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Synergy Resources Corporation (NYSEMKT:SYRG)

F1Q14 Earnings Conference Call

January 7, 2014 12:00 PM ET

Executives

Edward Holloway - President and CEO

Frank (Monty) Jennings - CFO

William Scaff, Jr. - EVP, Secretary and Treasurer

Craig Rasmuson - VP, Operations and Production

Analysts

Bertrand Donnes, III - Johnson Rice

Ryan Oatman - SunTrust Robinson Humphrey

Irene Haas - Wunderlich Securities, Inc.

John Malone - Mizuho Securities

Joel Musante - Euro Pacific Equities

Ipsit Mohanty - Cannacord Genuity

Jared Lewis - Northland Capital Markets

David Snow - Energy Equities

Raymond Deacon - Brean Murray Carret & Co.

Joseph Reagor - Roth Capital Partners

David Beard - Iberia Capital Partners

Jack Aydin - Key Banc

Steve Emerson - Emerson Investment Group

Operator

Good morning everyone and thank you for joining us to discuss Synergy Resources' First Quarter Results for the period ended November 30th, 2013.

With us today are Synergy Resources' President and CEO, Mr. Ed Holloway; the Company's Executive Vice President, Mr. William Scaff Jr.; and CFO, Mr. Monty Jennings. Vice President of Operations, Mr. Craig Rasmuson will be available to answer questions during the question-and-answer session. Following the prepared remarks, we'll open the call to your questions.

Then before the conclusion of today's call, I'll provide the necessary precautions regarding forward-looking statements made by management during this call. I would like to remind everyone that today's audio conference call will be available for replay through January 21st, 2014. The webcast replay will also be available via the company's website at www.syrginfo.com.

I would now like to turn the call over to the President and CEO of Synergy Resources, Mr. Ed Holloway. Sir, please proceed.

Edward Holloway

Thank you, Manny, and thanks to everyone for joining us today and Happy New Year. We issued a press release this morning, announcing our financial results for our fiscal 2014 first quarter ending November 30, 2013. The first quarter of the fiscal year was notable, due to the commencement of our operated horizontal production from the Renfroe pad in the Wattenberg Field, which significantly contributed to the record revenue of $19.3 million in the quarter, compared to $8.3 million in revenue for our year ago period.

Our operating income grew to $7.2 million in the first quarter versus $3.5 million for the first quarter of 2013. During the quarter, our oil and natural gas production increased 93% over last year, to a total of nearly 292,000 BOEs. This equates to an average of 3,208 BOEs per day compared to 1,658 BOEs per day a year ago.

We also achieved a 31% production growth in the quarter over the fourth quarter, despite a catastrophic flooding in Colorado during September, and the persistent mid-stream restraints hindering production.

In the first quarter, we completed drilling horizontal wells at our Leffler pad and began completion of those wells in late November. We also began drilling the first of the six horizontal wells planned on the Phelps pad.

We are drilling and completing horizontal wells, significantly under the original budget of $4.5 million per well, and we estimate that our all-in costs per standard horizontal well will range between $3.4 million to $3.8 million, depending on the number of frac stages and lateral length of each well.

With our increased cash flow from operations, the $53 million remaining on our $90 million borrowing base for the terms of our $300 million credit facility, the $61 million of available cash on our balance sheet, and the continued cash proceeds from the exercise of our $6 warrants, we are well positioned to execute on an increased fiscal 2014 capital expenditure budget of $189 million.

I would like to now turn the call over to our CFO, Monty Jennings, to take us through the details of our financial results for the first quarter. Monty?

Frank (Monty) Jennings

Thank you, Ed, and good day to everyone. Now, turning to our income statement; our revenues totaled $19.3 million in the first fiscal quarter of 2014. This represented a sequential increase of 31% from the previous quarter, and up 132% from the same quarter a year ago. The year-over-year improvement was due to the 93% increase in production. The increase in production was enhanced by a 20% increase in our realized average selling price per BOE.

During fiscal Q1 2014, our average sales prices were $93.06 per barrel of oil and $4.86 per MCF of gas, as compared to $81.03 per barrel of oil, and $4.27 per MCF of gas for the year ago quarter.

Our operating income increased to $7.2 million, an increase of 103% from the first quarter of last year. Net income increased 173% from the year ago quarter, totaling $6.1 million or $0.08 per diluted share, versus $0.04 per share a year ago.

Adjusted EBITDA, a non-GAAP term, increased to $12.8 million in the first quarter, which represents 67% of revenue, and is a 113% increase from $6 million a year ago. Please refer to a more detailed discussion about our use of adjusted EBITDA, and its reconciliation to GAAP in our earnings release, which can be found in the news section of our website.

Now, briefly turning to the balance sheet; as of November 30, 2013, we had cash and equivalents and short term investments totaling $61 million, as compared to $12.5 million at November 30, 2012. We have $37 million outstanding on the credit facility, led by Community Banks of Colorado, as of November 30, 2013. The current interest rate on borrowings is approximately 2.7%.

We increased our commodity derivative activity during the quarter to mitigate short term price fluctuations in the price of oil. Using swaps and collars, we have hedged 30,680 barrels per month of future production, covering all of calendar year 2014. The average price of a swap position is approximately $92.22 per barrel.

During the quarter, our hedging position produced a realized loss of $398,000 and an unrealized gain of $2.6 million, both of which were recorded in other income on the income statement.

I'd like to turn the call over to Bill Scaff, our Executive Vice President, who will provide more detail of our fiscal 2014 capital expenditure plan, and the operational aspects of our business. Bill?

William Scaff, Jr.

Thanks Monty. Our transition to horizontal development in the Wattenberg field is fully underway. Our costs on the Renfroe pad, where we have between 16 to 20 stage fracs per well, range from $3.5 million to $3.7 million per well. Our 90 day average production for the three Niobrara-B bench wells on the Renfroe pad was 321 BOEs per day, and for the two Codells was 376 BOEs per day. I would like to point out, that we achieved those results at Renfroe, without the [bed] for the gas lift or compression, which we have recently installed.

