Ring Energy, Inc.
Q1 2020 Earnings Call Transcript

Published: 12 May 2020

[Operator:]

Greetings, and welcome to the Ring Energy 2020 First Quarter Financial and Operating Highlights. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. Please note that, this conference is being recorded.At this time, I'll turn the conference over to Mr. Tim Rochford, Chairman of the Board of Directors of Ring Energy. Mr. Rochford you may begin.

[Tim Rochford:]

Thank you, operator, and welcome all listeners to our 2020 First Quarter Financial and Operations Conference Call. Again, I'm Tim Rochford, Chairman of the Board. Joining me on the call this morning is our CEO, Kelly Hoffman; our President, David Fowler; Brandy Brodrick, our CFO; Danny Wilson, Executive VP and Head of Operations; Hollie Lamb, VP of Engineering; and also Bill Parsons, our Investor Relations.Today, we're going to provide a quick concise overview of the financial and operational results for the first quarter. And as we did on our year-end 2019 conference call, we'll spend the majority of the call identifying, discussing and summarizing the factors that directly affect the current and future operations of your company. At the conclusion of the first quarter review, we'll turn it back over to the operator for opening up questions to the listeners.Now at this time, I'm going to ask Randy Broaddrick, our CFO to give us a brief overview of the activity financially in the first quarter. Randy?

[Randy Broaddrick:]

Thank you, Tim. Before we begin, I would like to make reference that any forward-looking statements, which may be made during this call are within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete explanation, I would refer you to our press release issued Monday, May 11. If you do not have a copy of the release, one will be posted on the company website at www.ringenergy.com.For the three months ended March 31, 2020, we had revenues of $39.6 million, net income of $43.8 million and earnings per diluted share of $0.64. This net income included a pre-tax unrealized gain on hedges of $47.1 million. Without this unrealized gain after the effect of income taxes, our net income would have been $7.2 million or $0.11 per share. This unrealized gain is recorded, because the value of the derivatives changed as a result of the changes in oil prices.During the quarter, we had $23.9 million in net cash flow and $16 million in capital expenditures. For post-CapEx positive cash flow of approximately $7.9 million. For the three months ended, we had sales of 855,603 barrels gas sales of 795,551 Mcf for a total of 983,195 BOE.Our received prices were $45.16 per barrel of oil, $1.22 per Mcf of gas for an average BOE price of $40.25. On prior conference calls, we have made comparisons of our current results with the prior year's results for the same time period. We have refrained from doing that this time in order to spend more time on current events. Those comparisons are in the news release put out yesterday.Before I turn it back to Tim, I'd like to highlight a few key points that, I believe are major factors in our ability to operate in the current environment. For the first quarter 2020, we had a pre-tax realized gain on hedges of $3.3 million. That's realized versus unrealized before. This amount was received in April for March hedges. The hedges we have in place are financial instruments and we will be paid based on the hedges we have in place versus the index price, regardless of any actual production or sales.We do not have to have matching production to receive payment on the hedges. The spring redetermination on our credit facility is in process. We have provided the bank group with the normal information we generally provide, including updated reserve information. We are currently in compliance with all covenants of the credit facility. The redetermination should be completed within the next few weeks.We have an opportunity with some of our vendors to receive discounts on outstanding invoices in return for paying those invoices up to current, as such we drew $21.5 million on our credit facility in order to make those payments and in return we have saved over $2 million.As most of you are aware, we filed an S-3 recently. This was a shelf registration. This was done because the shelf registration we had in place previously had expired. Ring has always kept a shelf registration active as we believe it is prudent to have that availability if needed. The company does not have immediate plans for use of this shelf registration.With that I'll turn it back to Tim.

[Tim Rochford:]

All right. Randy, thank you. I'm going to ask Kelly, our CEO to give us a brief overview of the activity over the first quarter.

