Rose Hill Acquisition Corporation
Q2 2019 Earnings Call Transcript

Published: 9 Aug 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Rosehill Resources Second Quarter 2019 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. . It is now my pleasure to introduce Director of Investor Relations, John Crain.

[John Crain:]

Thank you, Andrew, and good morning, everyone. And welcome to today's conference call to review Rosehill Resources' second quarter 2019 operating and financial performance. After I cover the forward-looking statements, Dave French, our President and Chief Executive Officer will provide opening comments and key highlights for the quarter. Following Dave will be Bryan Freeman, Senior Vice President of Operations, who will provide an operational review; and Craig Owen, Chief Financial Officer, who will provide a review of financial results for the quarter. We will have a question-and-answer session and Dave will close the call with some brief comments. Also joining us today on the call is Brian Ayers, Senior Vice President of Geology; and David Mora, Vice President of Commercial and Reserves. I would like to remind you that today's call includes forward-looking statements and certain non-GAAP financial measures. We believe our expectations are based on reasonable assumptions. However, a number of factors could cause the results to differ materially from what we discuss. We encourage you to read our full disclosure on forward-looking statements in our SEC filings and the GAAP reconciliations included in yesterday's earnings release. With that, I will now turn the call over to Dave.

[David French:]

Thank you, John. And thank to everyone for attending Rosehill's second quarter 2019 earnings call today. Since the time of our last earnings call, admittedly early days for me here, I've had a chance to really appreciate the strength of our portfolio, the capabilities of our team, and a wide range of opportunities in front of us. I'm convinced we have a bright future. It has been a busy summer catching up with many of our investors and I look forward to meeting more of you in the near future. Moving to our update, the second quarter of 2019 was as expected very active in both of our operating areas. Bryan will provide greater detail. But in general, we shifted our attention to our Northern area drilling and completions after an active close out of the first quarter in the South. As planned, we’re shutting some producing wells early in the second quarter in the North to ensure safe operating conditions and minimize well interference. These impacts from simultaneous operations or sim-ops partially dampened the early part of the second quarter. We have nine 3Q '19 completions planned in the North that we expect will drive volumes upward over the back half of the year and we can reconfirm full year 2019 production guidance. We're also pleased to announce our most recent results in the Southern Delaware. As we previously released the rationale behind our recent farm-in agreement was twofold. Firstly, increase our acreage position in an area we see potential; and secondly, provide the adequate lease configuration that will enable us to drill two-mile laterals were applicable. We were very excited last quarter to highlight the operational execution of the State Neal Lethco 1210 two-mile lateral with leading drill times and overall costs. And we are now equally excited to announce the first production results. We believe the combination of attractive rates, low per foot well costs and high oil cuts further crystallize the potential of our Southern Delaware assets. Along with optimizing D&C activities, we're also pushing only equally important work of lowering costs in the Southern Delaware area, especially associated with power and water management. The combined improving well costs and operating expense profile only serves to reinforce the choices of our 2019 balanced capital plan. Turning to our plans for the remainder of the year, we reinforced previous guidance on a tapered per capital program in the second half. Our activity will be laser-focused on a couple of key portfolio objectives. First, in the North, we're turning our attention to multi-well drilling of Wolfcamp B. We've historically drilled several Wolfcamp B wells in the North, but this 2019 fall program is a setup for 2020 and designed to tune our well spacing model. We'll also return to the South and drill another two-mile lateral and a delineation well in the Eastern block of the acreage setting up our 2019 plans there as well. Given our balanced 2019 plan and expected increase in our liquidity profile going forward, we do not expect additional funding needs for the remainder of the year. Should be a busy fall, and I look forward to sharing the results. With that I'll now turn the call over to Bryan Freeman for a review of our operational performance in the second quarter.

[Bryan Freeman:]

