SilverBow Resources, Inc.
Q3 2015 Earnings Call Transcript

Published: 7 Nov 2015

[Operator:]

Good morning. My name is Beth, and I will be your conference operator today. At this time I'd like to welcome everyone to our Swift Energy Company Third Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Doug Atkinson, you may begin your conference.

[Doug Atkinson:]

Thank you, Beth. Good morning. I am Doug Atkinson, Manager of Investor Relations. Welcome to Swift Energy's third quarter 2015 earnings conference call. Joining today's call is Terry Swift, President and CEO, Alton Heckaman, Executive Vice President and Chief Financial Officer, Bob Banks, Executive Vice President and Chief Operating Officer, as well as Steve Tomberlin, Senior Vice President of Resource Development and Engineering. We expect our presentation to take approximately 25 to 30 minutes, and have allowed additional time for questions. To complement our prepared remarks we have prepared a slide presentation available on the website within the Investor Relations section. Before I turn the call over to Terry, I would like to call to your attention the forward-looking statements on slide two. Let me remind everyone that our presentation will contain forward-looking statements based our current assumptions, estimates and projects about us, our industry, and the current environment in which we operate. These statements involve risks and uncertainties detailed in our SEC reports, to which refer you, along with cautionary statements contained in the press releases, and our actual results could differ materially.

[Terry Swift:]

Thanks Doug. And this morning, we'd like to thank everyone for joining the call. I am going to quickly cover the highlights of the quarter, before turning the presentation over to Alton Heckaman, our CFO. He will talk about the second quarter financials. After that our Chief Operating Officer, Bob Banks, will speak to us about our operations, and then we will have some concluding remarks and summary, before we open it up for Q&A. Before we start, I'd like to obviously recognize that we are in the midst of an energy storm in our industry. Over the past 12 months, we've actually seen crude oil go from its high to its low and drop approximately 60%. Over that same 12 month period we've essentially seen natural gas at one of its highs drop to a more recent low and we have seen a collapse of 50% in the natural gas price in that regard. What this means is companies are having to confront these issues, deal with the very significant decline in oil and gas revenues, and of course, Swift Energy Company is doing everything it can to reduce its costs and improve its performance, and focus on its balance sheet and liquidity, we'll talk about that a considerable amount today. I do want to point out that we've made considerable progress in reducing our G&A, our CapEx, our LOE, and at the same time we've improved our operation. In fact, we've set some new records. So while we obviously understand the seriousness of this environment and what I'm referring to as a global energy storm, we need to recognize that we've had a significant amount of improvement in our operation and we have done it safely. We actually have one of the best safety records in our history as relates to 2015. We definitely are purposed to keep our operations safe and to have a focus on HSE as we do that. Going to some of the highlights of our operation today, in our call, we did achieve quarterly production of 2.87 million barrels of oil equivalent which was above our guided range of 2.77 million to 2.82 million-barrels. We revised our full year 2015 production guidance and now expect our production in the range of 11.6 million to 11.7 million barrels of oil equivalent, and maintain our capital budget range of $110 million to $120 million. We recently drilled and completed our first upper Eagle Ford well in Fasken. Initial results are inline with our expectations, and in fact give us a lot of running room, in terms of what we believe is a very important asset that is not really booked into proven categories right now, and gives us a lot of running room, in terms of what we call the intrinsic asset value of the company. We designed and executed a newer enhanced completion technique, which includes increasing the size of the frac job to approximately 2,000 pounds of sand per lateral foot, compared to our previous jobs which were averaging 1,400 pounds of sand per lateral foot. The operating guys will give you a lot more detail on than today. We're very pleased with those results. We also executed an amendment to our credit facility agreement, lowering our borrowing base and commitment amount to $330 million from the previous number of $375 million. The amendment includes modifications to key covenants and these covenants modifications provide us additional flexibility in the current market environment, and we'll speak more to that later in our call. We also secured and have begun using an additional 30 million cubic feet a day of capacity out in the Fasken area, slightly ahead of schedule, and we are now producing at the 190 million a day capacity rate. In fact, I think the guys will talk to you a little bit today that we've been able to exceed that slightly. And lastly, our cost reduction initiatives are definitely still on track. We're still bringing costs down, and to be very specific and hit one of the highlights, our drilling wells in Fasken are now averaging on the drilling side $2.2 million, compared to prior quarter of $2.4 million a well. We're going to focus more on this during the call on each of these highlights, and at the end of our prepared remarks, I'll make a few additional summary statements, and we will open it up to Q&A. With that, I will turn it over to Alton.

