Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Emerald Oil, Inc. (NYSEMKT:EOX)

Q2 2013 Earnings Conference Call

August 7, 2013 10:00 AM ET

Executives

Ryan Smith – Vice President of Capital Markets and Strategy

McAndrew Rudisill – Chief Executive Officer

Analysts

Ronald E. Mills – Johnson Rice & Co. LLC

Steve F. Berman – Canaccord Genuity, Inc.

Neil E. Wiese – SunTrust Robinson Humphrey

Blaise M. Angelico – Howard Weil Paul Grigel – Macquarie Research Equities

Jared R. Lewis – Northland Securities, Inc.

Operator

Greetings and welcome to the Emerald Oil’s Second Quarter 2013 Financial and Operational Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator instructions) As a reminder this conference is being recorded.

It is now my pleasure to introduce your host Ryan Smith, Vice President of Capital Markets and Strategy. Thank you, Mr. Smith. You may begin.

Ryan Smith

Good morning all, and thanks for joining us this morning. My name is Ryan Smith, I’m Vice President of Capital Markets and Strategy and welcome to Emerald Oil second quarter earnings conference call. Yesterday afternoon we issued a press release and also the Form 10-Q to report our financial and operational results for the second quarter ended June 30, 2013.

On the call with me today is McAndrew Rudisill, our Chief Executive Officer. Please be advised that our remarks, including answers to your questions may include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call.

Those risks include, among others, matters that we have described in our earnings release, as well as in our filings with the Securities and Exchange Commission including the Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

During this conference call, we will also make references to adjusted EBITDA, adjusted cash flow and adjusted income or loss, which are non-GAAP financial measures. Reconciliation of these amounts to GAAP measures can be found in our earnings release.

I’ll now turn the call over to McAndrew.

McAndrew Rudisill

Thank you, Ryan. Good morning everyone. We will begin with some general comments and then we will open the call for questions. I’m excited to announce the results for our most recent operated Bakken wells. In May, Emerald completed its second operated well, the Arsenal, which had the initial peak rate of 1,638 BOE a day, while producing a total of 23,043 BOE during the first 30 days of production for an average of 768 BOE a day.

In June, we completed our third operated well, the Caper, which produced our highest 24 hour peak rate to date at 2,063 BOE a day. The Caper produced 29,815 BOE during the first 30 days of production, or an average of 994 BOE a day.

Also in June, we completed our fourth operated well, the Mongoose, which had the initial 24 hour rate of 1,523 BOE a day, while producing a total of 26,773 BOE during the first 30 days of production or an average of 892 BOE a day.

From July 2013, we completed both the Talon and Slugger wells on the same pad location. Both wells were completed with 34 frac stages. Emerald is currently drilling out the plugs on both the Talon and the Slugger. The early results look strong and we report the comprehensive results of both the wells with the next sequence of completed wells after 30 days of production data has been received.

We continue to be pleased with the initial results of our well. The drilling and fracking generated by our reservoir and operations team are shining through in these results. We will communicate results of our subsequent Bakken wells after we have at least 30 days in production. We do not plan to make separate announcements for each well, but more likely we will announce the results after we have two more wells produced in totally 30 days.

Since the beginning of the year, we’ve continued adding acreage to our operating area in McKenzie County North Dakota, and working to increase our working interest from our current average with approximately 67% towards an average of approximately 75%.

We recently purchased an additional 3,500 net acres in the McKenzie County for approximately $10.5 million or 3,000 per net acre. The acquired acreage is directly southeast and continued withdraw existing Low Rider Prospect in McKenzie County. The acquired acreage is directly southeast and contiguous to our existing Low Rider Prospect in McKenzie County. The acquisition added additional operated drilling spacing units which provides Emerald a total of 23 operated DSUs in the Low Rider Prospect.

Returning for close and pending acquisitions, we estimate we have approximately 58,000 net acres in the Williston Basin, with approximately 25,750 net operable acres and remaining 32,250 acres being non-operated.

During the second quarter, we produced an average of 1,393 BOE per day, which produced total oil and natural gas sales of $10.6 million and $2.8 million of adjusted EBITDA. As we continue to grow and execute on our operated well program, we expect our operated well to constitute the majority of our production days.

