HighPoint Resources Corp
Q1 2018 Earnings Call Transcript

Published: 9 May 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the HighPoint Resources Q1 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference Larry Busnardo, Vice President of Investor Relations. You may begin.

[Larry Busnardo:]

Good morning, and thank you for joining us today for the HighPoint Resources first quarter 2018 earnings conference call. Joining me on the call today are Scot Woodall, Chief Executive Officer; and Bill Crawford, Senior Vice President, Treasury and Finance. Before we begin, I'd like to call your attention to 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 and review these disclosures as they are referenced in our other filings with the SEC or in the 10-Q, which we filed yesterday afternoon. In addition, we will be referencing non-GAAP financial measures during our call, and a reconciliation to GAAP financial measures can be found at the end of our press release. With that, I'll turn the call over to Scot Woodall for prepared remarks.

[Scot Woodall:]

Good morning, and thank you for joining us today to discuss our first quarter financial and operating results. The first quarter was highlighted by the closing of our strategic business combination with Fifth Creek Energy in the subsequent rebranding of our company to HighPoint Resources. We are embarking on a new era for our organization and our new name recognizes the significant transformation we have made over the past several years, where we stand today and the tremendous opportunity we have in front of us. I'm excited about the future of the company. To summarize what we accomplished in the month since we announced the Fifth Creek transaction in December; we have completed the SEC review period ahead of schedule; we held a shareholder meeting in which 99% of our shareholders voted in favor of the transaction; we closed the transaction; we transitioned both organizations and all employees within the corporate headquarters by day one; we held the first HighPoint Resources board meeting on day two, to approve our business plan; we issued 2018 and 2019 operating guidance; the Corporation was rebranded and was completed and we started trading underneath a new ticker; and lastly we had equipment in the field and initiate drilling and completion operations in the Hereford field within weeks of closing the transaction. I'm extremely proud of the effort that everyone in the organization put forth to ensure we integrated both organizations and asset in a smoothly and timely fashion. HighPoint offers a unique value proposition among DJ Basin operators. We are well positioned for long-term shareholder value creation at a premier oil weighted and oil DJ Basin company with an asset base to support scalable, profitable and repeatable development. Our dominant acreage position of over 150,000 net acres is largely held by production and have a large inventory of more than 2800 undeveloped drilling locations, 95% of our locations can be developed as highly economic extended reach lateral wells. Wellhead economics are robust and generated 60% to 80% rate of return and top tier operating margins in a $50 plus per barrel WTI pricing environment. As a reminder, our legacy Northeast Wattenberg acreage position is over 60% oil and the Hereford field is approximately 80% oil providing an excellent investment opportunity. A 100% of our acreage is located in rule settings and far from the urban corridor. This provides maximum development flexibility and allows us to focus on full drilling and spacing unit development with XRL development that maximizes drilling and completion efficiencies. In short, we are far away from the noise of operating in an urban setting allowing us to control the pace of development and ensure capital is being allocated in the most efficient manner. Our complementary asset portfolio provides us flexibility to adjust capital and drilling activity within the portfolio and we will maintain disciplined allocating capital to the highest return assets in the portfolio as we maximize development in completion efficiencies. We are currently operating two rigs in the Northeast Wattenberg area and one rig in the Hereford area and expect the drilling program will be adjusted to include two rigs in Hereford and one in Northeast Wattenberg. We anticipate maintaining this three rig program going forward. In addition we are operating two completion crews and have the ability to add a third completion crew as necessary based on the timing of well completions. As outlined in our guidance, our planned activity over the next several years will deliver a step change improvement to production growth, cash flow, EBITDAX including associated improvements to the balance sheet. More importantly