HighPoint Resources Corp
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q4 2018 HighPoint Resources Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. At this time, I would like to turn the call over to your host, 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 2018 earnings conference call. On the call with me today are Scot Woodall, our Chief Executive Officer; Paul Geiger, Chief Operating Officer; and Bill Crawford, Chief Financial Officer. 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 and review these disclosures as they are referenced in our other filings with the SEC or in our 10-K, which we filed yesterday afternoon. In addition, we will 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. Lastly, we posted an updated corporate presentation yesterday afternoon to our website that we will be referencing on today's call. With that, I will turn the call over to Scot Woodall for his prepared remarks.

[Scot Woodall:]

Good morning, and thank you for joining us today. We will be discussing our fourth quarter and year-end 2018 financial and operational results as well as we will spend a little time talking about the 2019 business plan. 2018 was a transformational year that was highlighted by our strategic combination with Fifth Creek Energy. We integrated both organizations in a timely fashion, rebranded as HighPoint Resources and initiated the Hereford Field development program. I am pleased that this was all accomplished in a very short span of time and I applaud our employees for their efforts in achieving these milestones. Our 2018 full-year results were highlighted by production growth of 45%, EBITDAX growth of 57%, and improvement in per unit LOE of 21%, and we generate strong operating margin of $37.69 per Boe. Our balance sheet is in solid position as we enter 2019 with $33 million of cash on hand and an undrawn credit facility of $500 million. Operationally, we had an active development program as we spud approximately 100 gross wells and placed 87 gross wells on flowback. Drilling and completion costs for the 2019 program were executed as planned with Hereford wells averaging $5.1 million per well and then Northeast Wattenberg wells averaging $4.85 million per well. We are anticipating a 5% to 10% improvement in well cost for 2019 as a result of the execution efficiencies and design changes. We have seen positive performance from our high fluid intensity stimulation project in the Northeast Wattenberg field. I am pleased with the overall execution and initial results of the Hereford drilling program where we saw encouraging early performance data. Our current focus is on the optimizing production through enhanced completion design that is leveraging microseismic and fiber optic technology with work already in progress. This will provide an early determination of the optimal stimulation design and well spacing to be utilized for future development. Paul will discuss all of this in a little bit more detail. In 2018 we also successfully managed through midstream constraints in the Northeast Wattenberg. We are currently utilizing multiple midstream providers and have approximately 40% of our total processing capacity going to alternate outlets. I commend our marketing group, which did an excellent job of diversifying our gas processing to these other outlets. This added flexibility mitigates the risk of relying on a single provider and limits our exposure to future midstream constraints. I like to highlight that we achieved a significant milestone in 2018 by extending our record for consecutive days without a recordable safety incident to over 1,400 days. This is a tremendous accomplishment and reflects our continues focus on health and safety. We have a demonstrated track record of maintaining a conservative approach to allocating capital and adapting to prices and we will continue to do so. In this respect, we have set a 2019 budget that bounces an appropriate level of growth and achieve positive cash flow in the second half of the year. Bill will touch on our full-year guidance in his remarks. In summary, we are positioned to capitalize on our future development opportunities as our acreage is exclusively located in rural areas. Our 2019 program is fully permitted and we expect it to be extremely resilient to potential regulatory developments in Colorado. We continued to work in partnership with the stakeholders in our areas in which we operate and look forward to working with our elected officials to deliver a balanced and workable long-term political solution that protects our ability to responsibly develop our assets. I will now turn the call over to Paul for an operational update.

[Paul Geiger:]

