Earnings Call Transcript - CHRD Q3 2020

Operator, Operator

Good morning. My name is Matt, and I will be your conference facilitator today. Welcome to the Whiting Petroleum Corporation's Third Quarter 2020 Conference Call. The call will be limited to 45 minutes, including Q&A. I will now turn the call over to Brandon Day, Whiting's Investor Relations Manager.

Brandon Day, Investor Relations Manager

Thank you, Matt. Good morning everyone. This is Brandon Day, Whiting's Investor Relations Manager. Thank you for joining us to discuss Whiting's third quarter results for the period ended September 30, 2020. With me today is Whiting's CEO, Lynn Peterson. Also available to answer questions during the Q&A session will be our CFO, Jimmy Henderson, and our COO, Chip Rimer. Please be advised that our remarks today, including answers to your questions, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those currently anticipated. Those include risks relating to commodity prices, competition, technology, environmental and regulatory compliance, midstream availability, and others described in our filings with the Securities and Exchange Commission, which are incorporated by reference. We disclaim any obligations to update these forward-looking statements. In addition, we may provide certain non-GAAP financial information in this call. Relevant definitions and GAAP reconciliations may be found in our earnings release and 10-Q, which can be found on our website at whiting.com in the Investor Relations section. Following the prepared remarks, time permitting, we will open the call to your questions. I would like to remind everyone that a replay of this audio webcast will be available via the company's Investor Relations page at whiting.com. I'd now like to turn the call over to our CEO of Whiting Petroleum, Mr. Lynn Peterson.

Lynn Peterson, CEO

Thanks, Brandon. Good morning everyone, and thank you for joining us today. We filed our 10-Q last evening, and you can refer to it for detailed information. I'm sure there are a few of you that probably thought you'd seen the last of Jimmy and myself, but here we are again. We are excited about the opportunities that lie ahead and are delighted to work alongside Chip Rimer, our Chief Operating Officer, as well as the entire Whiting staff in our combined efforts to rebuild the company. We have been here just a short time but have been impressed with the great team of employees that have helped Whiting get through this tough time. We emerged from bankruptcy on September 1 with a strong balance sheet and we intend to carry forward a very disciplined financial program during these challenging industry conditions. The oil and gas industry continues to experience commodity volatility and is adapting to a lower price environment. As such, we have made strides to improve our cost structure and streamline operations. In addition to reducing our total workforce, all officers, along with a broad group of employees, saw a decrease in compensation. Furthermore, we continue to refine our compensation programs to ensure alignment with our shareholder returns. These actions taken in the third quarter are expected to generate approximately $20 million in annualized savings in 2021. We will continue to address expenses and try to make impacts wherever possible. EBITDAX for the quarter was 100 million after adjusting for non-recurring items related to the restructuring and reorganization. The free cash flow generated during the quarter went towards paying down debt, resulting in the current 400 million drawn on our revolver along with 13 million in cash, providing 363 million in liquidity. I would now like to focus on operations where the team has performed at a high level. For the three months ended September 30, 2020, production averaged 93.9 thousand barrels of oil equivalent (MBOE) per day, of which 60% was crude oil. During this same period, we spent 10 million on capital expenditures and brought seven wells onto production. The flush production from these wells materially enhanced the quarter’s production. We anticipate spending approximately 27 million in the fourth quarter while placing five wells on production and commencing completion operations on additional wells, bringing full-year capital expenditures to a midpoint guidance of $215 million. We are estimating full-year production to be in a range of 98 to 99 MBOE per day at the same 60% oil cut mentioned earlier. However, due to the timing of these completions, as well as a decline from producing wells, we expect our exit for the year to be about 10% under the full-year production rate. Our strategy for Whiting will be a continued disciplined focus on generating free cash flow along with alleviating the impact of production declines. The free cash flow generated by this business plan provides us with options to allocate capital towards opportunities that are most accretive to the value of the stock. In the near term, we will use the free cash flow to continue paying down debt to ensure continued liquidity. Longer term, however, we will look at our options of returning capital back to shareholders. Despite the continued challenging environment for the energy sector, our low level of debt combined with a moderate declining asset base gives us a strong foundation to build upon this strategy. As we move through the fourth quarter, we are continuing to refine our 2021 outlook. Under the current commodity environment, we anticipate spending approximately half of our expected EBITDAX towards drilling and completion operations, and the balance would be utilized to pay down debt. Using current consensus pricing for 2021, we see capital spending at a similar level as our 2020 expenditures, providing us the opportunity to keep 2021 production relatively flat to the fourth quarter 2020 exit levels. While we understand the challenges surrounding the volatility of commodity prices, this type of program would generate an attractive free cash flow yield in 2021. Moving further downstream, the appeal process related to the Dakota Access Pipeline is ongoing, with oral arguments taking place this past Wednesday regarding whether an Environmental Impact Statement will be required. We are expecting a decision from the DC Circuit Court of Appeal by the end of the year or early Q1 2021, as well as a decision from the District Court regarding continued operation should an EIS be required. We have continued to search and secure alternative market arrangements to help mitigate the potential impact of an unfavorable ruling. Ultimately, as we continue to experience volatility in commodity pricing and uncertainties around the net backs of our products, we have multiple levers that we can utilize to de-accelerate activity if we do not like the economic outcome. Consolidation within our industry continues to be one of the most significant discussion points with investors. We have seen this recently occur within the larger market cap companies, and we need to see this trend continue in this mid and small cap universe. It is our endeavor to be a part of these future discussions and progressions as we continue to redefine the industry. Before we jump into Q&A, I would like to welcome Scott Regan as our new General Counsel. Scott has been with the company for over five years and will provide a seamless transition. We would also like to thank Bruce for his long service at Whiting and wish him the best for his retirement as we look forward to working with his call and joining his family. With that, we would like to open it up for questions. Thank you.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Neal Dingmann with Truit Securities. Please go ahead.