the capital program will be primarily internally funded and we expect to generate positive free cash flow in the second half of 2019. We have a strong technical team that is executing at a high level with respect to drilling, completions and field level operations. We have high confidence that we can achieve our goals given our strong start to the year and the close proximity of the Hereford the Northeast Wattenberg area allows us to immediately transferring our plight, our proven execution skill set and cost structure across our total acreage position. We're off to a good start to the year and are reiterating our full year 2018, 2019 outlook. As you can see we're excited about the future, we have a great investment opportunity and believe we are well-positioned to deliver on our objectives. Now I'll update a little bit on operations. Northeast Wattenberg activity for the first quarter included drilling 20 XRL well and placing 22 XRL wells on flowback. We opportunistically added higher working interest in some of our Northeast Wattenberg wells that were drilled in the first quarter and we were able to accelerate infrastructure investment to coincide with planned development and provides an extreme flexibility. We have not increased our planned infrastructure investment for the year but rather just moved up a portion of future investment into the first quarter. Our understanding of reservoirs completion designs, fluid systems and flowback methods continues to increase. We continue to see positive results from the optimized completions targeting the Niobrara B and are very Niobrara C formations. Recent wells on average continue to meet or exceed the base Northeast Wattenberg extended reach lateral type curve. Recent completion activity was highlighted by a drilling and spacing unit located in 5-61-20 which is located in the central area of the Northeast Wattenberg area and is the easternmost DSU completed to date. An initial flowback began in December and early production data is encouraging as the wells are performing consistent with the base type curve through the initial 90 days of production. In addition, drilling spacing units located in 4-62-29, 4-62-32 and 3-62-4 were all placed on initial flowback during the quarter and continue to trend towards peak production. They will provide the foundation for our second and third quarter growth. As it relates to midstream, we're always seeking greater flexibility with respect to our gas gathering needs as previously disclosed. We entered into an agreement in December that provides additional gas process outlets to the east. We are currently moving 20% of our volumes in this direction to reduce our reliance on the DCP system. Although there has been some impact to production, our current natural gas processing capacity provides ample takeaway's to execute our 2018/2019 development plans. The team has done excellent job of maintaining well costs at levels consistent with our internal expectations. We also continue to achieve drilling and completion the efficiencies in the current operating environment, as recent XRL well drilling days to rig release averaged under seven days per well representing a further improvement over the 2017 average. Drilling and completion cycle times improved by 7% driven by 14% improvement in completion times frac and drill out days leading to an increased number of stages being completed and the amount of sand as pumped on a daily basis. The company set a record during the quarter by averaging 4.2 days per well to frac a recent five well DSU. Great work all around by our operations team. Hereford activity was initiated in April and we're in the process of drilling our first DSU that will consist of 10 extended reach lateral wells as we focus on full-field development. A full-time completion crew is also active and begin completion operations on the drilled but not completed XRL wells. We will incorporate optimized completions that include controlled flowback measures 1500 pounds of sand per lateral foot and 82 stage completions. These wells are expected to be placed on flowback during the second quarter and will contribute to our second half growth. As a reminder, Hereford natural gas volumes are processed in the field through the Summit Midstream plant which has ample capacity with respect to our future growth activity. In summary we're off to a good start to the year and expect to deliver significant growth in the coming quarters. We have high confidence in achieving our objectives as we continue to execute at a high level, have equipment in the field including three drilling rigs and two completion crews and continue to implement optimized completions. Lastly we are reiterating our 2018/2019 guidance outlook. I'll now turn the call over to Bill.

