Goodrich Petroleum Corporation
Q3 2021 Earnings Call Transcript

Published: 6 Nov 2021

[Operator:]

Good morning, and welcome to Goodrich Petroleum Corporation's Third Quarter Conference Call. [Operator Instructions]. Please note that this event is being recorded. Now I'd like to turn the conference over to Mr. Gil Goodrich, Chairman and CEO. Please go ahead.

[Walter Goodrich:]

Thank you, Nick, and good morning, everyone. We appreciate you participating in our third quarter earnings call this morning. During the third quarter, we acquired approximately 4,500 net acres and associated wells in production in the core of the Haynesville Shale in Caddo and Bossier Parishes of Louisiana. This acquisition meaningfully expands our operated acreage footprint in the core of the play as well as our inventory of future drilling opportunities and locations. As I'm sure you're all aware, the natural gas market improved dramatically during the third quarter, and the enhanced pricing, coupled with a 7% sequential growth in production, led to substantially higher EBITDA in the quarter, which grew from $24.4 million in the second quarter to $33.2 million in the third quarter. At the same time, as future prices for natural gas increased during the quarter, the change in the fair value of our derivatives or hedge position from the end of June to the end of September resulted in a mark-to-market noncash loss of approximately $65 million. We have again prepared a slide presentation, and we invite you to follow the slide deck during our prepared remarks. You can access the slide presentation on the Goodrich Petroleum website entitled 3Q 2021 Earnings Slides. I will now turn to the slide presentation for those of you who would like to follow along. And our standard disclaimer, forward-looking statements and risk factors are highlighted for you on Slide 2. On Slide 3, we provide our ESG statistics which we continue to update when appropriate. On Slide 4, we provide an overview of the company which we have updated. As I mentioned, we acquired approximately 4,500 acres in Caddo and Bossier Parishes of Northwest Louisiana and what we call Cedar Grove field. This transaction increased our core footprint to 32,000 net acres, increasing our net acres added thus far this year to 6,000. With the addition of the Cedar Grove assets, our natural gas resource potential in Northwest Louisiana grows to approximately 2.4 Tcf. The core of the Haynesville Shale continues to deliver very strong results. Increasing production volumes are helping reduce per unit operating costs, while coupled with the improving natural gas prices, our cash margin increased to 70% in the third quarter. The expanding EBITDA is having a positive impact on other financial measures as well, with adjusted trailing 12-months ROIC of 45% when adjusting for the unrealized noncash hedging loss in the quarter. In addition, we saw a further improvement in our debt metrics during the quarter, and we continue to project year-end net debt to EBITDA of less than 1. On Slide 5, we again show our year-end 2020 proved reserves with a breakout by category as well as an estimated range of present value based on a corresponding range of natural gas price assumptions. An updated range investments would obviously lead to higher present value estimates as the 5-year natural gas strip prices have moved meaningfully above $3 per Mcf. On Slide 6, our cap table as of the end of the third quarter shows the approximately $90 million outstanding under our senior credit facility and $32.5 million of second lien PIK notes, or paid in kind, for a total net debt of $117 million after taking into account the $5.5 million of cash on the balance sheet at the end of the quarter. As a reminder, our second lien notes are convertible into our common stock at $21.33 per share. As I mentioned, debt metrics remain low and should continue to improve into year-end as well as in 2022. In addition, our bank group has increased the borrowing base under our senior credit facility by $30 million to $150 million in our fall 2021 redetermination. You can see our historical production growth on Slide 7, which includes the current estimated amounts in our guidance for both full year 2021 and 2022. Moving to Slide 8, you can see our updated natural gas hedge position, consisting of both swaps and collars for the balance of this year and 2022 as well as the small amount currently hedged in the first quarter of 2023. Our hedging strategy administered by our Board's hedging committee is always primarily about risk mitigation and capturing hedging opportunities at the time, which will allow us to execute our strategy in the future, even if gas prices decline. We then hope and prepare to be wrong and seek new opportunities in a rising natural gas environment to improve operating performance and the balance sheet. Our current hedge position provides substantial downside protection while also giving us substantial exposure to higher unhedged prices as we execute our 2022 plans. And with that, I will turn the call over to Rob.