[Alton Heckaman:]

Okay. Thanks Terry, and good morning. I'll summarize our financial results for the quarter, and for those of you that follow along with the presentation, summary tables of our third quarter financial and operating highlights can be seen starting on slide four. As Terry mentioned our third quarter 2015 production was 2.87 million Boe. We were above guidance as to both our oil and our nat gas, while our NGL production was within the guidance ranging. Our overall financial results for the third quarter of 2015 include, oil and gas sales at $60 million, before the slight gain in price risk management and other income. Our adjusted net loss was $33.1 million, or $0.74 per diluted share, which excludes the effects of our non-cash ceiling test write-down. As noted in the earnings release we recorded a $322 million pretax ceiling test write-down in the third quarter, due to the continued lower commodity prices, resulting in a reported GAAP net loss for the third quarter of 2015 of $354.6 million, or just under $8 per diluted share. As Terry mentioned our controllable cost of metrics are a key focus, and for the quarter they include, general and administrative costs declined to $3.03 per Boe, lease operating expenses came in at $5.92 per Boe. Transportation and processing costs were $1.90 per barrel. DD&A was $12.43 per Boe. Interest expense $6.78 per Boe, and severance and ad valorem taxes were 7.7% of oil and gas sales on average. Our effective income tax rate for the quarter was essentially zero. Cash flow before working capital changes for the quarter came in at $5.1 million, while EBITDA was $23.4 million for the quarter. Both GAAP reconciliations can be found in the details of our earnings release. Quarterly CapEx on an accrual basis was below guidance at $31.1 million. On slide seven you'll see a break down of our debt maturity schedule. As of September 30, we had $302 million drawn on the revolver, and we had $7 million cash in the bank. And as Terry mentioned, effective November 2, we executed our amendment to our current credit facility agreement, lowering our borrowing base and commitment amount to $330 million from the previous $375 million. Additionally the amendments include modifications to several key covenants. These covenant modifications provide additional flexibility in this current market environment. We remain committed to restructuring the balance sheet of the company in a manner that increases the near term liquidity, and allows us to optimize our investment in our top tier development opportunities. All the while preserving our ability to repay our existing debt, and enhance our forward metrics and ratios. We're taking what we feel are all of the necessary steps to achieve this objective. And with that, I will turn it over to Bob.

[Bob Banks:]

