Earthstone Energy, Inc.
Q4 2016 Earnings Call Transcript

Published: 17 Mar 2017

[Operator:]

Welcome to the Earthstone Energy's Fourth Quarter and Full Year 2016 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. And joining us today from Earthstone Energy is Frank Lodzinski, President and CEO; Robert Anderson, Executive Vice President of Corporate Development and Engineering; and Tony Oviedo, Executive Vice President Accounting and Administration. I would now like to turn the conference over to your host, Mr. Neil Cohen, Vice President, Finance and Treasurer. Thank you, you may begin.

[Neil Cohen:]

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 27A 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 releases issued yesterday on March 15th. Also, listeners are encouraged to read our quarterly report on Form 10-K for the quarter ended December 31, 2016 in its entirety as well as all other reports and documents filed with the SEC for more detailed information about the Company. The content of today's call will include remarks from Frank regarding our accomplishments that were achieved in 2016 and direction for 2017 and beyond; remarks from me regarding recent financial performance and remarks from Robert regarding operational and A&D matters. I’ll now turn the call over to Frank.

[Frank Lodzinski:]

Good morning, everybody, and thanks for joining us on this call. Thanks, Neil. So, everybody knows how 2016 started off. It started off as a challenging year for the entire industry. We were able to make it a very transformational year for Earthstone. In May, we closed our Lynden Energy acquisition which gave us approximately 5,900 acres in Howard and Glasscock counties, Texas out in Midland Basin; got current reduction of about 1,300 Boe a day, which is about 62%, 63% oil. We were able to maintain a good liquidity position throughout the year. And in June, we did an equity offering that was very well received and expanded our institutional investor base. And in November, the big event of the year, we announced the acquisition of Bold Energy, which gives us a significant operator position predominantly in Reagan, Upton counties and the Midland Basin with current production being about over 4,600 Boe a day and 70% oil. Going forward, we are intent upon closing Bold as soon as humanly possible and will devote the majority of our financial and human resources to the development of this high-quality asset base along with our non-operated position that we acquired with Lynden. At closing, we’ll have a total of about 27,000 net acres; 21,000 net acres will be operated. As many of you know, we tend to operate the vast majority of our assets, and that’s going to be our clear focus while generating highly-compelling economics. So, these are the priorities within our portfolio. Robert will tell you a little bit more about what's going on operationally and so forth in a few moments. So, locating acquisitions and signing agreements and so forth, that's the easy part. And now, we're really focused on 2017 on the integration, execution and acceleration of the development of these assets to the benefit of our shareholders, not to mention our goals of additional acquisitions. Our intent is not to stop here and merely develop these assets but to make additional accretive acquisitions. I'll now turn over the call to Neil and for a brief summary of our results for Q4 and for the full year 2016 and then we'll get Robert involved.

[Neil Cohen:]

Thanks, Frank. For the quarter ended December 31, 2016, our production averaged 4,685 Boe per day, which is an 18% increase relative to the third quarter of 2016 and a 21% increase relative to the fourth quarter of 2015. Production consisted of 63% oil, 22% gas, and 15% NGLs. From a financial perspective, we reported a net loss of approximately $33 million or a $1.48 per share, and cash flow from operations before changes and working capital up $0.30 per share. We also reported adjusted EBITDAX of $7 million inclusive of approximately $740,000 in transaction-related expenses. During the quarter, we continued to optimize our cost structure. Specifically on a per unit basis, total cash operating expense inclusive of LOE, reengineering workovers, ad valorem taxes and severance taxes totaled $11.16 per Boe, which is a 16% reduction relative to the fourth quarter of 2015. In addition cash G&A, totaled $7.64 per Boe which is a 31% reduction relative to the fourth quarter of 2015. For the 12 months ended December 31st, 2016, our production averaged 4,002 Boe per day, which is a 2% increase relative to full year 2015. Production consisted of 60% oil, 25% gas, and 15% NGLs. From a financial perspective, we reported a net loss of approximately $54.5 million or $2.92 per share and cash flow from operations before changes in working capital of $0.82 per share. We also reported adjusted EBITDAX of $16.3 million inclusive of approximately $2.5 million in transaction-related expenses. Capital expenditures for the year totaled approximately $28.5 million. For both the fourth quarter and full year, our net income was impacted by $24.3 million of impairment expense including $2.9 million related to proved properties, $3.9 million related to unproved properties and $17.5 million related to goodwill. With respect to our balance sheet and liquidity, we continue to have a clean capital structure with low leverage. As of yearend and as of today, we only had 10 million of bank debt outstanding under an 80 million borrowing base. I'll now turn the call over to Robert.

