Amplify Energy Corp. Q3 FY2020 Earnings Call

Welcome to Amplify Energy's Third Quarter 2020 Investor Conference Call. Amplify's operating and financial results were released earlier today and are available on Amplify's website at www.amplifyenergy.com. During this conference call, all participants will be placed in a listen-only mode. Today's call is being recorded. And a replay of the call will be accessible until Thursday, November 19 by dialing 855-859-2056 and then entering conference ID 1783609, or by visiting Amplify's website www.amplifyenergy.com. I would now like to turn the conference over to Jason McGlynn, Vice President of Business Development Amplify Energy Corp.

Good morning and welcome to the Amplify Energy conference call to discuss operating and financial results for the third quarter of 2020. Joining me on the call today is Martyn Willsher, Amplify's Interim Chief Executive Officer and Chief Financial Officer. Before we get started, we would like to remind you that some of our remarks may contain forward-looking statements, which reflects management's current views of future events and are subject to various risks, uncertainties, expectations and assumptions. While management believes that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this earnings call. Please refer to our press release and SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books, records and reports. For additional detailed disclosure, we encourage you to read our quarterly report on Form 10-Q, which we expect to file later today. Also, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our press release or on our website at www.amplifyenergy.com. With this, I will now turn the call over to Martyn Willsher. Martyn?

Thank you, Jason. During this call, I will provide comments on our third quarter performance, our hedging program and an overview of our liquidity position and balance sheet. I will then turn the call over to Jason to provide additional financial details for the quarter. Following our prepared statements, we will take questions and I will conclude with closing remarks. Production for the third quarter averaged approximately 27,700 BOE per day, which mirrored second quarter 2020 production performance, and exceeded our internal expectations. Notably, oil production volumes increased by 5% during the quarter to approximately 10,800 barrels per day from 10,400 barrels per day in the second quarter. This increase in oil volumes was primarily attributable to royalty relief at Beta. However, it is important to note that all asset areas met or exceeded internal expectations despite intermittent third-party weather interruptions and reduced maintenance capital expense. These results demonstrate the sustainable value of our long-lived, low-decline assets. Third quarter adjusted EBITDA was approximately $24.8 million, meaningfully exceeding internal estimates and validating the exceptional execution of our cost reduction initiatives and hedging program. Capital spending for the third quarter was approximately $5 million, which was slightly above our internal expectations, primarily as a result of additional costs associated with our non-operated Eagle Ford asset. Remaining capital spending for the year will be $3 million and focus on high return capital work of projects and facility maintenance expenses across our operated assets. Free cash flow defined as adjusted EBITDA less CapEx and cash interest expense was $16 million in the third quarter and was driven by our significant cost reduction efforts. We anticipate a strong free cash flow profile again in the fourth quarter, as we continue to operate with a minimal capital budget and execute on our cost-saving initiatives. Since our last earnings call in August, we have significantly added crude oil hedges for 2021 and 2022. Currently, we have hedged approximately 75% of our fourth quarter 2020 crude oil production at attractive pricing in 2021. We've hedged a considerable amount of our forecast of crude oil production, where the mix is of swaps and collars. Our collar positions are more heavily weighted to the back half of the year, which will allow for greater upside participation in the market recovery. We intend to add to our 2021 hedge book over the coming months and we'll begin to layer on incremental hedges in 2022 and 2023 as the market allows. As explained during the second quarter earnings call, we monetized most of our 2021 crude oil contracts in order to capture market dislocation at that time and position the company to fully participate in a crude oil recovery moving into next year. This trade was very beneficial to the company, and we have rehaped those volumes locking in the improved economics. Our hedging program will allow us to protect future cash flows while also capturing potential upside and improving the commodity price environment. As of October 30, 2020, our hedge mark-to-market value was a net asset position of $13 million. Amplify's third quarter 2020 hedge presentation contains additional details on our current positions and was posted on our website earlier today under the Investor Relations section. Moving onto a discussion of our recent credit facility redetermination and our current liquidity position. Since the spring 2020 redetermination, we have reduced indebtedness and compliance with a scheduled monthly $5 million borrowing base reductions using internally generated free cash flow. As of October 30, Amplify had total net debt of $243 million, with $260 million outstanding under our revolving credit facility and $17 million of cash on hand. With the spring 2020 redetermination borrowing base reductions now concluded, Amplify expects to utilize excess cash flow for further debt reductions and additional capital for higher rate of return projects. Amplify's fall 2020 borrowing base redetermination process is currently underway, and we anticipate completing the process before the end of November. Although the borrowing base was reduced in spring 2020 as a result of market disruptions related to the ongoing COVID-19 pandemic and commodity price volatility, we anticipate that the current redetermination process will provide a result that supports our liquidity position and a solid foundation for substantial free cash flow generation. With this in mind, I'll now turn the call over to Jason McGlynn. Jason?

