Rose Hill Acquisition Corporation
Q1 2019 Earnings Call Transcript

Published: 15 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the Rosehill Resources Q1 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 follow at that time. As a reminder, this call maybe recorded. I'd now like to introduce your host for today's conference, John Crain, Director of Investor Relations at Rosehill. Please go ahead.

[John Crain:]

Thank you, Chris. Good morning, everyone and welcome to today's conference call to review Rosehill Resources' first quarter 2019 operating and financial performance. After I cover the forward-looking statements, David French, our President and Chief Executive Officer will provide opening comments and key highlights for the quarter. Following Dave will be Bryan Freeman, our Senior Vice President of Operations, who will provide an operational review and Craig Owen, our Chief Financial Officer, who will provide review of financial results for the quarter. We will have a question-and-answer session and Dave will then close the call with some brief comments. Also joining us today on the call is Brian Ayers, our Vice President of A&D and Geology and Colby Williford, our Senior Vice President of Land & Marketing. 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 results to differ materially from what we discuss. We encourage you to read our full disclosures on forward-looking statements and 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 first quarter 2019 earnings call. As many of you know, I joined Rosehill has President and Chief Executive Officer in April taking over day-to-day leadership of the company from Gary Hanna, who remains Chairman of the Board. Since that I time I have been a bit heads down on getting to know the teams in Houston and Midland, learning our track record and appraising the opportunities in front of us. Rosehill has strong momentum in one of the most prolific basins in North America. I look forward to building on the good work done before me and continuing the position the company for success. Moving to our quarter update, 2019 has been a decidedly active in both of our operating areas. Although new volumes were unreflective in the quarter, since we have not placed any development wells on until late March. Production was nearly flat compared to the previous quarter and averaged approximately 21,500 barrels a day BOE per day. This was accomplished due to a combination of returning some higher Geo-R wells shut in for production as gas infrastructure came on line, which modestly impacted our commodity mix for the quarter and some other operational efforts which Bryan will review later in greater detail. There will be an either higher level of activity in the second quarter and this will drive production adds in the second half of 2019. We're excited to announce our most recent well results in our emerging Southern Delaware area. The installation of electric submersible pumps or ESPs on each new well posted quality IP24 rates consistent with the expectations previously provided. These well results compared very favorably with offset wells normalized for lateral length and underpin our confidence in ongoing development of the asset. The trifecta of one good rates, two, higher liquids content and three, low well development costs help to check a lot of boxes. Bryan will share additional details of these results as well as updates on another Delaware area in the operational review. As previously guided, our development spend for the full year 2019 will be weighted towards the first half of the year. We are seeing shorter drilling times and an acceleration of completion dates on our operating acreage. We're working to feather in the June requirements associated with our farm-in deal announced last quarter. Given our strengthen in liquidity profile, we do not expect additional funds flow -- funding requirements and anticipate our 2019 capital plan to be approximately equal to adjusted EBITDAX. We have a busy summer ahead drilling three more wells this month and completing a Baker's dozen of 13 wells before our drilling operations pick back up in the fall. With that, I'll now turn the call over to Bryan for a review of our operational performance in the first quarter.

[Bryan Freeman:]

Thank you, Dave. The first quarter was indeed very busy as we operated two rigs, drilled 11 wells and completed six wells. We exited the quarter with 13 drilled uncompleted wells or DUCs. In late March, we began placing six wells on to production in our Southern Delaware area targeting the Wolfcamp A and B formations. Soon after initial flow back we installed ESPs on each well and have attained IP24 rates ranging from 938 to 1428 BOE per day, consistent with our expectations for uplift as compared to natural flow. Since these wells have not collectively reached 30 days of production from ESP installation, we provided the IP14s in our press release and we look forward to providing the IP30 rates for these wells once they are available. In our Northern Delaware area, we were active during the quarter in drilling at full well pad located on the Weber lease beginning completion operations on these and other wells in our DUC inventory. In late April, we placed onto production the Z&T 20 E006 well targeting the second Bone Spring sand formation. The well averaged a net production of 1457 BOE per day, 73% oil or 331 BOE per day per 1000 feet after seven days, which is an encouraging data point for this emerging formation. As Dave mentioned our teams worked hard during the first quarter to keep production nearly flat from the fourth quarter despite not bringing on any new wells to production until late March. Along with bringing previously shut-in wells back on line, we also installed the ESP on our legacy well in Northern Delaware. With results detailed in our press release, this is our second ESP installation in the Northern Delaware with both projects providing a significant uplift in each well's production profile representing a superior economic return on our capital. Along with these well results, we've experienced impressive progress on drilling and cost efficiencies in both of our operating areas through the beginning of 2019. In the Northern Delaware, we're currently averaging 15.3 days per well compared to 19 days in 2018, a 19% improvement. Our wells in the south are averaging 14 days in 2019 compared to 21.4 days for 2018 an improvement of 35%. The drilling time improvements or one driver of lower well costs, we are beginning to realize. So far in 2019, we are seeing well costs below $7 million and both of our operating areas for 1 mile wells. Along with operational efficiencies well costs are also being driven lower by procurement efforts focused on all categories of spending including completions, segmenting and tubular goods. We plan to stay focused throughout the year on controlling well costs and further improving operational efficiencies. For operating costs, the first quarter was impacted by higher produced water handling costs associated with issues related to a third-party operated SWD well in our southern area. Since that time we brought on over 40,000 barrels of additional capacity from two SWD wells and expect our water handling cost to decrease going forward. This cost cash operating cost to increase 23% compared to the fourth quarter although year-over-year cost decreased by 23%. With that, I'll now turn the call over to Craig for a financial review of the first quarter.