[William Crawford:]

Thank you, Scott, and good morning to all. As Scott just reviewed we are off to a great start to the year and delivered solid operational results for the first quarter that were generally in line with our quarterly guidance and consensus estimates. The first quarter provides a solid foundation to the year as we generated discretionary cash flow of $35 million in EBITDAX of $47 million. I will now spend a few moments going over some of the financial highlights. Our quarterly results were largely driven by reported production of 1.91 MMBoe coming in at the midpoint of our guidance range and was about 60% oil which was also in line with our guidance. First quarter production included preferred field volumes for 12 days coinciding with the close of the Fifth Creek transaction on March 19. Pro forma production for the DJ Basin totaled 2.2 MMBoe which was an increase of 74% over the first quarter of 2017. We continue to show an ability to improve our cost structure. Lease operating expenses averaged 327 per Boe or a 13% decrease from the comparable 2017 period. The slight uptick in LOE from the fourth quarter was anticipated as the first quarter is typically higher compared to the remainder of the year due to increased seasonal operating expenses. We expect our per unit LOE to trend down on a quarterly basis through the remainder of the year. We continue to capture greater value for barrels as our oil price differentials to WTI averaged $2.42 per barrel which was a 20% improvement over the Q1 2017. We maintain a strategic advantage relative to other DJ Basin companies based on our ability to capitalize on not having any firm oil transportation commitments and the ability to capture multiple markets. Our high oil cut low differentials and low operating expenses allow us to generate a strong margin of nearly $36 per Boe for the first quarter which we expect to be the highest amongst our DJ Basin peers and is up 19% year-over-year. Touching on the balance sheet we recently had our $300 million credit facility reaffirmed. As we currently do not foresee a scenario of utilizing the facility, we elected to maintain this level although our legacy Northeast Wattenberg reserves would have supported at least a 25% to 30% higher borrowing base. Later this year we plan to amend and extend the facility and incorporate Hereford Field proved reserves which will result in a meaningfully higher borrowing base. When combined with our quarter end cash balance of $225 million we had sufficient liquidity of $500 million to invest in our high rate of return drilling program. Our debt metrics continue to trend as expected with net debt to EBITDAX of 2.1x this quarter and is forecast to be below 1.5x in 2019. Now an update to our guidance outlook. We expect second quarter production to be approximately 2.4 to 2.5 MMBoe which is a sequential increase of 11% at the midpoint as we benefit from the wells that were placed on flowback that Scott just reviewed during the first quarter. Our capital expenditures are expected to total 135 million to 145 million as we operate three rigs and two completion crews for essentially the full quarter. Our 2018 plan is on track and we are reiterating our full-year operating guidance. On the hedging front we continue our strategy of being 50% to 70% hedged on a rolling 12 to 18 months timeframe and have taken advantage of the recent strength in crude prices to layer in support for our capital program to provide predictability and visibility into our future cash flows. For 2018, approximately two-thirds of our remaining oil production is swopped and we have about 40% of our expected 2019 oil volumes hedged as well at prices that support our 60 plus percent rate of return wells on our drilling program. You can find a full summary of our updated hedged position in the press release or in our 10-Q. With that, that concludes our prepared remarks and are ready to take questions. Operator?

[Operator:]

[Operator Instructions] And our first question is from Jason Wangler from Imperial Capital. Your line is now open.

[Jason Wangler:]

I wanted to ask I believe you had 8 DUCs up in Hereford and sounds like - in the completion side and doing them very similar to what you guys were used to further South. But as you bring them on with the flow back, do you expect to see a similar kind of trade for those wells kind of taking 90 or so days to kind of reach peak radar. Given the different gas and oil mix, is there any differences you're expecting on those wells or going forward in that area?

[Scot Woodall:]

The way we're modeling it is just as you described Jason is about 90 days to get to a kind of a peak production. And obviously this is going to be our first attempt at this and so I'm sure we will tweak as we go but that's currently the way we're modeling it.

[Jason Wangler:]

And as you move to a second rig there, will both rigs basically be focused on effect to the pad drilling or do you have some acreage capture or anything like that that you’ll be working on up in that area?

[Scot Woodall:]

No, not really. I think we just plan on putting the rigs and drilling the entire drilling spacing unit and actually the way that the plans lined out is the drilling spacing units are side-by-side and we just continue to move across the acreage position. And we're starting kind of right in the heart of the Hereford Field right where the summit gas plant is and so it minimizes infrastructure spending as well.

[Operator:]

[Operator Instructions] And our next question is from Brian Corales from Johnson Rice. Your line is now open.

[Brian Corales:]

I want to hit on CapEx for the quarter. It was a little bit higher than we had and it sounded like a lot of it was infrastructure is that - was that more than you'll originally planned or was it the timing shift to the first quarter, can you maybe talk about that a bit?.

[Scot Woodall:]

It's really with a timing deal and so you know the way we budget things is, you only said that capital budget and we think we are going to spend it evenly throughout our four quarters and an opportunity arose in Q1 where we could buy five used compressors that really a great deal. And so as you know we use these compressors to run our gas lift operations and so we end up buying all five of them in Q1 because it was just a great price and a great transaction for us. And typically we will spread those purchases out over four quarters. So the actual facilities or infrastructure budget is going to be the same for the year. We just kind of split the majority of it in Q1 and it was just kind of one of those deals that you just -it was too good to pass up then we decided to go ahead and pull the trigger and do it.