Thanks Alton. Today I'll discuss third quarter activity, including our production volumes, our recent drilling results, what we're doing to drive our costs lower, as well as our plans for the fourth quarter. For company-wide production Swift Energy's production during the third quarter of 2015 totaled 2.87 million barrels of oil equivalent, above our expected range of outcomes. Production was comprised of 68% natural gas, 20% crude oil, and 12% NGLs. Third quarter 2015 production was essentially flat with second quarter 2015 production. In our south Texas core area, third quarter 2015 production of 26,796 net barrels of oil equivalent per day was also essentially flat with second quarter 2015 levels. Gross volumes out of Fasken in the third quarter, which include production sold to Saka as part of the joint venture increased to 160 million cubic feet per day, compared to 142 million cubic feet per day in the second quarter of 2015. We are currently producing 190 million gross cubic feet per day at Fasken. However, at various points we have been able to produce in excess of 200 million cubic feet per day into the Howard Energy system. We drilled five operated wells during the quarter, four of which were in Fasken and Webb County, while the other in our Bracken AWP gas area in McMullen County. All five wells were drilled and pre-completed under budget. We drilled our longest lateral to date at AWP Bracken during the quarter to 7,125 feet, compared to our previous longest lateral of 6,095 feet. We recently started up upsizing our sand loadings from 1400 pounds per foot to 2,000 pounds per foot into the engineered completions at Fasken, and we intend to evaluate the performance of this design over the next three to six months. Three wells that were stimulated with the upside sand loadings were Fasken 38-H, 37-H and 106,-H which is the first upper EagleFord well. The Fasken 38-H tested at 30.2 million cubic feet per day, from a 7,874 foot lateral that had 33 stages, and 15.7 million pounds of proppant. This well has already produced 1 Bcf in 57 days. The Fasken 37-H tested at 25.2 million cubic feet per day, from a 6,884-foot lateral that had 29 stages, and 13.8 million pounds of proppant. This well has already produced 1 Bcf in 66 days. The Fasken 106-H our first Upper Eagle Ford test was 7,033 feet in lateral length, with 32 stages, and 15 million-pounds of proppant. Early results from this well are encouraging and inline with our expectations. We continue to improve our well time efficiencies in Fasken for both move in and walking wells. Specifically, we reduced move in wells from 23 days per well to 21 days on well, and improved our walking wells from 18 days per well to 17 days per well sequentially in the third quarter. This time is measured from rig on to rig off. Quickly summarizing our Southeast and central Louisiana areas, in Southeast Louisiana, Lake Washington averaged approximately 2,734 net barrels of oil equivalent per day, a decrease of 10% when compared to second quarter 2015 average daily volumes. We did perform multiple enhancement projects, including four sliding sleeve zone changes during the third quarter. We do have an inventory of re-completion opportunities, and expect to conduct a number of these low cost high return projects in the future. At central Louisiana which includes our Masters Creek, Burr Ferry, and South Bearhead Creek fields, it contributed 1,497 barrels of oil equivalent per day of production in the third quarter, which is a decrease of 7% from second quarter 2015. Now I'd like to talk a minute about some of the things we are doing to reduce our capital and operating costs. On the drilling side, our year-to-date average well cost is $2.4 million versus our 2014 average cost of $3.2 million. That’s a 25% cost reduction. During the third quarter the well costs continued to come down, and are now averaging $2.2 million. So the drilling guys are really doing a great job, and continuing to improve on the efficiencies on sequential wells, as the components of our program become more fully implemented. On the completion side, year-to-date we have completed 18 wells, 126,349 lateral feet, 438 stages, and pumped approximately 194 million pounds of proppant, all under budget. In a number of our wells, proppant concentrations have been increased about 40%, and are now at 13 million to 16 million pounds of proppant per well. Stages and clusters have been increased about 30% to 35%, and are now at 28 to 33 stages per well. Our 2015 completions per thousand foot of lateral is down about 21% over last year. And for the third quarter, our average completion costs in Fasken came in at $3.4 million, which is down further from the $3.8 million in the second quarter, even while pumping 40% more proppant on four of our eight completed wells. Additionally, our ongoing LOE reduction program is on track. Our lease operating expenses declined 19% year-over-year, with some areas realizing year-over-year reductions of more than 20%. Specifically, our lease operating costs in Lake Washington and AWP were down 31% and 23% year-over-year respectively. The primary drivers behind our LOE reduction program include lower labor, maintenance, and compression costs. Additionally our ongoing optimization of production treating regimens continues to achieve significant reductions in chemical costs. While some cost concessions are tied to the current cyclical reduction that we are seeing across the industry, we do believe a large amount of our cost saving measures are now more permanent in nature. Most importantly, we are doing this work with a very good safety record, and have achieved a number of important new milestones this year. Now for a look at remainder of 2015. We are targeting full year production levels of 11.6 million to 11.7 million barrels of oil equivalent, up slightly from our previous range of 11.5 million to 11.6 million barrels of oil equivalent. This level of production is still based on $110 million to $120 million in capital expenditures for the full year. We are deploying capital based on capital efficiency and payout metrics, ensuring that we are achieving the best use of our capital in our highest return projects. We have been focusing our development program in Fasken, where we believe we are generating very reasonable rates of return, and likewise but to a lesser extent in our AWP gas area, where we have drilled a few wells thus far in 2015, in order to hold a large acreage position. We will continue to monitor the economies in these areas and across our portfolio to ensure we are appropriately managing our capital spending in this difficult environment. As we look into 2016, we are focused on developing a work program and budget that provides a prudent level of activity that will allow us to meet our obligatory drilling and operating commitments, and also maintains and improves upon the momentum we created as it relates to our operational efficiencies. With that I will turn it back to Terry for his closing remarks.