[Craig Owen:]

Thank you, Bryan. Good morning everyone. I'm happy to report on our strong financial results for the quarter. Fourth quarter revenues were $79 million and production totaled 21,478 BOEs per day comprised of 70% crude oil, 15% NGLs and the balance natural gas. For the first quarter of 2019, Rosehill reported a net loss of $38 million or 2.75 per share which included $103.5 million non-cash pre-tax loss on commodity derivative instruments and we generated adjusted EBITDAX of $46.5 million for the quarter, an increase of 33% compared to the first quarter of 2018. Our realized oil price for the fourth quarter averaged $48.92 per barrel of oil and total equivalent realized price of $37.18 per BOE, both on an unhedged basis. Turning to costs, total cash operating expenses were $24.3 million or 1255 per BOE, which consisted of $10.4 million in direct lease operating expenses or 536 per BOE, $8 million in cash G&A expense or 416 per BOE, $2.4 million in gathering and transportation expense or $1.22 per BOE and $3.5 million of production taxes or $1.81 per BOE. As Bryan mentioned our cost in the quarter were impacted by a one-time event associated with a third-party SWD well in our Southern Delaware area that resulted in increased lease operating expense. Since that event, we have brought on additional water disposal capacity in the south and going forward we expect costs to trend back to previous levels. Total liquidity as of March 31, 2019 was $99 million. This amount increased to $121 million shortly after close of the quarter when we received proceeds of $22 million from the previously announced sale of our assets in Lee County, New Mexico. We feel this level of liquidity is strong given our balanced capital plan for 2019, but we will continue to look for opportunities to enhance this through asset sales and continued increases in our borrowing base. Lastly, I like to provide a brief update on the potential sale of our water midstream assets in the Northern Delaware area. We continue to work through this process and remain focused on making a determination for these assets very soon. We received strong interest in these assets given the highly strategic location of the water system and want to ensure that we meet our paramount objectives of finding the right partner and at the right valuation. And with that Chris, we are ready to take questions.

[Operator:]

Thank you. And our first question comes from the line of Neal Dingmann with SunTrust. Your line is now open.

[Neal Dingmann:]

Good morning all. My first question, after all the results you put out on the Southern Del. Looking at Slide 9, two questions around that based on what deems to be pretty positive results, I think on all those wells looking at both the Trees Estate and the State Blanco, I'm just wondering based off of those now that those were in the books. How do you think about cadence and just sort of thoughts about that area going forward now as far as for the remainder of the year and into 2020?

[Brian Ayers:]

Neal, Brian Ayers here. We've got a pretty well-defined drilling program laid out into 2020. Of course, we farmed in roughly 2000 acres just south of that Trees and State Blanco track. And we've drilled our first two mile well right in the guts of it. That well is going to be completed here in a few weeks. Our plans are to drill another four spud at least four wells and five , our clock works right in the rest of the year largely south of that State Blanco and Trees blocks. All of those will be two-mile wells except for one. And then we will probably keep a rig largely busy in here all of 2020.

[Neal Dingmann:]

Okay. And Brian to tack on to that looking at Slide 7 on the spacing is, you still feel confident that I think you've shown the four to six wells per section. Could you just maybe talk a little bit about that for as you target these wells, while you continue kind of in that spacing pattern?

[Brian Ayers:]

Yes. We have built a lot of science into what we've got done out here, Neal and started out with kind of a blank sheet and so far all of the science that we've done has told us that the spacing is probably right. If anything we may have some data that shows us we could maybe down space a touch. So your six wells spacing depending upon some more -- as some more work to do here may well find that. But, we'll know here within a few months.