Neal Dingmann, Analyst

Morning Lynn and Jim. My question, Lynn, you have been pretty straightforward about free cash flow being sort of the primary metric that you are looking at. I am just wondering if that is going to be the determinant on when and if you would bring the rig back and looking at activities. I am just wondering if you could talk a little bit about how you and Jim are looking at the plan for next year and what is going into that.

Lynn Peterson, CEO

Yes. Clearly we are all focused on doing the right thing here in a financially disciplined manner. Clearly we would like to bring the rig back. We hope commodity prices will allow that as we get into 2021. I think if you look at consensus pricing again, we are in that area right now. So yes, we are very optimistic that we can move forward in that direction. We will go through the fourth quarter and get this out to you later this year, being more definite on our plans.

Neal Dingmann, Analyst

Okay, and I know you have been always very clear about doing what is best for shareholders with this company. I know your past company got the job done with that. That said, right now you have had a lot of chat as far as would you look to add in the consolidator, would you consider obviously if somebody bought a type of de-lever asset for somebody, and just wondering if you think about M&A from either side of that - how should we think about it?

Lynn Peterson, CEO

All of the above. I mean, we are here. We work with shareholders and we are going to try to do the right thing. We have tried to do that in the past, and we are going to do it here. We are excited about the opportunities. Give us some time here, but we certainly want to move forward in that direction. Again, I think we will always be focused on shareholder value here.

Neal Dingmann, Analyst

Great to hear. Thanks, Lynn.

Operator, Operator

Our next question comes from Leo Mariani with Keybanc. Please go ahead.

Leo Mariani, Analyst

Yes, hi guys, just a follow-up on the M&A question. I guess Neal advanced that it looks likely that Whiting can be a consolidator. Do you guys see out there in the landscape good opportunities in the Bakken or are there stressed assets or assets that may become stressed down the road that you guys think you might be able to acquire at an attractive price during what could be a low point in the oil price cycle here?

Lynn Peterson, CEO

Yes, look Leo, I came here for a reason: to try to grow this company. We are going to look at all opportunities. We are going to evaluate them at the time. We are very familiar with the Williston, obviously. So we just need a little bit of time here to get everything moving in the right direction. Obviously, we need some stability with oil prices and commodity prices here. But yes, we're going to try to evaluate everything possible, and I will tell you right now our team is working diligently in that regard.

Leo Mariani, Analyst

Okay, great. And just with respect to the 2021 outlook, trying to hold production flat here in 2021 versus the exit rate. Just trying to get a sense if that is fabricated on certain oil prices. Do you guys just look at the strip and say, if you know the strip, which I guess is probably close to $40 next year. That's the type of price we need to see for that outlook; any color you can provide around that would be helpful.

Lynn Peterson, CEO

Yes, maybe I will let Jimmy comment on that if you don’t mind. Jimmy?

Jimmy Henderson, CFO

Yes. I think you're generally right, Leo, when we look at what the strip or consensus is right now for the next year. That's what our plan is based on. We have multiple levers to pull as we go through the years, so we're going to be flexible with that and kind of see how things go. When Lynn discussed our rig activity earlier, I think the real important thing is the cadence of completions, and the team has done a really good job of driving down those costs while focusing on being really cost-efficient on that side. So I think that's probably the biggest lever that we have is when we pull the trigger on completing wells as we go through the year. So that will be highly dependent on the pricing environment. As we've seen, our hedge book is pretty robust right now coming out of the bankruptcy process, so we take that into consideration too. So all that comes together to really define our decision-making on a real-time basis. Any additional comments, Chip? Any additional color there?

Chip Rimer, COO

No, I agree 100% with Jimmy. It's the cadence you want to have, and I think we've done a great job in identifying those, and I am extremely proud of our team and what we've done over the last year in managing costs.