[Kelly Hoffman:]

Thanks, Tim. As Tim mentioned in his opening comments, we feel it's very important to minimize the time spent on the call reviewing our first quarter and you've already heard but there's a release describing in detail the financial and operational results for the first quarter that was put out yesterday.And as Randy mentioned earlier, if you have not seen, a copy of that’s available on our website on ringenergy.com. We've been experiencing now – no really everyone has been experiencing, every operator is experiencing right now is an unstable, unpredictable pricing and storage dilemma. And because of the lack of storage capacity, there's a large differential between WTI spot pricing and actual price of buyer is willing to pay or the wellhead price.Until the markets improve and we begin to see the world economics at work again, we have to be prepared for this continued uncertainty. And before I turn it over to Hollie and Danny to give you a little more color on several of these items, there's a couple of things I want to point out.First of all, let me address the Delaware sale, which as many of you know we previously announced that we had entered into a PSA in April and the buyer has now started required due diligence. We're continuing forward with the answering questions and field business and things of all that nature as they come up.Closing is still estimated to be in June and we plan to use the proceeds to reduce our outstanding debt once we close the transaction. Also worth mentioning is that we continue to cut costs. You heard Randy mention the reduction in invoices things of that nature. But we've gone over and above that.Besides us already being a very low-cost operational company in general, we've continued to reduce G&A. we've continued to reduce LOE and especially our CapEx across the company and we'll continue to cut those costs as we are able and as needed going forward.And with that I'd like to ask Danny, our Executive Vice President of Operations and Hollie our VP of Engineering to walk you through the steps that we're currently taking that, we believe are necessary to ensure our ability to not only weather this storm but to come out a stronger company in the end. Danny?

[Danny Wilson:]

All right. Thank you, Kelly. I appreciate it. Let me start out with just a real quick recap of our first quarter operations. For the quarter, we spent, as Randy mentioned about $16 million in CapEx. During that time we drilled four wells and performed nine rod conversions.The drilling consisted of two, one -mile and two, 1.5 mile wells on the Northwest shelf. The average IP on these new wells was over 600 BOE per day. And although our total production for the quarter was down slightly from Q4, we were able to finish with a higher exit rate of 11,474 net BOE per day in March versus 11,270 BOE in December and this is with only drilling four wells in the quarter.A little bit of lumpiness there is just caused by timing, nothing else. Using our new frac procedure and our refined drilling and completion techniques we started using at the beginning of the fourth quarter, our new wells continue to exceed our type curve and our expectations. In a few minutes I'm going to address our current operations and our future plans.But for now I'm going to turn it over to our Vice President of Reservoir Engineering, Hollie Lamb to address a few issues.

[Hollie Lamb:]

Hi. This is Hollie Lamb. I am touching base on an article that was published late last week and reinforcing how we look at our reserves. The article made a first assumption that all San Andres wells are the same everywhere in the Permian Basin. There's a great variation in San Andres depositional environments across the Permian Basin. And amongst the individual basins and platforms that are subgroups within the Permian Basin.These different environments result in different rocks with different reservoir characterizations, such as pay thickness permeability and porosity to name a few. Our lateral lengths of our wells that we have completed to date vary from 1,929 feet to 7,088 feet. Our type curve is 5,080, which is an effective one mile lateral.We derive our San Andres horizontals from two independent geologic areas with different depositional environments having very different pay thicknesses that range from 500 feet to 100 feet. They contain multiple spacing options, multiple benches and we have completed them with various techniques.How do you make the assumption that all wells are equal? Only 6% of our wells IP on the first day of the month based on what we've done thus far. Using public data, one would only observe the highest recorded month, which means 94% of the time a 30-day IP drive from public sources would be wrong. Therefore, their assumptions are correct 6% of the time.Assuming their math is correct 6% of the time, we can then focus on type curves, which are not solely a function of historical data, they also include what geological region they reside in, the pay thickness, landing zone, how we evaluate the landing zone, percentage of lateral in zone, the length of completion, type of completion and how we bring on our initial production.As far as their assumptions on the reserve report, there are many assumptions that go into our reserve report except where we are we have the data so that the assumptions are very calculated. They include LOE differentials, working interest, net revenue interest, non-operated properties, pud timing, PDNP cases, recompletion opportunities and many others.Our reserves are independently reviewed by a third-party engineering company that is very well-known, Cawley, Gillespie and Associates began serving the oil and gas industry over 50 years ago and has continued an uninterrupted business throughout the decades and today delivers professional, ethical, reliable engineering and geological services for the petroleum industry. They have major clients such as Concho, GE Financial, Wells Fargo, UBS, Morgan Stanley, and ConocoPhillips, but they have hundreds of both public and private clients.Our reserves are also reviewed twice a year by our syndicated bank groups, which all have in-house engineering departments. All data that is entered into our database is independently examined by internal and external auditors. As Danny mentioned as of the six wells we IPed in 2020, all of them were Northwest Shelf wells and they had a range of IP of 438 BOE to as high as 813 BOE per day with an average of 558 BOE per day.The four wells that we completed in Q1, 2020 had an average IP over 600 BOE per day. Our type curve is 400 BOE per day. This year we have exceeded our type curve on every single well that we have drilled. We have stated on various occasions that our IPs are statistical and that there are going to be better and worse areas. But what I think our 2020 drilling has demonstrated is that we've hit the sweet spot in the Northwest shelf and we're excited about getting back to drilling when the market is ready.Danny, with that I'll hand it back to you.