Thank you, Martyn. As previously mentioned, production for the third quarter averaged approximately 27,700 BOE per day, which was flat with the prior quarter and exceeded internal expectations. This outstanding result can be attributed to strong performance across all of our asset areas and Beta royalty relief, which took effect at the beginning of the third quarter. As mentioned in our earnings release, our crude oil volumes grew by 5% quarter-over-quarter, resulting in a third quarter production mix of 39% oil, 17% NGLs, and 44% natural gas. Lease operating expenses for the third quarter were $27.6 million or $10.86 per BOE, down from $27.8 million or $11.03 per BOE for the prior quarter and considerably exceeding our internal expectations on both a total dollar basis and a per BOE basis. The reduction in lease operating expenses was due to the continued execution of our cost-saving initiatives instituted earlier this year and production outperformance. As we look to close out the remainder of 2020 and move into 2021, Amplify remains committed to operational excellence and efficiency, and our outstanding operating team will continue to identify and capitalize on additional cost reduction efforts. GP&T was up this quarter to $5.3 million or $2.07 per BOE compared to $4.7 million or $1.86 per BOE in the second quarter of 2020. This increase was primarily related to an increase in oil and gas revenues during the quarter. Taxes and other income increased this quarter to $3.8 million or $1.48 per BOE compared to $2.2 million or $0.87 per BOE in the second quarter. Again, this increase was primarily related to the increases in oil and gas revenue during the quarter. G&A expense for the third quarter was $6.4 million, including approximately $0.5 million of non-cash compensation and $0.3 million of non-recurring transaction costs and bad debt expense. Excluding the non-cash and non-recurring costs, the third quarter cash G&A totaled $5.6 million or $2.20 per BOE compared to $6.2 million or $2.45 per BOE in the second quarter of 2020. This reduction in recurring cash G&A expenses validates the company's commitment to delivering approximately $2.5 million in annualized cost G&A savings by the end of the third quarter and paved the way for achieving an annualized run rate of approximately $22 million. That concludes our prepared statements. With that, operator, we are now ready for the questions.

Thank you. Our first question is from Jeff Grampp at Northland.

Good morning, guys.

Good morning, Jeff.

Hey, Martyn, I wanted to start by discussing the borrowing base. I know you don’t have a number yet, but do you have any sense if it could remain flat? I assume an increase is not likely, but is there a chance for it to stay approximately the same? If there is a reduction, do you have an estimate of how significant it might be? Also, do you think the banks will insist on extending the forced amortization feature, or is there a possibility it could be eliminated?

So, obviously, we have to get through the process. But I think as far as an assumption, obviously prices have increased since our last redetermination and we've executed on the cost reduction initiatives that we had implemented. And so, I believe that a flat result is very attainable. No guarantees at this point, but I think a flat borrowing base with no additional mandatory reductions is the most likely outcome at this point.

Okay. That's very clear. On the capital side, it seems gas is kind of rallying here into the winter and you guys obviously have kind of multi-commodity exposure in terms of capital flexibility. Do gas projects make sense for you guys at these prices or just generically, maybe it would be great to get your thoughts on how you're thinking about capital deployment here beyond kind of the few million of mandatory maintenance CapEx we see from you?

Yeah. So, obviously, as part of our 2021 budget, we're taking a hard look at some of those gas projects. There's a mixture of operated project potential, but there's also some non-operated projects that we have a fairly significant working interest in that could be of interest to us. So we're certainly looking at those. Obviously, we're managing for free cash flow and ensuring that all those projects make sense from both an IRR and payback period perspective. Therefore, they're certainly much more on the table than they'd been in the last couple of years and that will be kind of fleshed out in our budget process over the next couple of months.

Okay. Great. Last one for me. Just on the CEO side of things, I know kind of you're on the interim side, is the Board looking to formalize that, or has a search been ongoing, or any kind of color you can provide us on that?

Well, our main focus for the last six months has been ensuring everything is executed on the operational side. To my knowledge, there is no current search for a different CEO, so I anticipate that we will evaluate this in the coming months and as we move into 2021.

