Lonestar Resources US Inc.
Q3 2019 Earnings Call Transcript

Published: 12 Nov 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Lonestar Resources’ Third Quarter 2019 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Please note, this conference call is being recorded today, the 12th day of November 2019.I would now like to turn the conference call over to your host, Frank D. Bracken, Chief Executive Officer. Please go ahead, Frank.

[Frank D. Bracken:]

Thank you. I have most of the team here with me, so if you ask me a question I can answer, I have help. Before I began, I need to direct you to the cautionary note regarding forward-looking statements, Safe Harbor and disclaimer on Slide 2 of the deck.Now, please turn to Slide 3 for my opening remarks. Lonestar reported a 33% sequential increase in oil and gas production to a company-record 18,097 BOE a day in 3Q 2019, which compares quite favorably to the second quarter number with a 13 handle on it. Reported production volumes of materially exceeded the company’s guidance of 17,000 BOE a day to 17,500 BOE a day. Production was compromised of – comprised of 67% crude oil and NGLs on an equivalent basis and timely execution of a large number of high-rate wells coming out of our 2019 capital program has driven these results.We also reported a 12% increase in EBITDAX to $37.1 million that EBITDAX performance was overwhelmingly driven by the fact that 3Q production volumes materially see the guidance in spite of some really soggy NGL prices. While our oil differentials have been under a bit of pressure, the oil and gas realizations in the Eagle Ford are still the best in the country.Lonestar’s 2019 drilling program continues to deliver stunning results. I think these results are remarkable in two respects

[Operator:]

Thank you. [Operator Instructions] We will now take our first question from the line of Dun McIntosh [Johnson Rice & Company]. Please proceed with your question.

[Dun McIntosh:]

Good morning, Frank and congrats on another really strong quarter.

[Frank D. Bracken:]

Thanks, Dun.

[Dun McIntosh:]

production, we talked about the Sooner well has been really strong, but what really surprised me this quarter was how well oil came in and it looks like the Horned Frog is really the driver there. What is it about those oil cuts that’s got them coming into eyes? Is it geology that’s something you all are doing on the engineering front and what are some of the leverage you all pulled there to really bring that oil cut up?

[Frank D. Bracken:]

Yes. I think a lot of it has to do with really careful mapping of the benches that are prevalent in the greater Horned Frog area. A lot of that mapping is done utilizing some very advanced logs that we’re – that we have at our disposal. And at the current oil and gas price ratios, we’re really focused on targeting our wells in the pieces of the lower Eagle Ford that have the most moveable oil that means they’ve got adequate fourth route to allow us to actually not only encounter that, but have the oil moved to through the wellbore to surface.So, it’s really a lot of science, but it’s also a lot of focus on doing the proper analysis to flow these wells back being very mindful of, in this case, DuPont. if you’ll notice on the production plots, we actually are quote “underperforming” on the gas side at Horned Frog Northwest. When we can produce that much extra oil, we’ll happily defer gas production to a later point in time. And that’s telling you how we’re choke managing those wells, but it makes a monstrous difference in the returns that we’re generating here being able to selectively grab that oil and maximize our intersection with what the oil-rich rock.

[Dun McIntosh:]

Okay, great. Thanks. And then on – looking at fourth quarter and kind of early next year, you got into a sequential decline, but the midpoint of that still puts you over the high end of your full-year guidance. You’re bringing on two wells at Marquis. I was wondering if you could give a little color around activity beyond that in the near-term. Kind of where you’re thinking about folks in early and I know you’ve – we talked about you had brought on a – you’re looking to bring in a new rig kind of some of the cost efficiencies you’re looking to achieve there would be great.