[Danny Wilson:]

All right. Thank you, Hollie. I want to add just a few points of emphasis on what Hollie has to say. First, it's extremely difficult to adequately perform a reserve evaluation based on publicly available information only. There's just too many assumptions that have to be made. Every year we have a small army of professionals, whether it's third-party engineers, engineers at our banking syndicates, the bankers themselves are independent and third-party auditors and our internal auditors that review our information every year, twice a year. These people have full access to our production, reservoir, geological, land, and financial information and they've reaffirmed our reserves twice per year every year since we have been in business.And the third point I'd like to make is, much like someone who claims that something isn't about the money, we always know it's about the money. It has been my experience that when somebody claims that they don't have an agenda as the case with this recent article, we always know that there is an agenda.And with that, I'll move on to our current and future operations. Beginning in mid-April at the request of our purchaser Phillips 66, we began for curtailing production on the Northwest shale from a little over 7,000 barrels a day down to 6,000 barrels a day. They like every other purchaser were concerned at the time about having adequate storage, but also wanted to keep enough oil flowing to meet their needs at their borger refinery.Based on the crash in oil prices we saw at the end of April, we proactively took further steps to lower production outside of the Delaware to near zero by the 26th of the month. Starting about a week ago, we began turning on some of the wells at a reduced rate with the goal of producing enough oil to shale production on every well in the CBP and Northwest Shelf during the month of May.Currently, we are producing at about 15% to 20% of normal production capacity exclusive of the Delaware. We are accomplishing this by turning on a few wells at a time, letting them produce long enough to shale production and then shutting them in and turning on another set of wells.In April when we started shutting down the wells, we went through a process of pickling the wells with chemical, which include corrosion inhibitor, paraffin control and scale inhibitor. This was done in an effort to ensure that we have the least amount of trouble when we restart the wells. This process will be followed again each time the well is shut in until prices recover enough to bring the wells back on full time.As we're holding the leases under our existing wells, we feel that we are being proactive in satisfying our lease obligations with our current strategy by showing significant production from each well, each month and then selling the oil when it makes sense. On our undrilled acreage, we are exercising options where we can in negotiating with the mineral owners for extensions on the remaining acreage. And so far this has been working out quite well.When the time comes to bring production back to full speed, we feel this can be accomplished over a 10-day to two-week period. Our rod pump wells can be turned on at full capacity with no problems. But the ESPs must be restarted slowly and then sped up over a number of days until they can reach full capacity again. As for our pricing required to bring production back on just like everybody else, we're monitoring prices and differentials daily.We believe it makes the most sense to turn the wells back on to full-time production. Once we see sustained pricing in the low to mid-$20 per barrel range and that's at the wellhead, inclusive of all differentials and transportation cost. And I just want to remind everybody that's not a one-day event that is an average across a month. We get paid on a monthly average.So we say that we need to see sustained pricing near $20, because we don't want to get caught in the W Shape type pricing scenario where once prices get back to a point everybody feels comfortable turning their wells back on that everything comes back on to full production not just us, but everybody else. And all of a sudden, we're back into a storage capacity issue again. So we want to see that pricing sustained over a period of time before we're willing to bring our wells back on full time.Our purchasers are anxious for us to come back online as soon as possible. I have daily in constant communication with our buyers. The purchasers are being very creative with the ideas to give us some guarantee of profitability. We've had several discussions with purchasers that ask what price do we need to be at and they're looking at the possibility if we can reach that point at some time during the month, they will go out and secure pricing that will allow us to have stable prices for a period of time whether it's a month or two months whatever the price, whatever the case may be, but in all cases, they're extremely anxious for us to get back to production.As for drilling, we feel like our prices need to be sustained in the mid-30 range, again, inclusive of all differentials in transportation costs. At this level, our economics particularly in the Northwest Shelf become attractive with our internal rate of returns in the 70-plus range in our discounted ROIs of approximately 2.5

