HighPoint Resources Corp
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Bill Barrett Corporation Fourth Quarter and Full Year 2017 Earnings Conference Call. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Larry Busnardo, Vice President, Investor Relations. Please begin.

[Larry C. Busnardo:]

Good morning, and thank you for joining us today for our fourth quarter and year-end 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'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 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-K, which was 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 now turn the call over to Scot Woodall.

[R. Scot Woodall:]

Good morning, and thank you for joining us today to discuss our fourth quarter and year-end 2017 financial and operational results. We entered 2017 with a clearly defined strategy of controlling what we could and executing at a high level on our operational, financial and strategic objectives. Our message to our shareholders throughout the year was consistent as we aim to execute a focused operational strategy within the DJ Basin in a capital-efficient and disciplined business manner, demonstrate continued cost improvement across our corporate structure, deliver increased capital efficiency through improved well results and decreased drilling and completion cycle times, selectively pursue opportunities to complement our legacy northeast Wattenberg acreage, and lastly to seek opportunities to reduce debt, while maintaining balance sheet flexibility and strong liquidity to internally fund our capital program. Reflecting on 2017, we exceeded all of these objectives, and I'm proud of our entire organization for their execution and maintaining a disciplined approach to operating in a safe and efficient manner. Our key accomplishments for 2017 were highlighted by production sales volumes of 7 million barrels, which were 20% higher than 2016 pro forma for asset sales and 12% greater than the midpoint of our initial guidance. In addition, DJ Basin production for the fourth quarter was 42% higher compared to the fourth quarter of 2016, while DJ Basin oil volumes were 38% higher. This is strong growth that accounts for both and highlights the quality of our acreage position. The operation team generated further field-level efficiencies as LOE of $3.46 per Boe was 24% lower than 2016 and extended reach lateral well costs of $4.65 million were below target as drilling and completion cycle times improved by 30% year-over-year. Consistent with our messaging, we announced a strategic business combination with Fifth Creek Energy in December that materially expands our DJ Basin footprint and significantly strengthens our balance sheet. Lastly, we enhanced our balance sheet flexibility through the April issuance of senior notes that extended our nearest debt maturity to 2022 and reduced debt. Total debt was further reduced via debt exchange in December. We enter 2018 with a very good financial position, consisting of $314 million of cash and an undrawn credit facility of $300 million. In summary, these achievements translated into 2017's earnings, cash flow, and EBITDA all coming in better than analysts' consensus estimates. Overall, it was a great year. Operationally, we are maintaining an active drilling program and completion program, and continue to operate a two-rig drilling program in the DJ Basin. Our understanding of reservoirs, completion designs, fluid systems, and flowback methods continues to increase, and we look to implement modifications this year to further maximize results. Our pace of drilling and completion activity increased during the second half of 2017 as we added a second drilling rig in the northeast Wattenberg. This allowed us to spud 69 extended reach lateral wells and place 54 wells on initial flowback. Recent completion activity was highlighted by drilling spacing units located in 5-63-32 and 5-63-30, which are located within the western area of the northeast Wattenberg position and includes a total of 11 extended reach lateral wells. Separately, initial flowback began in the fourth quarter on a drilling spacing unit in 5-61-20, which is located within the central area of the northeast Wattenberg and includes eight extended reach lateral wells. Early data is encouraging, with these wells on average meeting or exceeding our base extended reach lateral type-curve of 600 million barrels equivalent. We continue to methodically develop our acreage and are concentrating current activity on the southern portion of our acreage and to maximize resources and infrastructure. This provides the foundation for our growth in the first half of 2018 on our legacy acreage position. I'd like to now provide an update on the strategic business combination with Fifth Creek Energy. We are excited about this combination and view this as an outstanding value creation opportunity and a highly complementary asset. Integration of the two organizations continue to move along in a very smooth and collaborative fashion. We have set the date for the special meeting of the Bill Barrett Corporation shareholders for March 16 and we'd anticipate this transaction closing shortly thereafter. We plan to issue formal 2018 guidance for the combined company post closing. In summary, we executed very well in 2017 and are excited about the opportunities that are ahead for us. We view the Fifth Creek transaction as a true reset of our organization on multiple levels given the increased cash flow and EBITDAX generation and significantly improved leverage metrics we project on a collaborative basis. Importantly, we are in a good financial position and retain a meaningful cash position that provides ample liquidity to fund our development program. We will achieve several key milestones in the next month as we complete the combination with Fifth Creek and communicate our 2018 plans to the investment community. I will now turn the call over to Bill.

