Extraction Oil & Gas, Inc.
Q4 2020 Earnings Call Transcript

Published:

  • Operator:
    Good morning. I am Josh, and I'll be your conference facilitator today. I would like to welcome everyone to the Extraction Oil & Gas Fourth Quarter 2020 Financial and Operating Results 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 period. I would now like to turn the call over to John Wren.
  • John Wren:
    Thank you, operator. Good morning, and welcome to Extraction's fourth quarter and full year 2020 results conference call. I'm joined today by Tom Tyree, CEO; Matt Owens, COO; and Marianella Foschi, CFO. Yesterday, we issued our earnings press release and filed our 10-K with the SEC, both of which are available on the Investor Relations section of our website.
  • Thomas Tyree:
    Thanks, John, and good morning, everyone. I'd like to start by thanking our employees for their hard work during a very difficult but very successful restructuring process. A year ago, Extraction had 323 employees. Today, we have 121. With regret but out of necessity, we reduced our headcount by 62% in 2020. We miss those folks and we sincerely appreciate the hard work turned in by our current staff who picked up the slack as we emerged from Chapter 11 this past January. Our restructuring process was difficult but it's also positioned us for success in the current environment. Our streamlined staffing has increased efficiency and collaboration even during the pandemic and contributed to a reduction in cash G&A of nearly 50%. We equitized $1.3 billion in unsecured debt and preferred equity. We reduced our RBL borrowings from $600 million to the $254 million that's currently drawn under our revolver. We reduced our D&C and LOE costs by over 20%. Our run rate, transportation and gathering expenses have declined by approximately 50% through the renegotiation of 7 of our key midstream and marketing contracts. And we eliminated the vast majority of our midstream minimum volume commitments as part of that same process. One thing that didn't change during the restructuring is the quality of our property base, both in terms of geology and concentration. Our year-end total proved PV-10 value was $1.4 billion using March 1 strip pricing, and our PDP PV-10 was just under $1.2 billion. And today, for the first time in a long time, we have a balance sheet that complements the value of our asset base, with a straightforward capital structure comprised of common equity and our borrowing base facility, leverage of less than 1 times EBITDA and more than $250 million in available liquidity. As a company, we now have a new, highly engaged Board of Directors, and we've adopted a new business model, focused on returns over growth, low leverage, scale economics to be achieved through consolidation and the generation of material free cash flow. Specifically, with respect to our excess cash flow, we expect to fully repay our outstanding debt this year so we will be debt-free by year-end. And we hope to institute a dividend policy over the same time frame.
  • Matthew Owens:
    Thanks, Tom. By way of update, after ceasing drilling and completion operations back in the second quarter of 2020, we still generated net sales volumes of 83,000 BOE per day in the fourth quarter of 2020, of which was 62% liquids. This year, we recommenced operations with 1 drilling rig on our Wake North pad and 1 completion crew on our GP pad, both in Greeley. We are preparing the GP pad to be turned in line during the second quarter, and the Wake North pad should begin production around the beginning of the third quarter. As Tom noted, we are prioritizing cash returns in all of our operations, and we expect to balance the allocation of our cash flow among reinvestment in our projects, debt reduction and distributions to shareholders. We have also made the strategic decision to up-space relative to our historical drilling strategies. We believe this is the optimal way to allocate capital and maximize returns through decreasing cycle times and improving per-well EURs. We have already begun this effort by completing 13 to 15 wells on the GP and Wake North pads, which were originally planned for 20 to 24 wells each. And on 1 of our pads in Windsor, we are drilling only the Codell formation as its economics are superior to the Niobrara. I wanted to highlight these first 3 pads in 2021 because they are concrete examples of how the company has shifted its development strategy with a rigorous focus on capital allocation and maximizing returns.
  • Operator:
    . Our first question comes from Leo Mariani with KeyBanc.
  • Leo Mariani:
    Obviously, you have a plan to reduce debt to zero at the end of the year here, and you also talked about consolidation opportunities as well in the space. Certainly seems like the balance sheet is well positioned for that. I think in the press release, you did talk about some leasehold acquisitions. But wanted to see if there's any other kind of chunkier deals that you may have your eyes on out there? I know there are still some distressed private operators out there in the DJ. Maybe you can just kind of talk about that strategy over time.
