Legacy Oil + Gas' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug.13.13 | About: Legacy Oil (LEGPF)

Legacy Oil + Gas Inc. (OTCPK:LEGPF) Q2 2013 Earnings Conference Call August 13, 2013 11:00 AM ET

Executives

Trent J. Yanko - President and CEO

Matt Janisch - Vice President, Finance and CFO

Analysts

Brian Kristjansen - Dundee Capital Markets

Eric Nuttall - Sprott Asset Management

Don Rawson - AltaCorp Capital Inc.

Shailender Randhawa - RBC Capital Markets

Operator

Good morning, everyone. My name is Tracy and I’ll be your conference operator today. At this time I’d like to welcome everyone to Legacy Oil + Gas Inc. Second Quarter Investor Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you.

I’ll now introduce your host Trent Yanko, President and CEO and Matt Janisch, Vice President of Finance and CFO. You may begin your conference, gentlemen.

Trent J. Yanko

Thank you. Again, welcome everyone to our Q2 conference call. Thank you all for your participation this morning, with the results out last night. Again, we’re quite pleased with the quarter typically Q2 is a little slower from an activity standpoint, we were able to get back in the field in advance of where we all thought given anticipation of a harsh spring break up.

We were able to get started in mid May and accelerate our capital program basically taking some Q3 locations and pulling them ahead to Q2. Still in the context of needing the full-year spend and guidance, but we were able to get a bit of a head start on our activity and we were able to continue to have a strong operational and financial results in the quarter, starting basically back from Q3 2011, we’ve been able to string together a number of successful quarters which underscore the success we’re having on the asset base, on the well results, but also improvement in operating cost.

This is the sixth quarter of improvement in our reduction in our operating and transportation costs. We’ve seen our G&A per barrel go down again and our capital efficiency to continue to improve all while being able to exploit our plays, both our established plays in Bakken and Spearfish etcetera, but also continue to further delineate and prove up additional locations in our Midale play that’s been very good for us in Saskatchewan and turn the valleys with an asset that we like since we bought it back in 2010.

We are always very enthusiastic about the upside potential in this very large oil and play field and the well results over the last number of months, starting last year has been quite substantial with even the most recent well being one of the best wells drilled in the field in recent history.

From a numerical standpoint, production up 20% year-over-year to 18,164 Boe. Good takeaway there as that we continue to increase our oil weighting. We’ve been to grow production, while we’re continuing to increase our weighting to the light oil well, which is really nice for us in this environment of higher prices and better differentials.

Year-over-year cash flow up 50%, or north of $71 million and also cash flow per share up 39% year-over-year to $0.46, and all these financial results only have a portion of the production from the acquired assets from Villanova and Enerplus in the – in these results. So, we’ve been able to do that again largely through the strength of the organic program.

We saw record operating netbacks, given that light oil weighting and improvements in differentials and operating costs and G&A, our operating costs, [pardon me], and little bit lower royalties, we were able to post a $52.30 Boe operating netback, which is the highest in our Company’s history and 27% higher than last year with WTI only being up $0.73.

As mentioned, operating cost down 8% year-over-year. During that quarter, we also saw our bank line expanded from $525 million to $600 million, which is a testament of the strength of the underlying proved develop producing reserves and the predictability of the asset base.

Moving to operational results, the Midale as alluded to earlier continues to impress us. We’ve had further success in both development and step-out wells up at Steelman where we’ve had – became our biggest production growth to-date. We’ve – we did a number of new pool discovery wells in the first quarter at Alameda South of Pinto East. We had a new pool discovery in Taylorton and we’ve been able to follow-up in Q2 at both of those areas. We drilled two more wells at Taylorton, which one of those have gone, the second is coming on now, both at very good rates, 350 barrels a day plus.

The Alameda South of Pinto East well, we were unable to complete it after frac because it was flowing back so hard, it actually flowed for a month before we could actually run production equipment. So that’s been a very good follow-up well to the – our discovery up there and in the Pinto well we were able to step-out more than – step-out about two miles to the west, further extending the Pinto play that Legacy owned and then we further consolidated with our acquisition of Villanova. So we really like what we’re seeing down in that area also. As a reminder, the Midale is light oil were talking 35 to 40 API crude, lower royalties, blow up cost, extremely high netbacks and good productivity in these wells as we’ve seen.