[Robert Turnham:]

Thanks, Gil. Revenues were $58.7 million, and we had a net realized loss on cash settled derivatives of $12.5 million for net revenue adjusted for cash settled derivatives of $46.2 million. The average realized price was $3.85 per Mcf equivalent comprised of $3.77 per Mcf of gas and $70.40 per barrel of oil or $3.03 per Mcfe when including cash settled derivatives. Our per unit cash operating expense, which is defined as operating expenses excluding DD&A and noncash G&A, continues to decrease to $0.86 per Mcfe in the quarter, and cash interest expense was $0.06 per Mcfe for a total of $0.92 per Mcf equivalent in the quarter. Cash margin, including interest expense, was $2.11 per Mcfe or 70% of our realized price, including settled derivatives. As you will see in our slide deck and discuss later in my prepared remarks, both per unit cash expense and cash margin ranked first or second among our gas peers when comparing against their second quarter financials. We will update these peer comparison slides once everyone has announced third quarter earnings. We expect production to grow, commodity prices to be higher and per unit cost to continue to fall and, therefore, cash margins to continue to expand throughout the remainder of this year, driving significant EBITDA growth and free cash flow. Capital expenditures for the quarter totaled $27.9 million, of which nearly all was spent on drilling, completion and facility costs associated with Haynesville wells. During the quarter, we conducted drilling and completion operations on 12 gross, 4.5 net wells and added 4 gross, 2.2 net wells to production. Interest expense totaled $2.2 million in the quarter, which included cash interest of $900,000 incurred on the company's revolver and noncash interest and debt amortization of $1.3 million primarily incurred on the company's convertible notes. Turning back to Slide 9 of our slide deck. All of our activities remain in the core of the Haynesville. We continue to seek and review additional bolt-on opportunities to expand our 32,000-acre footprint through additional acquisitions and drill-to-earn farm-outs. Our acreage is currently approximately 75% undeveloped and 80% operated. On Slide 10, we've updated our inventory in North Louisiana to reflect our Cedar Grove acquisition and, as Gil said, now hold in excess of 2-point -- or close to 2.4 Tcf of reserve exposure, including 560 Bcfe improved reserves at year-end 2020 at $2.50 gas. We've not quantified our inventory at Angelina River or the TMS since all of our activity is planned for North Louisiana. Our wells continue to perform very well. And as we have stated many times before, we believe our well performance is driven by a number of factors

[Operator:]

[Operator Instructions]. First question comes from John White of ROTH Capital.

[John White:]

Congratulations on another flawless quarter. You guys just rolled through these with the greatest of ease.

[Walter Goodrich:]

Thank you, John.

[John White:]

I'm sure it's harder than it looks. But you touched on oilfield service costs. I believe you termed them moderate or reasonable. Is that what you're seeing? Are you seeing any indications of increases?

[Walter Goodrich:]

Yes, John, this is Gil. So this year looks pretty good. We've seen really relatively small amounts of inflation. We had actually baked in our preplanning more inflation than we've actually seen. We have seen some around the pipe side. Pipe prices have been up a little bit. Early indications that perhaps in 2022, you're going to see some modest inflation, probably, we think in the Haynesville around the completion side and fracs, but nothing that we can point to this morning and say is actually baking the cake at this point.

[Operator:]

[Operator Instructions]. Next question is from David Snow, Energy Equities Inc.

[David Snow:]

Have you looked at the comps for the Southwestern Haynesville acquisition? And how do they relate to your company's comps?

[Robert Turnham:]

Yes, David, this is Rob. We have. It's an interesting transaction. Obviously, if you look at it on a flowing metric, I think we've seen something in the 2,600 per flowing Mcfe. I've seen it -- we've seen it kind of dissect it in other ways trying to allocate acreage value. And by the way, it takes allocating value to the acreage to get into the basin. It's just -- it's highly desirable. There's obviously some transactions that have occurred recently and there are people that went in. So it's not a basin where you can just go in and pay for PDP and expect to get it. It's -- there's clearly acreage value. If you apply those metrics to us, the stock is worth more, that's not surprising. I mean we're -- if you look at 2020, previous guidance, we're certainly still trading well below our peers on an enterprise value to EBITDA multiple and yet, we still have a pristine balance sheet. So we think as we continue to post numbers on the scoreboard, you're going to see EBITDA grow dramatically. And we feel like we ought to get recognition for that as the numbers are posted. So more good news to come. And I think, as Gil said, we have plenty of room for upside on the gas price strip that we see and yet, we have plenty of protection in a balance sheet that's going to play very well next year. We're also setting ourselves up, I think we talked about this before, to be able to pay off the second lien notes. I think that's in our plan with the free cash flow generation in 2022. And then potentially, once that happens, be in a position, we're not calling for it yet, but certainly be in a position to ultimately pay a dividend down the road if the Board decides to go that route. So everything trending exactly where we thought it would and hoped for. So looking forward to a really good 2022.