  • Thomas Tyree:
    Yes, Leo, it's Tom. How are you doing this morning? I'd say 2 things. There is kind of a day-to-day optimization that we do in our assets, and those are largely cash transactions, whether they are sales of non-core assets or acquisitions of working interest to increase our ownership in our existing projects. And literally, we're considering those and executing those on a weekly basis. And then there are the strategic transactions. I would say at any one point in time, candidly, we're in dialogue with 1 or more parties about the possibility of transacting. And that, I would say that the majority of those are equity-based transactions. And I also don't think that the mode that we are in is materially different than the mode of others in the basin and others in the industry. So I would say it's a stated part of our strategy to consolidate and we're pursuing it aggressively.
  • Leo Mariani:
    Okay. And then just maybe jumping over to kind of the existing operations here. Obviously, you talked about a plan to kind of up-space with wider spacing. And just wanted to kind of get a sense when you sort of look at kind of current permits in hand across the company and kind of given the up space. What can you kind of tell us about the existing inventory, even if it's just kind of a high level number or XOG things that got 3 or 4 years of running room or whatever the number might be? And then maybe to kind of add on that, what's the plan in terms of further negotiations with some of the local municipalities? And kind of where does that stand in terms of maybe adding new operator agreements or expanding existing ones on the acreage footprint?
  • Matthew Owens:
    Leo, this is Matt. You're right, we have really looked at our inventory with an up-spacing perspective, focusing on returns. We have some slides on that in our presentation that illustrates how we view it. But up-space count that the company has is that 432 locations, and that was based off of when we did our original guidance. But as you can tell from the Slide 13 in our deck, that obviously changes with commodity prices.
  • Operator:
    Your next question comes from Patrick Sheffield with Beach Point Capital.
  • Patrick Sheffield:
    Just one housekeeping item. In the disclosure statement, I recall there being a pretty sizable working capital true-up that needed to be paid this year and in the $100-plus million range. And I saw your free cash flow guidance slide looks quite robust and you're going to end the year with no net debt. Is that -- was that working capital, which I thought was -- maybe some chunk of it was by the tax payments? Has that been kicked to a future year or was it overestimated? Or what exactly is going on there?
  • Marianella Foschi:
    Hey, Patrick, this is Marianella. Thanks for joining the call. I would say we -- that -- if you look at Page 7 in our presentation, we gave a $200 million working capital deficit. The year-end number, since we were still in bankruptcy as of year-end, is a little bit noisy. We do have, to your point, fairly large tax statements that we have made and will continue to make through April. Come April, there will be a more normal course working capital deficit. If you look at Page 7, we have made and we'll continue to make payments and working capital will tighten by about $60 million. And going forward, given our new production and the new commodity price environment, that should be our run rate production taxes going forward.
  • Patrick Sheffield:
    But your year-end -- I mean, your estimate of having no net debt at the end of the year takes into account the payments that you're making in April?
  • Marianella Foschi:
    Absolutely. It's all in. And we merged with -- that there was about 3 chunks of production taxes we made in January, February, March. The 1 in April is just a normal course annual tax payment. So really, the delinquent property taxes that we did not pay before bankruptcy were all paid through this month. And in April, we'll have another large bill. But like I said, that's equivalent to much higher commodity price and much higher production than we saw in 2019. And so once April is behind us, you'll see that more normal course. But yes, the free cash flow guidance is all in after working capital payments.
  • Operator:
    Our next question comes from Jeff Robertson with Water Tower Research.
  • Jeffrey Robertson:
    A question. Tom, can you talk philosophically about the reinvestment rate that you plan for the business in the context of dividend and generating free cash flow out into 2022?
  • Thomas Tyree:
    Sure. How are you doing, Jeff? Thanks for the question. First of all, I don't think we consider ourselves beholden to any set percent of cash flow going in any 1 direction, other than to say that we want to direct our cash flow every year to reinvestment in our projects, to debt repayment and to shareholder distributions. Those latter 2, I think the choice will become much more current for us towards the end of the year, certainly second half of the year, probably the fourth quarter after we are in a position where we've paid down most of our debt. And what we're weighing is distributions to shareholders versus reinvestment. Any given quarter, the things that factor into it are economic inventory and commodity prices and our dividend policy, which is yet to be determined. But we are -- I think we are set on imposing on ourselves a distribution policy that deals with, on the 1 hand, delevering, and on the other hand, returning cash to our shareholders and doing that on a continuous basis once we get our leverage down a little bit further. Does that answer your question?
  • Jeffrey Robertson:
    Yes. I guess what is part of what you're saying that you're going to instill discipline in the capital allocation process by how much you reinvest versus how much you potentially have for distributions?