[David Fowler:]

Thank you, Danny. Over the past several weeks I've had a number of conversations with middled operators representing both independent and private equity-backed management teams to just gauge what percentage of their production volume is it -- shut in or curtail.Two private equity-backed management teams I spoke with, both had exceptional hedge books and really only had minimal production cuts. One had a shut in of approximately 20% and the other one was about 5%. Now the majority of the independent producers I spoke with reported shutting 100% of their production. All remarks as selling a barrel of oil for a single-digit oil price which is simply giving it away. And most of those were unhedged of course.The independents that we're still producing, but on a limited basis had a few leases with extraordinarily low lifting cost and we're able to continue to pump those wells profitably. There may be some exceptions but the independents who shut in all of their production did so voluntarily due to oil price and weren't necessarily curtailed by their purchasers.An interesting insight from an operator that I hold in high regard share that the rapid pace of shut-ins across the Permian Basin and other basins have been so significant that it has caught some oil purchasers long on their nominations and that they're now coming up short on barrels. As a result they're reaching back to producers with a stronger wellhead oil price to get more barrels to flow their way.Based upon my limited conversations it seems to indicate that the magnitude of the shut-ins and curtailments by independent operators across the U.S. could be substantial and may mirror the 1 million to 1.5 million barrels reported by public companies to-date.If oil prices at the wellhead stays up $20 a barrel, shut-ins will probably continue through May and June and it may prove out that the 2.5 million to 3 million barrels a day that has in fact been shut in or curtailed across the U.S. could have a positive impact on the speed in which the market rebalances of course time will tell.On the M&A landscape, we anticipate deal flow to be robust between now and year-end and as companies seek to consolidate with peers that have leasehold positions in similar geologic plays. The motivation or purpose is to create a stronger better financially positioned E&P, so when the energy supply demand picture improves they'll be far better off.But we stay attentive to what's going on in the market in our core areas, our primary focus remains staying on strong financial footing, so that we can successfully navigate the volatility in today's market.And Tim, I'll turn it back to you.

[Tim Rochford:]

All right David, thank you. I'm just going to make a couple of comments before we turn it over to the operator. So I think it's important to point out that as Co-founder of Ring Energy and Chairman of the Board, I personally want to thank all of our management team, all the support personnel for the tremendous job that's been done in this very unparalleled time.I've been in this business 40 plus years and I've been through a number of cycles both good and bad, this management team has worked around the clock, examining every aspect of operations, all for one reason, the posture Ring Energy not only to survive, but to excel.We will focus -- going forward we will focus our attention on the two excellent assets at hand; Northwest Shelf and Central Basin platform both of these assets have years of drilling and development opportunity. I am confident in our ability to become one of the post-virus, post-war or price war success stories.So with that I'll turn it over to Rob, our operator. And Rob you go ahead and open it up for questions that we might have for our listeners.

[Operator:]

Thank you. [Operator Instructions] Our first question is from the line of Neal Dingmann with SunTrust Robinson. Please proceed with your question.

[Neal Dingmann:]

Great. Nice details. Kelly, I'd like to do my first question is really on your financials. I just want to make sure I'm clear. If you all could I think I heard this right, I just want to make sure that to believe that you all -- when you look at your total overhead that that in fact could be covered with just the financial hedges going forward this year. If you could talk a little bit about that as kind of part of that question would maybe just give some color on -- I would lump that in their kind of survival plans in these lower prices. If you could just love sort of costs with these hedges in there?

[Kelly Hoffman:]

Sure Neal. Look good question. Let me just answer that quickly and then hand it over to Randy and help give a little more color on it. The short answer to that is, yes. Yes, our hedges will cover our overhead going forward. But Randy, you want to add a little more color onto that?

[Randy Broaddrick:]

Sure. Yes. At sub 30 prices the hedging does allow -- provide enough cash flow to cover our overhead G&A interest expense so forth. Obviously, as discussed at $30 prices unless the differential is out of line would be bringing production back on. But -- and then at lower WTI prices, the hedges actually would generate even more income. So as Kelly said short answer is yes, the hedges would provide enough cash flow to cover our overhead.

