Legacy Oil + Gas Inc. (OTCPK:LEGPF) Q4 2013 Earnings Conference Call March 26, 2014 11:00 AM ET
Trent Yanko - President and CEO
Matt Janisch - CFO, and Vice President, Finance
Alan Knowles - Haywood Securities
Shailender Randhawa - RBC Capital Markets
Good morning. My name is Jay and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Legacy Oil and Gas Year End Results 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 hand the call over to Mr. Trent Yanko, President and CEO. You may begin, sir.
Thank you. And good morning everyone and I do appreciate your participation on the call here today.
Just diving right in with the results out for the full year of 2013 last night following up our release from about three weeks ago on our reserves, another really strong year for Legacy, the year-over-year numbers on the production side were up 17% to just over – averaging just over 19,000 Boes a day for production for 2013.
Our cash flow was up 24% year-over-year to $277 million, cash flow per share up 16% to $1.81, what was really nice to see is how those net backs continue to move up year-over-year up 15% now to just under $50 a Boe, so that would be a record cash flow on our net back on a yearly basis for us.
And we continue to work on the cost side of things. Operating costs were down just slightly year-over-year from 2012 to 2013. But G&A was down 16% to now $2.44 per barrel. So as much as we are continuing to look at growing the top line on production and cash flow, we are working on the bottom line on our G&A and operating costs et cetera and transportation; transportation was down year-over-year as well.
On a per share basis, which we like to look at because obviously we are shareholders too, reserves per share up 13% year-over-year, production per share up 9% and cash flow per share as mentioned up 16%. This is also in the – in light of us losing about 250 Boes a day to our average production due to outages in Turner Valley because of the flooding last summer. And we had some third party outages at Quirk Creek and Moose Mountain that were obviously out of our control, but still we are able to meet guidance across the board on our production, our exit production rate, we did exceed that at 21.5.
And for CapEx for the year, we spent about 2% more than our budget and given that we accelerated some facility projects that we are going to kick off in Q1 of this year, we move them into Q4 of 2013.
On the operational side, we did give some detail in the release with the reserves, but also a little more rounding out in yesterday’s press release. Obviously, very pleased with our progress in Turner Valley, 2013 was a high-water mark so far for us in the program where we have achieved some of the strongest production rates to-date and in history in the field. And I guess the modern era of the field we have been able to be able to track the pay zones much more consistently now with improved drilling, techniques and also our selective completions have realized wells that are producing at higher rates and hanging in at those higher rates much longer.
For example, our wells drilled in 2013 after six months have produced 122% more than the wells drilled out here historically by the previous operator. So that’s a very significant step change up. And we just brought on our first well of the 2014 program and we are seeing very similar results and drilling away on the second well in extremely good high quality pay right now. Some of the best operator pay we have seen in the play. So we are excited about that.
Midale big performer for us right across the board, we saw very good reserve adds in the Midale. This is a play that basically didn’t exist - the multi-stage frac Midale play did not exist three years ago.
We applied our technology and our knowledge base from our other plays, went into this area in Pinto and then to Steelman back to Taylorton, new pool discoveries Pinto East, Alameda South and beyond. So we’ve continued to not just extend existing pools. We are finding new pools. We are cumulating more land and we have additional prospects that we now picked up some 3D seismic on in Q1 and we have changed our well count here quite dramatically.
If I took the 2013 program in aggregate in all the areas we are averaging 225 Boe’s a day per well in the first 30 days very, very strong rates. And our inventory now is over 335 Midale locations. In our current [reserve] [ph] report less than 25% of those were booked so there is a very significant unbooked inventory here.
Bakken, again, strong performer for us, we continue to have good results since Star Valley. We’ve pushed the pool boundaries quite significantly but have not eroded the type curves. We are delivering 210 Boes a day on average in our Bakken wells even though we have been moving out into areas that haven’t been deemed to be productive, if I look back three years ago. Again, refinement of completion technologies, paying attention to that design and on the operation of the frac and it’s paying big, big dividends for us.
