HighPoint Resources Corp
Q1 2016 Earnings Call Transcript

Published: 6 May 2016

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2016 Bill Barrett Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to our host for today, Larry Busnardo, Senior Director of Investor Relations. You may begin.

[Larry Busnardo:]

Good morning, and thank you for joining us today for the Bill Barrett Corporation first quarter 2016 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 need to remind everyone to read the disclosure statements provided within the forward-looking statements of our earnings release posted to the home page of 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. These documents can be found on our website or at sec.gov. With that brief introduction, I will now turn the call over to Scott Woodall.

[R. Scot Woodall:]

Good morning and thank you for joining us this morning to discuss our first quarter 2016 results. I'd like to spend some time reviewing our operational results before turning the call over to Bill Crawford, to review our financial results. Our team continues to execute on multiple levels as exhibited by our quarterly financial and operational results. The quarter was highlighted by production coming in at the high end of our guidance range and beating expectations, while lease operating expenses and G&A expenses both came in significantly lower than last year. This outperformance led to earnings, discretionary cash flow and EBITDAX all meeting or exceeding consensus estimates. Financially, we remain solid with a balance sheet that remains in a very strong position. We exited the first quarter with over $100 million of cash a valuable hedge position with approximately 65% of our 2016 oil volumes hedged at $77 per barrel and an undrawn credit facility. We also successfully completed our borrowing base redetermination in April. Bill will touch on this in a little bit more detail in his section. Earlier this week, we announced the sale of noncore assets in the Uinta Basin for approximately $30 million. We view this as an opportunistic and strategic transaction that further streamlines our asset portfolio and will positively impact our operating cost structure as these properties have significantly higher lease operating expenses than our DJ Basin assets. Based on our internal estimates, the sale price amounts to over 15 times estimated 2016 operating cash flow at strip pricing. The proceeds will be used to further strengthen our balance sheet, and to add to our cash position, so another very good transaction for the company. Turning to operations, our team has done a tremendous job capturing significant cost savings over the past year. We continue to demonstrate an ability to further increase our capital efficiency as first quarter capital expenditures totaled $46 million. This was 20% below the midpoint of our guidance range. We accomplished this as most of our recent extended reach lateral well costs were executed approximately 10% to 15% below our forecasted well costs of $4.75 million per well. Accordingly, we're also lowering our full year capital expenditure guidance to reflect these cost savings, again a tremendous job by our operations team. The initial results of our extended reach lateral development program continued to validate our performance assumptions and continued to provide increasing confidence regarding the potential of the play. Our standard drilling and completion design continues to be a plug-and-perf design using approximately 1,000 pounds of sand per lateral foot and completing with 55 stages and doing a flowback that controls both the water and the natural gas. Now for a status update on our activity. During the first quarter, there were four extended reach lateral wells drilled and 16 wells, including 15 extended reach lateral wells that were placed on initial flowback beginning in early April. We also initiated completion operations on eight extended reach lateral wells including the four that were drilled and anticipate that flowback will begin on these during the second quarter. As we previously outlined, this will complete our first half drilling and completion activity, and we will have no uncompleted wells remaining. We continue to monitor industry conditions to determine the appropriate time to resume our development activity. I'd like to spend a few moments discussing a 10-well drilling spacing unit that includes nine extended reach lateral wells located on the northern portion of our acreage. We refer to this as the Weld pad (05

[William M. Crawford:]

Thank you, Scot, and good morning to all. As Scot just mentioned, in his comments, we're off to a great start to the year, as we posted solid financial results for the first quarter that were generally in line with our guidance and consensus estimates. I will now spend a few moments going over our financial highlights and key achievements for the first quarter. Despite a 31% drop in WTI and Henry Hub prices from the first quarter of 2015, we were able to generate EBITDAX in excess of $39 million, or $28.84 per Boe as production came in at the high end of the guidance range, oil price deducts improved, and we had lower operating and G&A costs. First quarter production volumes totaled 1.4 million barrels of oil equivalent. This was at the high end of our guidance range of 1.3 MMBoe to 1.4 MMBoe. Production was lower on a comparable basis to the last quarter and the first quarter of 2015, primarily due to the asset sales completed in the DJ and Uinta Basins during 2015. The first quarter production mix was in line with expectations at 65% oil, 20% natural gas, and 15% NGLs. For the second quarter, we expect production to approximate 1.4 MMBoe. This will be slightly higher than the first quarter as recently completed XRL (09

[Operator:]

Thank you. And our first question comes from Brad Carpenter from Cantor Fitzgerald. Your line is now open.