[Neal Dingmann:]

Very good. And just one follow-up on the ops, if I could maybe turn it over to Danny. Just it's been over a year now, since you guys have been accurate on the shelf, I'm just wondering how do you think about the latest curves in that play now? Versus I'm looking I think it's slide 11 if I recall in today's slide your prior curves. And maybe if you could just give some thoughts on again I know you don't have new curves out but just Danny any color you could give around that.

[Danny Wilson:]

Yes. No I appreciate that Neal. Now look we -- the curve that you're looking at on the slide 11 which is our type curve for the Northwest Shelf that's one that we came up with when we were doing the initial Wishbone acquisition and that was our work that we did looking at the wells that they had drilled and then using that as a model going forward. And we knew it was very conservative. We came in and after visiting with some of the other operators in the area, particularly with our friends over at Stewart Energy, we came up with a very different type of frac than we've been doing on the Central Basin platform. We also came up with some different types of techniques for completing the wells and even bringing them on production at slower rates to avoid things like the scale issues that played some of the early operators on the Northwest Shelf.And by doing that, we've seen exceptional results out there. We've contemplated over when would we be willing to update this curve? As I mentioned in my talking points that we really only started this new procedure early in the fourth quarter. And I'm even though we know it's successful there's no doubt about it and that we're exceeding the type curves, we'd like to have a little bit more history on it before we update that curve. And not to mention that that curve also takes into account what we think we're going to encounter as we move out into some of the lesser drilled areas. So it's kind of a balance. We know we have some really good wells. We have -- we feel like from our study that we have some good areas outside of the areas that have been the focus so far. But we just kind of want to leave that out there for the current time even though we feel like we're going to exceed that easily over time.

[Neal Dingmann:]

Perfect. Thank you.

[Operator:]

Our next question comes from the line of John White with Roth Capital. Please proceed.

[John White:]

Good morning. Thanks for all the detail. Danny touched on this. I was wondering if you get a little bit more explanation you differentiated between rod pumps and ESPs with the [Indiscernible] wells on rod pump being very easy to restart and ESPs needing to move a little slower. Can you give us some more detail on ESPs?

[Danny Wilson:]

You bet, John. No, that's a great question. And that's why it takes a little longer to ramp-up than some think you can do -- you would think you could just go out and turn on a switch and everything just comes right back to normal. Again, the rod pumps, those are very easy just to turn on. They'll come on with no issues and go right back to full capacity, a 100% of production.In fact, we've seen that just in the last week, when we started up our wells. We started out by turning on the rod pumps, because they were the easiest. And I mean our production popped right back up. In fact, it exceeded what we thought we were going to do. So, I think, we're getting a little bit of flush there.But the ESPs are a little bit different. Obviously, they're down hole. And you can't just say -- I'm going to get a little bit technical here. But we adjust the speed of the pumps by adjusting the electric current going down to them in hertz. And so, let's say, we start out a well and the manufacturer will recommend a starting speed and maybe that's 55 hertz, just as a generic number.And then, over time what we'll do is, we'll monitor the fluid level. We'll see what's happening. Assuming that the well is still maintaining good fluid levels, maybe every day, again, the manufacturer will recommend. And you don't go ramping too quickly, but we can run-up maybe another one or two hertz, we'll monitor the fluid level, if it's still in good shape, then we'll go up another one or two hertz.So that -- and that's why I'm saying, you have to kind of ramp into those, because you don't want to turn it on full speed pull all your production down. And then all of a sudden you've got a pump that's not moving the right amount of fluid. You've got gas interference now coming through. And that's what ruins those pumps.I will say ESPs do not like to be turned on and off. They like to be run at a very constant speed all the time, but we feel like with our -- with the procedure that we have in place is starting slow, pickling -- and the big part of this too is pickling the wells, as we shut them down. So we're loading them with corrosion inhibitor. We're loading them with paraffin inhibitors, we're using scale inhibitors. So that as they're shut down, we don't have a bunch of -- well, it's basically crap.

[Hollie Lamb:]

Junk.

[Danny Wilson:]

Junk. Falling back on to the pump. And that's when you have problems is, if you have a lot of, let's say, sand or scale or something, even iron that will come down, over time it settles out of the fluid and then it will come and sit down on top of those pumps. And then when you try to restart them, you have that junk in the hole and that can twist a shaft very quickly. And so, you just have to be a little bit more careful with it, but I think starting at the slow rate, pickling the wells ahead of time, will eliminate the vast majority of those issues.

