Battalion Oil Corp Q3 FY2022 Earnings Call

Welcome to the Battalion Oil Q3 2022 Earnings Call. As a reminder, today's conference is being recorded. Now I'll turn it over to your host, Battalion Oil Corporation's, Chris Lang. You may begin.

Thank you. Welcome, everyone, to our third quarter 2022 earnings call. I'd like to introduce a few of my colleagues that have joined me this morning, our Chief Executive Officer, Richard Little; our Chief Financial Officer, Kevin Andrews; 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 Monday and posted on our website. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement released Monday. We have also published an investor presentation, which may be found on our website and may be referenced during this webcast. Now our team will begin with a few scripted remarks followed by Q&A. At this time, I'd like to turn it over to Rich to begin.

Thank you, Chris, and good morning to everyone joining us for our third quarter earnings call. In November of last year, we closed on a new term loan with a simple goal in mind, to get the company back to development mode and start to drive meaningful growth in production and EBITDA. With the majority of our wells from this program coming on in the back half of the year, we knew this process wouldn't happen overnight. So patience would be key. Production in the first quarter declined from the fourth quarter of 2021 as we worked to bring on our first 3-well pad. Then in the second quarter, production rebounded nicely. Volumes from our new wells more than offset the natural decline of our existing production, driving modest production growth quarter-over-quarter. Today, our third quarter results speak for themselves. Our average daily production is up almost 8% over the second quarter. With most of our base production hedged entering the year, those new volumes provided us with critical access to a higher commodity price environment. As a result, our average realized price for crude oil increased 11% over the second quarter despite a 15% decline in average crude oil prices. The increased volumes, combined with improved pricing, drove a 34% increase in adjusted EBITDA over the second quarter of 2022, bringing total adjusted EBITDA in the quarter to $24.3 million, our highest since 2019. I'm also excited to talk about an important update we shared earlier this week, the news of our recent third Bone Spring test. While results are still early, production from that well appears to be in line with our Wolfcamp well performance this year, with several producing Bone Spring wells around our acreage and quite a bit of our own subsurface work focused on this area. We feel confident that this zone will be productive on our acreage. This test, if successful, would go a long way in further derisking the Bone Spring and could allow us to shift to a multi-zone development while potentially increasing inventory. This is an important test for us, and we'll continue to watch closely as we close out the year. We expect to have a more complete update on our next call. Looking forward, with significant political and economic headwinds caused by tension in the commodity markets, we find ourselves planning for uncertainty once again. As always, we will remain cautious as we work to finalize our 2023 capital budget, but we expect to enter the new year with confidence. We have a brand-new 3-well pad that was brought online in October and two more wells on the way before the end of the year. We have a Bone Spring test underway with promising early results, and our operational excellence has been on display as we continue to improve on record drilling performances and completion efficiencies. Our financial strength also increases in the new year as our weighted average strike price on crude swaps in 2023 improved by nearly $15 per barrel over our fourth quarter 2022 averages. All of this suggests that our story of growth looks prime to continue through the fourth quarter and into 2023. For a little more insight on operational performance, let me pass it off to Danny now.

Thank you, Rich. I'd like to start by once again spotlighting our performance in drilling and completions. On the drilling side, I'm happy to say that we remain ahead of plan through the third quarter, driven largely by improved efficiencies. I mentioned last quarter that we have seen a meaningful improvement in our drilling footage per day, and this has been a critical driver in our ability to keep cost per foot drilled down as we attempt to offset cost increases elsewhere. To help drive those efficiencies, we have done a lot of work this year improving our understanding of the subsurface in Monument Draw. A major project for our geology and subsurface team has been to study and interpret new seismic data received this year. These images provide new detail that helped offer a better understanding of regional faulting and its impact on structure and stratigraphy, which ultimately enhanced our well planning, landing zone selection, and geosteering. On the completion side, we continue to improve on our year-to-date performance as pump efficiency, once again, increased quarter-over-quarter as we push to reduce any project downtime. It's no secret that material and labor shortages, along with other inflationary pressures, have wreaked havoc on the oil and gas industry this year, with D&C activities arguably being hit the most. Thankfully, we have a team well-suited for those challenges, which has been key to our attempts and successes at mitigating cost inflation. Moving on to our midstream side, I'd like to provide a brief update on our AGI project. Construction is well underway; surveys and dirt work are complete, and the facility is under construction and on time. All major equipment is expected to be received by the end of the year. The facility has an expected in-service date in the first quarter, and despite the uncertainty the industry faces with material shortages and delays, we remain on track to hit that timeline. I'll close with a few comments on EHS, where a relentless focus on safety and responsible operating continues to drive strong results. Our TRIR remains at 0 after another quarter with no recordable incidents, which is, as mentioned, extremely rare in our industry. For the fourth consecutive quarter, we also reduced our flaring intensity and spill rate for oil and produced water. While all three of these markers are impressive stand-alone, what makes them very special is that all three were accomplished while we continued in active development mode. Now Kevin is going to walk you through our financial results.