Waterfloods expanded through 2013. We are back added again in 2014. We just converted a couple of more wells here in Q1. But we did a number of expansions in 2013 at both Heward, Taylorton in Frys/Antler in the Three Forks. And we have done a lot of the ground work and we are still waiting approvals in our Spearfish play. We’ve had now two approvals in our Midale play. So those are both getting underway here in early 2014.
So for us, on the balance sheet, we saw that basically debt it’s around $680 million when we net debt at the end of the year. If we look forward on 2014, basically our budget was to spend $350 million and our thoughts we are going to cash flow $350 million. When we look at where the prices have been so far in Q1 and where the strip is taking us looks like we will be under spending cash flow, only spending 93% of cash flow to still deliver that 12% growth. So we have got potential here for some upside, the balance sheet on a debt to forward cash flow is at 1.8x. And so again, we are seeing that improvement coming as a result of us living within our means, still growing production double digits and being very, very prudent on our cost side.
Just to refresh some of the listeners again, in the context of year end results, our reserves in F&D and recycle ratio results were released three weeks ago. We had a very, very good year on that basis as well. Our net asset value per share is now up 20% year-over-year to $11.71. We were able to generate finding costs including changes to future developmental capital of $20.20 a barrel and with finding development and acquisition cost of $22.01. So fantastic numbers, top decile.
And if we look at our recycle ratio, our F&D recycle ratio was 2.5x that would be one of the best in the oil weighted space right now. So again, very, very good numbers and as mentioned reserves up 24% year-over-year to 117 million Boe’s all – 84% of that weighted to light oil and liquids.
So the continuation of good results is in place, the assets are performing as we have expected. We have been able to see some very positive operational changes in Turner Valley. Continuing improvement in Midale, the waterfloods are starting to make some impact, our corporate decline year-over-year stayed at 32%. So that’s – part of that is due to the waterflood influence and part of that is due to the low decline nature of Turner Valley. And for us, when we look back we have now put 10 strong operational quarters in a row together.
Again, with that deep, deep inventory of 2000 net locations, the line of sight and the visibility to continue growth is very, very clear for us. And just having kind of a sneak-a-peek at Q1 with the way prices have been and operating costs coming down a little bit Q4 we did have some one-time charges those are largely being eliminated on both the royalties, we under-spent cash flow in Q4. So the royalties are little higher, operating costs are little higher due to some flood related works still ongoing in the quarter. But we are looking at net backs in Q1 that are in and around $57 a Boe. So very, very robust economics and also financial results can be generated from that.
Just as an aside, we did make mention – we should mention that we are – we may have some potential impact with the NEB’s announcement coming out yesterday. Their safety order where they – it will potentially impact our production that goes through the Quirk Creek plant that we don’t operate as a third party plant. They are doing some testing on the pipeline integrity throughout Alberta, so it’s affecting a number of producers.
We did plan to have an outage as a result of a turnaround at that plant at this time anyways. So in our forecast numbers we do have – we did have that plant going down for a period of time. So we are still trying to assess the longer term impacts. But in the short-term over the next number of months we don’t think it should have much impact. But again, we need to quantify that. And we are in dialog with TransCanada and the plant operator as well.
So with that I think I can open things up now to questions and look forward to hearing what you guys have to ask. Thank you.
(Operator Instructions) And our first question comes from Alan Knowles with Haywood Securities. Your line is open.
Alan Knowles - Haywood Securities
Good morning fellas. Just a question, you guys have had some great performance on various areas with improved well results from technology and modifying your fracs. Do you have something coming down that is visible to you now that you can see continued improvement in 2014, or even moving to more use of cemented liners for instance at some of the other operators are doing?
Yes. We’ve – for us the one of our biggest strengths has been the attention that we pay to the completions and basically and predominantly the frac design. So if I actually look back over three and a half years ago we started using cemented liners in the Bakken back then. So we recognize the potential of the improvement and being able to control the frac and how those fracs initiate and the profile of them back at that time.