Turner Valley, we’ve been able to stay in the pay zone more consistently. We are able to put these tri-lateral horizontals and stay at 90%, 95% of the time in the pay zone. We changed the completion technique in fluids and that seems to be leading to better and better well results. So the wells drilled this year have been some of the best ones we drilled period and kind of the best to-date has been the Herriman #6 well, which hit a peak production of 700 Boe a day and are still producing 500 plus Boe a day right now.

The Candor 2 well, which came – which was drilled in January still continues to produce at very strong rates, 225 Boe a day and that – and that’s very stable at that rate. And we’re on our fourth well, right now doing the completion and seeing good swabbing rates, good infill rates and decent oil cuts already on that [guide]. So, it’s taken us some time. We’ve touched at a bunch of different areas of the reservoir. We’ve used different completion techniques, but we do always believe in the potential of Turner Valley and its now really starting to show up in our production results. So we’re quite happy with where we’re right now.

Waterfloods, we’ve expanded and are expanding in the Bakken, in both Taylorton, and Heward, getting the injectivity up in those areas. We saw rapid response. We need to catch up with injectivity, because as you start pulling more out of the ground, you need to put more water back in. So we’re on top of that and we will seek the new pilots in Spearfish moving ahead in the later part of this year, the Midale.

We have approval in the Spearfish now. The application for the Midale is in. We expect that in another month or so and the Torquay or Three Forks waterflood has shown some signs of life with a little bit of oil production increase in the two wells offsetting the injector there. That pilot has approval to expand as well. So, we will be continuing to move ahead on the waterfloods.

Waterfloods there important for us because not only that they’re increasing our recovery factor and ultimately our reserves and our net asset value, its reducing our corporate declines which furthers our sustainability and ability to grow the Company in the future on a cost effective basis and generating that free cash flow that we’ve always talked about.

As far as hedging, we have been able to expand our hedging position quite significantly in Q2 as a way to strengthen and the Company’s financial position and give us more confidence in where that debt to cash flow position will be looking forward. So we’ve got 8,000 barrels a day hedged for the remainder of the year, at roughly $98 Canadian for WTI.

In the first half of next year we have 8,000 barrels a day hedged at just under CAD$97 and the last half of 2014 we have 2,000 barrels a day hedged at CAD$95.49 a barrel. So, good hedging book gives us that again extra layer of protection on volatility of commodity pricing. We have obviously been enjoying the higher commodity pricing and – but we’re making sure that we have some downside protection in with the hedging book.

And finally, discussion I guess in – we’ve had a lot of discussion on our debt to cash flow position. We’ve always been comfortable that we’re not going; the Company is in very strong financial position with a combination of our bank line and term no deal. But with debt to cash flow appearing at – average for the peer group, we’d like to see that a little lower. But the delevering is underway with our good operational and financial results.

Our crude oil hedging program and this current robust pricing environment, the deleveraging is happening a lot more rapidly than maybe a lot of people have anticipated. So we could be in a very strong financial position by the end of 2013.

And if we look out to 2014, based on some of the consensus we’re seeing from the analysts we maybe in a position where we’re spending cash flow and still growing at 10% to 12%. So a very enviable position, very unique position to be in where you have a very sustainable growth model and with a very substantial development inventory backing that up, that can continue that sustainable growth for the foreseeable future, and we continue to work away on cost improvements, capital efficiency improvements, but if we assume only the $90 a barrel forecast and no further improvements, that sustainable 10% to 12% is there.

So we’re comfortable with the direction of the Company. We are very pleased with the Q2 results. We see the rest of the year unfolding as expected, as per plan and continued to look at our asset inventory for additional play opportunities and improvement on our play. The Midale play its something that we’ve been working on for two years, drilled the first Midale multi-stage frac horizontal well back in January 2011. So this is something we’ve been working on quietly, but been able to amass a very significant position in the play and it underscores the depth and breadth of our inventory that we’ve been able to aggregate over these last four years.

So with that, I would like to open it up for questions. And again, thanks everybody for your participation.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from Brian Kristjansen from Dundee Capital Markets. Your line is now open.

Brian Kristjansen - Dundee Capital Markets

Good morning, guys. Trent, the question is, you’re fairly unique now and the oil weights with your sustainable growth, what’s your take on dividend payment in the future and where do you see that as you stand right now?