Not surprisingly, we have also observed that the better performing wells on the Renfroe pad, were those that have more frac stages, thus we adjusted our completion design going forward, to allow for a greater number of stages wherever possible.

On our second operated pad, the Leffler pad, we average 20 stages per well, and our average cost per well is approximately $3.5 million. We drilled five Niobrara-B wells and one Codell well on the Leffler, and completed the wells in late December.

We had all the wells in various stages of flowback, it had 24 hour IP rates on three of the wells, before mechanical issues at DCP Midstream's gas plant in Eaton delayed further testing and production. Modifications to the Eaton plant are being finalized, and we expect to have 30-day average production rates later in the quarter.

We have installed gas lift and compression equipment at Leffler, and we are comparing Leffler's initial results to those at Renfroe, which didn't have the equipment during its initial production. Ensign Rig number 17 moved to the Phelps pad in late November, and we are now drilling the fourth well on that pad.

The Phelps pad has six wells comprised of two Niobrara-C bench wells, one Niobrara-B bench well and three Codell wells. The first well has been set up for a plug and perf completion, with 26 stages. The second well with 24 stages, and the third well has 27 stages. We plan on completing one Niobrara well and one Codell well using the plug and perf method, which some of the industry leaders are utilizing with compelling results. We expect to complete drilling on Phelps this February, and to bring the wells into production by April.

In the meantime, our second rig with the Ensign drilling, rig number 131, has spudded the first of six wells planned on our Union pad. The Union pad is permitted for two Niobrara-B bench wells, one Niobrara-C bench, and three Codell wells. We anticipate an average of 22 stages per well on the Union pad.

At this point in time, we intend to keep both, rig number 131 and rig number 17, drilling horizontal wells for the remainder of fiscal 2014. As a result, we have increased our drilling capital expenditure budget for fiscal 2014 to $153 million up from $122 million. We are currently analyzing our leasehold and pad size to potentially drill mid-lengths and extended reach lateral wells, as well as permitting wells on tighter spacing on future pads. This drilling budget includes participating in five net non-operated horizontal wells, and deploying a third rig for a short period of time, to drill vertical wells, including our D-Sand test well, in a northern extension area, which we plan to spud by the end of March 2014. On a non-operated basis, in the northern extension area, (inaudible) has spudded an extension reach lateral well, in which we have a 16% working interest.

In the meantime, we continue to manage the challenges [present] with high line pressures, midstream gas processing constraints, and limited refining capacity for crude oil produced in the DJ Basin, which we discussed in our press release issued earlier today.

Taking all this into account, we project our average daily production in fiscal 2014 will range between 5,100 and 5,500 BOEs per day, and potentially exits between 9,000 and 10,000 BOEs per day in August. The impact of running two horizontal rigs will begin to show results, as we exit this fiscal year, and move into fiscal 2015.

We have expanded our footprint to over 24,000 net acres in the greater Wattenberg area, to the closing of the Apollo and Trilogy asset purchases, as well as continued leasing activities. We are constantly reviewing opportunities to acquire assets and leases in the Wattenberg field.

We thank you for your time and interest in Synergy, and we will now open the call to any questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions). Our first question is from Bertrand Donnes of Johnson Rice. Please go ahead.

Bertrand Donnes, III - Johnson Rice

Hey guys, thanks for taking my call.

Edward Holloway

Good morning.

Bertrand Donnes, III - Johnson Rice

Good morning. Could you may be talk about the expectations on the differences in costs or may be oil cuts on the Phelps pad and the Union pad, because of the location difference?

Craig Rasmuson

This is Craig Rasmuson, we are definitely in a higher GUR area, more gassy area on both those locations. Obviously, you can see from the Eaton area, it’s a more oily area for the first two pads, the Renfroe and the Leffler pad. So we suspect we will probably see closer to 50-50 oil and gas ratio down there. There is offset reductions from one of the big operators that really excites us to the Leffler pad and also from another big operator to the Union pad. So we have a good handle going in, on what we think we are going to see, and we are excited to go ahead and maximize the production on both those pads.

Bertrand Donnes, III - Johnson Rice

Okay great. Thanks, and just one more. Could you may be just outline your expectations on LOEs throughout the remaining fiscal 2014? Do you think it should drift back down, or is it -- may be with the pad drilling or may be as you move to a different region?

Craig Rasmuson

We expect LOEs to go up, obviously, in terms of total dollars, but the production out of these horizontals comes on with that strong flush production. We actually expect to drive the LOE per BOE down a little bit over the course of this year.

William Scaff, Jr.

We have been flat for some time here, and then eventually drive it down, as we continue to drill further.

Bertrand Donnes, III - Johnson Rice

Okay. May be second quarter, I don't know, third quarter wouldn't be a dramatic drop and then -- or third quarter, fourth quarter will be a drop or?

Craig Rasmuson

I'd say probably more the third or fourth quarter, you will start to see a drop.

Bertrand Donnes, III - Johnson Rice

Great. Okay. Thanks guys.

Operator

Thank you. The next question is from Ryan Oatman of SunTrust Robinson. Please go ahead.

Ryan Oatman - SunTrust Robinson Humphrey

Hi. Good morning guys. Wanted to talk about this second rig you had. Can you speak a little bit broadly about the efficiency gains and the potential benefits you see to operating with this second Ensign rig here?

Craig Rasmuson

It's really a coup for us, with all the municipal permitting and drilling that we have ahead of us in 2014 and 2015 to be able to get a [tough drive], faster more powerful rig. It's able to drill mid-lengths and extended laterals also, and that's in our future plan. But its also, natural gas driven. So we can certainly sell the point that mission-wise and the eco-friendly drilling closer to this municipalities. Its just a win-win-win all way across the board. Its quieter, it's in the -- it is the state-of-the-art, and 'for the commercial and/or residential areas' with our future drilling plans and where we are going. Its just, like I said, there is no downside to it all. We have got the same turnkey [points] as we have on the others. So its just simply a -- there is no downsize, it's perfect.