Okay. Sounds good. Thanks for the time, guys.

Thanks, Jeff.

Thanks, Jeff.

Our next question will come from the line of Noel Parks, Coker & Palmer.

Good morning.

Good morning, Noel.

Hope everyone is doing well. I have a couple of questions. Could you refresh my memory about the monetizations you completed earlier this year? I was also reviewing the updated hedge totals and wanted to know if there were any monetizations carried out during the quarter, or if it was just routine settlements.

No. There were just normal settlements during this quarter. Those hedge monetizations took place in the second quarter when the Cal 2021 strip was in the mid-thirties. And we felt like before the end of the year, we'd have the chance to rehedge those volumes at a much better environment. And so, somewhere between 42 and 45, depending on the hedges, we've rehedged those volumes, kind of locking in that gain. And so, that was kind of always the idea, and we were able to execute on that during this quarter.

Great. I understand you don't usually provide formal guidance on your expectations for price realization, but could you share some general insights on what you're observing or, perhaps more importantly, the trends you're monitoring for the various products?

Yeah. Obviously, in the past, we've got price realizations. I think you've seen NGLs be a little bit stronger recently than they've been over the last, call it, year prior. So, the realizations relative to crude are doing a little bit better. Gas is obviously doing better. For example, the Mid-Con region has obviously improved its netbacks as well. So, by and large, I think it's improved. There's some areas that we have a non-operated position in Eagle Ford where I think the oil pricing has been a little bit weaker. But in the Rockies, it's been a little bit stronger. And so, it's been kind of a mixed bag. For now, the realizations from this quarter would be your best estimate for a go-forward look. Hopefully, prior to our next call, we'll be implementing guidance again for 2021 and can provide great color on those questions.

There has been a lot of disruption this year, with significant movement and volatility in commodities. Some of our operations in Beta that are halfway through have experienced slight dislocations, but we expect things to return to normal as we progress further into 2021 and look at forward pricing. Similar occurrences have been noted in the Mid-Con area. However, as Martyn pointed out, we have seen better pricing in the Rockies, and we expect it to revert to historical norms moving forward. As Martyn mentioned, our current position serves as a good estimate for the fourth quarter.

Okay. Great. And I believe in the past you've talked about sort of a baseline maintenance CapEx level of just $5 million to $10 million. We've certainly had more disruption on oil pricing in the last couple of months. If we started turning the corner with COVID and things that stabilized or improved for oil, we have at least been in contango. Do you have any sense of at a higher price whether there are any sorts of projects that could move to the front burner, if say a quarter from now we were sort of closing back in on 50, similar to late summer?

Sure. We have several workover opportunities available, particularly in Oklahoma. Some of the ESP projects may be more viable with prices at $50 compared to $40, allowing us to bring production that is currently offline back online. These are relatively easy gains when the economic conditions are favorable. Earlier this year, we discussed the development of Beta, which we may reconsider if prices continue to improve throughout 2021. Additionally, the current attractiveness of gas applies to both East Texas and some small projects in Oklahoma as well. While we have opportunities, we will remain focused on free cash flow in 2021, given the current low market conditions. If prices start to stabilize, particularly above $50, we may gradually increase our activity levels at that time.

Great. As an example for those workover opportunities, especially the ESP substitution, what's roughly the payback time on a project like that?

Typically, we look at high-grading the ones that are a year or less. There are several of those still in inventory right now. Obviously, if both the gas price and the oil price improve, a greater number of those could move up the ranking. Those are the kinds of things we'll be looking at as the market continues to recover because they are a mixture of gas, oil, and NGLs, obviously. We're cognizant of the impact that has on the economics.

Okay. Great. Thanks a lot.

Thanks, Noel.

Thanks, Noel.

Thank you. At this time, we have no further questions.

All right. Thank you. This year has been challenging for the industry and our company. While the ongoing COVID-19 pandemic has continued to impact demand and prices have been slow to recover, the organization has demonstrated its resiliency and ability to adapt to the current environment. I cannot express my appreciation enough to the company's employees for their outstanding efforts and continued dedication. I would also like to thank our stakeholders for their continued support as we persevere through these difficult times. With strong free cash flow expected for the remainder of 2020 and 2021, we look forward to continuing to execute for all of our stakeholders and preparing for future opportunities. Thank you for joining us today. And as always, please do not hesitate to reach out to us with any additional questions.

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