[Brad Carpenter:]

Hey, good morning, everyone, and thanks for taking my questions. Scot, I appreciated your remarks on the Weld pad (16

[R. Scot Woodall:]

Sure, Brad, so the issue surrounded the gas lift valves and if you – that's kind of our artificial – lift choice is the artificial – is doing the gas lift systems. And we just had some malfunctioning valves. And if you're familiar with how gas lift operations work, you're controlling those at the surface via different injection rates and different pressures. And so, it takes sometimes, a few days, to kind of identify the problem. And what it ended up having to do is we ended up on all nine of the wells having to round-trip the tubing, replace all the valves, get everything – the wells were down for a few days and then you have to kind of start the whole flowback de-watering process. And so, it just kind of cost us a couple of weeks of impacting our production. So pretty minor thing really all the way around. It just took a little bit of time to recognize the issue, do the actual well work, and then put the wells back online and restart kind of that flowback process. So, they've been back online now, and as I said in my prepared remarks, they're inclining just like we think they should be, so those numbers that I was quoting where March is significantly higher than January, and April significantly higher than March, and the way the trajectory is going is I bet May is significantly higher than April, as well. So, I think we're just back on track, just kind of a little minor delay, just based on those gas lift valves.

[Brad Carpenter:]

Okay. Sure.

[R. Scot Woodall:]

And in terms of the completions, that Weld pad (18

[Brad Carpenter:]

Okay, great. That's very helpful. And then, Scot, could you touch on what an activity ramp might look like for you guys? Is there a specific WTI price that you're looking for before you'd put a rig back to work in the DJ? And then when you do on what portion of your acreage will you focus?

[R. Scot Woodall:]

I think there'll be a lot of factors that go into making that decision, Brad. Obviously commodity price is a big part of that. And not only commodity price in 2016, but really kind of what it looks like in 2017 and 2018 and if we're able to hedge some of that new production or not, I think is going to also determine if that's the best deployment of our cash in the bank and how 2017 is shaping up. So I think there's a few things that kind of go into that decision. I think the next pad that we want to drill is one that is in the southern portion of our acreage, which is kind of South of the river. If you kind of remember, there's a river that cuts through the middle of the southern portion of the acreage. We have a lot of mapping and geologic work that's been done down there and we're pretty excited about what it looks like. To-date, we've only drilled like one well down there and we had pretty encouraging results from that one well. And we most recently were able to take a farm-out from one of our offset operators that could enable us to add an additional like 150 locations that could be earned through this farm-out arrangements down there in that south-southwest portion of our acreage as well. So I think the very first pad that we would go drill, if we resumed activity this fall, would be doing a pad down there and collecting some data and trying to confirm our geologic and reservoir models.

[Brad Carpenter:]

Got you. That's helpful. Thanks for your time, Scot. Congrats on a nice quarter.

[R. Scot Woodall:]

Thanks, Brad.

[Operator:]

Thank you. And our next question comes from Brian Corales from Howard Weil. Your line is now open.

[Brian Michael Corales:]

Good morning, guys. Nice work on the – it sounds like the A is prospective up in the northern acreage. Do you all see it similar down south?

[R. Scot Woodall:]

Brian, no. We probably only limit the A potential to the northern half of our acreage position, is kind of the way that geologists are thinking today. We haven't drilled an A well down there, but the guys kind of put that on the back burner.

[Brian Michael Corales:]

Okay. And then maybe just bigger picture. I mean, it sounds like with the activity, the flow-backs you have right now you can continue to kind of still ramp up production throughout 2016. When do you need to have activity for 2017? Would it have to be like kind of third quarter of this year?