During the third quarter of 2013, we expect the average production to increase to approximately 2,050 BOE per day. We are comfortable with the current consensus forecast for average total year 2013 production of approximately 1,800 BOE per day, and we are reaffirming our previous guidance to exit 2013 at 2,850 BOE per day.

Our focus on the remainder of 2013 is ramping up production and acquiring more operated drilling spacing units from the Williston Basin, while keeping our balance sheet conservatively geared. Our game plan is very simple, and financial impact is tangible. Our cash flow is well along with our production, and we should start to see cost savings as we bring more wells onto to production from those picked asset leverage and reduction in drilling and fracking times.

I’d now turn the call over to Ryan to review our financial plans.

Ryan Smith

Thanks, McAndrew. We ended second quarter 2013 with $72.7 million in cash and nothing drawn on our revolving credit facility. Recently, we completed the semi-annual borrowing base redetermination of our revolving credit facility. As a result, we entered into an amendment with Wells Fargo, which increased our borrowing base to $75 million from the previous $27.5 million.

We believe that our cash on hand combined with cash flow from operations, proceeds from sale of non-core assets and availability under our credit facility will adequately fund our continuous two rig drilling program through the remainder of 2013. We’re maintaining our previously stated 2013 capital budget for well development of $127.6 million and are still forecasting to drill 12 net operated wells in 2013. We’re drilling our wells in less time, allowing us to drill more wells and to maintain our estimated cost of $10 million per well.

We’re maintaining our estimate of participating in 0.8 net non-op wells during 2013 and spending approximately $20 million to acquire – operate the acreage in the core of Williston Basin. Our entire capital budget continues to be focused exclusively on the Williston Basin.

During the second quarter, our average sales price for crude oil was $87.95 per barrel, which was a differential discount of about $6.20 per barrel relative to WTI at the same time period.

We’re hedged with swaps at $90 to $94 per barrel, and our credit facility with Wells Fargo allows us to hedge a portion of our existing production, and we are near the maximum ride. We plan to continue adding hedges as our production grows.

At this time, we’d like to open the call for questions. I’ll turn the call over to Chip, my moderator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)Our first question is coming from Ron Mills with Johnson Rice. Please proceed with your question?

Ronald E. Mills – Johnson Rice & Co. LLC

Hey, McAndrew. If I look at your latest presentation on slide 12, which shows your DSUs in the Low Rider area, you talked a bit about these low acres you added is contiguous with that, can you talk about where it’s located relative to these – to the highlighted DSUs, and from a production standpoint base, do you come with some production, is it similar to the prior Low Rider additions you did earlier this year in terms of what are the – what’s the exploration schedule or does the conventional production hold these DSUs?

McAndrew Rudisill

Thanks for the question, Ron. We’re going to post an updated presentation by Friday this week. So you can have a clearer picture, when looking at the map of Low Rider area where the DSUs are. To describe exactly where they are, they sit directly to the east of the [Nangia] DSU and to the south of Excalibur, so they basically run across to Northern line of the township directly to the South of the main Low Rider area. So they’re in line with Dudley Dawson (inaudible) and the Nangia.

Ronald E. Mills – Johnson Rice & Co. LLC

Okay, running to the east. And then in regards to production, it’s all – it’s a 120 barrels a day net of conventional production, that production holds the majority of that acreage, so we’re going to take some time to analyze what the best way to drill all these middle Bakken Three Forks wells in acreage in relation to the wells that have already been drilled.

Ronald E. Mills – Johnson Rice & Co. LLC

Okay, great. And then from me, the type curve standpoint, McKenzie, the well cost stand here at $10 million, but you look at the most recent three wells, and even the first well, the Pirate well, the 30-day rates are pretty stub, how did those 30 day rates compared to what’s in your 500,000 barrel type curve? And from a guidance standpoint, if I remember correctly, I take your production guidance, I was assuming the low case type curve, and so I’m just trying to get a sense as to what you think these wells are really tracking relative to economics, and what that means for your production outlook?

McAndrew Rudisill

Yeah, based on the current information, our operating team has done a really good job in brining first couple of wells on, and it looks like they’re tracking between 600,000 and 750,000 barrel EUR depending on the well. We want to drill a couple more wells in the Low Rider area and give these wells more time to continue producing to make sure these fit into that curve over a longer stay put period. And then I think, we’re going to feel a little bit more comfortable growing with our base case EUR for our guidance model. But as you stated conservative and appropriate right now to drill couple of more wells and give you some more time to produce.