[Operator:]

Our next question comes from the line of Richard Tullis with Capital One. Please proceed with your question.

[Richard Tullis:]

Thank you. Good morning, everyone. Maybe a question for Danny. If you could, recap again the shut-ins for April and what you expect for May between curtailments and shut-ins, Danny, please?

[Danny Wilson:]

Yes, you bet. Now, as I mentioned, when we went into April at our highest rate that we had for coming out of Q1, at almost 11,500 net BOE a day. Phillips called probably maybe the -- towards the end of the first week of April. And as I mentioned, they were like everybody else, we were seeing all these reports about storage filling up and everybody was getting very concerned and they asked us if we would slow down a little bit on the Northwest Shelf.We discussed that internally and we decided, since Phillips is a very important purchaser for us. And let me just throw this out there, in the meantime not only are they the purchaser on the Northwest Shelf, but now they are a purchaser on the Central Basin platform. They asked us to slow that down, which we did, and they were very grateful for that.And then, when had the day there around the 20 or so of the month and that price went minus $35 and we saw what that was going to do to the average pricing for April. We had a lot of discussions internally and we decided our best move at that time was to go ahead and just shut production down. And we did that across the Northwest Shelf and the Central Basin platform.We did leave the Delaware running, because we were in the middle of our – the work we're doing with due diligence and with the new potential purchaser in the Delaware. So, we did leave that going, but we did shut down the rest of the production.Moving into May, our goal was to show enough production on each well, that we could have – show significant production on those wells. We also at the end of April sold everything we could sell left our storage as empty as we could. And so we have a lot of internal storage right now in our system. So what we did, we're bringing wells back on beginning about a week ago, producing them for three to four or five days and then shutting them back down, putting that well – putting that oil in storage, and then we're restarting the other wells in the area.So I think we at least anticipate through May that, we will see – this will be the procedure. So, we're producing at about 10% to 15% of capacity in the Central Basin platform on the Northwest Shelf. We'll see where the pricing for June, what it looks like, and we'll see the big thing the pricing is not even as important as the differentials.When you get the WTI, WTS differential you get the CMA role. You get all those components that go into the pricing, those all settle around the 25th of the month. And so we'll have the price set for June at least futures prices for June will be set around the 20th, the differentials will be set around the 25th, and so at that point, I think we'll have a better idea of what June looks like.I will say the – just to give you an example of where we're at today. Today's price, when I looked earlier was around $26, but the differentials for May are about $12 for us. So that only puts us at about a $14 price, which isn't enough for us to bring everything back on. We are seeing the differential shrink in June and then even moving further out, we're seeing them getting even lesser and lesser as we're moving out. So, I don't know when we'll get back to full production, but it is getting better. Hollie has comment.

[Hollie Lamb:]

In our average differential over before this turbulent time had been about $2. So the $12 that Danny just quoted was by far the most what we've seen in the differential since kind of late 2018s.

[Danny Wilson:]

Late 2018.

[Hollie Lamb:]

Yeah.

[Kelly Hoffman:]

Richard, this is Kelly. I want to make a comment in addition to what Danny was saying just for clarification. Where Danny was talking about Philips asking for curtailment early on and that was important and we cooperate with that in an effort to help and sustain that relationship there. As time has gone on though, the storage is not the issue for us at this point in time. So, we're voluntarily doing this as a result of price. That's more important to us right now, whereas, if we wanted to ramp-up today, storage is available for us. We could increase our capacity. Would you agree with that Danny?

[Danny Wilson:]

Yes. Yes. In fact Philips like I say, I have constant communication with them and they would love for us to come back up to a higher production level.

[Richard Tullis:]

That's very helpful. Thanks to all of you. And just lastly, for me you saw a substantial reduction in cash G&A quarter-over-quarter in the first quarter. Randy is that – or Kelly is that a pretty good run rate going forward? Should we kind of look for similar type numbers as we move forward?

[Kelly Hoffman:]

Yeah. I think what you saw on the first quarter is a good run rate for what we'll see for the rest of the year.

[Richard Tullis:]

Okay. Thanks a bunch. That's all of me.

[Operator:]

Our next question is from the line of Noel Parks with Coker & Palmer. Please proceed with your question.

[Noel Parks:]

Hey, good morning.

[Kelly Hoffman:]

Good morning, Noel.