So we’ve moved to cemented liners, we’ve been using them in the Three Forks, in the Spearfish, in the Bakken, so a lot of our different areas. So we’ve been kind of at the forefront of that also at the forefront of using slower pumping rates and less tonnage. Again, three and a half, four years ago we recognized that as a potential cost savings but also performance enhancer in these plays and have been active in that.
Lately, we’ve been doing a lot of work on completion fluids and with the idea of introducing less damage to the reservoir and that was part of the – we think that’s a big part of the success we had at the end of the year in the Spearfish play where we saw wells come on at much higher rates and much lower water cuts we’ve used that now in the Midale and the Q1’s program I would say would be some of the most prolific wells we drilled in Midale to-date. And again, probably part and due to this completion fluid change and we’re now applying and we’ve been applying that in Turner Valley and some of our other areas. So there are still things that we can do and are doing and will continue to do, but for us when we forecast we just rely on historical. So all those would be potential upsides.
Alan Knowles - Haywood Securities
Okay. Great. Thanks very much.
Your next question comes from Shailender Randhawa with RBC Capital Markets. Your line is open.
Shailender Randhawa - RBC Capital Markets
Hi, guys. Yes, just a question on the evaluating options to accelerate the balance sheet in the release. Can you give us a sense of what the thinking is there and what a timeline might look like for [efficient] [ph] point?
Yes. Again, it’s difficult for us to put timelines on things that we are working on. I mean for us, we’d work very confident in the fact that we’re seeing the balance sheet improve on its own just basically, again, we’re living within our means and actually if the strip, if pricing continues to hang in below less than our means still growing at double digits so over the next 12 to 18 months the debt to cash flow picture here improves and without any special magic.
What we’re doing and what we’re looking at is, is there are ways that for us to accelerate that timeframe. In the context of not harming our long-term value creation, we spend a lot of time and effort putting the assets together here at Legacy successfully delineating, exploiting them, kicking them to better and better levels than they were previously before we own them. And so we realize that, that line of sight is very clear to some significant value creation.
What we’re looking at is, there are ways that we can accelerate ourselves down that path. So I guess a simple comment if it’s going to take 12 or 18 months to make that happen then that’s taking too long. So this is the priority for us we’re not, you’re not going to see us do anything out of character and out of the context of what we’ve been doing.
But we’re looking for ways to enhance the balance sheet and ultimately enhance the growth and value potential not dissimilar to what we’ve always tried to do. We’re always looking for 10 barrels a day more on a frac and we’re always looking for $10,000 a day savings on drill cost. So this is just another arena where we’re putting our efforts in to see if we can enhance shareholder value here.
Shailender Randhawa - RBC Capital Markets
Okay. And then just on the strip you mentioned how the business plan looks and the leverage comes out of it, was there a willingness to hedge more I guess in 2014 and protect some of that?
Yes. I mean we are still looking at the forward strip. Again, it’s been very backward dated for most of 2014 and that’s starting to lighten up. So we are looking at the latter part. We’re fairly significantly hedged in the first half of this year and there is not a ton more room on the first half although we do have - we do have some room in the latter half of 2014 and we are evaluating that. But our budget and our forecast is based off of - we forecast this year’s capital budget off of a low $90 WTI any wider than current differential pricing. So we still have that as a down side protection.
Shailender Randhawa - RBC Capital Markets
(Operator Instructions) And the next question comes from [Bill Clue] [ph], Private Investor. Your line is open.
Oh, hi, there. Yes. Just following up on your hedging program and it seems to me in the past of the top of my head, you sort of did anywhere in the 30% to 40% range with regard to production. And I presume that’s what you’re looking to sort of continue. But, switching slightly over from that, have you got any plans, or are you putting in anything place regarding hedging U.S., Canadian dollar position saying that we’ve seen quite a dramatic thing and if you pack that on to you’re talking double digits or 12% production growth, are you looking at locking in some of these dollar differentials given that all of your cost basically are Canadian and revenue in U.S.?