[Terry Swift:]

Okay. Thank you, Bob. I'll summarize today's call and make a few closing comments about our balance sheet and our liquidity. First, I want to focus on three milestones we have had in Fasken. We talked about today, and that is that we successfully drilled and completed our first Upper Eagle Ford test, and the initial results are in line with our expectations. We see that as a very big positive. Second, we have designed and executed our newest enhanced frac job techniques, which includes 40% more proppant than before, and we are very pleased with those results. And finally we increased our takeaway capacity at Fasken to 190 million cubic feet per day, and we're actually producing at that level or higher. We also have a focus on operational excellence and while applying industry-leading technology, it’s our driver, our cost structure continues to be lower, we're very pleased with the results we are getting there. And at the same time, we have an excellent HSE and safety record in particular. And we will stay focused on that. We do remain driven to control the variables that are in our business model and continue to make progress aligning our cost structure, that would be G&A and LOE, and all sorts of other drivers that we can work on to bring those costs more inline with the current commodity environment. We do have an inventory of several hundred high grade Eagle Ford locations, including as we noted now the 60 locations in the Upper Eagle Ford in the Fasken area. As a result of our improved well productivity and the operational efficiencies, cost cutting, we're able to tighten our full year production guidance, and at the same time maintain our full-year capital exploration budget. As far as liability management is concerned, we have retained Lazard to advise the company's management on the Board of Directors with respect to aligning our balance sheet, and including our senior notes, which trade at levels significantly below face value, and with their help addressing certain maturities and enhancing our liquidity profile. We are currently engaged in negotiations with a group of senior note holders regarding restructuring OR debt, along with possible avenues for increasing our near term liquidity, whether through reduction of the current senior debt interest obligations, or otherwise. We are considering a range of alternatives. The alternatives include new debt, equity-linked financing, exchange offers, asset sales, and other ways to maintain and protect the value for the company and its various constituents. To date, no understanding has been reached as a result of our negotiations, although they are still ongoing. The outcome of these negotiations, the timing of which cannot be accurately predicted at this moment, is likely to have a substantial effect on our liquidity, our future operations, and our financial condition. With that, we would like to begin our question and answer portion of our presentation.

[Operator:]

[Operator Instructions] Your first question comes from the line of Adam Leight, RBC Capital. Your line is open.

[Adam Leight:]

Good morning everybody.

[Alton Heckaman:]

Good morning.

[Terry Swift:]

Good morning, Adam.

[Adam Leight:]

I know you are going to be very limited on what you can say about liquidity and liability management. But can you A, give us an idea since we haven't seen the Q yet, how much if any additional, what flexibility you have? Is this 330 borrowing base is that a conforming base, is there any stretch capability, and is there going to be anything in the Q regarding going concern statements?

[Terry Swift:]

This is Terry. I'll let Alton think about anything in the Q that might be worth pointing out which we haven't actually put out yet.

[Adam Leight:]

Right.

[Terry Swift:]

But really in terms of our flexibility on liquidity, clearly commodity prices are the driving factor in having driven down our liquidity. I think to the extent that we look backwards, and we look at the current production mix, I mean, the numbers, somewhere shy of $200 million over the past year of cash flow liquidity that the company has not received due to the price collapse. We'll finalize that number. That’s an approximation, but it creates obviously a serious situation. As to the borrowing base and the liquidity in the borrowing base, I think we've got a lot of I'll say flexibility in the covenants, and I believe you'll see more detail on that in the Q. But basically, we have secured the liquidity to operate in the near term, and do the things that we need to do. I would remind you that right now we have two rigs running. Clearly that’s something that has to be on the table, and we take off that capital spending, should commodity prices not improve, should we find ourselves without the flexibility in the borrowing base, or any kind of re-determination that might be during the future, or should we find that the negotiations that we spoke of earlier end up not fruitful or we need to change some of that capital spending. Although again, going back to my opening comment mere here, the most serious and the most important part of this is commodity price. The company has been performing very, very well on the production side, on the cost side, on the safety side, but we just don't have control of commodity prices. Alton, do you want to have any comments about the borrowing base?

