HighPoint Resources Corp
Q3 2017 Earnings Call Transcript

Published: 1 Nov 2017

[Operator:]

Good day, ladies and gentlemen, and welcome to your Q3 2017 Bill Barrett Corporation Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Larry Busnardo, Head of Investor Relations. Sir, you may begin.

[Larry Busnardo:]

Good morning, and thank you for joining us today for the Bill Barrett Corporation third quarter 2017 Earnings Conference Call. Joining me today are Scot Woodall, Chief Executive Officer; and Bill Crawford, Senior Vice President, Treasury and Finance. Before we begin, I would remind everyone to read the disclosure statements provided within forward-looking statements of our earnings release. This has been posted to our website at billbarrettcorp.com. You can also find and review these disclosures as they are referenced in our other filings with the SEC or in our 10-Q, which we filed yesterday afternoon. In addition, we will be referencing non-GAAP financial measures during our call. A reconciliation to GAAP financial statements can be found at the end of our press release. With that, I'll now turn the call over to Scot Woodall for our prepared comments.

[R. Scot Woodall:]

Good morning, and thank you for joining us today to discuss our third quarter 2017 financial and operating results. We delivered another excellent quarter by all accounts, which speaks to the quality of our DJ Basin assets and our ability to deliver on our operational objectives. Execution across all spectrums of our organization remains high, and we have done an excellent job with executing on our 2017 business plans. Production continues to trend higher as third quarter volumes totaled 1.92 million barrels Boe equivalent, growing 26% sequentially. This was driven by excellent results in our DJ Basin program. Oil volumes grew 33% sequentially to 1.2 million barrels, impressive on all accounts. We continued to do a great job on costs as LOE improved 15% sequentially to $3.08 per barrel including DJ Basin LOE that fell to $2.52 per barrel or an 18% sequential improvement. We have implemented adjustments in our enhanced completions in the DJ Basin this year and are seeing positive early results. We continue to deliver efficiency gains, as our drilling and completion cycle times have improved 28% compared to 2016. This has helped mitigate inflationary pressures and has kept our extended reach lateral well costs in check. I will touch on each of these shortly in a little bit more detail. Underpinned by our year-to-date success, we are making positive adjustments to guidance for the second consecutive quarter. This includes increasing production guidance by 8% and it amounts in an overall increase of 12% from the initial guidance we delivered in Q1. We now expect to deliver 2017 production growth of over 20% with less capital. We continue to anticipate production growth of more than 30% in 2018 based on a $50 per barrel operating environment. Now turning to operations, we had a very active quarter as we operated two drilling rigs. We spud 26 XRL wells with completion operations conducted on 19 of those wells. In addition, we initiated flowback on 11 XRL wells that are located on the western side of our acreage position in Section 5 North/63 West (03

[William M. Crawford:]