Thank you, Dave. The second quarter was indeed very busy as we operated two rigs for a good portion of the quarter, drilled eight wells and completed nine wells. We exited the quarter with 12 drilled uncompleted wells or DUCs as was our plan entering the year. We released both rigs late in the quarter as we took a pause to catch up on our DUC inventory. And now anticipate resuming drilling in the weeks ahead, which I'll talk more about in a few minutes. As Dave mentioned, most of our drilling and completion work in the second quarter occurred in our Northern Delaware area, where we were active on both our Z&T 20 and Weber leases. We’ve provided the results in our press release for the Z&T 20 E006 well targeting the 2nd Bone Springs formation. Demonstrating the strong economics of this interval, we also provided extended production results for the Z&T 32 three-well pad brought on late last year, which continues to produce at an average rate of over 250 barrels of oil equivalent per 1,000 foot lateral. After more than six months on production, we maintained our exceptional operational performance averaging 15 days per well drilling and just under five stages per day on the completions for the Northern wells in the quarter. Our Weber lease in the Northern Delaware, we made the prudent decision to shut-in 10 wells during the quarter to avoid potential safety issues and adverse impacts to the wells during pressure pumping operations. As Dave mentioned, this caused a negative impact to second quarter production. We estimate production for the quarter would have been over 1,200 BOE per day higher had we not taken these preventative measures. Prior to the end of the quarter, we brought on some wells back online and this helped contribute to a total company average net production level over 20,000 BOE per day for the full month of July, which is a further estimate on two-stream basis. Turning to the activity in our Southern Delaware area, we brought on our first two-mile lateral well -- sorry, the well, the State Neal Lethco 1210 and we're very pleased with the initial production we're seeing, which is detailed in the press release. We're encouraged with both the production levels and the total well costs achieved $8.5 million or approximately $850 per completed lateral foot. We plan to taking learnings from this well, including completion design, pump rates, fluid loading and artificial lift approach to apply to additional two-mile wells we plan to drill in this area during the fourth quarter. We placed other wells on to production recently as well, including the Silow 14 which is also detailed in the press release and we look forward to providing additional results once sufficient flow back information is available. Altogether, the operations and land teams are making tremendous progress around our Southern Delaware infrastructure including ensuring adequate grid power, flow back support, water supply and produced water disposal capacity. Craig will touch on how this translated into total cash operating costs for the quarter. Moving to current operations, we're hard at work completing six wells in the North by simultaneously pumping two three-well pads on the Kyle 26 lease. After these wells are completed the crew is staying in the North and moving to a three-well pad on the Z&T 32 lease as we work through this DUC inventory. We also plan to resume drilling operations initially targeting the Wolfcamp B formation in the North. Overall we're excited by the potential of the Wolfcamp B given the thickness of the reservoir, pressure environment and the low decline profile that these wells previously drilled in the interval. In summary, you can see we have quite a bit of activity and progress that should drive the increase in production for the second half of the year, Dave mentioned. With that now I will turn the call over to Craig for a financial review of the second quarter.

[Craig Owen:]

Thank you, Bryan. I’m pleased to report on our strong financial results for the quarter. Second quarter revenues were $69.4 million and production totaled 18,934 barrels of oil equivalent per day comprised of 70% crude oil, 15% NGLs and the balance natural gas. For the second quarter of 2019 Rosehill reported net income of $11.2 million or $0.54 per diluted share which included a $33.7 million non-cash pre-tax gain on commodity derivative instruments and an $11.1 million pre-tax gain on the sale of a Northern -- excuse me, New Mexico assets. We generated adjusted EBITDAX of $43.8 million for the second quarter, a decrease of 11% compared to the second quarter of 2018, driven primarily by lower commodity prices. Our average realized oil price for the second quarter was $55.06 per barrel and a total equivalent realized price of $40.27 both on an unhedged basis. For natural gas, the current transportation constraints experienced in the Permian Basin in the second quarter resulted in a realized natural gas price of negative $0.44 per Mcf. This price was significantly impacted by Waha and EP Permian pricing points and is inclusive of processing costs and certain gathering costs. NGL pricing was also challenged in the quarter due to sharp increases domestically in liquid supply, most notably ethane and propane as export capacity constraints have caused domestic stock piles to build. Our average realized NGL price for the quarter was $12.05 per barrel, a 45% decrease as compared to the second quarter of 2018. We had a very strong hedge book protecting our downside commodity risk while also providing exposure to upside price movements. We have the vast majority of the remaining 2019 expected oil production hedged at $56.47, approximately 13,000 barrels of oil per day hedged on average in 2020 and ‘21 at $59.83 along with over 5,000 barrels of oil per day hedged in 2022 at $59.35. All of these aggregate positions provide us with exposures to upside price movements as well. Turning to costs, total cash operating expenses were $24.3 million or $11.72 per BOE, which consists of direct lease operating expense of $4.90 per BOE, cash G&A expense of $4.31 per BOE, gathering and transportation expense of $0.77 per BOE and production taxes of $1.74 per BOE. As Bryan alluded to, our cost in the quarter improved sequentially, due to bringing on additional company-owned and operated SWD well capacity in our Southern Delaware area that resulted in less reliance on third-party SWD well operators. We continue to have adequate SWD disposal capacity in both of our operating areas, including a number of approved permits on our Southern area to support our future development plan. The net result of our operations for the quarter, again, was seen at the corporate level with a strong cash return on capital invested of 23%. Total liquidity as of June 30, 2019 was $65 million made up of cash on hand and availability under our revolving credit facility. We expect our liquidity to improve in the second half of the year as we experience the benefits of expected production increases, lower capital investment and our scheduled fall borrowing base redetermination. Lastly, I'd like to provide a brief update on the potential sale of our water midstream assets in the Northern Delaware area. We have made extensive progress on this front. This is a complex process involving multiple parties with a number of aspects out of our control, but we continue to be optimistic that a value-added transaction could occur this year. And with that, Andrew, we are ready to take some questions.