Lynn Peterson, CEO

The team has done a really good job. We've got a good plan moving forward, and that's what excites all of us.

Leo Mariani, Analyst

Yes, that's helpful color for sure. Lynn, you obviously have emerged from bankruptcy very recently. You and your team kind of came in very recently. It certainly looks like you guys made some staff changes and some G&A improvements really rapidly. Just kind of looking ahead, are there any other sort of larger changes that you're looking at, whether or not it's on the operating cost side or potentially drilling costs or any other things you think you can do to the organization to maybe bring some improvements going forward?

Lynn Peterson, CEO

Again, Leo, our goal here is really to grow the company. We are not looking to be in a blow-down situation. I'm more focused on the opportunities that lie ahead, and we will always continue to tweak our team here. We will always strive to improve no matter what we do. So I think that's just part of our progression, but we're about trying to grow this company and doing the right thing for shareholders. So we are going to stay focused in that regard and I think the rest will play out.

Leo Mariani, Analyst

Okay, thanks.

Operator, Operator

Our next question comes from David Deckelbaum with Cowen. Please go ahead.

David Deckelbaum, Analyst

Morning Lynn, Jimmy, and team, welcome back.

Lynn Peterson, CEO

Hey David, good to hear from you.

Chip Rimer, COO

You thought we were done, David.

David Deckelbaum, Analyst

Lynn, I'm curious; I know a lot of people have asked in the documents and subsequent press releases. You're obviously brought in to grow this company. I know Leo asked about the deals that are out there as you try to set aside free cash generation and production stabilization. When you look at your inventories, do you see yourself more likely to add undeveloped locations at this point, or do you think it makes sense in this new paradigm where things could yield more PDP-heavy deals to help on the leverage-free cash accretion?

Lynn Peterson, CEO

I think if you look at companies trading at the current strip price, you can add PDP at a pretty robust price in my opinion. So I think anything we're going to do is going to be a combination. I'd love to acquire some undeveloped acres so we can continue to work on our inventory levels. But again, we're trying to look at this very unbiased and look at every opportunity. Some will probably be more PDP-heavy, and I hope we'll find a few that will have more opportunities for inventory. But we've also got to recognize the Bakken has been around for a number of years here; there is not a great deal of remaining inventory for anyone. So these are all challenges that we have and we're going to address as we go forward.

David Deckelbaum, Analyst

Do you sense, given those comments, are you at the point where you can be agnostic as to where your operations are as long as the returns make sense?

Lynn Peterson, CEO

I think we have to be open to that. Again, it goes back to the maturity of the basin. I think we do have a very solid operating team here and I think we can handle some things. I don't mean that as we're going to jump to another basin tomorrow by any means, but we're trying to look at every opportunity that lies out there and see what's best for shareholders.

David Deckelbaum, Analyst

I appreciate that. Just the last one for me. If you have a plan, obviously, by maintaining the volumes now in 2021, theoretically, I guess 2022, we're on a track to generate free cash flow at $40 and perhaps below. When you look at a $400 million debt balance right now, how do you think about sort of free cash flow? How quickly do you want to pay that down? I know that you have leverage metric targets out there, but do you feel like you're in a world now where it should be an absolute target of zero dollars debt? Is that the priority, or is this a balanced plan where you'd like to show maybe somewhat of a return of capital, maybe some share buybacks, or are we trying to say pay this down as quickly as possible?

Lynn Peterson, CEO

No, right now we're paying down debt because that's one avenue to look pretty, but we clearly want to return some of the returns to shareholders here. What is the right level? It's probably in that one to one and a half range—so we're pretty comfortable where we are today. Even so, we're in great shape. This is all going to be part of doing the right thing with our program. I hope we can use part of that for opportunities that arise and that we can return a portion of that to shareholders down the road. So we just laid out our immediate plan to pay down debt because that's the focus today, but as this moves into 2021 and beyond, we certainly want to continue to focus on returns to shareholders here.

David Deckelbaum, Analyst

I don't know. Nobody else has a question with it. But thank you guys and welcome back.

Lynn Peterson, CEO

I appreciate it, David. Good to hear from you.

Operator, Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I'll turn the floor back to management for closing remarks.

Lynn Peterson, CEO

All right, thanks, Matt. Again, thank you all of you for attending this morning. I would like to give a shout-out to the Whiting staff for your efforts and dedication during this trying time. Our team has lived with the company values of safety first, and even though I know at times they were distracted by the restructuring process and living through the COVID pandemic, I look forward to working with this team to build a company that we can all be proud of and bring value to our shareholders. We will be attending a few virtual conferences over the coming quarters. More importantly, we look forward to speaking with our investors directly and thank you for your time. If you have any questions, please feel free to reach out to Brandon, and we'll try to address those. Thank you very much. Have a great weekend. Appreciate your interest.

Operator, Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.