Thank you, Scot, and good morning, everyone. Highlighting operations, we continue to execute our Hereford development program and we have seen encouraging results from our high fluid intensity stimulation project, which was initiated in Northeast Wattenberg. I will touch on both of these in more detail in a moment. For the fourth quarter production volumes totaled 3.11 million barrels equivalent of which 2 million barrels or 63% was oil. Production grew 47% over the comparable 2017 period and we grew our oil volumes 55% over the fourth quarter of 2017. Our 2018 volumes include approximately 0.5 million barrels of adverse impact as a result of midstream constraints beyond our control. We saw a little adverse impact to our fourth quarter volumes. Touching more on midstream, through plan DCP expansions and our additional contracted capacity, we expect that our total gas processing and takeaway capacity in Northeast Wattenberg is sufficient to support our 2019 development plan. At Hereford, Summit is finishing its expansion and expect it to commission it 60 million a day plant in April. We are working with them to minimize any associated downtime with the startup. We are in dialogue with Summit and others to secure further capacity that supports long-term development from this area. I commend our production and marketing groups in their efforts in strategically diversifying our guests processing to other outlets. Now turning the operations. At Hereford, production sales volumes for the fourth quarter grew 40% year-over-year to approximately 6,000 barrels equivalent per day of which 76% was oil. We sped 24 wells and play seven wells on flowback during the fourth quarter. These wells were primarily located in Sections 14, 15 and 16 of 11 North and 63 West. Initial drilling operations began in April on DSU 11-63-14, which included 10 XRL wells and in August on DSU 11-64-23, which included three XRL wells. These wells utilize our standard drilling and completion design developed in Northeast Wattenberg. From an execution standpoint, we were pleased with these wells, which were drilled and completed for our $5.1 million plan costs, which is over a 30% reduction from the previous wells. The completions yielded solid initial rates on controlled flowback and oil cuts in excess of 90%. Early well performance has been highlighted by one of these wells located in DSU 11-63-14, which has reached cumulative production of approximately 50,000 barrels oil equivalent after 130 days of production, utilizing modified control flowback. This well has a high oil content of 88% and early performance validates our assessment of the resource potential of the field and reflects the quality and productivity of the reservoir. We remain highly competent with respect to the productive capacity and resource potential of Hereford to deliver economic inventory as both the Niobrara and Codell formations have exhibited pressure, oil cuts, source maturity, and initial productivity consistent with our expectations. Consistent with our drive to develop maximum value from our assets, we are also in the process of an extensive reservoir and geologic technical study as part of our 2019 program to increase the granularity of our subsurface picture and gain a real time assessment of our completion performance. There is more detail regarding this integrated approach on Page 15 of the corporate update, where we detail the significant 3D core and producing well coverage across this asset. This existing data will be integrated with the new to optimize our forward plan of development. We are very pleased with this subsurface characterization project, which we'll use the latest technology to optimize the economic development of Hereford. I would point you to Page 16 of the corporate update, which provides an overview and illustrates the scope of the project. As you can see, we are leveraging surface deployed microseismic and down-hole fiber optics which will allow us to monitor precise placement and effectiveness of our completions and analyze real-time down-hole data on our flowbacks. This data will be immediately utilized to modify our completion design to ensure that we are optimally stimulating the entire wellbore. Real-time flowback and production data will facilitate real-time optimization of our completion designs. When integrated together with the microseismic data, this will lead to optimization of completion intensity and well spacing. Our 2019 program also implements a buffer zone around our completions to increase completion intensity and mitigate interference with other operations. This is accomplished by implementing a methodical sequencing of drilling and completion operations as we move the development across the asset. You can find an overview of this on Page 17 of the corporate update. This illustration shows pressure containment area around our active completion activity, specifically by leaving a half DSU have completed, but not producing wells between our stimulation activity and our online producers. We are targeting more effective completion activity and reduce interference with active production. Similarly, by leaving a half DSU have drilled uncompleted wells between our drilling inactive completion operations, we are targeting reduced interference between completion and drilling operations. We expect to see immediate benefits and well stimulation from this work as well as lasting benefits resulting from improved subsurface understanding, driving a customized strategy for the next 10 years of economic development at Hereford. Turning to our legacy Northeast Wattenberg asset. We've produced approximately 24,500 barrels oil equivalent during the fourth quarter, 60% of which was oil. This is a 43% increased over the fourth quarter of 2017, we spud nine wells and placed four wells on initial flowback. Highlights of our 2018 program included two DSUs of the highest producing wells ever in Northeast Wattenberg position. As a result of our continuous base in surveillance and benchmarking efforts, we significantly increased the stimulation intensity for wells in 5-62-26 and 5-62-35 as a pilot program. This is highlighted on Page 19 of the corporate update where we demonstrate the continuous improvements to our development program and the 2018 pilot program, which is depicted in orange and shows that we are seeing significant uplift in production versus our previous design. As a result of the successful testing we've adopted as modified design is our new standard for all of our Northeast Wattenberg wells. We look forward to the improved Northeast Wartenberg well results from this program. I'm also pleased with our ability to maintain cost control as lease operating expense for the fourth quarter total $2.17 per Boe and marks a 34% improvement over the fourth quarter of 2017. We also expect to see an approximate 5% to 10% reduction in well costs over 2018 due to a combination of design changes, execution improvements, and efficiency gains. As Scot mentioned, we're able to execute a 2019 program without additional permitting. With this strong permit position and the exclusively rural nature of our assets, we expect our 2019 program to be resilient to potential regulatory developments. Overall, we're pleased with the operational progress made in 2018. In Northeast Wattenberg we have tested and adopted a higher fluid completion design which has led to improve well performance in which we expect to unlock additional value from the asset. At Hereford, wells have demonstrated high oil cuts, reduced D&C costs, reduced lease operating expense, and significant productivity to drive rates of return. Lastly, we are implementing design changes utilizing advanced technology that we believe will significantly improve the value generation from our coming decade of Hereford development. I’ll now turn the call over to Bill.

