

[Joel Musante:]

Right.

[Tony Oviedo:]

We're probably – the Eagle Ford and the oil production within Earthstone is probably about flat from where we were at 4,735 whereabouts. I think in the materials here, Robert correct me if I'm wrong, but the Midland Basin, Bold properties is over 5,000. So we're going to starting to approach 10,000 Boe a day. We haven't really changed our guidance yet because we've got a lot of work to do planning, integration, and so on. So we have stuck with an estimated exit rate of above 10,000 Boe a day. But we're already at that on a combined basis. So we need to sit back and really see where it will go on. And I wouldn't be surprised if it's beyond that but we’re not ready to commit to that yet now. That said, you have to bear in mind that for accounting purposes, reporting purposes, and so on, the way the accounting is going to go going forward in our 10-Ks, and 10-Qs and all that stuff is that it will be the Earthstone production plus the Bold activities, being added starting May 9. So in the second quarter we'll see a larger total and then in the third quarter we’ll see a larger total. And so there’ll be a little bit of noise that will start to rule in the second quarter. And we're going to try to keep on putting out a combined number and update the other numbers I spoke about once we get our arms around a definitive plan.

[Joel Musante:]

Okay. Alright well thanks for the detail. And congratulations on acquisition. And that was pretty much all I have.

[Frank Lodzinski:]

Okay yes…

[Operator:]

And that concludes….

[Frank Lodzinski:]

Operator we're ready to wrap this up unless there's any further questions.

[Operator:]

There’s no further questions.

[Frank Lodzinski:]

Okay well to the investors, and the analysts and others that are on the phone, thank you for participating in this call. As you know our phone lines are always open if there's questions. You can log lob them in here and between Robert, Tony, Neil, Scott and I, will try to answer your questions. And with that we're going back to work. So thanks for everything.

[Operator:]

The event playback has concluded. Thank you.