Thank you, Scot, and good morning. As Scot just mentioned, we continue to post strong quarterly results and execute on our business plan, which is translating into improved financial metrics and leading to increased cash flow and EBITDAX generation this year. We expect this momentum to continue into next year as well. Quarterly production was significantly above guidance with the corresponding increase in total oil volumes. In addition, our operation team continues to demonstrate the ability to improve efficiencies as evidenced by our improvement in LOE. We also benefit from our marketing efforts with crude oil price realizations improved for the quarter. All of these items positively impact our returns allowing us to generate top tier operating margins relative to our DJ Basin peers, while also demonstrating the quality of our asset base, our operational execution and the hard work of our entire organization. For the third quarter, we generated EBITDAX of $48 million and discretionary cash flow of $35 million, which were well above consensus estimates. Looking ahead, I would anticipate an upward trend in EBITDAX and cash flow generation in this current oil price environment, as we grow production volumes and maintain or decrease our cost structure. I will now go over a few highlights that Scot did not hit on. Our DJ Basin margin is likely the highest in the DJ Basin peers, which helps us drive a strong recycle ration. High oil cut with low deducts and efficient operating costs drove an unhedged DJ Basin margin in the third quarter of $28.38 per Boe, a 7% sequential increase over the second quarter despite WTI being basically flat. DD&A decreased to $22.52 per Boe in the third quarter, representing a 13% sequential improvement. This was primarily a result of greater proved reserve additions during the quarter at lower cost to the depletion pool. This decrease in DD&A rate demonstrates our commitment to drilling the highest rate of return wells and a focus on capital efficiency. Now, for our fourth quarter outlook and full-year guidance change, we expect fourth quarter production to be approximately 2 MMboe to 2.2 MMboe, as we continue to realize the benefit of improved cycle times, better well results and a greater number of wells contributing. This results in our full-year production outlook increasing to a range of 6.9 MMboe to 7.1 MMboe, representing a 20% production growth over 2016. This is being accomplished with less capital, so we're doing more with less. And as Scot mentioned, we continue to expect 30% production growth in 2018 at current activity levels. CapEx for the fourth quarter is expected to total $80 million to $90 million, which is higher than the third quarter just due to the slightly higher completion activity as we continue to run the two rigs. There's no change to our annual range of CapEx of $250 million to $270 million. We have narrowed the range for LOE to $24 million to $25 million, down $1 million from $24 million to $26 million, to reflect further operating efficiency and G&A to a range of $32 million to $33 million from the previous range of $30 million to $33 million. Now on to the balance sheet. We continue to protect our balance sheet flexibility and maintain a manageable debt profile with the nearest maturity not being until late 2022. We ended the quarter with $156 million of cash on hand and we recently finished our semi-annual borrowing base review with no change to our undrawn $300 million credit facility. We expect to end this year with over $100 million of cash on hand which would be supplemented with the Uinta sale proceeds that will be used to pre-fund our expected 2018 activity. With these Utah sales proceeds, we expect to end the year with net debt to EBITDAX of less than 2.5x. I would note that we have never ended a calendar year with net debt multiples greater than this and foresee the next year's being similar with our expected growth. On the hedging front, we continue to layer in support for our capital program to provide predictability and visibility into our future cash flows. For the fourth quarter, we're about 60% of our oil production is swapped at $57.69 WTI. We also have 7,900 barrels of oil per day swapped in 2018 at about $52.49 and have started hedging 2019 at $50 per barrel or higher. You can find a full summary of our updated hedge position in the press release or in the 10-Q. With that, we are finished with our prepared remarks and turn it over to the questions.

[Operator:]

Thank you. Our first question comes from the line of Brian Corales of Howard Weil. Your line is open.

[Brian Corales:]

Good morning, guys, and great job on the quarter. You've mentioned in the release and, Scot, you talked about the choke management program, I guess adjusting the chokes I'm assuming opening the chokes a little earlier than you used to. Can you talk about, I guess, peak production for a well previous and what it is now and have you seen any change to the declines in the outer months?

[R. Scot Woodall:]

Sure, Brian. So really the changes really have just occurred on the last two pads, which are the most west pads that we have that are over there, I believe, at 62 or 63 – 63 West. And the intent would be that we would reach peak production, say, in month three where I guess we typically would see that probably in months five or six. And so the two previous pads to the western pads were up in the north and we kind of started getting a little bit more aggressive with the chokes kind of halfway through those flowbacks. So they might be a month earlier, but really it really is going to take place on the two pads that have been online for maybe about 45 days thinking that they would reach peak production in about three months. It's still early to see since those are the first two pads, obviously we don't see a decline yet, so it's probably a little early to comment on if there is an impact to decline rates or not. But just from what early indications of what we did on the north and these two western pads, seems like we're trending in the right direction.

[Brian Corales:]

Okay. And then one more. You also mentioned, I think, the average well cost of $4.7 million. Are you all seeing any – is that currently where costs are still and are you all seeing any inflation kind of hit the numbers yet?

[R. Scot Woodall:]

No. That's probably what we averaged in Q3 and we expect the same number in Q4 (15

[Brian Corales:]

All right, guys, and good job on the quarter.

[R. Scot Woodall:]

All right. Thanks, Brian.

[Operator:]

Our next question comes from the line of David Beard of Coker Palmer.

[David Earl Beard:]

Hi. Good morning, gentlemen. Congratulations on the quarter and I jumped on a little late, but did you give us an update on the Uinta sale?

[R. Scot Woodall:]

Just briefly, just that the process is ongoing and we expect bids shortly, and we really expect to close and get the proceeds in by the end of the year.

[David Earl Beard:]

Okay, great. And then relative to the completions, a little bit of a follow-up on Brian's question, could you discuss maybe what you're thinking for next year in completion changes or do you really want to run what you have now through most of the year and then think about altering any completion design in 2019?