[Noel Parks:]

All right. Just a few questions. We kind of touched on my first one a second ago. So modeling out for the rest of the year does it seem like sort of that a $12 differential range is about as bad as we should assume it gets? Or do you think worst-case could even be a little uglier?

[Kelly Hoffman:]

That's a great question. Danny, I know we've spent a lot of time crunching those numbers. What's your sense of that Danny?

[Danny Wilson:]

There's a lot of things that go into that. Let me start out by saying that. And a lot of that is getting the economy restarted. But once that thing once it gets going. But the market is usually pretty smart about a lot of this stuff. And what we're seeing as we look out into the future and I don't have those tables in front of me right now, but I think April was our low point. I do think that was the case and I think we'll see things improving through now through the end of the year.

[Kelly Hoffman:]

So, Danny just to be clear for Noel and the other listeners so by the 25th of this month we'll know what that differential is going to be fixed at for June's production correct?

[Daniel Wilson:]

That's correct.

[Noel Parks:]

Okay, great. And about the rod pump conversion and I'm sorry if you touched on this earlier and I just missed it. Where do you stand relative to your overall inventory of those conversions, but roughly what share of those that you plan to do are already done and how many still lie ahead?

[Daniel Wilson:]

Yes. So, we've probably done about a quarter now of our wells. And again it's a matter of when the wells reach the fluid production when that production drops down to a point where it makes sense. And again we -- what we typically do is we'll wait for the ESP to fail and then we'll come in and do the rod conversion.We have really and I said this and at some point, we may even put some slides in the presentation about this we've lowered our failure rate from over what we call it one-time per year per well.So, going back and historically, before we started doing the rod conversions, a well would typically fail somewhere around six to nine months on a consistent basis. And what we've done now is we've lowered that down to a point where on average we're averaging a little over -- almost two years between failures.Now, that -- there's a lot that goes into that. But that's just an example of what we've been able to do by following this program. And again it also goes back so that's lower -- that lowers the failure rate means we're pulling fewer wells. But it also we're lowering tremendously lowering future pulling costs. Typically we'll spend $150,000 to $170,000 pulling an ESP and replacing it versus about -- we've been averaging about $30,000 a job on the rod when they go down.So, a tremendous savings for us in the future LOE and we see the same kind of response even by when we start out with very large ESPs and in these wells because we're moving a lot of fluid initially.And then over a period of time as the fluid level comes down if that larger pump fails, but it's not quite ready to put on rod pump will run in a smaller ESP that's much more efficient at those levels. And that all this plays in to the best -- I mean it's a tremendous improvement in our failure rates.

[Noel Parks:]

Great. Thanks. And I just wanted to double check. The times you have in the slide deck that show the IRR at different price decks for both the shelf and the recent platform.Those numbers -- I can't remember are those also adhering to your original type curves or have those been informed a little bit more by kind of the reality the upside from the reality of what you've seen in the field?

[Hollie Lamb:]

So, we've had gone through several iterations on the type curve on the CBP and one iteration on the Northwest Shelf. And the type curves that you're seeing in the corporate presentation as Danny previously discussed, the rod conversions are very accretive. They make us a lot of money. We spend a little bit but in the long run it's much better for us.So, both cases contemplate a rod conversion at 365 days from peak production rates and we kind of got to that number by looking historically across both basins and projecting where we're getting to that sweet spot of fluid level or fluid movement that we can convert from that larger volume ESP to the smaller volume rod.

[Noel Parks:]

Okay, great. And just my last one. I was listening to another smaller company with a single basin focus that also has done good hedge coverage and they happened to remarks last week that they have been getting more inbound calls from folks looking to offer financing. I'm just recurring to various terms. Then they can ever recall happening in this current environment. So I was just curious what you're hearing is as far as just folks who would like to find a way to give you money.

[David Fowler:]

That's a good question. Yes, that is definitely a good question, Noel. And comparing to the other company I would say that absolutely, we have probably seen more density in inquiries and over a two-month period than we – in the other two-month period prior to that.Not only for the inquiry as it relates to possible financings available in different sorts not just your traditional conventional banking but outside of that. In addition to that there's been a number of inquiries as it relates to folks that are interested in doing something along the lines of participating somehow or some way with the company, whether that's to join in as a side-by-side idea or whether it's to join in as a joint venture. There's a lot of a variety of ideas that have been kicking around more so than what we've ever seen before.