[David Snow:]

Some of the companies are talking about in the foreseeable future and ending of their tax-free -- income tax-free status as NOLs are used up. How does it look for you?

[Walter Goodrich:]

Gosh, David, this is Gil. We've got significant NOLs, well over $200 million of NOLs and very significant capitalized IDCs as well. So it would be very difficult barring a change in the tax laws for us to forecast a tax-based status for quite a few years in front of us.

[David Snow:]

Okay. And the new regulations being proposed for methane, how do you stand relative to that?

[Robert Turnham:]

Yes, David, this is Rob again. Look, it's extremely prudent for us and our entire industry to ensure that we minimize any methane emissions, and we're all over that. We've routinely put out our statistics, our ESG slide, which show you that we just hardly flare anything. It goes immediately into the pipeline. We follow all the guidelines of the various agencies to make sure that we're checking our equipment and keeping our emissions down to the bare minimum. And we're going to continue to do that. So we think it's healthy. Certainly, it adds cost into the business, but it's prudent. And by the way, the more you spend on that, the less that goes into the ground, which is bullish for commodity prices. So we think it's the right thing to do, and it's the right messaging. And we'll continue to kind of prosecute and do that necessary stuff for our business.

[David Snow:]

Okay. Just one more on the Southwestern acquisition. They have reserves that are not too far different than you, but their production is $700 million compared to $120 million for -- I mean, for you, it was about $166 million. They are fully developed, and you have much more to go. Or how does that compare?

[Robert Turnham:]

Yes, David. So the acquisition that they announced this morning was the GeoSouthern private equity-backed company. They still have a lot of running room over there in our view. Good acreage. They've done a very nice job developing that asset over the last few years. And so we would view it as a win-win. We think it's relatively fair valuation today in today's market. We think that Southwestern is picking up a very nice asset with a good bit of future development. So no, I would not consider them -- that asset fully developed at all. There's still a lot of running room for them.

[Operator:]

Next, we have a follow-up question from John White of ROTH Capital.

[John White:]

So you just mentioned, Rob, the possibility of paying a dividend at some point in the future. And that caused my ears to perk up. I think consensus opinion regarding the declaring of a dividend is there's some implied permanence to such a dividend. So before you would decide to declare a dividend, would you and the Board discuss a stock buyback given your cash flow?

[Robert Turnham:]

Well, all of this is preliminary, obviously, and we can't get out ahead of our Board because we're just not there yet. I think as we've discussed before, initially, paying off the second lien, we'll pay down the revolver further. But you're going to get to a point where your debt-to-EBITDA is going to be extremely low. And then at that point in time, after we posted very good numbers on a quarterly basis, we expect the stock to continue to perform well. And if it's severely underperforming, then you always have the option of stock buybacks versus dividends, but let's get to that point before we kind of make that choice. But that's always on the table, clearly, if you feel like you're better suited to take down undervalued stock versus paying a dividend.

[John White:]

Thank you. And I understand we're still very early on, on both of these issues.

[Robert Turnham:]

Yes. Thanks for the question, John. We appreciate it.

[Operator:]

[Operator Instructions]. At this time, we have no further questions. I'd like to turn the call back over to Mr. Gil Goodrich for closing remarks. Please go ahead.

[Walter Goodrich:]

Thank you, Nick. We're extremely well positioned, as Rob just articulated for 2022. We have the right assets, the right balance sheet and the right team in place to execute our strategy and plans for next year, and we believe we should continue to lead to continued strong shareholder returns in 2022. We thank you for your attention this morning. Take care.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.