[Alton Heckaman:]

Yes. I mean, really with respect to your direct question, Adam, there will be no going concern language in the 10-Q. As Terry just articulated, the $330 million is sufficient liquidity to handle kind of our intra month and intra quarter swing. So it allows us to maintain kind of on a cash neutral basis. As Terry said, we have the two rigs running and we can handle that through the end of the year, absent getting something done with the restructuring, we would clearly need to reduce our CapEx accordingly. But it does give us sufficient liquidity and in our modeling shows us that.

[Adam Leight:]

I guess I'll try one follow-up on that. Is it a reasonable expectation that liability management, as opposed to asset management is the way this is going to play out? Are you in any kind of advanced negotiations on potential significant asset sales, or is it more likely to be?

[Terry Swift:]

Yes, we can kind of wordsmith this in a lot of ways. Clearly, everything does revolve around the value of the assets, and in the current marketplace, it’s very difficult to transact independently on assets. I think too many people are looking at this storm in commodity prices as something that is going to last forever, and we just don't see that. So as to management sales of assets, yes, we've got some things that we've been looking at, and some things that I think could happen. But we're not giving away assets over here based on the extremely low prices. We just don't feel that’s the right thing to do. On the liability management side, again, because we do believe the assets have a lot more intrinsic value than the current commodity price that you see out there might demonstrate or the risk that people put, to a certain degree, I've never seen PUDS, or proven undeveloped locations like we have in Fasken, I have never seen proven undeveloped locations with such material value in my whole career. We've been drilling them one after the other, and the undeveloped locations that we have are actually better value than the proved producing that was drilled two or three years ago, and its all infield. But yet the marketplace right now has got such a negative bend towards how they risk categories that you just don't see the asset value right now that we believe is intrinsically there. Those kind of discussions about that kind of detail are ongoing with the bondholders, and to that extent they are definitely constituents or stakeholders in the company. We are trying to go through in great detail and understanding of exactly where the values are, and how they can be realized with different structures. We believe it can be a constructive conversation or negotiation and I wouldn't want to prejudice that, because I do believe there is a good outcome. But having that said that, I'm not in control of it and as I said earlier we can't actually predict the moment that would happen or would not happen. But we do know that we've got some really good bond holders, some folks that understand the business, and they are putting I think a reasonable pencil and analysis to this. So I think the answer really is in the liability management side, and I guess going back to how you phrase the question, its not as simple as just being able to do an asset deal.

[Adam Leight:]

Great. Thanks. And one last question from me. On the reserves, for year end 2015 report, can you talk a little bit about what kind of revisions you might see in the PDPs for price and tail productions, as well as the impact on your PUDS for the 5 year, and how the capital constraints sort of play into that?

[Terry Swift:]

Well, I think again we clearly are aware of the various definitions and how you have to go through different environments and set development programs or come up with what's referred to as the investment decisions. And you look at the properties and their cash flow given the definitions that you have, we did that third quarter. So you'll see in the actual Q, which we haven't put out yet, but you'll see more detail on that. We have adjusted those plans accordingly based on the commodity environment, and the definitions that we have to follow.

[Alton Heckaman:]

Yes. I think and I'm sure others do this as well, but we just don't come to year end and make the adjustments, as we role quarterly that is embedded in there, so.

[Terry Swift:]

Yes. So just as a point of reference, we don't know what other companies are doing in this environment, and quite frankly, I don't think anybody has seen, you could point back to '86, and you might have something similar. But I do believe this is the worst commodity crash that the energy industry has seen in our careers. And in that regard a lot of these definitions and rules weren't around back then, or they were different. So lots of companies are probably going to be handing it in different ways. We're trying to handle it every quarter, based on exactly what we see and not wait to year end.

[Adam Leight:]

Thanks, guys. Good luck.

[Terry Swift:]

Take care.

[Operator:]

[Operator Instructions]

[Terry Swift:]

Okay. With that, I'd like to wrap up with one final comment. I opened it up talking about an industry, or global energy industry storm. I think it’s a good characterization of what our industry is going through. Internationally, domestically, whether its oil, whether its gas, I would like to really end this call by saying we recognize that we have a lot of constituents, and we're doing our best to honor our role as management to all of those constituents. We do think we will get through this storm. Storms usually last in real life for maybe 12 hours, this one has lasted 12 months, but they end, they do have an end to them. So we thank you for your patience, and your support as we work through these difficult times. Thank you.

[Operator:]

This concludes today's conference call. You may now disconnect. Thank you.