[Noel Parks:]

Thanks a lot.

[David Fowler:]

Thank you, Noel.

[Operator:]

Thank you. [Operator Instructions] The next question is from the line of Dun McIntosh with Johnson Rice.

[Dun McIntosh:]

Good morning. Regards this year's budget, you all were out pretty early drop in all D&C activity in early April and took your CapEx budget down to $32 million. Last night it sounds like you all shaped another $5 million or so off of that. What's the driver there? Is are you still going to – obviously, you're still focused on the pump conversions as you've been discussing. But maybe a few less of those than you were thinking about or more favorable service terms? Any color there would be appreciated. Danny?

[Danny Wilson:]

Yes. No Dun. What we've done is we've gone back and studied what we can see historically is our failure rate and we've cut back just to the bare minimum. So we're not proactively doing the rod conversions like we were last year and even in Q1 where once a well did reach the point where it made sense to put it on the rod conversion we went ahead and did the job.What we're looking at now is with the lower production rates, we think that the failure rates could be even a little bit lower. We're hoping. And – but even if they're not these are kind of just kind of a bare bones maintenance not even maintenance isn't the proper word. It's as a well that goes off and is a candidate for rod conversions.We'll go ahead and do it but we're not going to proactively go out and do those jobs. And so I think that's what you're seeing is when we first contemplated the $30 million to $32 million, we were going to continue doing nine to 10 rod conversions a quarter and now we're just going to do them on an as-needed basis based on our projections and that's the difference.

[Hollie Lamb:]

And I think, Danny's team has done an excellent job negotiating lower service costs in the down environment. And so I think part of that change in budget is seeing the new environment we're working in

[Dun McIntosh:]

All right. Great. Thanks. And then sorry if I missed this but recognizing that the borrowing base redetermination is still ongoing. Any correlation there between the timing of that and the closing of the Delaware sale? And then do you – any other assets in the portfolio that you all could think about potentially monetizing not so much reserves is more along the line. I'm thinking more on the lines of midstream or SWD assets, particularly up on the shelf, where you've got a pretty robust portfolio there. Thanks.

[David Fowler:]

Yes. Well that's a mouthful, but all very good questions. There's no doubt that as was mentioned earlier with Randy's comments -- his remarks that we are in the middle of redetermination. Now we anticipate probably another two or three weeks before we're going to be actually having a sit down or the equivalent of a sit down with the banking group.But as also mentioned, all of that material all the information that we typically provide for them during these cycles has been sent over. And so we're looking forward to crossing that bridge and seeing what results we have there. There's no doubt that the Delaware sale will contribute to the payment of $30-some million just less than 10% down on the revolver is going to go along ways.It will be -- I wouldn't call it impactful, but it will be important. So we are counting on that. And so in addition to that, I think that as it relates to our going-forward and what we can put forth in terms of being in compliance, we feel pretty comfortable with.

[Dun McIntosh:]

All right. Great. Thanks very much.

[David Fowler:]

You bet.

[Operator:]

Our next question is from the line of John White with Roth Capital. Please proceed with your question. Mr. White your line is open for questions.

[John White:]

Hi [Technical Difficulty] shut in procedures and also Mr. Fowler's comments on other companies shut in policies. If it was stated I missed it, but what was production during April?

[Danny Wilson:]

John we have not filed April production yet. So that's not publicly available but...

[Hollie Lamb:]

We did curtail near the end of the month, but the rest of the month we were on track where we were in March.

[John White:]

You mentioned shutting in about 100% of starting April 23. So that's good.

[Danny Wilson:]

Yes. So John you kind of look -- I guess the best estimate would be maybe if you looked at March and you probably – yes, probably maybe not three or four, five days off that number on average that may get you close. I don't know. I haven't done that calculation, but that would be my guess.

[John White:]

Really appreciate it. Thank you.

[Danny Wilson:]

Thank you, John.

[Operator:]

As there are no additional questions at this time, I'll hand the floor back to management for closing remarks.

[Tim Rochford:]

Okay. Thank you operator. Well, listen once again we appreciate everyone the ongoing support is appreciated as well and we know you're busy so we're going to sign off. And if you do have follow-up questions which may -- you may or may not have feel free to reach out and put those calls through, we'll make sure that there are people that are available to respond to them. And once again thank you for your time.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.