[Frank D. Bracken:]

Sure, sure. So, we actually – we waited on a – we waited on a new rig that is what really caused the delay if you will in the Cyclone wells. But the rig has worked away. It’s what we call a unicorn. It can do everything we needed to do and should allow us to improve our rates of penetration in days drilled over the course of its contract. And we’re able to put it under contract for a lower day rate, that rig – that contract comes up in February and with based on where day rates are today, our anticipation is we can get another rig of similar kind or extend this one at even lower rates. So, continue to hopefully wind down the drill costs associated with the program.We have a lot of moving pieces to our 2020 budget. most of the flex if you will is really going to be related to going to be related to the – what we do in Cyclone/Hawkeye. We’ve been working very, very hard on, what I would call a potentially very significant deal that that would be a farm-in type arrangement. So, no cash out of hand, no incremental capital required, but something that allows us to leg into a lot more drilling locations in an area that we’ve demonstrated expertise.So, we’re going to – we’ve got to let the dust settle on that before we get much more specific about the actual order of drilling operations for 2020 and the mix. It depends on if we’re drilling more wells in cyclone, Hawkeye and Karnes and we are in horned frog and sooner. the results are going to be – are going to look different than they would, if the reverse were true. So, our preference is to not get very specific, but know that we’ve run a lot of different permutations of the budget and still feel inordinately competent with the production estimates that we’ve got out there. I mean, it really doesn’t take a ton of imagination to get there and feel pretty good about what it’s going cost to deliver those results.

[Dun McIntosh:]

All right. Thank you. That’s it for me and congrats on the quarter.

[Frank D. Bracken:]

Thanks.

[Operator:]

Our next question comes from the line of Neal Dingmann of SunTrust Bank. Please proceed with your question.

[Neal Dingmann:]

Good morning, Frank and team. Frank, just maybe an add-on to part of that last question more, given that the notable continued improvement in well returns you see in – you’ve continued to certainly highlight here and on the release, but you continue to leverage that you still have, how do you all think about when you look at 2020 or maybe, even beyond that 2021, I’m just wondering sort of that Balancing Act of growth or free cash flow. How do you – I’m just wondering, how do you sort of think about it any different today given the improvement in the wells than it was at the beginning of the year?

[Frank D. Bracken:]

Sure, sure. Look, we’re really happy with the returns that the 2019 program has generated and we’ll review those with the board on Thursday. I would note that they’re achieved despite the fact that we had a lot of pretty gassy liquids-rich wells brought on in the late second and third quarter, which actually – we had peak production at pretty poor NGL prices. So, those returns have been good despite that. look, I think, I think first and foremost, we’ve got to manage the business around liquidity. We want to make sure that we’ve got ample liquidity to run the business and the fortunate thing is that spending less capital next year allows us to expose the shareholders to really good returns and over time, dramatically improving EBITDA and improving debt metrics.So, at the moment, the, the notion that we’d want to consider ramping up beyond a capital program that would yield higher production than that, which is guided, is just something I doubt the board would even remotely consider at this time. So, first and foremost, manage to liquidity and borrowing base availability.

[Neal Dingmann:]

It makes sense. And then you just taught well cost, I guess where I’m going with this is, as I mentioned and you walked through that in the improvement in the results, I’m just wondering, with that, again, as you see sort of the 2020 plan, are you all still sort of walking up more high density completions in all, I guess if you could just talk about how you’re sort of balancing that and do you think you’re at a point now where you actually continue, I mean we’re certainly seeing service costs come down. So, I’m just wondering beyond that, just maybe, talk about that mix. I have to see that sort of making that mix.

[Frank D. Bracken:]

Yes. Service costs of debt, I mean, are steel is cheaper. So, anything that’s made with it’s going to be less expensive. We negotiated a reduction in our pressure pumping rates that are now – that are – that will be effective on the 2020 program. And then we’re actually effective at Marquis and saved us about $300,000 a well and we’ve got better drilling equipment available to us at lesser dollars as well. So, I think across the board, well costs will be coming down. We did make some fairly considerable investments in CDPs at areas, where we’re handling for us big volumes of gas that we’re very happy to handle, but exceeded type curve forecast for sure.I think the bulk of those were behind us. So – and then lastly, a lot of the actual pad locations that we are contemplating for 2020 are required substantially less kind of scratch in infrastructure than those that we drilled in 2019. So, all those factors should land to lower well costs as it relates to incremental prop and I think we’ve kind of generally speaking, found optimize sweet spots in each of our areas. And so my – could we talk more potentially, but I think, the 2019 program really demonstrates some fantastic results that were – that we’d be happy to repeat that at lower well costs.