[William Crawford:]

Thank you, Paul, and good morning to all. As Scot mentioned, 2018 was highlighted by year-over-year financial results that were driven by 45% increase in production volumes, a low oil differential of 2.73 per barrel and a 21% reduction in LOE. This allowed us to generate EBITDAX of $280 million, which is an increase of 57% over 2017. We delivered a robust base and operating margin of $37.69 per Boe which was a 27% year-over-year increase. We expect this to be tops amongst our DJ Basin and peers. Our oil differential to WTI was $2.61 per barrel for the quarter. For 2019, we expect to see a slight increase in this differential to about $4 per barrel, as trucking costs in the DJ Basin have increased approximately 30%. 30% since mid-2018 and we have locked in most of our first half 2019 volumes at about $4 and or in the process of signing up long-term crude gathering in Hereford at attractive rates. We continue to maintain a flexible balance sheet and have a very manageable debt profile with our nearest maturity not being until late 2022. We maintain ample liquidity as we ended the year with $33 million of cash on hand and are $500 million credit facility was undrawn. We began drawing on the credit facility to support our development activities in the first quarter. On the hedging front we took advantage of the strength and crude pricing during 2018 to layer in support for our capital program and our well hedged in 2019 and into 2020. This provides added predictability into our future cash flows as we have visibility to being free cash flow positive in the second half of this year. You can find a full summary of our updated hedge position in the press release or in the 10-K. I would like to spend a moment discussing our 2019 capital program and guidance. We have designed a capital disciplined returns focused program that allows us to modestly grow production and be cash flow positive in the second half of 2019. We will remain flexible and have disciplined with our 2019 capital spending plans and have the ability to adjust spending as we have no material commitments or a grudge to hold. Based on the current timing and sequence of our development program the capital budget will be weighted to the first half of 2019. Now for some of the key details. We have set a budget of $350 million to $380 million, which is 28% lower than our 2018 capital budget. This allows us to spot approximately a 100 gross wells and place approximately 85 wells on flowback. One continuous completion crew will be utilized, but we have the flexibility to add an additional crew as needed. First quarter capital spending is expected to be approximately $125 million to $135 million and as we maintain a similar development pace as the fourth quarter. 2019 production is expected to total 12.5 to 13 MMBoe within oil proportion of approximately 62% to 64%. At the midpoint this represents a production level that is 25% higher to 2018 production of 10.2 MMBoe. First quarter 2019 production is expected to be 2.7 to 2.9 MMBoe of which approximately 62% is oil. This represents lowers sequential production from the fourth quarter and which is primarily due to lower aggregates spending during the second half of 2018 and the timing of certain well completions. The remainder of our guidance may be found in our press release. With that we are ready to take questions. Operator?

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Welles Fitzpatrick from SunTrust. Please go ahead.

[Welles Fitzpatrick:]

Hey, good morning.

[Scot Woodall:]

Good morning, Welles.

[Welles Fitzpatrick:]

Can you talk a little bit to the cadence of the growth in 2019? Obviously it's down a little bit and in 1Q, but maybe 4Q 2019, 4Q 2018 growth rate or kind of how you're seeing the back half shape up. I mean, I guess, I'm looking for a trajectory in the 2020.

[Paul Geiger:]

Yes, Welles. This is Paul. Overall for that, the program is somewhat front loaded as we go through the years. So we've got about a flat trajectory through some point in the second quarter. And then as we bring those wells on ramping across the year into the fourth quarter from a rig standpoint, that development is across the asset positioned at the beginning of the year. By mid-year, we've moved the rigs up to Hereford and continuing the development up there.

[Scot Woodall:]

Yes. And one thing just to add to that a little bit, Welles, we're probably looking at Q4 2019 over Q4 2018 somewhere in that 20% to 25% up.

[Welles Fitzpatrick:]

Okay, perfect. So that's a 4Q number too. That's great.

[Scot Woodall:]

Yes. Coincidently year-over-year it's about the same, but Q4-over-Q4 is the same number as well.

[Welles Fitzpatrick:]

Okay. The cost savings, am I reading the presentation, the prepared remarks, right? You're just moving to more of an engineered frac maybe skipping some of the less productive stages or are you actually tweaking the formula?