[William M. Crawford:]

Thank you, Scot, and good morning all. We delivered excellent results in 2017 and entered 2018 in great financial position with over $300 million of cash on hand and a strong liquidity position. Our solid operational results translated into improved financial metrics and increased cash flow and EBITDAX generation throughout the year. The last several years were a challenging time for our industry, but our capital discipline and financings positioned us well for the future with significant opportunities in front of us. Let me briefly touch on our 2017 highlights. Production of 7 MMBoe was at the midpoint of our most recent guidance range and was 12% ahead of our original guidance. This represents approximately 20% pro forma growth over 2016 and was accomplished with capital at the low end of our original guidance. DJ Basin LOE averaged 287 per Boe, which was a 16% decrease over 2016 on a per unit basis. Our operations team continues to demonstrate an ability to generate significant efficiencies. We generated EBITDAX of $178 million and discretionary cash flow of $125 million, which were well above expectations as we headed into the year. Now, as we turn to the fourth quarter highlights, production totaled 2.12 MMBoe, which was above the midpoint of our guidance and represents a 37% year-over-year increase. DJ Basin production grew 42% and DJ Basin oil volumes increased 38%. Fourth quarter production was weighted 60% oil, which was slightly lower on a sequential basis as two DSUs that were placed on flowback in September ramped to peak production. The DSUs are located on the western side of our acreage position in a higher GOR area and also outperformed our initial expectations. We maintained no oil marketing or delivery commitments, which translated into oil price differentials in the DJ Basin averaging $2.51 per barrel, less than WTI. We would expect sub-$3 differentials in the DJ Basin for the foreseeable futures. NGL prices have also improved to 44% of WTI with improving market fundamentals. Our high oil cut, low differentials and low operating costs allow us to generate strong margins, which are at the high end of our peers. For the fourth quarter, our unhedged DJ Basin margin was $32.33 per Boe, a 14% sequential increase over the third quarter. For the fourth quarter, we generated EBITDAX of $57 million and discretionary cash flow of $46 million, which were in line to slightly better than consensus estimates. DD&A decreased to $19.10 per Boe in the fourth quarter, representing a 36% year-over-year improvement. This was primarily a result of greater proved reserve additions from a high rate of return wells at lower cost to the depletion pool. This highlights the capital efficiency of our drilling program. The lower DD&A rate and strong margins allowed us to post positive adjusted EPS for the quarter. Now, for our first quarter outlook on our legacy DJ Basin asset. As Scot mentioned, we plan to issue full year 2018 guidance from our combined assets following the close of the Fifth Creek transaction. We expect first quarter production to be approximately 1.8 to 2.0 MMBoe. As a reminder, this only includes production associated with the DJ Basin as our Uinta Basin property sale closed in December. This also does not include any Fifth Creek volumes. Our guidance represents somewhat flat production from the fourth quarter as we are being modestly impacted by high line pressures and line freezes associated with third-party natural gas processing constraints. We're always seeking greater flexibility with respect to our gas gathering needs, and we entered into an agreement in December that provides additional gas process outlets to the east. We are currently moving about 10% to 20% of our volumes this direction to reduce our reliance on the DCP system. We have the ability to increase volumes on the Sterling system throughout 2018. Now, CapEx for the first quarter is expected to total $80 million to $90 million, which is similar to the fourth quarter as we continue to operate two rigs on our legacy properties. All other operating costs are expected to generally be in line with 2017 run rates. 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 year with $314 million of cash on hand. This cash is expected to fund 2018 combined activity. We also maintain a undrawn $300 million credit facility. We plan to reassess the borrowing base on the credit facility in the next quarter or so to give us proper time to integrate the Fifth Creek assets. Our cash position includes $111 million of proceeds from a common stock offering that was completed in December and $102 million of net proceeds in connection with the sale of our remaining Uinta Basin properties that was also completed in December. We exited the year with net debt to EBITDAX of 1.8 times. On the hedging front, we continue to layer in support for our capital program to provide predictability into future cash flows and protect our capital investments that are providing strong rates of return at current strip prices. This strategy has worked well for us and we have taken advantage of the strength in the futures market to increase our forward price support. You can find a full summary of our updated hedge position in the press release or in our 10-K. In summary, our 2017 successes have positioned us well and we are excited about the opportunity ahead of us as we continue integrating the Fifth Creek transaction. We look forward to updating everyone with our 2018 outlook in late March. With that, we are ready now to take questions. Operator?

