Venoco Management Discusses Q1 2013 Results - Earnings Call Transcript

May.14.13 | About: Venoco, Inc. (VQ)

Venoco (NYSE:VQ)

Q1 2013 Earnings Call

May 14, 2013 11:00 am ET

Executives

Kevin Hehn

Edward J. O'Donnell - Chief Executive Officer

Timothy A. Ficker - Chief Financial Officer

Analysts

Sean Sneeden

Rasta Behrang - Jefferies & Company, Inc. Fixed Income Research

Operator

Good day, ladies and gentlemen, and welcome to your Q1 2013 Venoco Incorporation Earnings Conference Call hosted by Kevin Hehn. My name is Bill Pendra, I'll be your event manager today. [Operator Instructions] I would like to advise all parties that this conference is being recorded. And now, I would like to hand the conference over to Kevin. Please proceed, sir.

Kevin Hehn

Hello, everyone. I'm Kevin Hehn with Venoco. Venoco issued a press release today on our first quarter 2013 results, and we have also filed our form 10-Q with the SEC today. On the call to discuss the results, we have Venoco's CEO, Ed O'Donnell; CFO, Tim Ficker; and other members of the Venoco management team.

Before we get underway, allow me to make a couple of comments regarding forward-looking statements. All statements made in this conference call, other than statements of historical fact, are forward-looking statements. These statements are subject to a wide range of business risks and uncertainties, including adverse developments in financial markets and general economic conditions.

Any number of factors could cause actual results to differ materially from those presented in the forward-looking statements, including, but not limited to, the timing and extent of changes in oil and gas prices, the timing and results of drilling and other development activities, the availability and cost of obtaining drilling equipment and technical personnel, risks associated with the availability of acceptable transportation arrangements and the possibility of unanticipated operational problems, delays in completing production, treatment and transportation facilities, higher-than-expected production costs and other expenses and pipeline curtailments by third parties. All forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update any such statement.

Further information on risks and uncertainties relating to the forward-looking statements are set forth in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012. The earnings release and the relevant non-GAAP reconciliations are available on the Investor Relations page of the Venoco website, which is www.venocoinc.com.

Now let me introduce Venoco's CEO, Ed O'Donnell.

Edward J. O'Donnell

Thanks, Kevin. Welcome to all of you who've called in or are listening to the webcast this morning as we discuss our first quarter 2013 results. We were here just about a month ago discussing our fourth quarter and year-end 2012 results. And in that call, we discussed the majority of the significant activity that occurred in the first quarter. So our prepared remarks for today are going to be somewhat abbreviated compared to our typical earnings call.

As you recall, on December 31, 2012, we sold all of our producing assets in the Sacramento Basin, along with our acreage in the San Joaquin basin, excluding the Sevier prospect, for $250 million to an unrelated third party. As of March 31 of this year, about $10 million of the sales proceeds remained in escrow related to properties for which we were required to obtain consents regarding the transfer of ownership. As of May 1, however, we have received all of the proceeds from the sale, and title to all properties previously held in escrow has been released to the purchaser.

With respect to the Sacramento Basin properties, because title had not been transferred to the purchaser for certain of the properties until varying dates through May 1, the production and financial results associated with the properties held in escrow are reflected in our operating results through the date the title transferred.

Now I'd like to spend a few minutes discussing our first quarter capital expenditures and operations. During the quarter, our capital expenditures totaled $21 million. And of that total, approximately $13 million was for drilling and rework activities, $1 million for facilities and $7 million for land, seismic and capitalized G&A. Capital expenditures in our Southern legacy -- Southern California legacy fields accounted for $18 million, or 86% of total first quarter capital spending.

The majority of our capital spending and development efforts were focused on South Ellwood field in the first quarter of the year. In February, we completed the 4 redrill well, which were spud in late 2012. The original 4 well was drilled and completed late in the third quarter of 2012, but was wet. The redrill of this well was completed late in February, and over the last 30 days, has produced at an average rate of about 1,400 gross BOE per day, of which about 97% is oil. This well is drilled to the eastern boundary of our lease and bottoms in the same vicinity as the #12 well, which we completed in mid-2012 and has been producing at an average rate of about 2,000 gross BOE per day since coming online.

Due to the success of both of these wells, combined with our understanding of the geologic structure of the field, we believe that there are opportunities for several additional well locations along the eastern boundary in the field. Similar to both the 12 and 4 redrill wells, we believe these additional locations have the potential for some very high-impact wells.