[Neal Dingmann:]

Very good. Thanks. Congrats on the results.

[Frank D. Bracken:]

Yes.

[Operator:]

And our next question comes from the line of Jeffrey Campbell of Tuohy Brothers. Please proceed with your question.

[Jeffrey Campbell:]

Good morning, Frank, and congratulations on the strong quarter.

[Frank D. Bracken:]

Thanks, Jeffrey.

[Jeffrey Campbell:]

Regarding the cyclone area expansion that you’ve been discussing, can you characterize when you’ll know if this is a go or a no-go and it sounds like that if it comes through, you’re going to get the business drilling sooner than later.

[Frank D. Bracken:]

So let me answer, there are two separate questions or a question in that set position. I think we’ll – my anticipation is that that we’ll be at a decision point within the next 30 days quite handling and trust me the moment we can share that with all of you we’ll do so. And I think, and then as it relates to when we drill the wells that’ll depend on a whole barrage of things. So, I can’t give you any specificity there. I can’t tell you that, that regardless of whether we consummate a transaction or not. Hawkeye will absolutely be back on the calendar in 2020 and prominently so, and simple reason returns are fantastic there. So, it’ll – it was absent in the 2019 program. Clearly, we’ll bring these three cyclone wells on in early 2020 and will bring at least three Hawkeye wells on. I feel pretty certain about that. How the rest of it shakes out or really be a function of getting to finality with the things we’re working on right now.

[Jeffrey Campbell:]

Okay. Well, that’s pretty helpful color. In fact, the Marquis results were strong and that was something we were anticipating. Knowing it’s – it is early, do you have any sense for the returns on these first two tests might rank order in the Lonestar portfolio.

[Frank D. Bracken:]

I’ll make – I kind of make two comments to you; one, these are wells that, that we think will go on a jet pump really effectively. We’re not there yet. The rates and the pressures are still quite robust. But we’re – these wells are acting like something that once we get them on jet pump, they’ll give us some terrific rate for a sustained period of time and I can tell you the type curve has got a lot of steepness to it though the reason the type curve has a lot of steepness to it is because that’s the way of the offsetting wells drill by other operators have performed. And it’s guesswork at this point in time. So, I’d be as happy as we are about the wells, I’d be with 23 or four days of production, I’d be reticent to go there yet, but I can tell you that after we put the press release out yesterday, I had had inquiry from a competitor wanting to do a data trade. So, you’re not the only one whose curiosity has been aroused.

[Jeffrey Campbell:]

That’s great. And for our last question, I just want to mention that the press release referenced to issues with line pressures. I mean, it’s the first time I’ve heard about that in Eagle Ford in recent memory. So, I was just wondering it’s just indicative of a lot of industry activity or was it something else?

[Frank D. Bracken:]

Yes. I mean, generally speaking it’s the – you’re exactly right, generally speaking, we’re – we’ll get low line pressures and guys are even starting to take some of the really big horsepower out of service based on lower volumes. This is just a little localized hotbed, where there’s been a lot of recent drilling activity and some kind of long-term plans to accommodate it. I mean, DeWitt County is a busy area for several of the really big voice. So, we’re doing great. You can see in the rates, but we think we’ll actually get some relief once that that all settles out. So yes, it’s just a little local hotbed that we’re in…

[Jeffrey Campbell:]

Okay. Well, thanks again, and congratulations on the quarter.

[Frank D. Bracken:]

Thanks, Jeff.

[Operator:]

[Operator Instructions] Our next question comes from the line of Jeff Grampp of Northland. Please proceed with your question.

[Jeff Grampp:]

Good morning, Frank.

[Frank D. Bracken:]

Good morning, Jeff.