[Operator:]

Thank you. The first question is from Jason Wangler of Imperial Capital. Your line is open.

[Jason Wangler:]

Good morning, everyone. Was curious, as you look at the completion types that you guys are running, and it looks like the wells are performing as you expected, are you seeing any tweaks, to changes in those as you head into this year? And I guess included in that is the well costs that you say you're going to kind of keep flat with more efficiencies. Is there maybe more you could expand on what those things would be?

[R. Scot Woodall:]

Sure, a little bit. I think we're kind of still zeroing in a little bit on this, like 140 feet or so of stage spacing, which translates into 82 plus or minus stages per 9,500 foot lateral. And we seem to be kind of going back and forth between like 1,300 pounds to 1,500 pounds of sand per lateral foot. So, those seems like kind of where we directionally are as we enter into 2018. And so, I think that's kind of primarily where we're going to stay. It looks like there's a little bit of pressure on cost in 2018 and we may budget something as an overall well cost increase of around 5%. But I think, much like we did in 2017, I would expect our operations team, through reducing cycle times, to continue to hold those costs flat throughout the year. At least that would be my expectation.

[Jason Wangler:]

Okay. And as you mentioned – I guess Bill's mentioned the line pressures and the freezes. As you kind of get with the Fifth Creek deal, too, is that something that you see may be impacting how you plan the activity between the combined company going forward, or do you see that easing as the year goes on?

[R. Scot Woodall:]

Well, kind of two points along those lines. So sure, obviously, the Fifth Creek transaction gives us a lot of flexibility, which we like that word flexibility, whether we're talking about balance sheet or controlling our own pace of development, is a pretty good keyword for us in this organization. And having another outlet there to summit could give us the ability to allocate more capital up there and less that would flow through the DCP system. So, I think that does give us more choices and more options, and that will surely be taken into account as we look forward to putting out combined company guidance later into March. Specifically to the line pressures and things that we experienced, I kind of think that the worst is probably behind us. So, we were probably more impacted in November, December and January on curtailments associated with DCP than what we see going forward. If you remember, we've signed another contract with another outlet for gas, and those volumes have continuously ramped up. So, we may have only moved a couple of million a day through that other third-party arrangement in November, but we're currently moving somewhere around 7 million to 10 million a day of volume through there. And we think in April, we'll be over 20 million a day going through that other outlet. So, we really think that we've got the issue kind of behind us and it did impact some of the volumes in the fourth quarter and translated into a little bit of the first half of Q1. But like I said, I kind of think that issue is more behind us. So, we look for a pretty robust year going forward.

[Jason Wangler:]

Thank you. I'll turn it back.

[Operator:]

Thank you. The next question is from Derrick Whitfield of Stifel Financial. Your line is open.

[Derrick Whitfield:]

Good morning all, and congrats on a strong year.

[R. Scot Woodall:]

Thanks, Derrick.

[Derrick Whitfield:]

Scot, perhaps building on your last comment, could you discuss the degree of Q1 volume impacts associated with third-party processing constraints and line freezes?

[R. Scot Woodall:]

Yeah. Clearly, I think the first 45 days or so of Q1, we've had some impact. But I think, like I said in my prior remarks, I think most of that is behind us. There is one area of our acreage position that still is experiencing some curtailment and we're still trying to work through those issues over the next couple of weeks. But by and large, by being able to ship most of the gas through this other third-party arrangement is putting most everything we have back online as we speak today.

[Derrick Whitfield:]

Perfect. And then, could you guys speak to some of the inflationary pressures you're seeing in basin and what self-help measures you're taking to offset those pressures?

[R. Scot Woodall:]

Sure. Pressure pumping continues to be under inflationary pressure. So that's probably one of the leading inflation items. But we're seeing a little bit in some of the other ancillary services, like drilling rig and some of the other things. But as I mentioned before, 2017 over 2016, we drove cycle times by 30%, and it's not so much in drilling days, but it's a lot in the completion timeline, whether that's number of fracs per day, the time it takes to drill out plugs, the time to set facilities. We're kind of tracking every part of the whole completion drilling cycle and just continuously are able to make improvements along those lines. So, I'm optimistic that our team will be able to offset some of those inflationary pressures due to those continued efficiencies.