[R. Scot Woodall:]

You know, probably to maintain, like a flat 2017 production versus 2016 production, we probably need to be adding wells in the first quarter or second quarter of next year. So you have to start fourth quarter of this year to start getting some production first or second quarter next year, if the goal was to maintain flat production 2017 to 2016.

[Brian Michael Corales:]

Okay, and obviously, I didn't hear a price, but we've been hearing, I guess through other companies, $50 is kind of a magic number for at least starting to put a little bit of activity back to work. Is that fair?

[R. Scot Woodall:]

I've seen that same thing written, as well, Brian, and I'm not sure I necessarily want to commit to an actual price, but something in that range. And then like I said, it kind of depends on where 2017 and 2018 are going too, just thinking these things have two-year or three-year payouts.

[Brian Michael Corales:]

Okay. All right, guys, well, thank you.

[R. Scot Woodall:]

Sure.

[Operator:]

Thank you. And our next question comes from Neal Dingmann from SunTrust. Your line is now open.

[Neal D. Dingmann:]

Morning guys. Say, Scot, just one clarification. It sounds like just around the well, it was just kind of a temporary with the gas valves. I guess you're satisfied with all the pad performance and anything else related around that.

[R. Scot Woodall:]

Yeah, we sure are.

[Neal D. Dingmann:]

Okay.

[R. Scot Woodall:]

So we just had to round trip the tubing, fix the valves and I think we're back up obviously on an inclining trajectory.

[Neal D. Dingmann:]

Why, is it more cost or it's just, again, for somebody less technical like myself ,why gas slipped over the ESP in that area?

[R. Scot Woodall:]

Actually, just think it's a more efficient operation that you can get a lower bottom hole pressure for cost efficiency. So you're right it's a balance of both of those.

[Neal D. Dingmann:]

Okay. And then on Brad's question, as far as kind of when did you decide to bring a rig back. Again, I know you don't have 2017 out. How do you guys think about, I guess, maybe another way to approach that is think about sort of PDP declines. I'm just thinking more from the stance of if you do take that cash, maybe something with higher returns and pay something back versus maybe drill or actually bring a rig back, how are we thinking about the decline or how do you guys approach that when you start looking at the rest of this year and into 2017?

[R. Scot Woodall:]

As we said, kind of this year of an inclining production profile. So we definitely think that with the activity at the end of 2015 and the first quarter activity that we had, you'll see production rise throughout 2016. But when we think about an overall company existing PDP decline, it is something in that 25% type of a range. So you could probably factor that in if you're trying to build a model for 2017 and 2018, I guess.

[Neal D. Dingmann:]

Okay. And then just lastly I guess when you and Bill look at it now, your bonds certainly have come back as the stock has, with that I'm looking here I guess is your 2019s and 2022s, I think the 2022s are around $0.73. Any thoughts of buying that back? Or now that they're across the $0.70, does it make sense to do that versus other alternative uses of the cash?

[William M. Crawford:]

No, I think like you said, the bonds are very thinly traded at those levels, and glad to see the equity rise along with the bond prices rising. But we'll just look as we have the cash on hand and make the decisions in the third quarter, what's the best use of that capital.

[Neal D. Dingmann:]

Makes sense, Bill. Thanks, guys.

[Operator:]

Thank you. And our next question comes from Jason Wangler from Wunderlich. Your line is now open.

[Jason A. Wangler:]

Good morning, guys.

[R. Scot Woodall:]

Good morning, Jason.

[Jason A. Wangler:]

Was curious just maybe shifting to Uinta, obviously the sale this week looked pretty positive. I apologize I missed the beginning of the call, so I hope I'm not rehashing anything, but just kind of how that worked out. Obviously, you had the entire package up a while back. Prices obviously didn't cooperate and you pulled it. Just curious if you could provide any color on how that happened and kind of your thoughts on the deal because it looks pretty positive to me.

[R. Scot Woodall:]

Sure. So after we closed the data room and we rejected all the bids, we had a number of people that had come through the data room that just continued the dialogue with our team. And this particular entity was asking if we'd split it up, and they were more interested in one part of the package versus another part of the package. And we came to terms. And so I think we're always receptive if it kind of makes sense for the company, and so this seemed like a real strong one-off negotiated transaction for the company.