Ryan Oatman - SunTrust Robinson Humphrey

That's great. Then a lot of peers in the DJ, not only Synergy, are talking about the differentials out there. What do you think is a decent number that you would use moving forward and how does that compare with, say where you were, in the first half of calendar 2013?

Craig Rasmuson

Well, the first half of calendar 2013, quite frankly, we had a very sweet deal with Suncor, at NYMEX minus 750. We were able to hold on to that, all the way through December 31. As you know, crude oil capacity has reached its capacity. And so, from the standpoint of railing out and where they are going in the first quarter and into the second, and third quarter 2014, we think that that will loosen up a little bit. So I am thinking, somewhere between $12 to $15 is going to be the average number that we are going to see in the discount for 2014.

Ryan Oatman - SunTrust Robinson Humphrey

Okay, great. Then finally, I mean, just very good execution in terms of the well costs. I mean, $3.5 million here versus some peers, well above $4 million. Can you talk about, your ability just to execute on that moving forward, and then the potential for that number, (inaudible) go, hate to lead you here, but potential for that number to even go potentially further with this Ensign rig here? And I will leave it at that, thank you guys.

Edward Holloway

Well, this is Ed. One thing about the Ensign rig, the new one, we should be able to cut two to three days off our drilling time per well -- going forward with what we are looking at doing here is -- I think our ability to micromanage each pad is just proving to pay dividends throughout our -- keeping ourselves well ahead of our permits, working with all our landowners and property owners on the best methods to go forward, and staying on top of the new and driving changes that are going on in the Wattenberg, which are going to (inaudible) on weekly basis, definitely a monthly basis.

We are able to move, because of our nimble footprint. And I think that's going to continue. I don't know where costs are going to go from here, but we have definitely driven them to a level that we are very proud of, knowing that we are using the best driller, the best fracking, the best fracs going forward. We are using a hybrid frac. So we are not cutting any corners, we are just executing on every element of the drilling and completion phase of the drill. So I think we are going to be able to maintain that momentum, add more frac stages, and still keep our price level well below the $4 million mark.

Ryan Oatman - SunTrust Robinson Humphrey

That's great. Thank you.

Operator

Thank you. The next question is from Irene Haas of Wunderlich Securities. Please go ahead.

Irene Haas - Wunderlich Securities, Inc.

Yeah, I just want a little clarification with this $127 million of operated horizontal budget. How many wells you can squeeze out in this particular budget?

Edward Holloway

We are looking at a gross of about 34 wells, which should net us somewhere around 32 net wells. There is still some title and waiting on some elections from other people as to their election to participate or not. But we are going to be in the 90% working interest on most of our stuff, and some of it as high as 100. So I think that's really the budget numbers, 32 net, 34 gross.

Irene Haas - Wunderlich Securities, Inc.

So 32 net operated plus the five non-operated, almost like -- almost 37 wells, roughly net?

Edward Holloway

In my math class, that's how it came out.

Irene Haas - Wunderlich Securities, Inc.

Okay, great. Thank you very much.

Edward Holloway

Thanks Irene.

Operator

Thank you. The next question is from John Malone with Mizuho. Please go ahead.

John Malone - Mizuho Securities

Yeah, good morning guys. Just to follow-up on Irene's question about non-operating wells, you have got five there. The $22.5 million budget, is that sort of the reddening stone or is there a possibility of more (inaudible) coming in over the course of the year?

Frank (Monty) Jennings

Well John, we are getting noticed by some of the larger operators as to their plans going forward. But we also get notices, of then changing from second quarter to their third quarter and with our [funky] year-end, it's really hard for us in that [down], definitely could be more, or it could be right on.

We have one very large pad within Canada that we are working on. They were talking about first quarter calendar; first quarter 2014, and now I think they are juggling with third quarter 2014. So with us overlaying their third quarter, I don't know where that's going to fall.

William Scaff, Jr.

John we have -- we have budgeted for five. But basically, as time goes on, we get noticed on more. That's why the line of credit is perfect, where it sits. That will allow us to participate in as many as we need to, going forward, to fiscal 2014.

John Malone - Mizuho Securities

Okay. Fair enough. Then just another quick budget question; you have got $30 million allocated for acquisitions. Have you targeted specific acquisitions, or are they sort of just opportunistic? And can you talk in all about how the market is for acreage there right now? I know that some of the smaller private players might be selling out?

Frank (Monty) Jennings

Well, we did announce that we closed on two acquisitions, which basically fulfill that $30 million that we had budgeted, that we are always actively talking with some of the smaller operators, as their intent going forward, keeping them in front of the wave. Some of them are having a hard time keeping up with the capital calls that they are getting. So we are always having that conversation, and we are anxious to look forward. We have a real definite criteria, where if its bolt-on, if its newer production meaning vertical wells that have been drilled in the last two to three -- or actually five years, it hasn't been refracked and it's adjacent to our acreage. We have a high degree of interest going forward.

If it's scattered acreage throughout the basin, we'd have to really look at it from being able to get it at a very reasonable price going forward. So we are really looking for bolt-on or acreage that we can use as poker chips with the other big operators to trade back and forth, and to block up more of our acreage. With our low cost profile that we are achieving, its much better for us to be the operator than the non-op.

John Malone - Mizuho Securities

Okay. Just one more quick one for me. You talked about the Renfroe numbers being prior to putting on gas lifts and compression. So Craig, can you give us any sense of what kind of uplifts, in terms of production increase, you can see from adding compression, adding gas lift?

Craig Rasmuson

We've attracted with some other operators, and we certainly have seen anywhere from -- as little as 7% to 10% increase all the way to 20%, 25% increase. So its kind of a moving target right now for us, I think it will be better after 30 days, 60 days, 90 days to give you true numbers there. We are excited in the area that we are in, simply, it's for the first two pads, simply because they are very oily and we have a lot of good (inaudible) and a lot of good liquid in that well bore. But they are just not the bores for our gas line. So ultimately, let's just see the better side of those percentages.

William Scaff, Jr.

With the wells being on a natural decline, its hard to gauge also, but Craig's right. We typically see somewhere around between 10% and 20%.

John Malone - Mizuho Securities

Okay. Thanks guys.

Operator

Thank you. The next question comes from Joel Musante of Euro Pacific Capital. Please go ahead.

Joel Musante - Euro Pacific Equities

Hey guys.

Edward Holloway

Good morning Joel.

Joel Musante - Euro Pacific Equities

Right now, I mean, it looks like the well that you are drilling has a very high working interest in. How sustainable is that? I mean, going forward what kind of working interest can we expect?

Edward Holloway

I think Joel, we are really planning for the near future being a north of 90% working interest. That would change, if all of a sudden, we decided that the extended laterals and bringing in another operator as a non-operator, including their acreage, and it made sense, we would look at that. But as it stands today, we are going to be at the 90% or above. Everything we are permitting.

Craig Rasmuson

Joel, even on the wells in which we participate, as a non-operator, we can kind of see the reverse of that. End of November, we were actually participants in eight wells that were in progress, eight gross wells. But that eight gross wells equated to less than one net well to our interest. Certainly, it was kind of drilling better -- better spots, but they have got a high working interest amount.

Joel Musante - Euro Pacific Equities

Right. Makes sense. Okay. And just one more; on the interest expense, you guys have been capitalizing interest for a few quarters now, and I was just wondering, when we could expect to see interest hit the income statement?

Frank (Monty) Jennings

What we do is, as we incur this interest expense; because we have got all these developments in progress right now, they do qualify for interest capitalization. So we capitalize all that interest. Now it goes into the full cost pool, and it ends up being amortized. So you are really seeing, in that DD&A number, you are seeing some of that interest come back through. We don't break it out separately at that point.

You can see a -- we will give some details on the actual interests that we paid; in the 10-Q, that we will file for this quarter, so you'd be able to see that. But as long as we maintain a pretty big inventory of projects in progress, and a relatively low balance on the debt, we will qualify to capitalize that interest, as long as we maintain those ratios.

Joel Musante - Euro Pacific Equities

Okay. Well, thanks a lot, and that's all I had.

Operator

Thank you. The next question is from Ipsit Mohanty of Cannacord. Please go ahead.

Ipsit Mohanty - Cannacord Genuity

Good morning guys. Thanks for taking my questions. Just a couple of questions. One a little broader, and one Synergy specific. What's your outlook in 2014 on the expansion in midstream versus the intense activity, in terms of the high line pressure situation?

Edward Holloway

Well, this is Ed. DCP is currently working at a very strong pace to improve on that. But with that being said, I don't know if they are going to be able to keep up with the pace of the industry going forward. I do find it very encouraging in Noble's comments, that they are, I believe moving nine of their 11 rigs out in their extended area, and I believe one of the reasons for that, is they are waiting for Wattenberg midstream to catchup with everything, going forward. So that's actually a good sign for us, and there is not another major player in there, really pressing the issue in the Wattenberg field. We think they are going to -- its going to be hard for them, just through the permitting process, they are able to raise the capital. I think 2015 is going to be a very interesting year from their standpoint and ours, as far as midstream. But we are planning on battling what we have battled in the last two years.

Ipsit Mohanty - Cannacord Genuity

So is it the summer of 2015 that you are really looking at an inflection point?

Edward Holloway

I hope so.

Ipsit Mohanty - Cannacord Genuity

All right. Wonderful. Thank you. And then, most of my questions have been addressed, but one still outstanding is an update on your efforts, basically your plans for the Greenhorn shale?

Edward Holloway

Well, we did announce what we are doing. We have classified a D-Sand test, which is below the Greenhorn and during that test, we will be evaluating the D-Sand, the J-Sand, the Greenhorn, Codell and Niobrara in that test well.

Ipsit Mohanty - Cannacord Genuity

That's wonderful. Thank you.

Operator

Thank you. The next question is from Jared Lewis with Northland Securities. Please go ahead.

Jared Lewis - Northland Capital Markets

Good morning guys. Thanks for taking my question.

Edward Holloway

Hey Jared. Are you warm?

Jared Lewis - Northland Capital Markets

Barely. It's cold, it's very cold. When you look at your acreage, where do you see the opportunity on your extended reach program? How extensive do you think it could go across the acreage?

Edward Holloway

Well, we are getting more and more data, understanding the play through Whiting and Noble and Carizzo. We are very excited in what we have put together there. I think this test well is really going to give us a good indication of what the quality of the rock is, compared to some other parts of that extended reach play. We are actively looking at acreage in that area, and we keep hearing compelling results from Barrett, Bonanza Creek, Carizzo, Whiting and Noble.

Jared Lewis - Northland Capital Markets

Okay, great. Kind of another midstream question, how big of an impact was it in the quarter, and if you look at it from where it was in Q1 to now, where would you quantify capacity adds?

Edward Holloway

I would classify it at the same level. It helped for a very short period of time, and I would say line pressures generally have come down, but they are still registering on the high level, and Craig can probably give you more of an operational frustration with that.

Craig Rasmuson

It was great for a period of time, a short period of time when pressures dropped in some parts of the Wattenberg, if you will, as many as 80 to 100 pounds. It was short-lived, and our frustration, our headaches now operation in the field is, they will fluctuate. You will have something that's 160, 180 pounds one day, and the next day it's back to 280, 300 pounds. And when you are setting in your operation, gentlemen that are on the location for your setting to run the pressure and/or time, it just loads your wells up when you have that big increase in the -- in pressure.

Our field people have begged me and they just said, hey, we'd rather -- obviously in the perfect world, 150, 180 pounds would be great. But just give us 280 consistently, and we will continue to compress, we will continue to find our way in. And the fluctuation is what has made it really-really tough on us. The DCP's plant going down just before Christmas, right there a mile from our Leffler pad, has just passed, something over 400 pounds, in that neighborhood, and its just all the other operators, including ourselves and some of our vertical production in that neighborhood has been impacted greatly, being down since December 23rd.

It is supposed to be on the 5th, now we are here in the 10th, we are open, as we are close to the 10th, it is now at the 15th. So we are just hoping to get that plant back up and running. It is a 25 year old plant that had some major issues that needed to be overhauled and some maintenance issues that just all hit kind of the perfect storm in that area, (inaudible), which really obviously the perfect storm against us and our initial production [of those Leffler's]. So we are excited to get them on, even if it’s at 300 pounds, when everything is trying to flowback, that will be fine, because those will be (inaudible) as well in the neighborhood of different (inaudible). We need these competing at that plant back on.

While we are waiting, we have been putting in tubing and compression, so that when we go on, we are ready to go.

Jared Lewis - Northland Capital Markets

Okay, I have got to ask though. The wells are basically -- once you get the go-ahead, you will turn those things on?

Craig Rasmuson

They are ready, and they are ready with all the bells and whistles that we didn't have wondering for like Bill said -- on the Renfroe; the Renfroes are flowing back. They are in the flood. We got affected by a lot of rain up there. Fortunately, no flooding in that neighborhood. So we didn't tube a month, right away, and now these are tubed up, and these are knocked out, they are ready to flow. They are all flowing back, and the compressors are fired up on location. So we will get a true good 30-day, 90-day read on those wells, once DCP gets flowing again.

Edward Holloway

(Inaudible) Craig?

Craig Rasmuson

They are saying they have temporary (inaudible), which is this weekend, Friday-Saturday is when they are open, that they are going to be up and operational again. We had this terrible cold snap yesterday, hopefully that didn't delay at all. It's warming back up, into the 40s for us, and into the 50s this weekend is what the forecast is. So hopefully, we will get back up and running.

Edward Holloway

Got to fall to zero.

Jared Lewis - Northland Capital Markets

I was going to say. It's 22 below here. I mean, you need to come and visit again, Ed. Thank you very much for the color, that's all I had.

Edward Holloway

Thanks.

Craig Rasmuson

Thank you.

Operator

Thank you. The next question is from David Snow of Energy Equities. Please go ahead.

David Snow - Energy Equities

Yes, hi. Will the plug and perf wells use a cemented liner?

Craig Rasmuson

Yes.

David Snow - Energy Equities

Okay; and I am wondering, is there anything new in Nebraska?

Edward Holloway

Well, yes there is, nothing to announce. The drilling activity continues to pick up, what we believe, some fairly significant discoveries have been made. Some are very close to some of our leasehold acreage. So we are really keeping -- really close watch on what's developing out there.

David Snow - Energy Equities

Is that more recently, it seems like there is a hiatus about half a year ago?

Edward Holloway

This all, recently. It's -- I don't know how many rigs are going, we will get that report from George Seward who is on our Board, who lives out in that area. And the other problem is, Nebraska is really slow on requiring reporting, and it’s a lot of small independents or, I think the only real public company out there is Credo-Forestar, who keeps continuing to permit on their drilling programs. So we are watching that -- believe me, we are watching it.

David Snow - Energy Equities

Okay. And I am wondering, didn't you do one Greenhorn test and you weren't too excited about it?

Edward Holloway

Well, we did one Greenhorn test in the Wattenberg. I wouldn't classify it exciting, but is very consistent. It's viable, but its now going to the horizontal side, we need to see someone test the Greenhorn horizontally, going forward. It's basically been what Craig -- five to six barrel a day well, 20 to 30 MCF of gas.

Craig Rasmuson

Keep in mind, that's vertical. That's been a year old now too.

Edward Holloway

Yeah. The decline has been miniscule.

David Snow - Energy Equities

Are you planning a horizontal in this well that's coming up, or vertical?

Edward Holloway

The extended areas are going to be a vertical test, to get core samples and look at the D-Sands, which could be very prolific.

Craig Rasmuson

But the goal is to move to a more horizontal Greenhorn.

Edward Holloway

Right.

Craig Rasmuson

That's the approach of that particular project.

Edward Holloway

In the extended area.

David Snow - Energy Equities

Okay. And what kind of a spacing potentially do you think is possible now?

Edward Holloway

Well it looks to us, and really watching Noble, who has really been pressing the envelope from a spacing side, is that it looks like to us that, in the right areas, 24 wells per section in the Wattenberg.

David Snow - Energy Equities

Okay. That would include all the different zones?

Edward Holloway

That would include Niobrara and the Codell. That would not include J-Sand, which is viable, and the Shannon and Sussex which is viable in certain areas.

David Snow - Energy Equities

Okay. All right. Thank you very much.

Operator

Thank you. The next question is from Ray Deacon of Brean Capital. Please go ahead.

Raymond Deacon - Brean Murray Carret & Co.

Hey, congratulations on the quarter. I had a question about plug and perf and what type of costs you expect on those wells, and I guess, if you have any thoughts on what percentage of wells in the Wattenberg are being done with plug and perf now?

Edward Holloway

Well currently, a very low percentage is being done in the Wattenberg. Whiting is -- extensively out in extended reach area, with some tremendous results. So we had the opportunity on our Phelps pad, due to the fact that we could not get the sliding sleeves, we are having a well bore problem which we are concerned about, getting the sliding sleeves in and getting stock. So we natively went to a plug and perf, which we were wanting to do anyway. And so we will do two plug and perfs on that Phelps pad, with four, that will be a sliding sleeve. And we will probably perf every 75 feet.

It's hard, we have made a statement on stages, but its really difficult to say, we are going to have quite a few entry points compared to a sliding sleeve.

Raymond Deacon - Brean Murray Carret & Co.

Right.

Edward Holloway

Each stage may have two or three entry points in it, so its going to be interesting.

Craig Rasmuson

With two on that pad, we are going to be able to alternate, while we are fracking one well, we will be setting the perfs on the other and alternating back and forth, and by doing it that way more efficiently, we plan to see a cost of approximately the same. We are putting the cemented liner in, 4.5 inch casing, and just the cost of alternating. We don't see a marked cost increase from the sliding sleeves, we think its going to be pretty much a one-off, as long as we keep the (inaudible) of alternating between two wells on the same pad.

Edward Holloway

And I will say, we are going to do one Codell and one Niobrara.

Raymond Deacon - Brean Murray Carret & Co.

Got it. And just one more question, kind of bigger picture about the expansion area. I know, Whiting has talked about their concept of a mineral belt and why that acreage may be prospective for the Codell and Niobrara, even though resistivities initially led people to think it wouldn't be as good as the Wattenberg proper. But I guess, do you have a timeframe for kind of testing that acreage, other than the one well that you talked about, next year? Industry activity that you think will help you prove up more locations there?

Edward Holloway

I think you will see that in fiscal 2015, which will be our calendar fourth quarter 2014. I think when we announce our CapEx, we will be pushing a greater percentage of our CapEx that way, and possibly a little bit of our CapEx out in Nebraska.

Raymond Deacon - Brean Murray Carret & Co.

Got it. Got it. Thanks very much.

Edward Holloway

We are also participating in four Carizzo wells in that area, which is also going to give us a lot of information, as we move into 2015.

Raymond Deacon - Brean Murray Carret & Co.

Got it. Got it. Thank you.

Operator

Thank you. The next question is from Joseph Reagor of Roth Capital Partners. Please go ahead.

Joseph Reagor - Roth Capital Partners

Good morning guys.

Edward Holloway

Good morning.

Joseph Reagor - Roth Capital Partners

I had a few growth questions here. First one is, G&A was a little higher than normal, and that's again a figure from the short statements that are up pre-Q. Only a portion of that was really the stock-based comping up. So what was the rest of that, and how should we think about G&A going forward?

Frank (Monty) Jennings

There was also a component in there of cash compensation related to the compensation committee granting the first executive bonuses that they have granted on a discretionary basis. So that was included in this quarter, it's not expected to be an every quarter, it's not scheduled to be repeated at all at this point in time, but there was about $1.2 million in executive compensation included in this quarter.

Joseph Reagor - Roth Capital Partners

Okay. Then on the new rig contract, that one is through calendar 2014 or fiscal for you guys?

Frank (Monty) Jennings

It's calendar 2014.

Joseph Reagor - Roth Capital Partners

Okay, are there any --

Frank (Monty) Jennings

December.

Joseph Reagor - Roth Capital Partners

Okay. Are there any provisions in that contract for extending it towards 2015 and beyond, or is it just a one year contracting that (inaudible) it out next year?

Frank (Monty) Jennings

Well, there is a provision to continue with that rig, and we will start talking with them, probably as early as August-September, about just continuing that contract. At that time, we are still going to be under two rigs running, the one is more on a path-by-path basis at rig 17. So at that point in time, we will probably look at locking up two rigs, and may be have a third rig more on a pad by pad basis at that point, going into 2015.

Joseph Reagor - Roth Capital Partners

All right. Thanks guys.

Operator

Thank you. The next question is from David Beard of Iberia. Please go ahead.

David Beard - Iberia Capital Partners

Good morning gentlemen.

Frank (Monty) Jennings

Hello David.

Edward Holloway

How are you doing Dave?

David Beard - Iberia Capital Partners

Good, good. Lot of questions have been answered, just two. I wondered if you could just give us your thoughts on the mix of production horizontal, vertical and when you may see crossover there?

Craig Rasmuson

I don't understand the question.

Edward Holloway

Yeah, the crossover question kind of threw us a little bit.

David Beard - Iberia Capital Partners

Yeah, just when horizontal production will outpace vertical production?

Edward Holloway

I think it's already there.

Craig Rasmuson

Horizontal. Just with the few horizontals we drilled, we have already -- we are probably double with our vertical (inaudible) at this point.

David Beard - Iberia Capital Partners

Okay. Then maybe could you comment a little bit on the IP rates from Renfroe? How are they versus expectations or any type of, tight curve from that well?

Edward Holloway

Well, I think the Renfroe is probably not our best model to really look at, simply because we've (inaudible) those wells of seven inch casing for a period of time. Then ran tubing. We don't have compression, it's currently installed. Should be operational some time this week. Where the Lefflers are going to be coming on with everything ready to go, and so, for us, modeling a decline curve and all that, we have done that, we have given you the 30, 60 and 90 day numbers, where you can develop your decline curve going forward. Well it's going to be interesting with the Renfroes, as we spoke earlier, is what occurs when we use gas lift and compression. And gas lift, is recycling the gas back down the well bore, helping them lift the heavier crude oil to the surface, and just keep recycling it and selling off the excess going forward.

So till we have all that in place, its really hard for us to give a real -- identify the exact decline curve, and then with these wells coming on, going to more stages per well on the fracs, we are really intrigued to see how that changes the profile as well.

So like we said, we still have our training wheels on, we are learning on the fly, quick. We have quick studies. We are using the up-to-date in most, what the best practices going forward are, and we are anxious to relay all that information in future quarters.

Craig Rasmuson

But that being said, 90 days later into the Renfroe pad, we got a blended average of 376 BOEs per day on the Codell, and on the Niobraras, we are 321 BOEs per day, 90 days later. And our expectation is, we are pretty happy with those numbers, 90 days into production. 68% oil, so again, we have got real high content of oil in that particular path.

David Beard - Iberia Capital Partners

Great. I agree, those are nice numbers. Thank you for your time. I appreciate it.

Edward Holloway

Thanks David.

Operator

Thank you. The next question is from Jack Aydin of Key Banc. Please go ahead.

Jack Aydin - Key Banc

Hi guys.

Edward Holloway

Hey Jack.

Jack Aydin - Key Banc

Hey. Most of my questions were answered, but I have two follow-ups. On the guidance you issued, you said 5,100 barrels to 5,500 barrels average for 2014. How many wells, basically of that 32 net wells, you are assuming to be hooked into production?

Edward Holloway

We are looking at 27 currently, depending on the conditions going forward, it would be ideal to have all the 32 -- 34 wells, 32 net hooked up. But we are anticipating a minimum of 27.

Jack Aydin - Key Banc

Okay. Now also on the three wells that basically, your IPs, I would say, in Leffler, but it is basically because you stopped doing the work because of DCP. The initial reaction versus the other wells that you have, how do you feel about the initial results?

Craig Rasmuson

The initial results are good, and I think they are going to better, as now we continue to get compression and get them all tubed up. But they all fit fairly well with the Renfroe's initial results.

Jack Aydin - Key Banc

Appreciate it. Thank you.

Operator

Thank you. The next question is from Irene Haas if Wunderlich. Please go ahead.

Irene Haas - Wunderlich Securities, Inc.

Yes. I had two follow-up questions. Those warrants, how many have you got exercised, and secondarily, the authority is seven net wells, how many of it will make it on to the book by your fiscal year end? And then, second question is, looking at the location, how many PUD locations you think reserve engineers will grant you for each horizontal well drilled?

Edward Holloway

That's more than two follow-ups. I think that, like we mentioned, 27 of our operated horizontal wells, the real question is going to be, how many of the non-ops are going to hit, to answer that question. The PUD question is, it is an ongoing battle and struggle with the reserve engineers on coming up with PUD development. So we really do not have a really good handle as to what we are going to be able to book. That being said, its at the most negative point at this period of time, so we are definitely not overbooking anything, and its still a battle with the reserve engineers on what they are willing to do and not do, and I think its more from the standpoint that the state has come out with the spacing order. Therefore the reserve engineers don't know if it's 10 acres, 20, 50, 80, and they are just throwing their arms up and its just a real battle going forward.

Craig Rasmuson

Irene, we are still looking for a meaningful update at our February 28 reserve report. But as Ed stated, as we move forward, its going to get better and better in terms of how they view it, with more and more companies going from vertical to horizontal, having more on the books that they can compare. They'd like to see wells right next to you. So right now, its like maybe one for one, as time goes on, we think that's going to get better. So with each quarter, we think we will continue to increase the PUD value.

Irene Haas - Wunderlich Securities, Inc.

Are they giving you sort of your full -- north of 300,000 EUR per well, per zone?

Edward Holloway

Well, they are not. They are basically giving you -- from what I can see, they are giving you the -- taking area and giving well that has the longest results, whatever that is, they are using that as their baseline. And some of those are very disappointing wells that were drilled by other operators.

Irene Haas - Wunderlich Securities, Inc.

Got you.

Frank (Monty) Jennings

Yeah on the warrants, the total population of warrants was 9 million. At the end of November we were down to almost exactly half, 4.538 million, and we did get some exercises in December. We are down to 4.03 million right now.

Irene Haas - Wunderlich Securities, Inc.

Thank you.

Operator

Thank you. The next question is from John Malone of Mizuho. Please go ahead.

John Malone - Mizuho Securities

Hi guys. Just one follow-up for me. You talked about, obviously, the frustrations with the midstream bottlenecks. With your 5,100 to 5,500 guidance, how sensitive is that to the midstream problems and how you factor that in to your guidance?

Frank (Monty) Jennings

Up until now, we've had this problem as we have grown for over the last three years. So we think, even with that in place, we still can hit those numbers, otherwise we wouldn't have given those numbers, subject to midstream problems. So we think we can hit those numbers currently, with the issues that are in place.

John Malone - Mizuho Securities

So even if they persist, you think that it's something you can handle?

Frank (Monty) Jennings

Yes.

John Malone - Mizuho Securities

And then, that range, 51 to 55, is part of it the size of that range, a function of midstream doing better than you anticipated, or is it just -- you think its going to be a problem persisting the way it is?

Frank (Monty) Jennings

It's going to be a problem, persisting the way it is, and so we factor that in. And that 5100 to 5500 is with midstream being more (inaudible).

John Malone - Mizuho Securities

Okay. Thanks.

Operator

(Operator Instructions). The next question is from David Snow of Energy Equities. Please go ahead.

David Snow - Energy Equities

Yes. There were four municipalities that have banned fracking. Can you give us a general comment on how you see the overall political outlook? I guess it would be, most likely at the state level that would affect you, just some color on this issue?

Edward Holloway

Well, I think that the industry is putting on a campaign, I think (inaudible) are starting to the surface as to the whole aspect. I will tell you that, each one of those communities really has very minor oil activity going on. But with that said, they are getting all the headlines going forward. It's still a risk issue with us, and we are monitoring it on a weekly basis, through COGA and other operators, and the overall campaign going forward. My personal belief is once that the risk reward of the minor amount of pollution evolving compared to the revenue that's going to schools, libraries, fire departments, and the state, at the end of the day, be the trump card. But its still a persistent issue going forward.

Craig Rasmuson

We got to get to the public educated, and synergies are involved in that COGA, (inaudible) marketers, and other associations in the state of Colorado are really gearing up. Even, the University of Colorado is doing a frac sand study to come out. So it's third party, not coming from the oil industry. So we are looking forward to March, April, May, before the political season starts in November, to make sure that the public is educated.

David Snow - Energy Equities

The political season starts in November, did you say?

Craig Rasmuson

Well I was talking about the next -- here in November.

Edward Holloway

It will be in November.

David Snow - Energy Equities

Well is it going to be on the ballot or something?

Edward Holloway

Well, that's what they are trying to do.

David Snow - Energy Equities

What's the chance of that happening?

Edward Holloway

That's a good question. At this point in time, it would be tough to answer that, but there is probably a good chance that could happen, it's just a matter of, what frame it would take. Whether it's banning or whether it's trying to change the constitution. There is different ways that they may come at it, and that's what we are waiting to see.

David Snow - Energy Equities

Okay. Thank you very much.

Operator

Thank you. The next question is from Steve Emerson of Emerson Investment Group. Please go ahead.

Steve Emerson - Emerson Investment Group

Gentlemen.

Edward Holloway

Steve, how are you doing?

Steve Emerson - Emerson Investment Group

Good. Can you give us some flavor, as to how many acres of non-op inside the recent acquisitions you hope to complete or some range that -- give us some feel for the progress?

Frank (Monty) Jennings

Well I think you are asking about our Apollo acquisition, where we have some non-op partners, is that what you are talking about?

Steve Emerson - Emerson Investment Group

Yes.

Frank (Monty) Jennings

We are in conversation with that group. I will tell you that we made a significant acquisition. We acquired the disposal well of which Apollo had 25% and all his non-op partners elected to sell that. We now own 100% of that well going forward. That really alleviates another bottleneck that's occurring in the Wattenberg is water disposal. We have got a handle on that. We are in discussions with those parties. We are just taking a wait and see attitude. We are not going to chase it and we will just see where they want to play out. But we are in discussion and talks with them, but nothing has developed.

Steve Emerson - Emerson Investment Group

Okay. Thank you. And to make further -- perhaps you can give us some flavor as to your acquisition opportunities at this point, or basically you are tapped out, unless -- how much dry powder do you have for acquisitions, based on your budgets, and your bank line?

Frank (Monty) Jennings

Well, we are going to have a significant -- in our February determination, we think our borrowing power is going to go up significantly. I think we have enough dry powder of things that we are looking at, but we are talking to some larger operators, just preliminary thoughts going forward; climate change, things change, we have a meeting at the times and things that go, and we get a little bit larger in our capabilities. Like we have talked in the past, we like to keep everything to scale, but our scale continues to increase and become bigger and bigger. So we are constantly in conversations with many operators, and the opportunities are there, it's just a matter if they are good opportunities for us or not.

Steve Emerson - Emerson Investment Group

Excellent. And if you have to hazard a guess, how many extended reach laterals do you think you will do this year?

Craig Rasmuson

Well, that's a roll of a dice at this point. We are really looking at it. I think you are going to see our extended laterals percentage go up dramatically, since we haven't done any. So you will see us doing some extended laterals, probably in 2015. 2014, we might have a few mid laterals and all the extended laterals will be non-op.

Steve Emerson - Emerson Investment Group

Excellent. Thank you very much and great job.

Edward Holloway

Thank you.

Operator

Thank you. The next question is from Ryan Oatman of SunTrust Robinson. Please go ahead.

Ryan Oatman - SunTrust Robinson Humphrey

Thanks. One quick follow-up for me. You talked about the potential to exit the fiscal year in August at 9,000 or 10,000 barrels a day versus -- I am looking at a (inaudible) closer to six or seven. What needs to go right for that to happen, and what are the risks? I guess, to the upside and the downside for that number. Do you need to see the gas lift work in kind of the 20% increase in rates? Just kind of, trying to get a feel for the risk and the potential around hitting that (inaudible) number?

Edward Holloway

It's the oil business, and like right now, we have a plant go down, and we are down for probably two weeks. If everything goes well, and we get these wells online, or our drilling time table picks up a little bit, we have really looked at this number hard, and we think that its achievable, providing everything goes relatively smooth. So that's why, bringing on the second rig, we sped up that timeframe to where these wells will be coming on in the third and fourth quarter, we are pretty confident that we will have them on then. If we wouldn't have brought on a second rig, we would be probably drilling eight or nine wells, that probably wouldn't even get into production until after 2014 for us. So that's how critical this second rig coming on, really starting to take the lumpiness out of our production growth, and starting to mellow it out just a little bit going forward.

So that's why we are a little more optimistic about that exit rate than we were probably in the beginning, because we are really looking at just one rig, the new rig we are bringing on, to speed us up two to three days is our turnaround going forward.

William Scaff, Jr.

The key here was really bringing that (inaudible) rig on this January 1. We weren't positive when that was going to occur. Maybe the end of January, February. We are very fortunate with our relationship with Ensign. We started talking to them, they started putting it all together in December over Christmas, and obviously, we are moving forward now with that rig as we speak. So we are pretty excited about bringing that on, as early as we have. So that's going to help a lot with the timing of the revenue, in hitting the production we are talking about by the end of fiscal 2014.

Craig Rasmuson

We are also in the process of that one and triple the number of horizontal permits we have. There is a long (inaudible) survey, that are just in the (inaudible). Process is a little more lengthy as far as time, because of notices and things you are required to do, as of last August, when the state kind of tweaked the permit process, especially the municipal stuff we are doing. We will have enough permits. Permits are good for two years, so we are trying to (inaudible) that in, permits for our two rig programs, and drill into a three rig program through 2015.

Ryan Oatman - SunTrust Robinson Humphrey

Very good. Thank you.

Operator

Thank you. That is all the time we have for questions. I'd like to turn the floor back over to Mr. Holloway for any closing remarks.

Edward Holloway

Thank you, Manny. This is the most exciting time in Synergy's history, as the increase in production from horizontal drilling begins to impact our revenue, cash flows and reserves. We are focused on the Wattenberg field to provide growth for our company, as we deploy the latest practices proven in the field, combined with a keen focus on controlling costs. Thanks to everyone for joining us today, and for your interest in Synergy Resources. Please don't hesitate to contact us, if you have any further questions.

Operator, you can now conclude the conference call, and I will turn it back over to you, Manny. Thank you.

Operator

Thank you. Before we conclude today's presentation, I would like to take a moment to provide important cautions regarding forward-looking statements made during this call within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. The use of words such as believes, expects, anticipates, intends, plans, estimates, should, likely or similar expressions, indicates a forward-looking statement.

The identification in this presentation of factors that may affect the company's future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the success of the company's exploration and development efforts, the price of oil and gas, the worldwide economic situation, any change in interest rates or inflation, the willingness and ability of third parties to honor their contractual commitments; the company's ability to raise additional capital, as it may be affected by current conditions in the stock market; and competition in the oil and gas industry for risk capital; the company's capital costs, which may be affected by delays or cost overruns; the company's costs of production; environmental and other regulations, as the same presently exist or may later be amended; the ability to identify, finance and integrate any future acquisitions; and the volatility of the company's stock price.

I would like to remind everyone that today's presentation will be available for replay through January 21st, 2014 starting in approximately two hours. Please refer to this morning's press release for dialing instructions. A replay of the audio webcast will also be available via the company's Investor Relations section at www.syrginfo.com.

This ends our presentation. Thank you for joining us today. You may now disconnect.

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