Also at South Ellwood, during the first quarter, we continued drilling the #19 well to a probable location northeast of the platform. This location has the potential to prove up a new fault block, as well as to add PUD locations in that fault block. The well was originally spud late in the fourth quarter of 2012. We set casing on the well and then suspended drilling so we could move back to the redrill of the #4 well just discussed.

Shortly following completion of the 4 redrill well in February of this year, we returned to the #19 well to continue drilling. However, the intermediate casing string parted after running it in the hole. We also had a failure on an electrical generator that supports the drilling operation.

The 2 events have resulted in a second suspension of drilling on the 19 well, as well as a delay to our drilling program in the field. We did, however, repair and cement the intermediate casing string in 19 before ceasing operations on that well.

We are now using the downtime in drilling activity to prepare the next well to be drilled to the eastern boundary of the lease, to follow up the success we've had with the 12 and 4 redrill wells. This next well will be a redrill of well #15.

As a bit of history, Platform Holly in the South Ellwood field was originally set in 1966 to develop the Rincon Formation, which was of limited areal extent and was quickly depleted -- developed and depleted. However, while producing from the Rincon, the Monterey was discovered, and that opened up the significant development opportunities that we continue to exploit today.

However, given the limited extent of the original development program, Platform Holly was not designed or constructed for significant drilling activity. As a result, all of the well slots on the platform have been utilized. So to drill a new well, we have to reclaim one of those slots and then redrill an existing well to a new bottomhole location. To reclaim a well slot, we have to cut and recover a portion of the casing already in the well before we can sidetrack the well and drill it to TD. That process adds additional time and upfront cost to our drilling program, but allows us to drill wells as it can accommodate the high rates of production we're experiencing from these wells.

With that in mind, we're currently in the process of reclaiming the well slot for well #15 and preparing it for sidetracking once our electrical generator is repaired. We expect to complete the well in the third quarter. We then intend to return to the #19 well and complete it before year end. We had very limited development activity in both the West Montalvo and Sockeye fields during the first quarter. For Sockeye, we don't intend to spend any significant capital in the field during the remainder of the year. However, at West Montalvo, we will be kicking off a 5-well drilling program late this month or early next month.

Also in the first quarter, we spent approximately $3 million, or 14%, of our CapEx on the onshore Monterey shale play, primarily related to facilities and well work on existing wells, all on the Sevier area.

For full year 2013, we expect to make capital expenditures of between $90 million and $100 million. Approximately $78 million, or 86% of the budget, will be allocated to our legacy Southern California projects, primarily at South Ellwood and West Montalvo, as I just mentioned.

We have limited capital expenditures planned for our other legacy Southern California fields this year. The remaining $13 million, or 14% of the budget, is allocated to onshore Monterey activities. Our daily production volumes in the first quarter were 10,628 BOE per day, compared to 16,939 BOE per day in the fourth quarter. Pro forma for production attributable to the Sacramento Basin, our daily production volumes in the first quarter were 9,501 BOE per day, compared to 8,718 BOE per day in the fourth quarter. The 8% increase is primarily the result of production from the 4 redrill well at South Ellwood.

Although the well came online in late February, it contributed nearly 500 BOE per day to our first quarter production. Additionally, fourth quarter production was negatively affected by the annual maintenance shutdown at South Ellwood.

As expected, our production mix during the first quarter changed substantially with the sale of the Sacramento Basin properties. Of our reported production for the first quarter, 85% was liquids. Excluding the production related to the Sacramento Basin, liquids accounted for about 95% of our total production, which is about what we expect the mix to be for the remainder of the year.

Lease operating expenses for the first quarter were $19.36 per BOE, compared to $15.69 per BOE in the fourth quarter. Pro forma for the costs and production associated with the Sacramento Basin properties, first quarter lease operating expense was $21.05 per BOE, compared to $25.75 per BOE in the fourth quarter of 2012.

The fourth quarter expenses were negatively impacted by the scheduled annual maintenance shutdown at the South Ellwood field, which resulted in both higher expenses and lower production. Our LOE came in right around where we expected, and we anticipate that our LOE for the full year will be in the range of $20.50 to $21.50 per BOE.

Now a brief discussion on pricing. As we've discussed on prior calls, all of our fields, except for South Ellwood, are subject to sales contracts tied to California Buena Vista postings, adjusted for oil quality and other adjustments.