[Robert Anderson:]

Thanks, Neil. Got a little raspy voice, so apologize and we'll get through this as quick as we can. On February 13th, we issued a press release that was rather comprehensive with Bold that addresses our collective activity since the pending transaction was announced back in November of 2016. Rather than reiterate some of the same comments, I'd like to provide an update, so we can turn to questions as promptly as possible. At present, we're not changing any guidance, although we may update guidance after closing once our plans are further defined. First off, let me congratulate both of our operational teams for reaching a production level that is -- that we haven't reached before, and that is production is approximately 9,300 Boe a day, being 69% oil on a combined basis for our January 2017 estimates. Now, addressing Earthstone. Our capital expenditures for the fourth quarter totaled approximately $13.2 million and related primarily to the completion activities of our Eagle Ford inventory in Karnes and Fayette counties, Texas where we have 33% to 50% working interests and along with that we have one Wolfcamp A well in Howard County, Texas where we have a 40% working interest. We funded these expenditures with cash flow from operations and cash on hand; and as Neil mentioned, borrowings under our credit facility have remained unchanged at $10 million. We continue to be pleased with the performance of our Tubb A, number 1 well in Howard County, which is brought on line in early November 2016. The well flowed naturally for the first 43 days and was subsequently put on electric submersible pump. Cumulative production has totaled approximately 141,000 barrels of oil equivalent being 84% oil with an average daily rate of 1,060 Boe PD, over its first 132 days. We will resume our Eagle Ford drilling program in southern Gonzales County later this month by drilling and completing 11 gross and 4.4 net wells over the course of 2017. We will likely do this sequentially subject to commodity prices. Estimated costs at this time for a 7,000 foot lateral are expected to be $6.3 million while such costs for a 5,300 foot lateral are expected to be $5.4 million. Earthstone is currently budgeting $23 million for this Eagle Ford program in 2017. Now, moving on to some of the Bold assets. As planned, Bold released its drilling rig in February, and we will resume drilling in late April. At present, there are nine gross wells that are in various stages of completion with two full flowing back after frac, three preparing to flow back after the frac, one currently being fraced and three wells waiting on completion. Bold expects all these wells to be on line by the end of May. We continue to be pleased with production from the recently completed Bold WTG 5-234 number 1 in southeastern Reagan County. This well is completed over 9,300 feet with Bold’s enhanced completion and was the first well on this acreage since October 2014. Based on early production of 58 days, the well has cumed production of approximately 78,000 barrels of oil equivalent being 82% oil for an average daily rate of approximately 1,320 Boe per day. When normalized to a 7,500 foot lateral, this well is tracking approximately a 1 million barrel of oil equivalent type curve. As indicated in the press release from February 13th, most wells are generally tracking or exceeding area-specific targeted type curves. Starting in late April of this year, Earthstone intends to maintain a one rig drilling program during 2017 with current plans to add a second drilling rig towards the end of the fourth quarter of 2017. So, from April through December 2017 with one rig, we estimate that 14 gross and 11.7 net wells will be drilled, and 14 gross 10.7 net wells will be completed and brought on line for an estimated capital cost of approximately $7 million. These costs incorporate recent completion cost increases and revised total well costs ranging from $6.3 million to $6.7 million for a 7,500 foot lateral. I would like to remind everyone that our current total operated and non-operated location count of some 700 locations could be expanded. For example, on the Bold assets in Upton and Reagan counties, our previously announced count of 500 locations is predicated only on one Wolfcamp A and two Wolfcamp B benches. We believe that additional zones exist in the Wolfcamp C in Reagan County, the middle Spraberry and Midland County, and the lower Spraberry and Upton County; all of these horizons are being tested or developed by other operators in close proximity to our acreage. Finally, for 2017, we planned a $130 million capital budget with a $100 million devoted to the Midland Basin while the remaining $30 million we spend in the Eagle Ford and the Bakken. We've had numerous inquires about our Eagle Ford and Bakken assets which currently provide a strong source of cash flow to support a significant borrowing base and to fund our acquisition and development activities. We continue to deliberate the merits of retaining or divesting of these assets. We do intend to aggressively pursue additional acquisitions within the Permian Basin where we're currently reviewing several opportunities. Now, I'll turn it back to Frank.

[Frank Lodzinski:]

Thanks, Robert. I’m glad you hadn’t run out of voice. So, keep it going for the Q&A part, and we'll get through this. So, anyway, thanks. I hope the market and all you folks on the call understand or appreciate the fact that our Company at closing will have rapidly transformed itself into a high growth Midland Basin operator. I can't tell you how anxious we're to get this Bold deal closed and fully demonstrate the potential of this acreage to the market, and further expand our acreage positions, and frankly we can't wait to find and close the next deal. In anticipation of closing, a big part of this is to seamlessly integrate the personnel and the operations and the activities of the two companies. And as many of you know, we have done this in the past and we're going to do it currently. So, we've already started the process of integrating operations of both the companies, even prior to closing here. We appreciate the help that we've received from the Bold folks, appreciate the continued support of our equity investors, our current and former and future lenders, where we're going to expand our credit facilities and get on with business and building profitable and accretive production in future growth in share price. So, with that operator, I'll now open up the line for questions.