[Jeff Grampp:]

I’m just curious understanding that that 2020 still has some variability as you guys kind of work through some of these land opportunities and whatnot, but is it fair from maybe, a 10,000 foot level to think on the kind of lower end of the range, maybe, that’s a little bit more oil focused activity program in 2020 and that my bias up your oil mix, whereas the higher ends maybe kind of more Sooner-horned frog oriented and therefore, a lower gas mix, am I right to kind of think about it that way or would you have some other, I guess points or caveats, where that might not make so much sense?

[Frank D. Bracken:]

I would – so I would tell you that I don’t, while I would not confirm that assumption, I think it’s – there’s a lot of reasonableness associated with it. But by the same token, what kind of gives us comfort is that we look out at the analyst estimates on production and the EBITDA forecast and we got lots of room to make you happy at this point is really where I would come out on it. So, we’re pretty happy either way, both either end of that spectrum generates free cash. We just have to – we just really got to, we got to work through the details of the budget and get some pretty big issues worked out in terms of where specifically we’re going to drill, because we don’t like to give – we don’t like to give any more specificity until we know which wells precisely we’re going to drill. But I think in general, your basic thought process is sound.

[Jeff Grampp:]

Okay, great. Thank you. And for my follow-up, I was curious if you can kind of give us any kind of update on the potential asset sale of your East Texas assets.

[Frank D. Bracken:]

Yes. So, we completed our Brazos well. The logs were better than the Wildcat well. the wells stimulated better than the Wildcat well, I would tell you. And we’re able to generate really good early rates. We’ve got a mechanical obstruction that we’re waiting on lower pressures to deal with. I would tell you, I think we’re not – we’re producing out of a fraction of the total lateral length right now. We’re going to let those pressures come down, go remediate that well. And then I think at that point in time, would be the appropriate time to launch a formal process. I will tell you that we’ve not been able to stave off all of the – all the inbound inquiry and we have people working in advance with our data on the asset. So, hopefully, it’s just a deferral of that sale and nothing else.

[Jeff Grampp:]

Okay. And if I can sneak one more in here, can you just talk about overall your comfort level with the current liquidity position and any thoughts on buying back your bonds or as liquidity, the kind of a paramount focus as far as the balance...

[Frank D. Bracken:]

Sure. So, what we’ve not been able, what we would have liked to have been able to address on the call is just how the borrowing based review worked out and all that. I can tell you, it just seems like the banks are – have got so many big problems out there that everything is slower than it usually is. We’ve seen this before. City’s engineers have been through it. They actually recommended that the conforming borrowing based number would have been an increase. I think based on the current market conditions, it looks kind of like flat is the new up. If I had to coin a phrase and I think that’s where – then that’s where we’re headed, that process is still ongoing and probably, weeks away from getting settled out. I think more than anything, liquidity is what you’ve got to maintain. You’ve got to maintain optionality to run the business and never get taught – caught too squeaky. So, that is – that’s why you don’t see us even thinking about changing the basic mentality of more limited capital spending in 2020 with a mind toward free cash flow.I think incrementally, we’re going to be looking to – we’re looking – we’re going to be looking to try to improve that, where we may be able to take advantage of a very soggy market for properties. And if we can do that on a very accretive basis with a feathering in of equity, that’s something we’d consider. Because I think, I think, as I look at it and I think as the board looks at it, the returns of what we’re doing are outstanding and they’re – they’ll go toe to toe with anybody in the industry. Our cost structure is now in line with companies many times our size. The only thing holding us back is balance sheet issues. And so we’ve got to be very mindful of those and make sure we do the things we can do to preserve that liquidity.

[Jeff Grampp:]

Got it, understood. I appreciate the comments at the time, Frank.

[Frank D. Bracken:]

Got it, Jeff.

[Operator:]

And thank you, Frank. there are no further questions in the queue. I’ll now turn the call back to you. Please continue.

[Frank D. Bracken:]

Well, thanks very much for your time and attention. We’re looking forward to coming back and in a few months and updating you on our progress. Thanks very much.

[Operator:]

Ladies and gentlemen, this concludes the Lonestar resources’ third quarter 2019 financial results conference call. Thank you for joining us today. You may now disconnect your line.