Battalion Oil Corp Q1 FY2020 Earnings Call

Good day and welcome to the Battalion Oil Q1 2020 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to John-Davis Rutkauskas. Please go ahead, sir.

Good morning. I'm joined by a few of my colleagues today, who I'd like to introduce. Battalion's Chief Executive Officer, Richard Little; our Chief Financial Officer, Ragan Altizer; and our Chief Operating Officer, Daniel Rohling. This conference call contains forward-looking statements. For a detailed description of our disclaimer, see our earnings release issued yesterday and posted on our website. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of those non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement released yesterday. We have also published an investor presentation, which may be found on our website and will be referenced during this webcast. Now, I'll turn it over to our team to present a few scripted remarks followed by Q&A. Rich?

Thank you, John-Davis. I'd like to welcome listeners to Battalion’s first quarter 2020 earnings call and our second investor update as Battalion Oil Corporation. During last quarter's earnings call, we introduced our management team and presented our approach to oil and gas development. You heard me emphasize capital discipline as well as integrity, doing what we say we're going to do. We had already planned to suspend our capital program. And as the market continued to decline, the decisions we had to make in Q1 required agility and an even greater level of discipline. I'm proud of our team's ability to drive down costs and for their quick response time to thoughtfully be in production across all of our fields. In Q1, we continued to strengthen our three-year hedge book with nearly 100% of our PDP volume hedged through 2021 with an all-in price of over $48.50 when taking into account fixed price basis and roll for the entire two-year period. And we have 75% of our production hedged out into year three with an all-in price of $53 a barrel in 2022. Ragan will touch on more of the specifics later in the presentation. We were also able to work with BMO during our spring redetermination to achieve a modest reduction in our borrowing base. We're now at a level that I'm comfortable operating within until our next redetermination in November. I want to thank BMO for their transparency and their vote of confidence in our business plan and this team's ability to deliver. We remain focused on creating value levers in our business such as our AGI well we mentioned on our last call. With the permit now in hand and the well already drilled, we've created more options to further drive down operating costs and potentially have an asset that we could monetize while helping others in the area with their H2S treating capacity. We continue to improve efficiencies as we've seen in this quarter. We brought adjusted G&A down only $1.50 per Boe versus $5.99 per Boe in the same period last year as well as a number of operational efficiencies that Danny will touch on in his portion of the presentation. On our last call, I made a reference to the merit of keeping our drilling rig in the face of market uncertainty. Ultimately we elected to release the rig and we'll monitor the market to determine the best time to return back to the development in the field. With breakeven oil prices in the high 20s, I feel like we could see increased activity along with other operators that possess what I call tier 1 assets. Furthermore, we initiated a well-thought-out campaign to voluntarily shut in over half of our production with a focus on reservoir maintenance, leasehold obligations, and operating expense to determine which wells to shut in. As our hedges are purely financial instruments and also deepen the money, we simultaneously unwound hedges that are no longer required to offset our physical sales, and therefore, eliminating speculative exposure to commodity price. This allows us the ability to significantly pay down debt through the end of the year regardless of how we produce our fields. As far as the COVID-19 update, I'm pleased to report that we've managed to avoid cases of COVID-19 within our workforce. We took immediate action in March to protect the health and safety of our employees by implementing a business continuity plan, including remote work arrangements for our Houston-based employees, as well as providing proper spacing among field personnel. We've been active in the communities where we operate to help support first responders and city officials during this pandemic. We continued to conduct 100% of our work remotely, including processing payments and invoices to our stakeholders. Safety is one of our core values, and we continue to monitor the situation to keep our team out of harm's way. Now, I'll let Danny deliver his remarks on our operations.

Thanks, Rich, and good morning, everyone. As Rich highlighted, we had a busy quarter delivering efficiency gains and savings across our operations. Most importantly, we did so safely in challenging times. I'd like to take a moment to recognize the crews and frontline leadership that has continued to fuel our nation even through this downturn because it'd be easy to lose focus with everything going on in the industry and the world right now. Instead of that, on Slide 4 you can see the continued improvements in our drilling and completions programs. We drilled another record well in both cost and days on the Eureka pad. In true Battalion fashion, that well’s record didn't stand long as you can see from the dotted red lines representing our Q2 wells on the graph on the right. Average cost came in just over $200 a foot, representing a 12% drop versus the fourth quarter. As Rich said, we laid the rig down after finishing up our last two well pads, and we want to thank the crews and leadership from Precision. We went two years without an OSHA recordable and have drilled some of the most efficient wells in the basin together. Also in the quarter, we wrapped up our initial seven-well frac campaign ahead of schedule and under budget while pumping larger jobs, and we're excited about the early performance we've seen. We've postponed our next fracs but have four DUCs waiting for us in Monument Draw that are offsetting our existing pipelines and facilities. So there'll be some of the most efficient capital we'll spend when the time is right. Slide 5 shows our significant progress in LOE and workover expense. In the first quarter, we aligned our operations with a new set of service partners that had initial costs. This kept LOE at $7.30 a Boe, but we're benefiting from those changes now and are seeing LOE trend down. The teams have implemented a proactive program that attacked our high failure rate wells and had a well-by-individual well prescription for artificial lift, chemicals, and all other expense categories. This was driven by the well’s history and the reservoir. Failure rates at West Quito and Hackberry are down by 50%, which is showing up in fewer workovers as you can see in the chart. Monument had an increase in the quarter, but again, we anticipate seeing the benefit in Q2 through Q4 by doing the necessary downhole work early in the year. All of this work has us poised for an outstanding second quarter. While we're setting in production, these efficiencies and the team's hard work are paying dividends to our overall liquidity. Slide 6 is another snapshot of our H2S handling. We're proud of the team's work here and are one of the very few operators that have a solution to sour gas on the Eastern side of the Delaware Basin. In the quarter, we finalized our installation of a third liquid redox train and now have the capacity to keep up with a one to two rig program. We've put as much as 70,000 pounds of sulfur per day through our facility at some of the lowest costs to date. It feels like we have now addressed the capacity issue at Monument Draw and are prepared for growth when the market recovers. As Rich mentioned, we've done a lot to prepare for an AGI well and facility that will allow us to further drive down operating costs. This is a great opportunity and option created by the team that will bring significant value to the company in the near future. Before I hand it over to Ragan, I'd like to thank our teams for their hard work in these unprecedented times. They set the foundation for us to grow and continue to make a significant impact across all areas of the business.

Thanks, Danny. I'll begin with a few highlights from Q1 and then address our liquidity position. Our daily net production for the quarter was 18,791 Boe per day, of which oil represented 10,297 barrels per day. The same quarter last year was at 10,233 barrels of oil per day while Q4 of last year was 11,489 barrels of oil per day. We exited the quarter with increasing oil production at about 11,000 barrels per day. The company earned $47.4 million of total revenue for the quarter, of which 88% was from oil sales excluding the impact of hedge settlements. We realized 98% of the NYMEX WTI during the first quarter and realized a gain on crude oil derivative contracts of $5.1 million. Net income for the quarter was $114.5 million resulting in earnings per basic and diluted share of $7.07. Adjusted EBITDA for the quarter was $23.5 million compared to $12.7 million from the same quarter last year, primarily the result of sharply declining operating expenses and G&A cost. Our adjusted EBITDA reconciliation table can be found in our earnings announcement. Total operating costs were $18.20 per Boe compared to $25.49 per Boe for the first quarter of 2019. This was comprised in part of adjusted G&A of $1.50 per Boe in the first quarter of 2020 compared to $5.99 per Boe in the first quarter of 2019 as well as lease operating and workover expense for this quarter of $8.07 per Boe compared to $10.94 per Boe in the same quarter last year. For additional financial metrics and adjusted financial data, refer to the selected operating data table in our earnings announcement. During the first quarter of 2020 we incurred capital expenditures of $65.1 million. These expenditures included spudding three new wells and completing seven wells, securing surface acreage related to our recently permitted AGI wells, and bringing the third train online in our Valkyrie H2S processing system. Our original budget for 2020 had the lion's share of capital already slated for the first quarter. And as Rich has mentioned, we suspended our capital program early in the second quarter. We will continue to monitor conditions ahead for the opportunity to reengage in our development programs. Earlier this month, we announced the results of the scheduled borrowing base redetermination process with BMO, which resulted in a reduction of our borrowing base from $240 million down to $200 million. This represents a 17% reduction, which we believe is an excellent outcome considering the current pricing markers and the general environment around reserve-based lending. I want to take this opportunity to thank BMO yet again for their commitment to our partnership and recognize the valuable role they play in our industry in general and specifically their belief in our team and our assets. Pro forma for this redetermination as of the end of the first quarter, Battalion's liquidity was $26.5 million based on $900,000 in cash on hand, plus availability under our revolving credit facility, less open letters of credit. Finally, I'll mention our hedge book. With $105 million of mark-to-market value at the end of the first quarter, our hedge does not only provide a solid price for on substantially all of our production through the end of 2022, but also provides ample liquidity for us to access at our discretion. Some specifics on our hedge book: 100% of PDP production for the back half of 2020 and all of 2021 and 75% of 2022 is hedged with plain vanilla swaps and 2-way collars. I'll point out that in addition to hedging the WTI fixed price, we also match those positions with the other two key components of underlying market-based pricing, basis differential and natural gas. All-in pricing on our old hedges for the back half of 2020 is $50.28 per barrel, while 2021 is at $45.51 per barrel, and in 2022 is hedged at $52.38 per barrel. Like Rich acknowledged earlier, while the environment we find ourselves in today is one of uncertainty, we have confidence in our path forward because of the strategies we implemented previously in preparation for a downside scenario like the one we're realizing. Between physical sales and financial settlements, no matter what happens next, we are committed to paying down debt and continuing to strengthen our overall financial position. Back to you, Rich.

Thanks, Ragan. I share that same confidence with you. We're certainly far more accustomed to bringing new wells online than we are to strategically shutting in over half of our production. Nevertheless, while these times are challenging, I do reinforce the notion of sound business principles such as long-term planning, which remain the best way to make what could be difficult near-term decisions. Our team has done a commendable job of preparing us for circumstances such as the one we find ourselves in, building long-term relationships with key stakeholders such as mineral owners and vendors for actively creating optionality in our development strategies and simply treating each other with respect. I'm hopeful that the market will turn around before the end of the year, but regardless we'll continue to look for more ways to enhance our competitive advantage and further strengthen our balance sheet. Thank you for your time and interest in Battalion Oil Corporation. With that, we'll now open the call up to questions.

We'll take our first question today from Noel Parks with Coker & Palmer.

I just had a few things I wanted to run by you. With the shut-ins, do you have an idea of roughly where LOE might end up for the period that you have shut in your either percentage or sort of unit figure for what that might look like?

I believe you're inquiring about unit costs, Noel. The challenge with providing unit costs lies in the fact that we're measuring barrels per day, and we are not yet certain how long we will be shut in during the quarter. I can confirm that we have been shut in since May. We will evaluate the market in June and July. Therefore, I am unable to provide guidance for the second quarter regarding the shut-in period, which began in May. It would be difficult to give guidance on an LOE unit cost since we do not know our production for the quarter, but we will continue to monitor the market and make informed decisions. I'm sorry, but I can't provide a unit cost as we are uncertain about production levels.

No problem. Fair enough. On the cost side, I noticed that the absolute dollar amount in G&A for the quarter was similar to last year's figure before the filing. I'm curious if there are any remaining restructuring costs that you anticipate will be reported separately or any items that won’t be included in recurring G&A going forward.

We still have a little bit left to address. As we mentioned in the last call, we consolidated our offices and closed the Denver office, which is now vacant. We are currently focused on finalizing our lease agreements. Aside from that, we expect this to be the last outstanding issue related to restructuring costs.

Okay, great. And just looking at the larger environment in the basin. Do you have any thoughts on what consolidation might look like either for assets on the market that might be attractive to you? And is there any thoughts you had on that? And I guess I'd be curious about what would be the most attractive trait that would help you decide one way or the other about maybe looking at other properties?

Sure, Noel, I think that's an easy one right now. When you look across the landscape, there's not a lot of value being given for undeveloped. So we're being realistic about deals that we would look at, it's probably going to be PDP heavy, but we'd also want to be able to continue our efficiencies, which means that we're going to be looking into the Permian Basin because that's where we operate. So we're going to be looking to that as well. And of course, we have done a good job of de-levering our balance sheet. We've got a strong balance sheet, and we're not looking at doing a leveraging transaction. So, those are the kind of deals that we'd be looking at doing for us.

Okay, great. And just one last question from me. As you plan for the remainder of the year, considering the current slowdown and the potential for recovery later, do you have any insights on the NGL markets? I'm not very familiar with the hedging options for those products, but are there any plans to possibly resume hedging NGLs in the future?

No, I'd be honest with you. I think Ragan even alluded in his comments that we're looking at 88% of our revenue coming from oil. We're going to be looking for improvement in NGLs and gas pricing before we’re going to look at doing any kind of hedging for those products. We're mainly focused on what drives our business, and that's oil.

Next we will hear from Emily Holden with The Guardian.

I wanted to ask about a reference that you had in an SEC filing to a PPP loan. It seems to say that you have taken one that doesn't disclose the amount. Can you provide more information about that?

Yes. Sure. We didn't disclose your amount but we took about $2.2 million of PPP loan. We think that was the right thing to do. We felt like the PPP loans were set up for businesses our size, and it helped us to further our operations. So yes, we did it.

That will conclude today's question-and-answer session. I'll now turn the conference over to Richard Little for any additional or closing remarks.

Okay, great. Thanks. I want to thank everybody on the call for your interest in Battalion Oil. I hope on this call we were able to convey to you that we will continue to be opportunistic, and we're going to find ways to create value while at the same time we're going to protect our business for our stakeholders. So while we recognize we're in better shape than most in the downturn, it's not lost on us that there are a lot of workers out there in our industry facing an uncertain future, and our hearts go out to them. This pandemic has definitely lasted a lot longer than what we were expecting, but we'll continue to put the health and safety of our workforce and our families first. Like everyone else, we're not sure when the market will turnaround or how quickly we'll recover, but I assure you that we'll keep our eyes on the ball and we'll prepare ourselves and this company for responsible growth when the opportunity does present itself. So again, thank you for your time today.

And that will conclude today's conference. Thank you for your participation. You may now disconnect.