[Operator:]

Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Neal Dingmann with SunTrust Robinson Humphrey. Please state your question.

[Neal Dingmann:]

Robert, I'll try to keep mine quick for you to try to last this out. Just my first one on, towards the Eagle Ford, guys is that four wells that you're going to drill, does that hold everything? And while I’m looking in that direction, what are sort of the lease obligations this year, next year for that area?

[Robert Anderson:]

Yes. It's 4.4 net wells, Neal. And it won't hold some acreage that expires in 2018, so that’d be a 2018 drilling program. But, it does hold everything else. Actually one of those units is HPP, so by Chalk, so. We have a pretty limited amount of expirations in 2017 and will extend what we feel is the most attractive. There is no competition out there for leases at the moment.

[Neal Dingmann:]

Okay. And then, turning to the farm. Frank, I know it's early; you guys haven't taken over potentially yet on Bold, but when you, should you already have the plans laid out, what you, Robert and Neil talk about this. How would you attack that as far as -- Robert, mentioned on locations, he's going to talked about the A and B. When you have that rig, are you talking sort of multi -- I am just wondering how big the pads will be and kind of what your initial plan is on spacing intervals et cetera?

[Frank Lodzinski:]

Well, Neal, as you would expect of us, we have only about 15 different alternative drilling schedules around here. And we are trying to sort through all of that with the help of the Bold people. And clearly, prices are a determinant. So, we have probably about 11 obligation wells to drill. Is that right, Robert, about 10, 11?

[Robert Anderson:]

8, this year.

[Frank Lodzinski:]

8? That’s even better. So, for the 8 wells, we are going to move around a little bit to make sure that we fulfill all of our leasehold obligations and contractual obligations on the farm-outs and things like that. The remainder of the program for running a one rig program will move around a little bit also. And maybe do a few and Midland -- I guess, it's Midland County, maybe do a few in Midland County, and kind of concentrate on Reagan County a little bit more. But really, it's going to be the fourth quarter of the year, unless we are able to accelerate, bringing in that second rig when we will go set up and do more of a pad drilling kind of thing where we get out there and drill three or four wells at a time. So, it's all kind of under process. We will move around a little bit this year, and then move to pad drilling at the end of the year and into 2018.

[Neal Dingmann:]

Got it. Last question, I’m sure this will be asked at every which on your M&A ,Frank. Market still looks a little pricy especially in some of the quality areas like you are at. Just add, love to hear any comments from you or Robert. Are you seeing little pieces out there; are there little bolt-on or farm-ins, anything you could talk about regarding M&A?

[Frank Lodzinski:]

My voice is holding up. I’m going to turn it over to Robert.

[Robert Anderson:]

Neal, there is -- we are actually working on several different times and sizes of transactions. So, there is still plenty of good opportunities for us to consolidate and grow our position within the two or three counties that we’re working, in reasonable terms in our opinion.

[Frank Lodzinski:]

Yes. Clearly, we have to be very careful in terms of doing anything. So, we are not close to doing anything in particular, other than normal business of trading acreage or maybe picking up normal operations, trading acreage, maybe picking up some small offset tracks that will help us lengthen laterals and things like that. And we are out trolling for deals right now that we can jump on and hopefully acquire after we close the Bolt transaction. And there seems to be interest, nothing definitive but interest. And you know Neal that we've always been able to dig them up one way or the other.

[Neal Dingmann:]

That’s what I’m counting on. Thanks, guys.

[Operator:]

Thank you. Our next question comes from the line of John Aschenbeck with Seaport Global Securities. Please state your question.

[John Aschenbeck:]

Just hoping you could share a little bit more color on that WTG well in southeast Reagan. I think the initial rates on the wells have been significantly stronger and oilier than what industry expectations were. And I was curious to get your thoughts behind the drivers of that outperformance. And then, maybe just stepping back higher level, why you think acreage and southeast Reagan might be somewhat misunderstood by the industry?

[Robert Anderson:]

John, good question, and we appreciate that because it is a little bit misunderstood. But, the rates might have outperformed a little bit to what our expectation was but the oil cut and the type of performance in general that we're seeing from that area did not surprise us one bit. The older wells in the area had similar oil cuts. And so, we weren't surprised at all. I think as you move to the south and to the southeast, you find that the wells get gassier. And depending on how far away you get, they get very gassy. So, I'd say that we're pleased with the outcome, we're not totally surprised by the oil cuts, and we're very happy that the rates are hanging in there and doing what they're doing because it is definitely a validation of our work but also even better performance than what we quite thought, so.