[Paul Geiger:]

Hey, Welles. This is Paul. Some of all the above, but we are tweaking the formula. I think you've got engineered enhancements there. As we focus on the things that we believe are drivers of performance in that, that being a fluid and we’re able to through design changes and process efficiencies in the rest of the schedule, able to drive performance down. We've got a good graphic of that in the corporate update demonstrating overall drill and complete costs, continuing to come down. But as we continue to ramp that fluid intensity up in the program, so we're able to achieve both of those things with an increased focus on all the efficiencies. The slide showing that it's in Page 20 of the corporate update.

[Welles Fitzpatrick:]

Wonderful. Thank you all so much.

[Operator:]

Thank you. Our next question comes from Derrick Whitfield from Stifel. Please go ahead.

[Derrick Whitfield:]

Thanks. Good morning, all.

[Scot Woodall:]

Good morning, Derrick.

[Derrick Whitfield:]

Perhaps for Scot or Paul, could you comment on the length of your flowback periods for the high intensity fluid completions and compare that versus the previous design?

[Paul Geiger:]

Sure, Derrick. This is Paul. In the Northeast Wattenberg we're keeping that about flat. And so depending on what we're seeing from the individual wells, you've got a ramp program there from anywhere from two to three and sometimes as much as four months to peak oil production. So as we think about that, gas continues to climb after that, so you've got Boe growth, but that's about how we expect those to go. We're still modifying that in Hereford. So we're watching that. We've seen as we tweak some of those – some of those things peeking out as early as 60 days. And so we're continuing to watch that and modify that. There's a, I believe a graphic on Page 19 of the corporate report that demonstrates that performance.

[Derrick Whitfield:]

Very helpful. And then perhaps, again Scot or Paul, but referencing Page 16, while clearly early in the data collection phase, can you outline any key learnings and completion design in spacing?

[Paul Geiger:]

Yes, Derrick. Paul again. Looking at that Page 16, we've got that big data set across the asset now with the 3D, with the core, with the existing producing well footprint. This piece that we're talking about specifically in the – our development optimization work across late Q1 and early Q2 of this year is yet to happen. So we've got those fiber optic strings that we’re running currently in three of those wells across this footprint. We've got the microseismic array laid out across there, but these learnings in those specific graphics represent the immediate data that we'll have available during those completion operations, which will occur beginning of Q2 – late Q1, but beginning of Q2. And so those are the visuals associated with that.

[Derrick Whitfield:]

Very helpful. Understood. Thanks for your comments.

[Operator:]

Thank you. Our next question comes from Jason Wangler from Imperial Capital. Please go ahead.

[Jason Wangler:]

Good morning. I was curious as you think about executing the 2019 program and you mentioned the exit rate kind of – the fourth quarter numbers in terms of production. How do you see it in 2020? Do you see the ability to be kind of cash flow neutral throughout the year? Or what's the program kind of be fairly similar or just kind of your thoughts early on there?

[Scot Woodall:]

Obviously it's early. We're just putting out 2019 guidance to talk too much about 2020. But the kind of the way that we see the world right now, I would assume are spending, it's somewhat kind of similar to what we're talking about in, in 2019, which probably leads to some sort of modest growth path profile associated with that. But I don't know if I want to go into too many of the specifics associated with that quite yet.

[Jason Wangler:]

That's helpful, Scot. I appreciate it. And then the operating costs, I guess LOE and maybe G&A look like they're coming up a bit, at least from the guidance, if I'm doing the math right, on a per Boe basis, if I may be wrong there, but if they’re not just, could you maybe talk about that? Is there something just maybe going on there?

[Scot Woodall:]

No, not really. I think, the Hereford Field is a little bit higher on LOE and it becomes a little bit more of our portfolio. You may see that shift up a little bit. We just don't have quite all the infrastructure there that we have Northeast Wattenberg. So we're trucking water disposal versus piping it and some of those other little things that should work themselves through the system, as we kind of get up and running and get a little bit larger development footprint.

[Jason Wangler:]

Okay. I appreciate it. Thank you.

[Operator:]

Thank you. Our next question comes from Mike Kelly from Seaport Global. Please go ahead.

[Michael Kelly:]

Hey guys. Good morning. Scot, I was appreciate your political comments – commentary, just wanted to check in with – to hear your thoughts maybe regarding this bill, we keep here and above that’s sponsored by Speaker of the House and also the Governor that this expected sometime soon. I just wanted to get your thoughts on that and give us the temperature of the current climate? Thank you.