[Jason A. Wangler:]

Okay, great. And obviously you have I think after the sale a couple of thousand barrels a day producing there. Do you have an idea on just kind of the decline rates of what we have left as far as what we should kind of be thinking about from a modeling perspective just specifically in the Uinta?

[R. Scot Woodall:]

Well, I think we reported something like a 35% decline in Uinta for this quarter. I think it will be a little bit less than that with these properties gone, but it's still probably 25% or 30% on a base decline rate.

[Jason A. Wangler:]

Okay. That's helpful. Thank you very much.

[Operator:]

Thank you. And our next question comes from David Beard from Coker Palmer Institute. Your line is now open.

[David Earl Beard:]

Hey, good morning, gentlemen. Nice quarter.

[R. Scot Woodall:]

Thanks, Dave.

[David Earl Beard:]

Just could you give a little color relative to LOE, transmission and SG&A costs sort of using the first quarter as a base? Can you give us some color of how the rest of the year should play out? And I'm also considering the asset sale.

[R. Scot Woodall:]

Obviously, like we said in our prepared remarks, Q1 is a little higher on the SG&A, because we did have some of the severance costs, et cetera, in there and so I think we'll start to see that trending lower, maybe closer to $7 million to $8 million. LOE, the same thing, with winter weather you have to plow the roads, do some other things that just take a little bit higher cost structure, so we will see that trending lower and expect to be within the guidance.

[David Earl Beard:]

Okay, thank you.

[R. Scot Woodall:]

And we did sell properties. The properties we did sell in Utah were averaging probably closer to a $15 to $16 per BOE equivalent. And so once those exit the portfolio, you will see the overall blending down as well.

[David Earl Beard:]

Great. Thank you.

[Operator:]

Thank you. And our next question comes from Gabe Daoud from JPMorgan. Your line is now open.

[Gabriel J. Daoud:]

Hey, good morning, guys. Just obviously you guys continued to exhibit some pretty nice efficiency gains on the XRL side, drilling them around 8 days per well. I think the best one is 6.5 days. Could you maybe just comment a little bit on how much more efficient I guess you can get? And ultimately where you think well costs end up shaking out?

[R. Scot Woodall:]

Yeah, I think we always continue to challenge our operations team to do better. I think there's always probably – they joke at me there's always probably a standard 10% ask on the table from me to them, but we typically report D&C costs in arrears and we're recording actual cost. And so fourth quarter last year we were at that number of that $4.75 million per well. We're still in the process of completing this last handful of wells, but those costs are trending something like I said about 15% or so less than that $4.75 million number. So they continue to do a great job, and it's probably kind of that same old story of what have you done for me lately? So I'm sure as soon as we book those costs and have a good handle on them, we'll be asking for, like, another 10% the next time that we resume activity.

[Gabriel J. Daoud:]

Thanks, Scot. That's helpful. And then maybe just a quick follow-up on that. As prices begin to rise, I guess how much of the gains that you've realized so far do you think maybe you give back as service companies start to maybe increase prices to gain some more margin? How do you think about that?

[R. Scot Woodall:]

We were probably always, and I haven't looked at it on this recent batch of wells, but if you look at the reductions maybe from that $8.25 million where we were in the $100 price environment, commodity price environment, to that $4.75 million in the current price environment, probably something in the area of a 60/40, where we thought 60% was really by our own efficiencies of drilling days, completion times, all those types of things, and maybe you're getting something in that 30% to 40% from just strictly service cost concessions. So it probably will depend on how fast commodity prices rise and how much you give back of those numbers through time.

[Gabriel J. Daoud:]

Got you. Thanks, Scot. That's all I had.

[Operator:]

Thank you. And this does conclude our question-and-answer session. I would now like to turn the call back over to Larry Busnardo for any further remarks.

[Larry Busnardo:]

All right, thank you again for joining us today. We know it was a busy week for everyone so we appreciate you being on the call. Feel free to contact us if you have any additional questions regarding our results this quarter. Thank you.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.