[Neal Dingmann:]

Okay. And then, lastly, David for you. Now that you've been there and analyzed some things, I know the plan is set to spin within cash flow. Do you still feel pretty good about that plan as far as, I guess the question would be is production and sort of ultimate free cash flow still online from as far as you see everything?

[David French:]

Yes. That's the plan. I think when we looked at it, obviously, we'll have as I said in my opening, the lion's share of the capital we spend in the first half of the year, as Brian talked about we've got the five wells planned for the second half of the year and really are going to look at what that rolls into 2020. But don't expect really to be outspend EBITDAX for the year, we should be in line. With that general forecast with the volume, I would say the volume wedge associated with the development of first half of the year in the summer really coming on in third quarter.

[Neal Dingmann:]

Very good. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Jeffrey Campbell with Tuohy Brothers. Your line is now open.

[Jeffrey Campbell:]

Good morning and David welcome aboard. I just want to clarify, this sounded like based on the update that Craig gave in the remarks that you intend to retain some ownership in the water assets as opposed to a full sale of the assets, is that correct?

[Craig Owen:]

Jeff, this Craig. Yes. Well, that's correct in the standpoint of our area, we intend if we do sell, we intend to sell our northern position that's what we're marketing right now. But we intend to hold onto our southern water assets at this point.

[Jeffrey Campbell:]

Okay. Thanks for that clarity. I was wondering, when I look at your work in Loving, I see type curves for the Upper and Lower Wolfcamp A and the second, third Bone Spring Sands. I was just wondering are these the four go to zones for the next couple of years. I was also wondering if you're doing any multi-bench development currently or will perhaps over the next 12 or 18 months?

[Brian Ayers:]

Yes. In fact, we are developing, if you flip to page 12, those three type curves are often drilled in the same had -- the same thing time. There is no brake. There's no barrier between the top and the third Bone sand and the base of that lower A shale. So, we drill and frac those in three and four well clusters as one tank. Those are the best rocks out here. That along with the second Bone Spring sand will be the focus of our wells going into 2020 although we're also going to start growing some Wolfcamp B wells, we see a substantial amount of, I mean some serious upside in Wolf B.

[Jeffrey Campbell:]

Right. And the Wolfcamp B is a good chunk of your inventory there too. So a good result will be important. If I could ask just one last one. We're seeing some pretty dramatic reductions in drilling days down the Southern Delaware. Just wondering if you could add a little color on what's behind the improvement and what I'm really wondering is, is this just primarily better logistics or are things like the 3D seismic or maybe optimizing fluids and bits contributing to faster drilling? Thanks.

[Bryan Freeman:]

Yes. Thanks. This is Bryan Freeman here. A lot of it we've moved from doing science wells to starting to do development wells. Also as we progressed over the last year or two, you break the wells down by section, the surface intermediate curved and lateral. We've somewhat struggled over the last year or two with improvement in the lateral until here recently this year in 2019 which we work with a bit, then there to develop a different bit. And then, also another power section a seven inch power section in the lateral that in itself has greatly reduced our drilling times. We're able to single trip the laterals versus we were struggling with three trips.

[Jeffrey Campbell:]

Thank you. Okay, great. I appreciate that color. Thanks.

[Operator:]

Thank you. And our next question comes from the line of Jeff Grampp with Northland Capital. Your line is now open.

[Jeff Grampp:]

Good morning guys. Question on the oil mix front. I think you guys touched on in the prepared remarks about the oil mix in these well seems -- maybe a little bit better than some of the prior type curves that you guys had put out. So I guess first wanted to see if that's a fair conclusion or if maybe you guys expect some change over time on those wells. And more broadly how you guys are expecting oil mix to trend over the remaining of the year given that like first quarter had a little drop in oil mix?

[David French:]

I think -- this is Dave French. I think obviously the wells are sitting in that 90% range. I think we're not seeing lift or no lift in material change in that. So the guys are really liking the liquids evolution. I think we -- I mentioned in my opening remarks very briefly that we had a little bit of an up tick in the gas side of the business just because we moved -- we've been able to reduce significantly our flaring. So we added some flare volumes back in the portfolio. But, as we add new wells on and they're coming in at kind of the 90% liquid side, we're going to see that Geo-R that sort of overall gas content trend itself down to more what you would have expected coming into the year.

[Jeff Grampp:]

Okay, great. And my follow up on kind of the to do list if you will or objectives that you guys laid out in the slide deck. I know Craig touched on the water side, but I was wondering, if you guys could have any broad commentary or just drill down more on the simple find strength in balance sheet objective that we're looking for a checkbox? Is there any kind of commentary you guys could provide on the particulars of things you could be looking to achieve here?