Trent J. Yanko

I guess, our position hasn’t changed with respect to the dividend, because the important components to a successful growth model or successful low growth to a higher yield model is free cash flow. So we’ve been focused on that since the inception of the Company back in 2009. And you can use that free cash flow to fund growth or you can use it to fund a dividend, buyback stock, pay down debt. But without that free cash flow, you really don’t have a going concern model.

So, for us the steps we’re taking on continuing to improve our capital efficiencies, working that debt to cash flow down, operating costs etcetera, delineation of the play, the waterfloods to manage corporate decline, all those make us a better growth Company, all those that also make us a better dividend payer. So, the steps we’re taking position us to have that optionality in the business model, but I don’t think we’re in a position, tomorrow to start paying a dividend. But we’re on a path of that sustainable growth, which could easily trend – we could easily transition to the dividend model, that’s just not on the horizon at this moment.

We want to see some more results from the waterflood. We like to further delineate some of our Midale opportunities. And we’ve seen the ones the models that have been successful, that had a very long telegraphing base to them where people are seeing – paying attention to guys, after they’re going to ultimately convert to dividend. They’re watching their capital efficiency, they’re watching their decline rates, they’re looking at their debt to cash flow. So I think we’re in – they’re putting on hedging. So we’re doing all the right steps that make us a better growth Company, but they’re also the same steps that you would need to do become a dividend payer.

Brian Kristjansen - Dundee Capital Markets

Got it. Thanks. Is there any – you mentioned preferring this year debt to capital lower? Is there a target threshold do you like to be in or that’s just in line with the group?

Trent J. Yanko

Yeah, it’s hard to say. I mean, I think our peer group is closer to two. So, when you – it’s tough to really say what it is. Obviously less that is better than more debt. Giving that – the fact that we’ve that large component that termed out, we’re drilling a lot of development wells for high netback oil that pays out quickly. We are not in a – we are not worried about our debt to cash flow position. But we want to see that gets down – continue to get lower.

People use 1.5 times is a magic number. I think that depends on your commodity price forecast, but given mid cycle pricing circa $90 oil, 1.5 to 1.7 feels comfortable, and I think – and it works. We are little more unique because of our development focus and the robust economics we have with the oil, but still less debt is better than more debt and we’re heading that direction.

Brian Kristjansen - Dundee Capital Markets

Great, thanks. And lastly on the hedges, the incremental hedges and when you see it forthcoming, how much do you want to have hedged or do you have a threshold for that as well?

Trent J. Yanko

I think we’re circa 50%, 55% of our oil after royalty, so I mean I think we’re happy with that position for the rest of this year. The strong backwardation makes you pause going too far out, but we’re going to have a comprehensive hedging program where we continue to layer on hedges as we move forward. A lot of this was driven off of the Villanova and the Enerplus deal, so we wanted to lockdown that acquisition given that we funded it with a bigger component of debt. That deal basically de-levers itself over the course of a year. So us having hedges out to the end of 2014 deals right for us at this moment, but we’ll continue to build the future position as we move along through 2013.

Brian Kristjansen - Dundee Capital Markets

Okay, perfect. Thanks, Trent.

Operator

(Operator Instructions) Your next question is from Eric Nuttall with Sprott Asset Management. Your line is now open.

Eric Nuttall - Sprott Asset Management

Good morning, guys. Just a question on the JV farm-out that you did with Manitok on the Cardium at Turner Valley, I am just wondering if this is a model that you’re going to be assessing for other plays, obviously there is a tradeoff in terms of decline if you’re heading down the dividend route at a later date. So do you have to decide on, is it going to be growth versus income before you conduct that or is it something that you can continue to evaluate?

Trent J. Yanko

With respect to the Manitok farm-out, we like the play, the Cardium play at Turner Valley, but given our – just the way the capital allocation has been going it just continued to slip to the bottom of the list. It is a little higher risk prospect than we have compared to the – we’re drilling all development wells, we did that last year, we did it this year, and then really we couldn’t find a place for it in this years budget, but we wanted to see that prospect drilled. So doing the deal with Manitok I think made a lot of sense. They’ve had a lot of success in the – in drilling in the psuedo-foothills and trying targeting the Cardium also at Stolberg et cetera, so they do have some – they do have the technical savvy to be a good operator and we do have Cardium that overlies the entire Turner Valley unit which is not part of this deal. So I think it made sense to accelerate the testing of this prospect.