[Brian Corales:]

And then two questions on the Hereford asset. Is there something you'll need to see before you bring up that second rig, and then two, I know Energy is drilling kind of over the border of Wyoming, have you all participated in any of those wells and how does that - and if so has that acreage - how does that compare to your acreage at Hereford?

[Scot Woodall:]

So maybe taking the first part first Brian. No, I think we're comfortable with the technical assessment of the Hereford Field. And so we are striving as quick as we can to put the second rig up there because we think the rate of returns are very strong and so really it's more of a logistical deal of getting permits and spacing and all those kind of things that just will take us a couple more months before we're able to execute on that. In regards to the EOG drilling and things going on in Wyoming. Yes historically we have participated in some of the EOG development and I’d say three to five wells perhaps a year, so we do obviously have access to information on those wells, how they are completed and how they're performing and they're great wells. And so we do expect the Hereford to perform very similar to the Fairway Field because the geology is very consistent as you map the two areas across. If you look at the early short lateral results back in 2009/2010 the Hereford Fields short laterals compare very favorable to the Fairway Fields short laterals. And if you look at the first seven wells or so that Fifth Creek did the two modeling laterals and newer completion technologies on their 30 day IP’s compare very favorable to the Fairway field. So we think it's going to be a very similar and the performance will be very similar and obviously we'll continue to tweak things with our completion techniques in all. But you know we're excited about it all and we - I think it's was a great accomplishment to get a frac fleet up there and a drilling rig up there in early April. And we're all anxious to see those results.

[Operator:]

Our next question is from Welles Fitzpatrick from SunTrust. Your line is now open.

[Welles Fitzpatrick:]

The follow-up on Brian's question. The midstream that I'll make sense sounds like a great deal. But with the increase in working interest obviously that does cost more but it does produce more production, should that bias our models towards the higher end of guidance on both CapEx and production or is it sort of within the kind of middle of the range they all previously talked about?

[Scot Woodall:]

So you kind of hit on the second point there wells that the capital spend in Q1. There were some unleased minerals associated with the program that we were drilling in the legacy Northeast Wattenberg position that we were able to pick up in the quarter and increased our working interest in a number of wells and so that's a little bit more CapEx. And you're right, it does contribute more production probably in the second half of the year. But I think as you know we probably tend to have a conservative bias in our estimates and I would say that it's the additional production is probably within the range of our full year guidance.

[Welles Fitzpatrick:]

And then just another modeling one, can you remind the ad valorem tax assessment in Colorado is that done once a year. So we should flow those numbers through on full year?

[Scot Woodall:]

The answer is, yes.

[Welles Fitzpatrick:]

And then just one last one, Summit obviously DCP is getting the majority of the headlines but can you talk to the Summit plant expansion up north is everything on track there?

[Scot Woodall:]

Yes, they just had their earnings call a couple of days ago and they announced that their six year day plant is on track for the end of this year.

[Operator:]

[Operator Instructions] And our next question is from [Steven AK] from Seaport Global. Your line is now open.

[Unidentified Analyst:]

Just hoping you could maybe comment on just consolidation in the basin. Obviously, you've got enough scale here it looks 150,000 acres but just interested in your thoughts on that progressing forward.

[William Crawford:]

You're right Steve. We're pretty happy with our - where the company fits today. When you think about the amount of inventory that we have, I think we calculate at the three year drilling program holding it flat, we'd have like 17 years of inventory and it's pretty high quality inventory at that 60% or 80% type of rate of return. So, we feel pretty good about that. We feel pretty good about where our balance sheet fits over the next few years. So I don’t feel like we have to do something in terms of adding additional acreage or do additional consolidation. With that being said, I think when you're a pure one basin focused company as we are in a DJ Basin, I think you always continue to look at opportunities and there's a number of opportunities that are out in the basin from huge range of sizes. And I think you'll see us look at all those opportunities but I think kind of based on where the company sits today we obviously have the opportunity to be very selective, if we were going to pull the trigger on any of those opportunities.

[Operator:]

At this time I'm showing no further questions. I would like to turn the call back over to Larry Busnardo, Vice President of Investor Relations for closing remarks.

[Larry Busnardo:]

Okay, thank you again for joining us today. I know it's a busy day with calls were around all afternoon and today and all afternoon. So if you have any additional questions please feel free to reach out. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.