[R. Scot Woodall:]

I think for the most part, we're pretty comfortable with where we are. We need to see a few more months of data. If anything, maybe there's one more stair-step of sand going from 1,500 pounds to maybe 1,700 pounds, but we need to probably see some data before we actually make that decision. So I think right now we're kind of executing on the 1,500 pound and the 120 foot stage spacing in the wells that we're completing now.

[David Earl Beard:]

All right, great. Appreciate it. Thanks a lot.

[Operator:]

Our next question comes from the line of Jason Wangler of Imperial Capital.

[Jason A. Wangler:]

Good morning, guys. You talked about the efficiencies quite a bit on the call and they've been great. We're just curious, as you look in the 2018, there's nothing formal yet but a two-rig program would be a lot of wells. Just how do you see kind of triangulating your spending and activity around what the efficiencies you gained on the two-rig program?

[R. Scot Woodall:]

Sure. You're right, because probably we're in that 50 to 55 wells growth per rig. So if you run two rigs, you're probably more than 100 wells. So I think some of the drivers, as we think about 2018, will be where commodity prices sit, as we try to balance cash flow and spending, and also what are the proceeds from Utah and we consummate that deal, and looking at that to help drive some of the 2018 funding. So, provided that goes as we plan and we see some positive bids in the next couple of weeks and actually get that deal close by year-end, probably will drive spending levels for 2018.

[Jason A. Wangler:]

Okay. Great. And maybe, Bill, one for you, just you kept the G&A side pretty much in line, but noticed it kind of spiked up in the third quarter. I was just curious if there was anything there you could comment on.

[William M. Crawford:]

No, I think what we had kind of put in the press release, there was some variable compensation cost, and obviously with the kind of year we're having, there's just some short-term variable compensation as well as some legal costs.

[Jason A. Wangler:]

Okay. I appreciate t, guys. I will turn it back.

[Operator:]

Our next question comes from the line of Chris Stevens of KeyBanc.

[Chris S. Stevens:]

Hey, good morning, guys. Nice quarter.

[R. Scot Woodall:]

Thanks, Chris.

[Chris S. Stevens:]

As we look into next year, I guess your pace of completion should start to increase, I guess, as the impact of that second rig starts to show up. So, what's the outlook for that oil mix over the next few quarters and maybe where you would expect it to average in 2018?

[R. Scot Woodall:]

Probably in the same – kind of roughly the same place. I think it's in that 62%, 63%-type range. I don't think it'll really move much off of that.

[Chris S. Stevens:]

Okay, okay. And then I guess in regards to the LOE, we saw the DJ come down nicely this quarter to about the mid $2 range. Is that a good run rate going forward or is there anything in there that impacted it this quarter? I guess just how you're thinking about that as we head into next year?

[R. Scot Woodall:]

It's probably a pretty good run rate. Obviously Q4 and Q1 are sometimes a little higher just to the weather in the Rocky's, but I think probably on an overall basis for the year, it's probably a pretty good run rate.

[Chris S. Stevens:]

Okay, great. Appreciate it.

[Operator:]

Our next question comes from the line of Jeffrey Mitchell of Stifel.

[Jeffrey Mitchell:]

Hi. Good morning, all, and congratulations on the quarter. So, another job (20

[R. Scot Woodall:]

I think we over the last year or two have tried to tweak just a couple of wells on a drilling spacing unit and then looked at the results and then that would drive how we do the future completions. So you're right. We tested a 100-foot stage spacing in a couple of DSUs and we're really waiting on those results. And so, going forward, we're doing 120 feet, we'll see if the 100 feet ends up having a cost/benefit analysis associated with it, and then maybe we'll go to the 100 feet or stay at 120 feet. So it was just a data point that we wanted to go collect.

[Jeffrey Mitchell:]

Okay. It makes perfect sense. And then I know that you all mentioned over past or over the first nine months of 2017 that completed well cost of average $4.7 million per well on average, which includes the costs of incorporating higher proppant volumes and tighter stage spacing. So directionally, what percentage of the cost saving realized to-date do you believe are self-help versus (22

[R. Scot Woodall:]

Probably, there is a – service costs have clearly gone up. And so I think we've been able to kind of keep those a little bit more in check by the efficiencies. So from an overall well cost of $4.75 million, we probably have experienced a 10% or 15% inflationary number with that well cost and probably have mitigated half of that or so through the efficiencies.