Ronald E. Mills – Johnson Rice & Co. LLC

Okay. And then one that question, you have some, I guess charges are the best way to call it on, on redeeming some – some preferred debts outstanding, what’s the current plan with that going forward, is that something that we might expect over the next couple of quarters or was it just really a one-time deal?

McAndrew Rudisill

Let’s talk about the accounting for the redemption of the preferred, so that everyone is clear on that now. Let’s backup for the point, when the preferred was enough – that was initially made in February of this year. So moving on to the balance sheet for accounting purposes, valuation needed to be attained for both the Preferred A and the warrant and that total valuation has to add up to $50 million.

So the preferred, for accounting purposes, was valued at $37.3 million, while the warrant liability was at $12.7 million. As we’ve redeemed the Preferred A, then we have to apply a non-cash discount accretion to write up the issuance discount originally assigned to the preferred act. So including those (inaudible) paid off at par at $12.5 million, we need to accrete up the difference between the 50 and 37 base rate. So of that $5.6 million part of the loss, $1.8 million is due to cash charge associated with the redemption of $15 million in the preferred this quarter; 328,767 were associated with accrued dividends on that $15 million portion, and the balance of the $5.6 million, $3.472 million was the non-cash discount accretion on that $15 million piece.

Going forward, we plan to continue to redeem the balance of the preferred over the course of this year. So any redemption that occurs in the third and the fourth quarter will also have with non-cash discount accretion applied to it as well as the redemption premium.

Ronald E. Mills – Johnson Rice & Co. LLC

Okay. And how do you weigh that use of proceeds versus drilling more wells in terms of driving that decision?

McAndrew Rudisill

We look at the capital cost arbitrage between our revolving credit facility, capital costs and then the cost to hold the preferred on the balance sheet. We can borrow from the bank right now at 2.5%. We received a larger than expected credit line redetermination this quarter and we’re basically swapping up preferred capital for 2.5% capital. So we’re fully funded to drill the program as we plan and any extra borrowing capacity increase that we receive which will need to terminate the curve.

Ronald E. Mills – Johnson Rice & Co. LLC

It makes perfect sense. Let someone else start going, and I’ll get back in queue. Thanks.

Operator

Thank you. The next question is coming from Steve Berman from Canaccord Genuity. Please proceed with your question.

Steve F. Berman – Canaccord Genuity, Inc.

Good morning, guys. In McKenzie, can you talk a little more about well costs, you obviously are off to a real good start there, can you give us some shots on what you see are going forward relative to the $10 million or lesser right now?

McAndrew Rudisill

Yes, Steve. Thanks for the question. It take a lot of time around here with our operating team focusing on the cost control of drilling these wells. And one of the reasons why we decided to drill Talon and Slugger all in a pad was to reduce cost, and more efficiently use surplus land in that area.

I think now we’re going to see more cost savings in the future, and where we’re trying to driving those, number one: drilling days, bringing those down. Our average drilling days right now I think are at 23 days. We’re trying to bring our frac cost down, both from profit side, and on the pricing of the frac, then also the amount of time it takes to frac. And then I think, generally with (inaudible) just because more infrastructure has been built in this Low Rider area now as we’ve drilled more wells, we’re going to start hitting some of the – zip zap in leverage firstly in U.S. movement that has to go on from DSU to DSU as we talk development program. So, and 10 remains our target on the cost on the wells, we’re actively trying to get it in under that.

Steve F. Berman – Canaccord Genuity, Inc.

Well I’m – bridged in Europe, and you still have some, cuts are very encouraging that only results in low density, not power thrusts, and I’m just – your thoughts on general and any possible future plans for Emerald as for as that kind of testing goes?

McAndrew Rudisill

We are also really impressed with the Kodiak’s increased density and we think it can be applied to the Low Rider area and they are already starting to work on the permitting process for that.

Steve F. Berman – Canaccord Genuity, Inc.

Okay, great. And one more just your future plans for Three Forks testing?

McAndrew Rudisill

Yes, I think that we should have the Three Forks results to talk about sometime early in 2014.

Steve F. Berman – Canaccord Genuity, Inc.

Excellent. All right.

McAndrew Rudisill

We are in the planning process on that right now.

Operator

And our next question is coming from Ryan Oatman from SunTrust. Please proceed with your question.