[Operator:]

Certainly. . Our first question comes from the line of Neal Dingmann with SunTrust. Your line is now open.

[Jordan Levy:]

This is actually Jordan Levy, Neal’s substitute. Just wanted to ask how you guys view balancing kind of internal growth with external growth, while kind of maintaining spending within cash flow and how you kind of see that progressing going forward and into 2020?

[David French:]

Hey, Jordan. This is Dave. I think my take on internal external growth or at least how we’re trying for the portfolio. First couple of years, the company since inception, we grew very quickly from sort of 5,000 to 20,000 barrels a day. We focused this year really on balancing capital to cash and we don't think the market is really going to pay for growth. It’s going to require a lot of tapping up on our capital from external sources. And so, when you think of internal external for us, it’s going to be about trying to find the right balance within our portfolio. We sit in by any lead table an exceptional resource in the Northern Delaware, and we think people are going to be very excited and really -- when we truly understand and unpack the Southern Delaware potential, we think it’s going to bring people to the story. We don't think doing that in a way that's going to help spend our cash makes a lot of sense. So, we’re certainly focused on moderating growth this year for the balanced portfolio but we think we will still put together a focus on both 2019 and 2020 as they’re going to provide very interesting rates of return self-funded. If that answers your question?

[Jordan Levy:]

Yes, absolutely. Thanks David. And then if I could just ask one more. Kind of thinking about the Wolfcamp B in the North Delaware, could you just give us a little more color Bryan maybe on kind of the geologic properties and how you guys are going to approach to that interval when you start test and having the strong technical team you do, how you kind think about that interval in terms of the overall inventory in the North?

[Bryan Freeman:]

Yes, we have drilled three wells in the B back in 2017, watch those wells over the last twofold full years. And while we’ve been doing that, actually our peers have also been. We are very active in starting to derisk that play. If you’ve been following me at all when I talked to folks about this for the last three plus years, I've been saying and still feel strongly that ultimately the Wolf B interval will rival the Wolf A when it comes just to flow rate sticks and just the size of the B resource. The Wolf B in the core where we're at is 700 and plus feet thick. We see at least three sub-bench plays there, a B1, a B3 and a BB4 target. From a stick count standpoint, I wouldn't be surprised if we don't ultimately significantly increase our well count that we have in the B now, its thick, its porous, its rich, it’s a silty shale that I think really has legs to it.

[Operator:]

. Our next question comes from the line of Mike Scialla with Stifel. Your line is now open.

[Jarrod Giroue:]

This is Jarrod for Mike. Thanks for the quick update on the water assets in the North. I was just curious what kind of synergies you guys are looking for a potential buyer? So I’m assuming that you guys would still want to utilize that infrastructure for your water disposal.

[Craig Owen:]

Sure, Jarrod. This is Craig. And as we’ve talked through the year, we're looking for a partner that -- this is not their first rodeo, they’ve done it before. We’ve got to be comfortable with a partner that knows what they’re doing operationally. So they’ve been out in the field. We can't move our water, we can't move our production. So it’s very important, that relationship will be important. Obviously just like a glove ideally with the overall deal. But certainly looking for someone who has got a track record in the business of water movement, water management.

[David French:]

Hey, Jarrod. I might add a quick -- I might add, this is Dave. The one thing that is important for us and we talked about in the last earnings call as well is that it’s important for us to put our own volumes too there. We don’t think we want to be in the business that we're marketing that capacity. So part of the synergy there is we are providing what we think is sort of a baseload for that SWD disposal but we're offering the ability for folks to hook in an infrastructure who might want to use other operators’ volumes as well which just isn't a good role of an E&P company to spend your time to market by yourself. So we think that natural blend of -- we will provide our volumes as baseload and somebody else to do the work but also thinking about bringing in volumes that they can enhance their returns on, we think is good business model.

[Jarrod Giroue:]

And then one more quick question, with the wells that were shut-in this quarter due to sim-ops. For your guidance going forward, is that incorporated if there is going to be any other shut-ins this year or is that something we have to keep in mind?

[David French:]

That's correct. Certainly for the rest of the -- we confirmed guidance for the rest of the year. So, we have summer operations, whether there is going to be some volume taken offline. But in general the focus for the second half of the year will be pretty minimal sim-ops effect and certainly for 2020 will roll into expectations for the year.

[Operator:]

Thank you. And I'm showing now no further questions. So with that, I'll turn the call back over to CEO, Dave French, for closing remarks.

[David French:]

Thank you, Andrew. I'd like to thank everyone for joining the call today. I hope we gave everyone a good sense of the spring and early summer Rosehill activities and a preview for the fall. For us there really is no substitute for good execution on picking the right targets and drilling solid wells. Rosehill will create shareholder value through relentless and disciplined delivery on the potential of acreage. Expect nothing less from us as the company. Take care and enjoy these last fading days of summer. This concludes our second quarter earnings call. Thank you for your interest in Rosehill and have a great day everyone.

[Operator:]

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