Jones Energy's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Jones Energy, (JONE)

Jones Energy, Inc. (NYSE:JONE)

Q3 2013 Earnings Call

November 7, 2013 10:30 am ET


Robert Brooks - EVP & CFO

Jonny Jones - Chairman and CEO

Mike McConnell - President

Eric Niccum - EVP and COO


Neal Dingmann - SunTrust

Michael McAllister - Sterne Agee

Biju Perincheril - Jefferies


Ladies and gentlemen, thank you for standing by. Welcome to the Jones Energy 2013 Third Quarter Earnings Conference Call. The company’s news release announcing its third quarter results was circulated yesterday and is also available on its website at During the presentation, all participants will be in listen only mode. (Operator Instructions) Following today's presentation there will be an opportunity to ask questions. As a reminder, this call is being recorded.

An audio replay of this call will be available through 9:00 a.m. Eastern Time December 9, 2013 by dialing (877) 344-7529 for callers in the U.S., or for (412) 317-0088 for international callers and entering conference code 10036135. An archive of this call will also be made available on the Jones Energy website at

I would now like to turn the call over to Robert Brooks, Jones Energy’s Executive Vice President and Chief Financial Officer. Please go ahead, sir.

Robert Brooks

Thank you, and good morning everyone. Participating with me this morning are Jonny Jones, Chairman and CEO; Mike McConnell, President; and Eric Niccum, Executive Vice President and Chief Operating Officer. After our formal remarks, we'll open the call for questions.

Let me remind everyone that today’s conference call contains forward looking statements. These statements, including those describing management’s beliefs, goals, expectations, forecasts and assumptions are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company’s actual results may differ from these forward looking statements for a variety of reasons, many of which are beyond the company’s control.

Additional information concerning certain risks and uncertainties relating to the company’s business prospects and results are available in the company’s filings with the SEC. During the call, management will refer to certain non-GAAP financial measures. Reconciliations to these measures are provided in the full third quarter 2013 earnings release and quarterly report on Form 10-Q filed tomorrow.

I would now like to turn the call over to Jonny Jones, Chairman and CEO.

Jonny Jones

Thanks, Bob. Good morning everyone. Thanks for joining us today to discuss our third quarter 2013 results. This marks our first full quarter since going public in July; we have a lot of activity to discuss.

During the third quarter, we increased our total net production to 17,380 barrels of oil equivalent per day. Production growth was driven the company's activity in our core Cleveland play where we increased production to over 10,600 barrels of oil equivalent per day. So 10% from the second quarter and over 100% from the third quarter of 2012. It's worth noting that liquids production was up 12% over the prior quarter.

The third quarter of 2013 was characterized by growth in rig count and an increased pace of wells being spud as the company continued to execute on its operating plan that was communicated at the time of the IPO. During the third quarter, we added two rigs to exit the period with a total of eight rigs running, seven in the Cleveland and one in the Arkoma Woodford play. Since then we've added an additional two rigs to bring our total rig count to 10 about a month ahead of schedule.

I would like to brag a little on our best-in-class operating team. During the period of significant growth in our rig activity not only has our team been successful meeting or beating targets but they have also increased drilling efficiency and maintained cost discipline. The average spud to rig release in Cleveland was reduced by 9% to 25.9 days in the third quarter compared to 28.4 days in 2012. In addition, the cost level for our base 20-stage frac completion design remains at $3.1 million all in.

During the quarter, we (inaudible) total of 20 operating Cleveland and completed 22. IP30 rates for the 22 wells completed in the third quarter averaged 470 barrels of oil equivalent per day in line with management's expectations. Looking forward, we expect to drill 20 additional wells in the Cleveland in the fourth quarter of 2013. In total, we have spud over 300 horizontal in the Cleveland, more than any other operator in the play.

Since we began drilling the Cleveland in 2004 we have gradually drilled longer laterals and increased frac stages. In the first two years of drilling horizontal Cleveland wells we typically use four frac stages and realized an average IP30 rate of 162 barrels of oil equivalent per day of which 11% was crude oil. Our third quarter results shows a 2.9 times improvement in IP30 over those initial results and just as importantly approximately 53% of the initial production is now crude oil. These increases in performance have occurred over time that dramatically improved well level economics in the play.

The company is currently implementing a new completion design which will significantly increase both frac density and profit per stage. We expect a boost in production rates and hope to be able to share some early results of these operations in the first quarter of 2014. We expect this new design to increase our AFE. Our analysis of the results will be focused not just on whether well performance increases, rather we will seeking to increase our overall well level return in order to justify the additional investment.

In the Woodford, we kicked off drilling under our new agreement with BP by drilling two wells in the third quarter. For the balance of 2013, we expect to drill eight wells in the

Woodford, all of which will be undergoing batch completions in December and January, 2014 along with the two wells drilled in the third quarter. Overall in the Woodford, we expect to drill 13 wells this year and we'll have three rigs running for the rest of the fourth quarter. As in the Cleveland, we plan to continue to test increased frac density and work proppant per stage in completing these wells with the objective of further enhancing the well level economics in the play.

We've made a proposal to our partner Southridge to acquire all of its interest in the Woodford which Southridge is currently evaluating. Just to remind everyone, the prior agreement includes a spud fee which reduced the drilling economics of an otherwise outstanding play. And if we are successful in acquiring the property it will no longer be burdened by this fee. Regardless of the outcome of these negotiations, the company retains all of its production in PDP reserves associated with the previously drilled wells and controls over 800 identified drilling locations in the Woodford in addition to the 90 Southridge locations.

With that, I'll turn the call over to Bob Brooks, our CFO, who will discuss our financial results for the quarter. Bob?

Bob Brooks

Good morning, everyone. My comments today will focus on a few third quarter highlights and updated guidance for the calendar 2013. We plan to release preliminary 2014 guidance after our December board meeting.

Our third quarter revenue increased 7% over the second quarter to $68.6 million driven by increases in total production and realized liquids prices but tempered by a lower percentage liquids in the production stream and lower realized natural gas prices.

Oil the percentage of total production was down about 2 percentage points from the second quarter due to production declines of a water-drive recompletion project which was completed in the first quarter in one of our non-core areas of operations. Oil production in our core Cleveland properties, however, was up over 7% and the percent of liquids in the production mix was relatively flat at 67%.

Our overall production mix in the third quarter was 25% oil, 29% NGLs and 46% natural gas, and we expect oil and natural gas liquids production to remain at about this level on a percentage basis in the fourth quarter as we continue to drill in the liquids rich fairways of our plays.

EBITDAX was essentially flat with the second quarter results at $52.5 million driven by higher revenue being offset by higher expenses primarily lease operating expenses which resulted from the company's and/or our partners' increased levels of work over activity in the quarter. Our LTM EBITDAX proforma for the Chalker acquisition was $205 million.

Net income in the quarter came in at a loss of $15.2 million. However, adjusted net income was a positive $13.4 million after adjusting primarily for the effects of unrealized losses on derivative contracts and non-stock compensation issued invested in connection with the IPO.

In the second quarter earnings release we increased CapEx guidance previously provided in the S-1 to a range of $220 million to $230 million due to the company's increased drilling efficiency and the expectation of drilling more wells in 2013. You'll see in the third quarter earnings release that we further adjusted our 2013 CapEx guidance to a range of $235 million to $245 million as a result of the company adding its 9th and 10th rigs a month sooner than originally planned, an increase in the number of wells drilled due to increased drilling efficiency and to account for the higher cost associated with the new completion design that Jonny discussed earlier.

During the third quarter, we completed our IPO and raise net proceeds of approximately $177 million and we used $167 million of that to pay down our senior credit facility. The borrowing base on our facility is $500 million and the available balance of $222 million which together with $23 million of cash provides total liquidity of $245 million.

This concludes our formal remarks. Operator, you may now open the call for questions.

Question-and-Answer Session


(Operator Instructions). And our first question comes from Neal Dingmann of SunTrust.

Neal Dingmann - SunTrust

You mentioned, Jonny, kind of in the press release you talk about kind of 22 wells completed kind of how those been trending that there are in expectations. Your thoughts as, I know as you sort of, I don't want to say tweak, but sort of improve the well design, how should we think about sort of that average IP30 going forward on a lot of those Cleveland wells? Is it fair to say that 470 is kind of in the range for a while or what's your thoughts about that?

Jonny Jones

Thanks. How are you? These wells that we drilled in the quarter all had a 20-stage frac design which we've been using since way over 2013. So we look back at the 2013 results we've been consistent with the frac design. We're just now shifting that design. So there's no results that are out yet on that. So we would expect the IP30 to increase obviously with the new capital that we're spending for the new design. The design is still in a bit of state of flux but the wells point forward will all have the new design. In fact, we're in the process of doing our first right now.

Neal Dingmann - SunTrust

And then it looks like, to make sure I'm clear with this on the wells moving down to the Woodford, I guess is it fair to say then that all that activity I guess is going to be in of those either in the new partnership with BP or Vanguard or is all the activity in that going to be connected with those two?

Jonny Jones

Yes, it is. For the rest this year that's correct.

Neal Dingmann - SunTrust

And then last question, I'll open it up again. As far as just you missed the 20-stage frac design. Why aren’t you looking at things to maybe lengthen that to see just what kind of results you're getting if you would go much further? I know you guys have done previously a lot of test around that and then (inaudible) is hard as well spacing your thoughts these in the Cleveland what you're seeing and what your thoughts are?

Jonny Jones

Yes. First, I'll tackle well spacing. We've consistently been developing in the Cleveland on five wells per section now for more than five years. We have a number of secondary positions that we've taken the full density and in fact that's sort of the go in plan now where we drill all five wells in the section at the same time and batch frac where we can. So nothing has changed there.

What we've seen, if you go back to the results I spoke to of our IP30s and frac stages back when we actually started the play, just to give you some context, we were looking at 1500 foot laterals with four frac stages and now we're maximizing a section. So we're around 4,350 feet of frac stages.

And our design so far this year has been 20 stages using Packers Plus. The new case design will be Case Perf which allows to dramatically increase the frac stages but I think it's important that shortening the spacing between fracs we've really seen some significant results some other operators where we've seen dramatic increase in profit. So that's really where you're going to see our focus is not only decreasing the spacing between fracs and getting off a large number of fracs relative to the 20 we're doing now but also increasing the profit per stage. So it's a pretty dramatic change that you'll see (inaudible) we're able to announce those results and the exact design we're going to use.

It's still bit in a stage of flux. There's a lot of vendor information that we're still gathering to tweak the design to exactly what we're going to be doing. But all the wells that are remaining for rest of the year with the completions that we spoke to early will have the new frac design.


(Operator Instructions). Showing no further questions I would like to turn the conference back over to management for any closing remarks. I apologize. We do have another question, if you would like to take it, from Michael McAllister of Sterne Agee.

Michael McAllister - Sterne Agee

Off of this new frac design does that have any effect on in -- you mentioned a dramatic use of proppant. Will that have any effect on cost going forward?

Jonny Jones

Yes, as I mentioned I believe in my prepared comments, we do expect an increase in cost. We don't have a final number on what that would be yet. But one of the things that's been interesting is we've been able to increase frac stages and profit over the last couple of years and our drilling efficiency has allowed us to keep our cost flat. So we are continuing to see an improvement in efficiency. So the exact increase that will be caused by the proppant and how much that we can offset with our efficiencies is something we're studying right now before we provide any guidance on that.

Michael McAllister - Sterne Agee

So it can be offset by drilling efficiencies and tight days of drilling?

Jonny Jones

We're hopeful that some cost can -- we will -- we do expect to see an increase in cost and have actually provided an uptick in our CapEx for the rest of the year to account for that increased cost.

Michael McAllister - Sterne Agee

Could you also comment on some of the M&A activity that's happening around you? There seems to be a lot of interest in your area and well there is any commentary you can give on that if possible would be much appreciated.

Jonny Jones

Yes. I can't speak to any specific transactions. Obviously, there's a lot of activity in the area which we're monitoring very closely. One of the things that we remind everyone is when we did IPO one of thesis around that was there's going to be a lot of activity in our area which is kind of the past and met a lot of interest. The number has been four, five data rooms actually there within our area where we're very active and we've been monitoring that activity. We don't have anything to announce at the present there obviously actively involved in evaluating all the opportunities that are out there.


Thank you. Next we have a question from Biju Perincheril of Jefferies.

Biju Perincheril - Jefferies

Following up on the previous question about acquisitions, can you talk about sort of your interest level in the various plays in the mid-continent? Are you looking still at sort of mainly focused on the Cleveland program or what's your relative interest level in play maybe at Granite Wash versus the Cleveland or Marmiton?

Jonny Jones

Obviously we have over 500 locations in Cleveland and plan to continue with the level of activity we have there. We have the ability with the inventory we have to significantly increase our level of activity in Woodford as we see results from our current activity. To remind everyone, we do have a large number of locations, HBP in both Tonkawa and the Marmiton.

Some of the M&A activity has been in the Marmiton which is something that's been interesting for us to watch. Operators are actually drilling wells offsetting us in both the Marmiton and Tonkawa.

We expect to provide some guidance as to our activity levels in those two plays sometime in December following our board meeting when we expect to provide 2014 guidance. I do not expect to see us putting an emphasis into the Granite Wash. We're seeing economics there that are competitive with our other opportunities.


And this does conclude the question and answer session and I will turn the call back over to management for closing remarks.

Jonny Jones

Thank you, operator. I am very excited about the progress we've made in executing our plan to increase rig count, drilling complete wells at low cost and I'm comfortable that we can continue to execute on the plan. In addition, the new completion design we are testing holds great promise and we look forward to updating the market on the outcome. Operator, you may now bring this call to a close.


Thank you. As a reminder, an audio replay will be available through 9:00 a.m. Eastern Time December 9, 2013 by calling (877) 344-7529 for US callers, or (412) 317-0088 for international and entering conference code 10036135. A replay of the conference call may also be found on the company’s website Thank you for attending today’s presentation. You may now disconnect your lines.

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