Neil E. Wiese – SunTrust Robinson Humphrey

Good morning, everyone. This is actually Neil Wiese in for Ryan. Most of my questions have been answered, but looks like you guys are making solid progress on getting to your operated acreage count of 30,000 by the end of the year, just wanted to see what the progress was there and if you guys are still seeing ample opportunities? And just as a quick follow up to that, I noticed the non-op acreage count went up and just wanted to get some color on that? Thank you.

McAndrew Rudisill

To answer your first question, Neil, about the target for the end of the year, we feel very comfortable about achieving that 30,000 net acre target. The most recent addition was a good one for us and we continue to have other opportunities in and around the Low Rider area and keep building on acreage.

So our team has done a great job of doing that right now. And then non-op, I’d say it’s – the non-op also uses trading materials that help us with position changes on the operated acreage and all others often fluctuations quarter-to-quarter, the net direction of the non-operated acreage for us has continued to go down over the course of the last year. I think that trend is going to accelerate over the course of the next couple of months as we continue to follow our non-operated acreage as we receive ASCs. We’ve just been aggregating ASCs in larger blocks, more recently, because we found it’s easier to transact in bigger numbers.

Neil E. Wiese – SunTrust Robinson Humphrey

Gotcha. That’s very helpful. Thank you.

Operator

Our next question is coming from Blaise Angelico from Howard Weil. Please proceed with your question.

Blaise M. Angelico – Howard Weil

Hi, guys. Good morning. Just real quick, a small up tick in the G&A, could you talk about how you’re thinking about that over the balance of the year here?

McAndrew Rudisill

Sure, Blaise. G&A, let’s say relatively steady to this level – course for the year, and you can make sure between cash and stock buy to a more normal 50-50, this quarter particular we have to add quite a few operating staff in the field that we pent upped down on a second grade. And as for the cash impairment is quite as higher.

Blaise M. Angelico – Howard Weil

Gotcha. Thanks, guys.

Operator

And the next question is coming from Paul Grigel with Macquarie. Please proceed with your question.

Paul Grigel – Macquarie Research Equities

Hi, good morning. A quick follow-up on the EUR question from earlier, you guys are obviously looking to feel a little bit more data. How much more you believe that something we could see, come November in 3Q results, so is that when the year end revision with the reserve report?

McAndrew Rudisill

I think it’s possibly between 3Q and 4Q, I mean, we want to have enough wells on to have more than 90 days data on each of those individual wells. So really, it’s a good alternative sample frac process doing analysis on the reserve engineering.

Paul Grigel – Macquarie Research Equities

Okay. And do you guys come along with 2014 guidance? And I was looking a little bit further ahead, but obviously, pattern it may, but also may be provide some clarity as well?

McAndrew Rudisill

Yeah. We haven’t given the guidance yet, I anticipate that we’ll be able to do that in the third quarter.

Paul Grigel – Macquarie Research Equities

Okay, great. Thank you.

McAndrew Rudisill

Operator, I think we’ll take one last question.

Operator

Sure. The final question is coming from Jared Lewis from Northland Securities. Please proceed with your questions.

Jared R. Lewis – Northland Securities, Inc.

Hi, guys nice results. Just real quick, you done a nice job moving the working interest 67% goal to 75%, what kind of timeline do you think you are going to see that?

McAndrew Rudisill

I think that we can achieve that 75% by early in 2014, if not the full year.

Jared R. Lewis – Northland Securities, Inc.

Okay. And you were real quick, a lot of questions on EUR and the well design, obviously, you got nice design going, very good results, you think that’s going to be repeatable across your wells?

McAndrew Rudisill

Today, as I’ve proven today, I mean we effectively drilled out quite a large of Low Rider created 360 degree well control throughout the township and what we are seeing in the geo steering and what we’re seeing from the fracking looks very similar from well to well.

Jared R. Lewis – Northland Securities, Inc.

Excellent. Thanks and good job.

McAndrew Rudisill

Thanks a lot.

Operator

Thanks you, and this concludes our question-and-answer session. I’d like to turn the call back over to management for any further closing comments.

McAndrew Rudisill

I just want to say thank you everyone for joining us on the call this morning and thank you for your continued interest in Emerald. Have a good day.

Operator

Thank you. That concludes today’s teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Emerald Oil's CEO Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts