HighPoint Resources Corp
Q4 2019 Earnings Call Transcript

Published: 27 Feb 2020

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the HighPoint Resources Fourth Quarter 2019 Earnings Conference Call. At this point, all participants’ lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions]I’d now like to hand the conference to your speaker today Larry Busnardo, Vice President of Investor Relations. Please go ahead, sir.

[Larry Busnardo:]

Good morning and thank you for joining us this morning for the HighPoint Resources fourth quarter and year-end 2019 earnings call. On the call with me today are Scot Woodall, CEO; Paul Geiger, COO; and Bill Crawford, CFO.Before we begin, please review the disclosure statements provided within the forward-looking statements of our earnings release, which you can find on our website at hpres.com. You can also find these within our other filings with the SEC or in our 10-K, which we filed yesterday afternoon.We will also be referencing non-GAAP financial measures during our call and a reconciliation to GAAP financial statements can be found at the end of our press release. In addition, we have posted an updated Corporate Presentation to the Investor Relations portion of our website and we will be referencing several slides within the corporate presentation on today’s call.With that, I’ll turn it over to Scott to begin prepared comments.

[Scot Woodall:]

Good morning and thank you for joining us today to discuss our fourth quarter and year end 2019 financial and operational results. We will also be discussing our 2020 -- 2020 plan. 2019 was not without challenges, but we executed financially and operationally as an organization in our first full year operating as HighPoint Resources. Our returns focused strategy allowed us to execute our corporate initiatives and deliver solid financial and operational performance. Our priority for 2019 was to sustain the capital program that would generate free cash flow in the second half of the year. This was accomplished during the third quarter. The excess cash was used to strengthen our balance sheet and reduce borrowings under our credit facility.Our solid operational execution and ability to optimize our cost structure was evident in our financial results, as we meaningful -- meaningfully increase EBITDAX by 21% to $339 million. This was underpinned by development activity that drove production sales volumes growth of 23% to 12.5 million barrels and oil volume growth of 21% to 7.7 million barrels. This was accomplished with capital expenditures that were 29% lower in 2018, underscoring our commitment to maintaining a disciplined approach to capital investments.We maintain a focus on managing cost by reducing operating costs by 16% per Boe compared to 2018 and then include a 23% reduction in cash G&A. Our profitability was also demonstrated by our peers leading operating margin of $30.31 per barrel, benefits from our asset having high oil percentage, a little oil price differential and lower operating cost structure. Operationally, our efforts were highlighted by the successful execution of our large scale optimization program in the Hereford field, which has realized intangible benefits of increased capital efficiency, enhance well performance and stronger per well economics.This significantly advance our geologic and reservoir understanding of the field and several generations of completion enhancements were accomplished in a single project area instead of over several years. I will discuss our results in more detail including a status update and our development plan going forward.In our legacy Northeast Wattenberg field we continue to deliver strong well performance as high-fluid intensity completion are performing materially better than earlier programmed well. This highlights our ability to continually enhance value from our assets and has demonstrated by our 2019 drilling program achieving a 48% rate of return.For 2020, we will maintain a disciplined approach and plan to prudently allocate capital to our highest return development opportunities and preserve inventory. We have a flexible development program as the majority of our acreage is held by production and we have very key drill and commitment. We realized the importance of managing our liquidity have set a plant spending level as approximately 40% lower than 2019 as we prioritize positive free cash flow generation and no increased debt. We remain focused on creating further cost by generating greater operating efficiencies in our drilling program leading to lower well cost and enhanced returns.Bill will touch on full guidance in his remarks. I will turn it over to Bill now for his comment.

[Bill Crawford:]

Thank you, Scott, and good morning to all. Scott already touched on a lot of our key financial highlights I’ll provide some additional detail around the financial results and some color around 2020 outlook.Again, as Scott mentioned, one of our key financial objectives for 2019 was to sustain a capital program that would build momentum throughout the year and allow us to generate free cash flow in the second half. This was accomplished in the third quarter and allowed us to deliver $52 million of second-half free cash flow. This excess cash was utilized to reduce borrowings under our credit facility and we ended the year with $140 million of debt on our credit facility and $350 million of liquidity.I would like to highlight that with respect to our longstanding $26 million letter of credit, you will reduce readably on a monthly basis beginning on April 1, until it expires in Q3, 2021. This relates to our longstanding GTP commitment which will end as well that. Reducing debt and maintaining liquidity will remain our top priority for 2020. Our capital budget and non-op divestitures reflect this.Our nearest senior note maturity is over two and a half years away, and we will be prepared to address them as markets avail themselves. On the hedging front, we have a great majority of our anticipated 2020 oil volumes hedged and a WTI price of over $58, which is well in excess of currency reprises. We also have a strong base of 2021 hedges at $55 to protect our current activity. This is consistent with our longstanding strategy of being 50% to 70% hedged over the forward 12 months to 18 month timeframe to protect our capital investments. You can find a full summary of our updated hedge position in the press release.Now on to our 2020 capital program and guidance, as Scot mentioned, we will maintain a disciplined capital approach for 2020. We set a spending level of $200 million to $220 million, which allows us to generate free cash flow and not increase overall debt levels.Based on the timing of operations, budget is weighted towards the first half of the year and remains flexible to adjust to any macro related changes. Paul will discuss timing and cadence here in a moment. First quarter capital spending is expected to be approximately $90 million as we focus on completing our inventory of that in both Hereford and Northeast Wattenberg. The drilling in the first half of the year is focused primarily in Northeast Wattenberg before we plan to resume drilling and completion operations in Hereford in the latter part of the year. 2020 production is expected to total 10.5 MMBoe to a 11 MMBoe with an oil proportion of 57% to 58%. I would like to note that this takes into account about 0.6 MMBoe of our production associated with the plan divestitures. First quarter production is expected to be 2.7 MMBoe to 2.8 MMBoe. The remainder of our cost guidance may be found in our press release.With that, I'll turn it over to Paul.

[Paul Geiger:]

Thank you, Bill and good morning everyone. First, I would like to congratulate and comment our field and office personnel for a great quarter and year, delivering our best combined HSC performance in several years as a result of rigorous route further analysis and quality corrective actions. Our fourth quarter production outcome was heavily impacted by midstream availability in Hereford and the power outage across that region in late November that continued into the beginning of December.However our strong operational and execution allowed us to grow annual production by 23% with the fourth quarter production disruption pulling full year 2019 production till lower end of our guidance range. The development activities drove an increase in crude reserves to 127 million barrels of oil equivalent, a 22% increase over our year end of 2018. This was driven by a meaningful increase in Hereford reserves recognizing the success of the Section 16 Southeast Wells. This provides an economic baseline and support of the additional spud bookings audited by our outside reserve engineers. Hereford wells in Section 6 Southeast and Southwest continue to perform well exhibiting shallower declines and supporting our development curves.I would now refer you to slide 14 and our updated corporate presentation. As you can see, production from each set of wells is exhibiting strong trajectory. This is highlighted by the average per well cumulative oil of Section 16 Southeast wells, attracting 40% above all earlier wells after 230 days and Section 16 Southwest wells, attracting 30% higher after 185 days. The 12-well development DSU in Section 17 initially display positive productivity, but did not recover as well as the surrounding wells following the field-wide power outage caused by extreme winter weather. We initiated a work of this program to ensure open laterals on each of the wells. These wells have returned to production recently and continue to clean up with post-work over production rate is still approving.At Northeast Wattenberg, we’re delivering strong well performance as higher fluid intensity completions were performing materially better than earlier program wells. This highlights our ability to continually enhance value from our assets and is demonstrated by our 2019 drilling program achieving a 48% rate of return. Our more recent operations are highlighted by seven wells located DSU 5-61-35, completed with high fluid intensity completions and placed on flowback last in the third quarter.The wells have exhibited strong production performance as per well average cumulative oil production is attracting 50% above analog offset after 125 days versus wells with the previous standard completion design. Slides 17 and 18 is a corporate presentation, highlights the impact that higher crude completions have had on production performance of our wells and demonstrating our success and enhancing from all areas of our legacy assets. We're very focused on tuning our cost structure in response to low commodity prices. These operating expenses should across the year achieving $2.10 per Boe average for the fourth quarter, the lowest of 2018 and 2019.Now, moving on to 2020 operations. At Hereford, we resume completion activity in the first quarter with completions on the (inaudible) 2019. This program incorporates the design optimizations from our (inaudible) program and our 2019 development program. Significantly among those are larger volume completions with 50 barrels a foot, medium sand loadings at 2,000 pounds, cluster methodology and simultaneous stimulation of wells.These system was located in the Fox Creek area of DSU 12-63-34, will be turned on line during the late first and early second quarter. We will evaluate the relative performance of these wells during second quarter, make any indication design changes and we expect to initiate continuous drilling, complete operations at Hereford beginning in the third quarter. And we are in the process of completing the 24 DUCs. We're currently operating one drilling rig and we plan to spud up to 13 new wells in the first half of the year.Early 2020, North East Wattenberg activity resulted on lower overall corporate oil percentage as these higher GOR wells come online. We expect this trend to reverse as we begin continuous development of Hereford field in the second half of 2020. The company is committed to producing energy in an environmentally responsible manner. Both Hereford and Northeast Wattenberg completion programs utilize natural gases fuel, reduce produced water for completion and employee there was completions at full of our techniques.We incorporate the sustainability and innovations focus in all our wells. Finally, we're in the process of divesting our non-operated assets in Wyoming, Colorado and New Mexico, all of which constitute a smaller portion of our overall acreage position. We have received successful bids from multiple parties and expect these transactions to close separately during the second quarter. In aggregate, we expect these accretive sales to bring in $27 million, which is approximately seven times the three year average cash flow. The proceeds will be used to repay borrowings on revolver and our 2020 guidance is net of the approximately 600 Mboe expected production loss from these sales.To summarize, in our first full year at HighPoint Resources, we increased production 23% versus 2018, demonstrated economic DSU development at Hereford with the 16 Southeast wells. We expanded our proved reserve base 23%, successfully developed high volume completions across the Northeast 100, leading to our best program rate of return, and we drove our EHS incident rates to multiple year lows. For 2020, we're focused on conservative capital management on rate of return performance within the drilling program, and on generating positive free cash flow. We look forward to providing future updates and delivering on our full year 2020 guidance.Operator, we’re now ready for questions.