[Frank Lodzinski:]

Yes. As a finance guy, I'll say this and you seem misunderstood by the market, I understand that. But in one of our press releases out there, we indicated that, thankfully, the performance of the well, the oil cut and things like that that Robert has referred to, has validated our technical expectations and from a rate standpoint perhaps exceeded that given that we're not arm wavers and overly optimistic but we're very pleased with what we've seen down there so far.

[John Aschenbeck:]

My follow-up was on tests of additional benches, and Robert I know you beautifully touched on this in your prepared remarks, and I also know there's a one standout test nearby that's produced from up to five benches with some pretty strong initial rates. So, was interested -- and I'm sorry if I missed this but was interested if you have plans of your own to test additional benches this year, and if so what the timing is on those?

[Robert Anderson:]

John, we're not likely to be the exploration leader out there; we got plenty of good benches with good economics in the three that we highlight in Reagan County and Upton County. And we’ll let the industry drive the Wolfcamp C activity closer to us? And at some point we'll do it but it's just not going to happen probably in 2017. I think they'll be a piece of our budget going forward that goes to doing certain kind of tests like that, but we'll wait till we get down the road a little bit further.

[Operator:]

Thank you. Our next question comes from the line of Steve Berman with Canaccord Genuity. Please state your question.

[Steve Berman:]

Couple of financial questions. If I did my math right, LOE per Boe in Q4 was in 7s, down from nicely from where it's been in already within your guidance for 2017, if that number is correct and you haven’t even closed on Bold, what drove that number, so it could be so much down from where it's been?

[Neil Cohen:]

I’ll say they probably just did higher volumes Q4 over Q3 -- Q4 was 4,700 a day, Q3 was around 4,000 a day…

[Robert Anderson:]

And the LOE was flat quarter-over-quarter.

[Frank Lodzinski:]

Yes, Steve. I think that’s it. But, as you know, our practice is to have our employees out there operating our wells and that’s a big reason why we concentrate on operations. And historically we have operated more than 75% or 80% of our portfolio. But, we are just looking everyday as to how we can reduce those LOEs. So, keeping the LOE flat with bringing on additional wells and additional volumes is one of our traits that we’ve done well over the years. And if you were here, you could see that Neil’s got two pages of 11 by 17 statistics out here. And I just visited with these guys this morning and we’ll visit with Steve Cohen, so on of looking through the portfolio to see what we can do even better on an LOE per Boe, our goal is to get it considerably below that. So that’s kind of it.

[Steve Berman:]

Got it. And then, my second question, looking at slide nine of the new presentation, if I back out, I take the 66.1 MMBoe of total one 1P reserves and back out the 18.6 million from standalone Earthstone at the strip that’s 47.5 million for Bold which know has a heavy PUD component, but do you have that 47.5 on the SEC basis to go along with the 12.1 in the press release just looking at apples to apples here both SEC and strip?

[Robert Anderson:]

We’ll have to dig it out, Steve and talk to you offline about that.

[Steve Berman:]

Okay. But that 47.5 million that’s again with the big PUD component you’re confident you will be able to get to all those PUDs within the five-year rule?

[Robert Anderson:]

As big as the EURs and as high as our working interest is, it doesn’t take -- it's not 500 locations to get that.

[Steve Berman:]

Got it.

[Robert Anderson:]

So, yes.

[Steve Berman:]

All right. Thanks, everyone. I’ll turn it back.

[Operator:]

Thank you. [Operator Instruction] Our next question comes from line of Jason Wangler with Wunderlich. Please state your question.

[Jason Wangler:]

Hey. Good morning, guys, just a couple of quick one. One, Robert, you mentioned you have eight obligations in the Permian for 2017, just wondered how that looks for next year as well does that kind of stay flat or where that goes?

[Robert Anderson:]

It's about the same or one or two wells less, and I think that fulfills all the obligations. So, it's about the same amount of capital in 2018 as a commitment.

[Jason Wangler:]

Okay. And then, just, you mentioned all the Bold wells that are coming to completion, assuming that those nine get on by May, I assume that there's a component of those that it would be funded through you guys. Is that included in the CapEx budget that we're looking at already, so you guys already implemented that?

[Robert Anderson:]

Yes. It’s one or two wells on the completion side that are kind of in the middle of the closing kind of date, so they get captured in the well count and the capital.

[Jason Wangler:]

Perfect. Okay. I'll turn it back. Thank you.

[Operator:]

Thank you.

[Frank Lodzinski:]

Well, I guess I'm kind of pleased that maybe our press releases and the data we’ve put out there has been pretty good because we normally get more than four questions, and looks like we added them all. So, before anybody dials back in with more questions, we'll kill this call. And as you guys know, we always strive to be really transparent. If there's clarifications that you want, you can call us and so on within the confines of publically available information, will help square things away. And thank for your interest and thank you for the call. Operator, we're done.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may disconnect your lines at this time.