[Derrick Whitfield:]

Great. And then lastly for me, regarding the Fifth Creek acquisition. Can you offer any color on where you stand with the 12 DUCs netted at the time of the acquisition and how your view on D&C and flowback procedures are evolving now that your teams have had the opportunity to work with one another?

[R. Scot Woodall:]

Sure. So the Fifth Creek transaction, in general, has just gone great when you think about going through the whole SEC review process. And I think we'd had a very expedited process along those lines, got the shareholder votes set there for the 16th, so kind of in the middle of the month. So, that has gone tremendously smooth. We got the Glass Lewis report this morning in which the Glass Lewis recommends a for vote for all of the items that our Board of Directors put out to the shareholders. So, we're excited about that. So from that whole approval process, everything seems to be on track. Working with the Fifth Creek people has been a tremendously collaborative event as we kind of worked through putting together a business plan for 2018 as well as tackling some of the organizational issues and things. So, that has been great to work with all of those guys. Going specifically to the DUCs that you brought up. Of the 12 DUCs, three of those were completed by Fifth Creek in December and placed online in December of last year. The remaining nine DUCs will be done post closing. And so, we I think have already secured services to go up there really by the end of March, beginning of April to begin the process of completing those DUCs. Similarly, I think we already have been working in a very collaborative fashion with the Fifth Creek people and have secured almost all of the permits that we need for 2018 for the Hereford position and expect to have a drilling rig up there running probably in April as well. So, seems like it's all on track, moving pretty smooth. I would say that the outlook that we put in conjunction with the announcement of the transaction back in December still looks intact. Obviously, we will update that post closing and post getting a business plan approved through our new board, and those items as well, and I look forward to sharing that with everybody. But it seems like that that outlook is still intact as we continue to work through the process.

[Derrick Whitfield:]

Thanks, Scot, for the detail. I'll turn it back to you guys.

[Operator:]

Thank you. The next question is from Gabriel Daoud of JPMorgan. Your line is open.

[Gabriel J. Daoud:]

Hey. Good morning, everyone. Maybe just following up a little bit on the Fifth Creek question. Are you guys able to disclose, I guess, post the three DUCs coming online, what current production is from Fifth Creek?

[R. Scot Woodall:]

They're shaking their head, no. So I guess not yet. So, we'll probably update Q1 volumes for those guys when we do the guidance later in March.

[Gabriel J. Daoud:]

Understood.

[R. Scot Woodall:]

But I'm sure I can probably just say that it's meeting our expectations of how we forecast it during the acquisition process. I can say that much.

[Gabriel J. Daoud:]

Got you. Got you. That's helpful. Thank you. And then just one last one for me. The oil mix for 2018 is guided to around, I guess, 60% on the year. How does that look, I guess, as you move throughout the year? And I know that will be impacted by Fifth Creek and the ultimate plan, but is the expectation that it's flat in 1Q, the oil cut, and then it kind of sets higher throughout the year?

[R. Scot Woodall:]

Yeah. That's probably the right way of doing it. So, I would think that that rise is probably as the Fifth Creek production comes on line since they're a heavier weighed to oil, so you probably see that rise back half of Q2, Q3 and Q4.

[Gabriel J. Daoud:]

Great. Thanks, Scot.

[Operator:]

Thank you. The next question is from Park Carrere of Scotia Howard Weil. Your line is open.

[Park Carrere:]

Hey. Good morning, everybody.

[R. Scot Woodall:]

Good morning.

[Park Carrere:]

Maybe try to ask Derrick's question a little bit different, realizing you can't talk about your official guidance yet. But as it relates to the preliminary guidance you gave late last year, was 1Q guide as expected or did those line pressures hamper it a little bit further than you thought?

[R. Scot Woodall:]

It's basically in line with our expectations. We factored in a little bit of curtailment in Q1, but that's basically the way that we saw the full year. So like I said, I'd probably reiterate that the guidance that we – or the outlook that we put out in December is still intact for all of 2018.

[Park Carrere:]

Okay. Perfect. And then just one last one, the pipeline contracting the gas going east, what do you think you can get that up to maybe longer term through 2018? What's kind of the ceiling?

[R. Scot Woodall:]

We think that we have the ability to move more than 30 million a day in June

[Park Carrere:]

30 million. Okay. Thanks, guys.

[Operator:]

Thank you. There are no further questions at this time. I'd like to turn the call back over to Larry Busnardo for closing remarks.

[Larry C. Busnardo:]

All right. Thank you again for joining us today. We're around all day if you have any questions, so feel free to reach out. Thanks.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day, everyone.