[Operator:]

Thank you. [Operator Instructions] Our first question will come from the line of Derrick Whitfield from Stifel. You may begin.

[Derrick Whitfield:]

Thanks. Good morning all. Perhaps for Scott or Paul with respect to your 2020 guide, could you speak to the production impact associated with Section 17 wells and with that question, I am trying to separate Section 17 impacts from activity impacts?

[Paul Geiger:]

Sure. This is Paul. We look at those versus our previous curve in their net contributions to our 2020 budget, our picked up production is about 250 Mboe.

[Derrick Whitfield:]

Okay. Thanks. And then with respect to the five DUCs at Fox Creek, could you speak to the well design spacing for those wells?

[Scot Woodall:]

Sure. They are Codell and Niobrara wells on North and South DSUs and those are Codell’s at equivalent four well spacing and Niobrara’s at equivalent six to eight well spacing across that area. Before design goes those are (inaudible) completions at the 50 plus barrels a foot 2000 plus pounds of sand a foot based on our findings and our 2019 results.

[Derrick Whitfield:]

Great. And just one last Bill, on that last question, assuming success with Fox Creek could you speak to how you’re thinking about second half plans for Hereford?

[Scot Woodall:]

Absolutely. As we bring those wells on in the first quarter and the beginning in the second quarter, we will be monitoring those across the first, the second quarter with that higher grade flowback that we've been talking about in the last quarterly call to bring those wells on more aggressively. In that way, we’ll be able to watch those wells over Q2 for reflective of any design changes, any modifications before we go into continue development in the third and fourth quarters of the year.

[Derrick Whitfield:]

Great. Thanks. Thanks for your detailed commentary.

[Scot Woodall:]

Sure.

[Operator:]

And our next question comes from line of Welles Fitzpatrick from SunTrust. You may begin.

[Welles Fitzpatrick:]

Okay. Good morning.

[Scot Woodall:]

Good morning, Welles.

[Welles Fitzpatrick:]

On the -- could you talk to the GOR of the asset sale, just so I can kind of better understand that the kind of cadence of how that you are shifting with the new 2020 guide?

[Scot Woodall:]

Sure. As we look at the total piece of those asset sales, they fall within the range of our operating production, very similarly and then you've got the -- of course, the Permian component, the Wyoming DJ component. So all together, those are 60% to 80% or 60% to 70% oil.

[Welles Fitzpatrick:]

Okay. Perfect. And then on the blizzard, the – is it right to assume that the only real impact in 2020, is that kind of DSU 11-63-17 section to 259 Mboe you talked about or were there other impacts that might have negatively affected that back items?

[Scot Woodall:]

No. Well, we didn't see other negative impacts from that field wise shut-in. It was really limited to that Section 17 area.

[Welles Fitzpatrick:]

Okay, perfect. And then just one last one for me. What you guys are seeing with current NGL pricing, obviously there's been a little bit of a pleasant uptick with the new pipes coming on, are you seeing that continuing into February actuals?

[Scot Woodall:]

Yes. The actuals were up from our obviously the lows Q3 and kind of seeing that $10 to $12 per barrel with our mix now that we're getting more to DCP, which is now off curtailment we can get on to those long-haul pipes down to Belvieu. Obviously, I think it’s still just $0.15 down there. So it's not great, but it's better than it was in Q3.

[Welles Fitzpatrick:]

Got you. Thank you so much.

[Operator:]

Thank you. And our next question will come from the line of Jason Wangler from Imperial Capital. You may begin.

[Jason Wangler:]

Hey. Good morning, guys. Curious on CapEx spend and thanks for the details for this year. Obviously you’re spending a pretty good chunk of it first quarter, is that second quarter also going to have a pretty good piece as you can complete those docks or how should we kind of think about it as you think about the optionality of the second half of the year?

[Scot Woodall:]

Yes. I’d probably say yes, Jason. It won’t be as much as what Q1. But it will have some of those docks still be done in the early part in Q2 which will lead to a little bit higher spending.

[Jason Wangler:]

Okay. And then just looking at the guidance from the operating expense and G&A things, are those levels just a little bit higher than last year basically just because of the lower production level or is there anything else we should be thinking about on those numbers?

[Scot Woodall:]

I don't think there's anything else you should be thinking of in those numbers. We did them all on a per Boe basis and so it’s just the denominator there.

[Jason Wangler:]

Okay. I appreciate it.

[Operator:]

Thank you. And I’m not showing any further questions at this time. I’d like to turn the call back over to Larry Busnardo for any closing remarks.

[Larry Busnardo:]

Thank you. Thank you again for participating in our call today. Please feel free to reach out if you have any additional questions. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.