[Craig Owen:]

Sure. Jeff you hit on it. Water -- any asset sales, we sold the New Mexico assets we had that helped, if we sell water and certainly that will help, and we intend to use those proceeds to pay down our positions on debt and possibly some of our higher cost financing. But, beyond that certainly borrowing base should continue to move up give us more liquidity and flexibility, but we are looking and we've talked about this over the last six months or so, we'd love to simplify our balance sheet from a complexity standpoint and we'd like to get into the high yield market should it. Obviously, it's opened up a little bit. It's not great. We were well-positioned opportunistically to hit the market, if and when it's available. If it is, we would like to issue potentially there and pay down our second lien refinance, our second lien debt and refinance our Series B preferred anything on top of that would pay down our revolver.

[Jeff Grampp:]

Got it. Understood. Perfect. It sounds great.

[Operator:]

Thank you. And our next question comes from the line of Michael Scialla with Stifel. Your line is now open.

[Michael Scialla:]

Hey. Good morning everybody. Brian you mentioned you're developing the third Bone Spring and the Wolfcamp X, Y simultaneously. I've just wondered, do you have any sections yet or you've developed the majority of what I'm looking at page seven. The majority of those Bone Spring and Wolfcamp zones to get a sense of what kind of vertical or horizontal communication you might be looking at or are there any plans to fully develop a section near term.

[Brian Ayers:]

The only session that we have that we've developed fully across those three zones is that little half section we call Kyle 24. It's the block in the northeast. And when we completed them all at the same time, we drilled a five well had their May or June of 2017. It's producing like its one tank. We haven't fully developed anything else yet. We are very cautious about timing. Mike it's a 4D problem, it isn't just a spatial one. And so, we're very conscious of that old parent child concept and how we work through that. But the plans are within probably the next year we will have fully developed in those 3 benches at least one more track.

[Michael Scialla:]

Okay. Thanks. And just want to confirm, you mentioned drilling and completing faster than the original plan had anticipated with most of the spinning in the first half. I just want to get an idea on the full CapEx and production guidance for the year, if there are potentially any changes come in there?

[Craig Owens:]

Hey, Mike. It's Craig. As Dave mentioned we still expect to be balanced. We've got a lot -- we're very excited about the south, the six wells has turned on. We don't get a lot more history there, before we do anything different on production guidance and so forth. But, we're confident that we can land it CapEx with the EBITDA balance. And we'll update as we go more through the year. But that's kind of where we've said. And we're running one rig right now. We're about to sit in that rig off in a couple of weeks and we'll pick you back up in the fall and complete what we have. So we'll be active -- this quarter we'll be active, all quarters. But we'll take a pause in the third quarter and hit the accelerator again kind of late third quarter early fourth, that will give you an idea pace.

[Michael Scialla:]

That helps because that one rig bounced between the north and the south or does it stay in wanted areas, that staying in the south or?

[Craig Owens:]

Right now it's in the north. It will come back in the south and that works.

[Michael Scialla:]

Great. Okay. Just one last one, for me Dave, any thoughts at this point on any changes you might make it at a high level for the company where and where you see the company going over the next couple -- two, three years?

[David French:]

Hi, Mike. I think we're going to really think about the pace and scale the development of the South. I think the early results are quite good, but that's going to be driven by as Brian puts that crew back in the field in the fall, we're going to spend some time this summer looking at the development we've got. As I described in my opening, we need to feather in also the commitments associated with the farm-ins, so you'll be seeing us predominantly develop in the fall in the south and into next year. But as other Bryan talked about, I have two very high quality Brian leaders on my team. We are going to come in the north and thinking a lot about the Wolfcamp B and that development. So those combination within the Delaware Basin are going to drive our attention certainly in the near future. I think that combination looks quite good.

[Michael Scialla:]

Great. Thank you.

[David French:]

I don't see a material change in direction. I think it's really thinking about how to stay balanced as we do that. So we are focused on capital discipline, thinking about when that development occurs and Craig and I was thinking about the extent we can do some balance sheet work opportunistically that'll be the focus for the fall.

[Michael Scialla:]

Got it. Thank you.

[Operator:]

Thank you. And that does conclude today's question-and-answer session. I'd now like to turn the call back to David French, CEO for any further remarks.

[David French:]

Thank you, Chris. I'd like to thank everyone for joining the call today. As you can tell the team is excited about the continued strength of the Delaware Basin. We have a solid anchor business in the north, commercial validation of our southern acreage potential and the additional portfolio muscle unlocked with our recent farm-in. These coming months will be busy and I look forward to continue to meet and to hear from our investors. It's a great time to tell our story in an important and pivotal time to join as a leader and as a shareholder. This continues or this concludes our first quarter earnings call. Thank you for interest in Rosehill. And everyone have a great day. Take care.

[Operator:]

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