[Jeffrey Mitchell:]

Okay. Perfect. And then lastly, I know that in the past you all talked about moving a rig down to the recently-acquired acreage down in the south during, I guess, the first half of 2018 to begin drilling operations down there. Has this plan changed and/or directionally how should we be thinking about the activities in 2018 between the legacy northern assets versus the recently-acquired assets to the south?

[R. Scot Woodall:]

Yeah, we still have plans to do the recently-acquired activity and I think that'll get done in the first half as I said. But I would say primarily most of the activity will be back up in the core part. If you kind of remember one of our maps, we added some acreage kind of in the heart of that southern acreage position. There's a round circle kind of there on some of the investment presentation materials. And we actually plan to concentrate a lot of activity on there in 2017.

[Jeffrey Mitchell:]

Okay. Perfect. Well, thank you for answering my question.

[R. Scot Woodall:]

On page 18, I think (23

[Operator:]

Our next question comes from the line of Dan McSpirit of BMO Capital Markets.

[Daniel Eugene McSpirit:]

Thank you, folks. Good morning. If we could just revisit the choke management question, how much production history will you need from the two western pads to conclude whether the decline rate has changed? And as a follow-up to that, what's the risk if the decline rate gets deeper from opening up the choke and the business itself becomes more capital intensive?

[R. Scot Woodall:]

Probably, we need to see six months (24

[Daniel Eugene McSpirit:]

Got it. Thank you. Have a great day.

[Operator:]

And our next question comes from the line of Chris Stevens of KeyBanc.

[Chris S. Stevens:]

Thanks for taking the follow-up here. Just I guess as you drill some wells south of the river here in the first half of 2018, are there any expectations on how those wells might look compared to the central or northern acreage?

[R. Scot Woodall:]

Probably in line, I would guess, Chris. I don't think we've really varied our expectations too much geologically. We like it. We think that actually the Niobrara C thickens up and so probably our G&G organization is probably – would put a little bit of a tick-up in terms of expectations which – the engineers are always conservative. So we're probably running with the same expectations that we have kind of on the central acreage position and we'll see. I said we've been down there with two rigs, we're drilling a number of wells now, and all those completions will take place kind of at the end of the year and then into the first quarter a little bit.

[Chris S. Stevens:]

Okay. Any sort of differences in GOR (26

[R. Scot Woodall:]

I wouldn't really think so. We're not moving that much to the west. So I really don't think it's noticeably different.

[Chris S. Stevens:]

Okay. And then just lastly, any thoughts on line pressure out there, are you experiencing any sort of tightness there?

[R. Scot Woodall:]

Yeah. There clearly is some pressure on line pressure right now. Things are up in the mid- to high-300s, I would guess, in terms of line pressures. Obviously, nothing that impacted Q3 production or production results.

[Chris S. Stevens:]

Okay. Thank you.

[Operator:]

And our next question comes from the line of Gabe Daoud of JPMorgan. Your line is open.

[Gabriel J. Daoud:]

Hey. Good morning, Scot. Good morning, everyone. Just a picture – excuse me, a question on, I guess, your ability to continue to bolt on. Is that something that you'd like to continue to do in 2018, is it to try to pick up some more acreage and potentially maybe use the Uinta proceeds for that or would you just prefer to use the Uinta proceeds to fund the outspend for next year?

[R. Scot Woodall:]

Clearly, we like the basin. So I think we'll look at other opportunities. And so our land group and geology group kind of always are reviewing land opportunities just to kind of bolt on. So it's kind of a normal course of business, I guess I would say, and we'll see what opportunities present themselves. You're right, the Utah proceeds could help in that matter, but probably targeting more towards funding the D&C capital program is what I would think first.

[Gabriel J. Daoud:]

Got it. Thanks, Scot. Thanks, everyone.

[Operator:]

And I'm showing no further questions in the queue at this time. I'd like to turn it back to you Larry for closing remarks.

[Larry Busnardo:]

All right. Thank you again for joining us today. As always, please feel free to contact me if you have any additional questions about anything we discussed here today. And we look forward to seeing you at future investor events. Have a good day.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the call. You may now disconnect. Everyone, have a wonderful day.