We’ve retained a good chunk of the residual and also over Turner Valley. And for us as kind of mentioned with Brian, I think we continue to evaluate our options as a company, but while we look at dividends versus growth, the steps we need to take to make this a better company, a better business, a better franchise they’re the same steps with depending no matter what model you’re following, that’s working on our capital efficiencies, continuing to put up the strong operational and financial results further delineate our inventory, work on getting – keeping our managing – our management on our corporate declines with the waterfloods, and also the hedging program et cetera.

So for us, we’re going to continue on with the growth right now but we’re preserving the optionality of the dividend because we’re setting ourselves up appropriately.

Eric Nuttall - Sprott Asset Management

Great. Thank you.

Operator

(Operator Instructions) Your next question is from Don Rawson with AltaCorp. Your line is now open.

Don Rawson - AltaCorp Capital Inc.

Hi, guys. First just a question on waterflood in the Midale and Spearfish just wondering what you anticipate is how long it would take to see a response in those plays.

Trent J. Yanko

Probably, and again we have to model it a little more rigorously, but in the Spearfish given it's a relatively low GOR reservoir and the wells are new. We would probably see response more similarly to what we have seen in the Bakken a little more rapidly, I can’t give you an exact timeframe to response but it's not going to be years and years. In the Midale, it's probably going to be a little longer because we have higher [mortgage], the wells are of higher productivity and they have a decent GOR, a more normal GOR compared to – Gas, oil ratio compared to our other plays. But still we’re getting on the waterfloods in both of these areas as quickly as we can to mitigate the loss of reservoir energy and drive and it also will have a more impact to – a better impact to ultimate recovery but also get us starting to mitigate declines sooner rather than later.

Don Rawson - AltaCorp Capital Inc.

Okay, thanks. And then operating costs have been improving as you mentioned, where do you think they will be in 2014; is that trend kind of – has it mostly played evidently, would you think they will settle out there or is there still any room to move?

Trent J. Yanko

There’s a little bit of room to move and it's going to be more in step with the production continues to grow. I mean a good chunk of our costs are fixed. So as we continue to grow production there are always going to be a very slight potential reductions to operating cost but we’ll be able to aggressively work those down. I think we’re down nearly 20% from 2011, that’s 15% to 20%. So, we have been able to work those down but without a bunch of brand new production which will have lower operating cost, we’re probably getting to where the changes are going to be a couple of percent over the course of the next year, but when you roll that altogether with current unit, current – not even current pricing, if you use $90 oil you’re still looking at operating netbacks nearly $50 which would be not just top decile, that will be probably in the top one or two in the business.

Don Rawson - AltaCorp Capital Inc.

Okay, thanks. And the last thing was just; I am wondering if you could quantify the impact on production from shut-in production at Turner Valley due to floods at the end of the quarter? Thanks.

Trent J. Yanko

Yeah, the flooding was in the last sort of couple of weeks of the quarter, so there was some minor impact, not the entire field was shut-in. So we had minor impacts in the quarter. And then we did have a little carry through into Q3 as we got the, as the third party operator got the Quirk Creek gas plant going again. But we got a lot of our production back on before the quarter ended. So, that’s why we were able to come out in the release and reconfirm our production guidance and our CapEx guidance for the year. So we feel comfortable that we’re on track and it was a very short-term phenomenon at Turner Valley.

Don Rawson - AltaCorp Capital Inc.

Okay, thanks.

Operator

Your next question comes from the line of Shailender Randhawa with RBC Capital Markets. Your line is now open.

Shailender Randhawa - RBC Capital Markets

Hi, Trent. Just wondering if you could just comment on the LGX’s plans maybe through the back half of the year and plan specifically in the Alberta Bakken that they have? Thanks.

Trent J. Yanko

Sure. With LGX we're moving ahead with looking at drilling two wells in the play. We did shoot the 3D seismic a while back. We spent a lot of time interpreting that data. While we were doing our technical work we have seen some good well results to the north of us from Torquay in both the Banff and the Big Valley or the Three Forks. So we’re encouraged by what they have been up to, the well to the south of us on the Murphy block continues to be a very strong performer and we feel that we have a couple of play types that we’re going to test that look what – it's very similar to what Torquay is drilling a couple of miles away from us on the North and we have an anomaly that looks to what Murphy has drilled there, their best Three Forks well on the south.