Effective May 1, 2013, we entered into a new sales contract for South Ellwood, which is tied to a combination of Buena Vista, California Midway-Sunset and Napo postings. All of the indices, Buena Vista, Midway-Sunset and Napo, have traded at a premium to WTI in the recent past and have traded at discount to Brent during the same period.

However, over the last month or so, we've seen the WTI Brent spread narrow, while Buena Vista has surpassed Brent and has been trading at a premium to Brent since mid-March.

For the first quarter, our realized oil price was $99.71 per barrel, which was about $5.35 above the average WTI price for the same period.

Now I'd like to introduce Tim Ficker, who will go over the financial highlights. Tim?

Timothy A. Ficker

Thanks, Ed. I'll take just a few minutes to mention some of those financial highlights for the quarter. Adjusted EBITDA for the quarter was $40.4 million, which is on par with our fourth quarter results of $40.7 million. And adjusted earnings for the quarter were $4.8 million, which is up about $14.2 million compared to the fourth quarter.

Oil and gas revenues were $86 million for the quarter, compared to $90.7 million in the fourth quarter. The pro forma for the sale of the Sacramento Basin assets, oil and gas revenues were $83.8 million in the first quarter, which is up about 13% from the fourth quarter, due primarily to higher oil production resulting from increased production from the South Ellwood field and realized oil prices, which were about $5 higher in the first quarter compared to the fourth quarter.

Lease operating expenses for the quarter decreased by $5.9 million from the fourth quarter. Again, pro forma for the Sacramento Basin sale, LOE decreased by $2.6 million, due in large part to costs we incurred during the fourth quarter for the scheduled maintenance shutdown at our South Ellwood field.

On a BOE basis, we reported LOE of $19.36 for the first quarter compared to $15.69 for the fourth quarter. Pro forma for the Sacramento Basin sale, fourth quarter LOE per BOE was $25.75, compared to first quarter LOE per BOE of $21.05, which is in line with our LOE guidance for the year of $20.50 to $21.50 per BOE.

The transportation expense on a year-over-year basis decreased from $4.4 million in the first quarter of 2012 to $38,000 in the current quarter, due to the elimination of the barging operation related to South Ellwood field as a result of the onshore pipeline that we put into service early in 2012.

Our G&A decreased from $21.1 million in the fourth quarter to $15 million in the current quarter. When we exclude noncash share-based comp, going-private-related costs and severance costs related to the sale of our Sacramento Basin asset, G&A decreased slightly to $12.6 million in the first quarter from $13.2 million in the previous quarter.

On a pro forma BOE basis, G&A expense, excluding noncash stock-based comp, going-private-related costs and severance costs, was $14.71 for the current quarter, compared to $16.45 for the fourth quarter.

Although our G&A was higher than our full year guidance of $11 to $11.50 per BOE, we incurred higher share-based expenses in the first quarter than we expect to incur for the remainder of the year.

Turning to the balance sheet. Compared to the year-end 2012, the biggest changes were, again, in the PP&E and debt. Net PP&E decreased as a result of the receipt of proceeds previously held in escrow from the sale of our Sacramento Basin assets, as the proceeds were reported against the full-cost pool. That decrease was somewhat offset by our capital expenditures incurred during the quarter. And debt decreased primarily as a result of repayment of the second lien term loan from the proceeds we received from the Sacramento Basin sale.

And with respect to debt, in March 2013, we entered into an amendment to our revolving credit facility. And as a result of that amendment, we increased the borrowing base from $175 million to $270 million, with commitments to $268 million. And we used a portion -- or we used some proceeds from the increased facility to pay off the remaining principal balance of that higher rate second lien term loan on March 29.

That's a brief financial overview. Ed, I will turn it back to you.

Edward J. O'Donnell

Thanks, Tim. Now let's open it up for questions about our first quarter 2013 results.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from the line of Sean Sneeden from Oppenheimer.

Sean Sneeden

Tim, just -- you guys had roughly 240 -- $214 million outstanding on your credit facility, I guess, as of today, which would give you, call it, about $50 million or so of liquidity. Can you just talk about what sort of plans you have or mechanisms you have in order to kind of boost liquidity going forward, hopefully, near term?

Timothy A. Ficker

Yes, Sean. You cut out there a little bit, but I think I understand the question. One of the things that I think that we haven't stressed in the past is that the year-end reserve report, it didn't include any reserves for the well that we just drilled out at South Ellwood, the #4 well that Ed mentioned earlier. And so our borrowing base at that time -- at the time that we put the new amendment in place, was based on the year-end reserve report. So midyear, we would expect to get some reserves associated with that. And therefore, we would probably expect to see increase in that borrowing base. That's -- the borrowing base, though, we -- it's redetermined twice a year in November and April.

Sean Sneeden

Okay. And so your -- you already went through that redetermination process in April, right?

Timothy A. Ficker

Yes, the redetermination process in April was in conjunction with the amendment. And again, it was based on the year-end reserve report. We have a reserve report that's prepared twice a year, at year end and midyear. The midyear reserve report is the one that will be used for the November redetermination.

Sean Sneeden

Okay, great. And then there's nothing sort of the on the agenda in terms of asset sales or any potential MLP or anything like that to near term, right?

Timothy A. Ficker

We've talked about our options in the past. And certainly, it includes potential asset sales. We talked about the midstream asset that they're very valuable. But in our revolving credit facility type of arrangement, they don't provide much credit support there. There are some complicating factors in selling that from an accounting perspective. But that's something that we continue to look at. We also mentioned the MLP, and we've talked about that in the past. So I would say that we still consider those things. We still look out longer term. We're still focused on deleveraging and increasing our liquidity, but not anything that we have to talk about right now.

Sean Sneeden

And then, would it be fair enough to say then you're plan as of now is to organic -- organically delever? Is that fair?

Timothy A. Ficker

Well, I would -- Ed mentioned we're going to drill the next well out at South Ellwood. We've got a drilling program out at Montalvo. So yes, we're going to continue to execute on our drilling program. We do expect to get reserves associated with the drilling out at South Ellwood. So that will increase our liquidity.

Sean Sneeden

Okay. And then, just on -- operationally, you said that now that you tested, I guess, the new kind of successful well there. You think you might have additional opportunities for additional drilling kind of going forward? Can you talk about what you see or what a potential program there might look like?

Edward J. O'Donnell

Well, we're looking at, Sean, I don't know, the 15 level, and we get it to TD in late July or so, will tell us certainly more about the geology over in that area. But the way we picture it right now, we expect that beyond that, we should have at least 3 or 4 drilling locations beyond that, along that -- that's just along the eastern boundary of our lease there. So we still think we have some infill opportunities within the field also, but they're a lower priority right now as the higher impact wells are on that eastern boundary. So they do take a while to drill and we kind of, I think, mentioned that or alluded to that in the notes this morning with the cut and recover operations required to reclaim these slots, it just -- it adds some cost and some time upfront, so it takes a while to drill these things. So we -- and we just have, of course, one rig on the platform, so it takes a good 3 months or more to get a well down out there.

Sean Sneeden

And then, can you just remind me what the well cost is for those wells?

Edward J. O'Donnell

It ranges, Sean, from -- I'm going to say from a low of $6 million that we drilled earlier on -- under $6 million, actually -- up to maybe $15 million. And it does depend on the prep work required to reclaim the slot going forward. But at the same time, these wells -- the 2 that we've added, the big wells we've added, referring to #12 and #4 redrill, they've added between $200 million and $300 million in net present value to the company. So there's a lots of a bang for your buck there for these kind of impact wells here.

Sean Sneeden

Okay. And then just kind of one housekeeping question to clarify. On the sale of the Sacramento Basin assets, I think you said you sold it for $250 million. What was the purchase price adjustment there?

Edward J. O'Donnell

There really wasn't anything material in terms of adjustments. We got the full proceeds so once we were able to get all the consents for -- to assign those properties to the purchaser.

Sean Sneeden

Okay. So all the proceeds then were just used to repay the second lien term loan, correct?

Edward J. O'Donnell

Yes, that's correct. We had [ph] to pay down the revolver and then use the increased revolver, the new revolver to pay down the second term loan, that's correct.

Operator

We have no further questions. [Operator Instructions] And our next question comes from the line of Robert Murray [ph] from Credit Capital Investments.

Unknown Analyst

Some language in the 10-Q about the debt covenants, the leverage covenants, I should say. And I was wondering if you could tell us where you stand right now in terms of that calculation, what the official number is?

Timothy A. Ficker

Yes, we're well within that covenant, Robert. We don't talk about where we are today. But we project and estimate that we will be within the revised covenants for the next 12 months, at least.

Unknown Analyst

Okay. And then just on the operational side. There's been a couple of articles in the press, I think there's New York Times or Bloomberg, about the Monterey and environmentalists trying to thwart drilling activity there. Do you have any comments on that? And generally, how difficult or easy it will be for you to drill there?

Edward J. O'Donnell

Well, I guess, there's a lot we can talk about there, Robert, in regard to that. The activism against frac-ing, of course, is nationwide right now. And -- but really, it's been, I think, with very limited success on the part of the activist, with the exception of the moratorium in New York, perhaps. Other than that, they haven't really had too much success. And so I think they are regrouping in California, and where they've got a solid base of support and trying to establish a beachhead, if you will, in California, and maybe, try to move from there. But the -- frac-ing isn't something that we use so much to a great degree at all. The only frac-ing that we really have done recently is in the Sevier prospect in the onshore Monterey, and that's limited, of course. And that's on federal acreage there, so it's really more tied to what the BLM does. But there is a lot of bills in the legislature right now in the State of California regarding the regulation of frac-ing. And right now, it's hard to predict, but I don't -- I think it's going to end up with the state, the division of oil and gas and geological resources being the regulator and the BLM, on the BLM properties. And the governor -- Gov. Brown here is really actually been supportive of the oil industry and he understands the need for jobs and revenue to the state. And so there's -- he's actually been supportive of the industry in that regard. So I think it's going to turn out all right. I think we're going to have regulations we can live with at the end of the day. However, regardless, it doesn't impact our company very much. And certainly, the programs we've talked about, our legacy properties, that -- our work at South Ellwood, Montalvo, they don't require frac-ing. And so it's not a need there and it doesn't really impact our properties there. So the only impact we would have would be a little bit of Sevier, probably.

Operator

We have no further questions in the queue. [Operator Instructions] Next question is from the line of Rasta Behrang from Jefferies.

Rasta Behrang - Jefferies & Company, Inc. Fixed Income Research

Just 2 quick questions. If I'm not mistaken, you said that you need to reclaim one of the slots at South Ellwood to drill the well. What -- is there any impact on your production if you do that reclamation?

Edward J. O'Donnell

We've got a total of 30 slots on the platform. And as I mentioned, they've all been utilized. But we've got a number of idle wells out there, idle wellbores, that are available to us to reutilize for drilling purposes. So we've got a lot of opportunities to do that. And we have some low-rate [ph] wells, as well, down the road, I guess, would be candidates if -- once we run out of idle wellbores. But right now, we're not impacting production to reclaim these slots.

Rasta Behrang - Jefferies & Company, Inc. Fixed Income Research

And if I'm not mistaken, in the first quarter, you reshuffled some of your hedges, you unwound some of them and put in new puts. What was the cash impact?

Timothy A. Ficker

Excluding the Sacramento Basin assets, we took out the gas hedges in conjunction with the sale. And excluding that, I want to say the total impact was -- well, both during the first quarter and in the second quarter, was $3.6 million. I think that was...

Rasta Behrang - Jefferies & Company, Inc. Fixed Income Research

Net cash outflow or inflow?

Timothy A. Ficker

Right. We -- outflow. We settled some basis swaps in the first and second quarter, our oil basis swaps.

Rasta Behrang - Jefferies & Company, Inc. Fixed Income Research

So if you want to adjust your Q1 EBITDA for these monetizations, what would be the impact or the adjustments?

Timothy A. Ficker

I think that the number was $2.1 million impact in the first quarter.

Operator

No further questions. [Operator Instructions] I don't seem to have any further questions in the queue at the moment. Okay, we do have a question now. It's from the line of Robert Murray [ph] from Credit Capital Investments.

Unknown Analyst

So just one financing question. The 10-Q mentions potentially taking out the 11.5% bonds, so would that potentially involve the issuance of a second lien bond or expansion of the revolver?

Timothy A. Ficker

We've talked about -- like internally, we talked about a few different options. We haven't taken anything off the table, but it's not lost on us that those bonds are callable in October of this year. And so again, we're not going to talk about specifically how we would take those out, but we're looking at different options to do just that.

Operator

No further questions in the queue. [Operator Instructions] No questions in the queue at the moment. [Operator Instructions]

Edward J. O'Donnell

Well, if there are no further questions this morning, we do appreciate you listening to the webcast this morning. And a replay of information on this call will be posted on our website on the Investor Relations page. Again, thank you for listening. Thank you for your questions, and have a good day.

Operator

Ladies and gentlemen, that concludes your conference call for today. Thank you for joining. You may now disconnect.

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