[Scot Woodall:]

Sure, Mike. I guess what I would probably say is, obviously the industry has been engaged with the newly elected leaders and there's been a lot of discussion back and forth over the last, several weeks and I guess I would say that it – my opinion has been pretty productive. We haven't seen any reactionary things about, drilling bands and moratoriums and huge setbacks and all those types of things. I really think that the new leadership, here in Colorado is really aimed at trying to do a productive long-term solution. And so we're trying to work with them to get to a long-term focus productive, like I said solution. It seems like, there's still kind of focused on a couple of things. Local control is probably one of the ones that is top of their list and just kind of for a reference, obviously we updated a slide in the presentation on Page 6 and we've kind of shown this slide in different variations of this before. But if you look at Page 6, you see our acreage footprint and then in the green, we've outlined the actual municipalities in the State of Colorado. And you can see that we are totally outside any municipalities. And so when we think about local control, then we think about new regulations in Colorado, leads us to believe that we should be pretty resilient to any new changes that come about. Obviously, we're all anxious to see the bills as they come out still think that we're probably a couple of weeks away. And I think I probably have said that for a couple of weeks that I think it's two more weeks away or so before we start seeing some of the first draft language. But that's kind of what our people are telling us right now.

[Michael Kelly:]

Awesome. Appreciate that. Switching gears a little bit, if I look at Page 17 and the Hereford development a slide, I just want to make sure I understand this buffer zone, and is this just simply kind of a sequencing exercise or is there, at least kind of a slight loss of inventory associated with kind of this go forward development versus prior expectations? Thanks.

[Paul Geiger:]

Yes, Mike. This is Paul. As far as that sequencing goes on 2017, those buffer zones are really differed production and those are built into all of our numbers for 2019 and built into the guidance and the rest of that. But you've got to half a DSU on either side of your active stimulation that are waiting on the next phase of development. So there's zero loss of inventory there. There is some component of, of deferred production, but we believe that's a trade for the significant enhancement of stimulation intensity that will get with that kind of treatment.

[Michael Kelly:]

Got it. Understood. Just double checking there. Thank you, guys.

[Operator:]

Thank you. Our next question comes from David Beard from Coker Palmer. Please go ahead.

[David Beard:]

Hey, good morning, everybody. I appreciate the color on the fourth quarter exit and a little bit on 2020? My question relates to how sensitive you are to changes in oil prices. Both on the upside or downside relative to accelerating activities, you need to see a month, a quarter or two quarters kind of either way before you put more money in the ground. Thanks.

[Scot Woodall:]

Sure. I would say that when you look at our hedge position for 2019, I'm not sure you need changes near-term and commodity prices would make us change. Really are capital plan. The company really tries to look out 12 or 18 months and tries to add to hedge so we can kind of secure these rates of return. So I don't think you'll see us real reactionary one way or the other to add or subtract.

[David Beard:]

All right, great. Thank you. Appreciate it.

[Operator:]

Thank you. Our next question comes from Welles Fitzpatrick from SunTrust. Please go ahead.

[Welles Fitzpatrick:]

Hey guys, thanks for letting me hop back on. Just a real quick one, I mean, can you talk to I suppose a follow-up on Derrick's question. But the spacing for the 19 program is that going to be closer to kind of implied 10 to 12 wells per unit. And also can you remind us that have most wells, I've been Hereford to have to have most of those been landed in the B2 zone to date?

[Scot Woodall:]

Yes. Maybe just a real quick while we're doing spacing tests right now so as you remember, we've got like a 10 well or 12 well, a 16 well type spacing. So when Paul was talking through the fiber optics in the microseismic work. That's going to be done where we can look at the spacing differences between like a 16 well and a 12 well. So I think, we kind of need to get that data and as Paul keeps saying, it's real-time data that we can then be able to change either our completions are spacings kind of very quickly. So I think the real determination for the back half of the year, what kind of drive a little bit on the data that we see in the first half of the year.

[Welles Fitzpatrick:]

Okay.

[Scot Woodall:]

And then I kind of missed the second part of your question, Welles, why don’t you repeat the second part?

[Welles Fitzpatrick:]

Yes, on 27, you guys talked a decent amount to the different; I guess the different targets within the Niobrara. Have most wells been landed in the lower of the Niobrara B2?

[Scot Woodall:]

That is correct. So in our patterns right now we're doing there is Codell development and Niobrara and all of the landings have been in the B2.

[Welles Fitzpatrick:]

Okay, perfect. Thank you.

[Operator:]

Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back to the Larry Busnardo, Vice President of Investor Relations for closing remarks.

[Larry Busnardo:]

Okay. Thanks again for joining us today. As always, we're around all day. If you have any additional questions, please feel to reach out to us. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.