So we’re going to be pursing those, those two different play types with this drilling program. This should get going in – we’ll get going in the month of September and meanwhile we’ve been able to keep production going at Maniberries basically holding that in with spending very little money on workovers, maintenance, well startups et cetera very low dollar activity that’s actually benefited us quite dramatically. So LGX continues to have a decent cash hold stream. We’re quite excited about the drilling program that’s coming up here in September and regardless of the results we’re still building a good little junior with its own cash flow base and a free cash flow base actually.

Shailender Randhawa - RBC Capital Markets

Okay, thanks. And what are those – what about the pilot wells in the Bakken, what do you anticipate those running at and what sort of depths are you going to be targeting on those two Bakken wells?

Trent J. Yanko

For LGX?

Shailender Randhawa - RBC Capital Markets

Yes.

Trent J. Yanko

Yeah, so we’re actually going to be drilling the Three Forks and testing the Banff on the way down. So, the Big Valley and Three Forks are equivalent, so we’re not drilling in the middle Bakken, we’re drilling the Big Valley formation. So we will – these wells are set up to be straps and then have the option of converting them to horizontal wells. So, right now we're – we have built our forecast in with – if they go all the way to horizontal then horizontal completions are going to be $5.5 million to $6 million.

Our commitment though on the Blood Tribe of land is to only – we only have to drill vertical wells. So, we’ll have a look at the vertical section, the core, the logs, maybe even some testing and make the decision whether to kick these out horizontal, we’re not. So, I can’t – we know what the ultimate cost could be in our quarterback. What the actual program looks like will depend on what we see when we actually drill these things.

Shailender Randhawa - RBC Capital Markets

Okay, thanks. It makes sense.

Operator

(Operator Instructions) Your next question is from Fred Holliman, retired investor. Your line is now open.

Unidentified Analyst

So, Trent, I am wondering about the $35 million shorts that are here all the time on the stock, how is that affecting your stock price?

Trent J. Yanko

Yeah, I mean – we look at that, we see that report that comes out every couple of weeks and unfortunately the key aspects can’t – has difficulty really tracking the nature of those shorts. We’ve done a lot of investigation on it. There probably is a component, a real short component on the stock but from our evaluation in what we’ve talked to from a lot of the investment dealers and sales and trading guys is that, we think the big portion of that is us being utilized in some of these ETF’s that are being set up that you can convert income to capital gains.

Legacy is a decent capitalization company. We don’t pay a dividend, we’re fairly liquid and I think we’re well suited to be utilized in these ETF’s. So without going into a ton of detail, there is no real – I don’t think there is really an opportunity for some significant short covering in these type of instruments but it does look wonky on the short report, and Matt do you have anything to add to that?

Matt Janisch

Well, one of the other things that we look at an analysis and what Trent said is just completely accurate. One of the things we look at is the cost to borrow Legacy stock which is also an indicator of the true short position. And the cost to borrow Legacy stock was actually quite low from what we’ve been told. So that again indicates that the short position, a significant portion of it is not a real targeted short position. So it's pretty difficult to look at that number and believe that it's a fully fundamentally targeted to make it short. So it's a complex issue, it's something that we’ve discussed with TSX and they are continuing to look into it.

Unidentified Analyst

Okay. Thank you.

Operator

There are no further questions in queue at this time. I’d turn the call back over to Mr. Yanko.

Trent J. Yanko

Again thanks everyone for your participation this morning. I just wanted to again underscore that this was another successful quarter for Legacy. Things are definitely on track on the drilling program. We’re seeing the waterfloods do what we anticipated them to do as far as seeing the production response and we’re moving ahead rapidly on getting those expanded.

We like what we’re seeing in the Midale where we’ve been at the forefront of that play and are reaping the benefits of being early and being innovative on that play, and Turner Valley continues to impress. It's living up to our expectations and now hopefully the streets will like what they see because we sure like that asset from more than just the production result standpoint, the low decline, the free cash.

It's been a great acquisition for us, and the delevering. I think we’re going to be in a very unique position by the end of this year and as investors and the street starts looking out towards 2014 numbers I think we’re going to be very unique in being able to, and again this is just consensus numbers and it isn’t guidance, but to be able to spend especially cash flow and grow production 10% to 12% on a conservative oil price forecast I think would be a very unique position and differentiate Legacy from it's both oil and gas weighted piers. So, thank you and we look forward to reporting back for our Q3.

Operator

Thank you for joining ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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