Good morning, everyone, and thanks again for joining us. Total production in the third quarter increased nearly 8% over the second quarter of the year, coming in at 16,228 Boe per day compared to 15,044 Boe per day during the second quarter. As Rich mentioned earlier, we brought the first 5 wells of our capital program online during the second quarter, and it's the flush production from these wells that drove the production increase in the third quarter. With a new 3-well pad recently put online in the second week of October and another 2-well pad beginning fracking in this upcoming week, we expect to continue to ramp production through the end of the year and into 2023. Total revenue in the third quarter was $99.1 million, of which oil represented 71%. We have talked in previous quarters about how outproducing our hedges will be an important byproduct of our production growth, and this quarter really helps illustrate that. Despite seeing an overall decline in benchmark prices, with average crude oil prices falling nearly 15% between the second and third quarters, our average realized price net of hedges increased approximately 11%. Our growing production, coupled with this improved realized pricing, helped drive a 34% increase in adjusted EBITDA from $18.2 million in the second quarter to $24.3 million in the third quarter. With additional volumes already online in October, we expect to continue this trend of improved realized pricing and growth in adjusted EBITDA through the fourth quarter and into 2023. The weighted average strike price on our crude oil swaps improved nearly $15 per barrel over our fourth quarter weighted average strike price. A few more comments on our financial results: we reported GAAP net income to common shareholders for the third quarter of 2022 of $105.9 million or $6.42 per diluted share. After adjusting for $101.9 million of selected items, including the effect of net unrealized derivative gains, the company reflected an adjusted net income of $0.24 per diluted share. For details of these adjustments, please refer to our earnings announcement. On the capital side, during the third quarter, we incurred an accrual basis of $48.5 million in capital expenditures related to oil and gas assets, of which $42 million related to drilling and completion activity and $2.2 million related to the development of our treating equipment and gathering support infrastructure. This brings our total drilling for 9 months of 2022 to $112.7 million in oil and gas-related CapEx, with $98.1 million related to D&C and $8.2 million related to treating equipment and gathering support infrastructure. I would also like to provide a few comments on our 2022 guidance. With 8 wells online through October and 2 more expected to come online in December, we find ourselves nearing the end of our 2022 development program. Based on what we expect in the fourth quarter, we are reiterating our guidance on capital activity, CapEx, and total production, but we are reducing our estimates for total oil production due to slightly lower than planned oil cut. These details can be found in our earnings release. Now I will close with liquidity and capitalization, as well as provide a brief comment on the recent enrollment of the term loan. At September 30, 2022, the company had liquidity of $48.5 million, consisting of $33.5 million in cash and $15 million in delayed draw term loans available to be drawn under our Term Loan Agreement. At that time, however, the company was not in compliance with the current ratio requirement under the Term Loan Agreement. We have since amended the Term Loan Agreement to modify certain provisions, including, among other things, decreasing the current ratio from 1.0:0.9 as of September 30, 2022. As a result of this amendment, Battalion was in compliance with the current ratio requirement for the quarter ended September 30, 2022. Now I'll turn it back to Rich for some concluding remarks.

Thanks, Kevin. We are incredibly proud of our third quarter results. Supply chain disruptions, midstream curtailments, downtimes, and delays have caused a little bit of chaos in our industry this year. But with a bit of patience and a lot of hard work, we've been able to deliver on what we said we would do. Our production is building, and so are our cash flows. Now we find ourselves well positioned to close out the year on a high note and enter 2023 from a position of strength. Once again, thank you for your interest in Battalion, and that will conclude our scripted remarks. I'll turn it back to the operator to facilitate Q&A.

Thank you. With that we'll go ahead and just end the call. But again, I just want to let everybody know that we appreciate your interest in Battalion. Very happy with the third quarter results, and we're pleased with our progress year-to-date. We do have a lot to be excited about with a significant jump in our 2023 realized pricing as the 2022 hedges roll off. We're looking forward to the progress on our AGI project and continued production growth. So again, a lot of good things happening here, and we appreciate your interest. Thank you. Thank you. And ladies and gentlemen, that does conclude today's conference. We appreciate your participation.