  • Thomas Tyree:
    Well, first of all, I would say our capital allocation process is already pretty darn disciplined. We've got a Board and a management team that are very, very focused on making sure that any investment we make in any of our projects is highly economic and is accretive to our return on capital employed on a corporate basis. But I think the question you may be getting at is, when we sit around on a quarterly basis and decide how we're going to allocate capital, we are very rigorously going to look at the benefit of distributing cash to shareholders as an alternative. And that probably is different than past practices. I'd also say that it's hard to envision a scenario, even with commodity prices very high, where we would not allocate a material percentage of our cash flow to shareholder distributions or debt repayment, if it happens to be this year.
  • Jeffrey Robertson:
    A question, if I can follow up, maybe for Matt. On Slide 13, where you talk about the de-spacing, I think you said, Matt, that the current numbers are based on strip pricing. I'm just curious, how does the changes in prices and changes in costs, how does it affect the ideal spacing for your development?
  • Matthew Owens:
    Yes, you're correct. Page 13 is illustrative of how we kind of are looking at each development area in our inventory. Obviously, we're not going to make real-time changes based on weekly moves in the commodity price, but we're going to be more focused on what it looks like 12 to 24 months down the road. But if there is a long-term uplift in the strip or it's not backwardated as much, that could shift us to the right slightly on this plot on Page 13. But really, the main goal we're going for here is not necessarily maximizing our net present value, it's really maximizing the return on each incremental dollar we invest in the ground. So how much more CapEx or how much more NPV are we getting, net present value are we getting for each capital dollar that we're putting in the ground. And on this particular example that we're showing here, the limit is, in our minds, right around 12.
  • Operator:
    Our next question comes from Dave Zimmerman with Eaton Vance.
  • David Zimmerman:
    Jeff just asked my question about the spacing. A little more elaboration. It sounds like it was driven by incremental well economics as opposed to whatever was driving it in the past. Appears that other basin operators are doing similar things. How much does the spacing approach vary among your 3 or 4 large areas? How dispersed is the quality of your regional areas?
  • Matthew Owens:
    Dave, thanks for the question. It does vary. On that same slide, there 13, you'll see in the first bullet point, we mentioned it's anywhere between 6 and 15 wells per section. And that really covers our acreage position in the core from the northern end in Windsor all the way down to the southern end in Hawkeye. For example, the lower end of that scale would be the acreage that we have in the Hawkeye Area. And the main reason for that is just the amount of formations there. So in Hawkeye, if you remember, the Codell formation is not present. It's a Niobrara only. So down there, we are looking at about 6 wells per section in the Niobrara. As you move north and you get into Broomfield, North Hawkeye, you get into Greeley, we have the Niobrara and the Codell formation there, so they both play in. And right now, the best economics that the company has is really the remaining pads we have in the Greeley area, and those will be the ones tipping the scale towards the upper end, around 15 wells per section.
  • David Zimmerman:
    Great. So essentially, you'll be drilling your best wells first, no question about it presumably, right?
  • Matthew Owens:
    That's the general plan that we have over the next few years.
  • David Zimmerman:
    Yes. And then just the last 1. I thought that Hawkeye required some meaningful infrastructure, midstream infrastructure spending before it's really ready to develop. Can you just speak to that order of magnitude of potential midstream requirements to get Hawkeye ready? Or is Hawkeye already all set?
  • Matthew Owens:
    That's a good question. So when we first purchased the asset a couple of years ago, you're correct, there was very little midstream infrastructure down in the area, particularly for the gas processing, and there's actually no oil infrastructure in place at that time. Over the last couple of years, a large public company drilled some more wells down in that area, spread out across their position. It's since been purchased by a private operator who has continued the development. But they have continued to expand their gathering infrastructure with respect to gas, and it covers most of their position, which is really the Western flank of our position. And we're not too far from the gathering infrastructure for the pads that we want to drill in the next few years. And then there's also an oil midstream company who has come down and started laying gathering lines. So while it's not as built out and robust as it is up in the Wattenberg Field, there is continuous expansion going on, both with the gas gathering and the oil gathering down in that area.
  • Operator:
    And that concludes our Q&A. I would now like to turn the call back over to Tom Tyree for any further remarks.
  • Thomas Tyree:
    Thanks very much for joining us this morning. If you do have follow-on questions, please feel free to contact any member of the management team, but in particular, John Wren, our VP of Investor Relations. Thank you.
  • Operator:
    Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.