Thanks for your question. It’s Matt Janisch, the CFO. We have done various things on (indiscernible) and we’ll continue probably the biggest thing was that when we took out term debt we did that in U.S. dollars that effectively packs very significant hedge. Unfortunately what happened in the financial statements is that gets hit through the earnings, so if you saw in Q4 and for the full year we had a loss for this year, majority of that well, if you take away the hedging and the foreign exchange, we would actually had a fairly significant profit. So we have done that we think it’s prudent. And we’ll continue to look at other means of protecting ourselves.
Okay. Thank you.
Our next question comes from [Bill Menalok] (ph) Private Investor. Your line is open.
Hello, I was wondering at the Turner Valley and in the Midale play, when you run your AFEs to drill your wells, what sort of rate of returns are you showing on your – what would probably be your type curves?
Sure. In Turner Valley that’s actually moved up quite significantly. So the type curves that we are still showing and using in our forecast are quite understated from where the results have been. So when we actually use the – all the historical results the type curve generates probably about a 45%, 50% rate of return. The last seven wells Bill that we’ve drilled in Turner Valley would be well in excess of that probably pushing towards 80%.
If I look at the Midale play and roll it altogether, we’re looking, again, probably in and around 100% to 120% IRRs at 90, and again, I'm including all this at $90 WTI. And again, that’s assuming a 175 barrel a day IP where we have been on in aggregate running in all the areas at 225 and in certain areas that’s closer to 260 so if I take all the wells drilled its 225. But the last year’s drilling is much stronger than the year before which was much stronger than the year before that. So we’re seeing that continued improvement, so very robust economics at $90 oil.
Very good. Thank you very much.
The next question comes from [Jay Thomas] [ph], Investor. Your line is open.
Thanks. Good morning guys. Couple of times this morning the fact has been mentioned that you guys are thinking about improving shareholder value. From my perspective as a private investor, I haven’t seen that happen and so are you guys thinking about this, I’d like to hear your, or can you discuss your plans to try and make that happen?
Yes. And what – our belief is that we have been increasing shareholder value throughout the last four and a half years. We’ve been focusing on getting, when we started the company it was 300 Boe’s a day and about a million barrels of reserves. So we’ve seen that grow from 300 to 21,000, we’ve seen reserves go from about 1.6 million barrels to 117 million, net asset value is now $11.71 a share.
Our cost structure is lower than it was. Our visibility of growth is better. Our inventory has gone from a few hundred locations to a few thousand locations. So where we’ve been able to control our destiny, we’ve done a very good job on how we’ve approached the – on what type of assets we have in the portfolio, how we’ve drilled them, how we’ve completed them, the costs associated with the capital and the operating side and the results that we’ve been able to achieve.
Through this last couple of years, unfortunately capital markets being the way they are, that those good results haven’t been reflected in the share price. And we believe there is maybe some opportunities and a couple of different options where we can potentially improve the visibility and – of the share price and also the – to start to see that those good results over the last couple of years starting to be reflected in the price. So we’re looking at ways to potentially catalyze improvement in the balance sheet, that’s happening over time, but there is ways that we can accelerate that through potential sale of non-core non essential cash flowing type assets.
We have a very deep inventory, 2000 locations all for light oil very low risk is that something that we should potentially joint venture on, bring in third-party money to improve the balance sheet but also improve the growth rate. There is a number of under levered private companies out there that we could improve our balance sheet growth rate and increase our drilling prospects through a share exchange.
So we’re looking at a bunch of different things that can help enhance the company, nothing we will do will take us away from how we build things, we’re going to still be a light oil focused company, we’re still going to be conservative operators, very prudent operators, very technically driven and focused.
But what can we do to further, again, get the excitement back in the story, the numbers are the numbers, they’ve been very good, we need to improve I think the perception and visibility of the company, it’s been maybe easy to ignore us in these tough capital markets and we’re not alone and we need to start getting some attention back. And we’re putting our money in our office, we’re delivering the financial and operational results and we’d love to see that translate into a higher share price.
Fortunately, we haven’t required external capital to execute our business plan that was part of our by-design we haven’t needed to raise money to drill wells. We’ve been living within our means and very much so in 2014. But we are shareholders too and we’re very aware of the share price performance and are looking at ways to improve that.
Thanks for taking the time to respond to that guys.
(Operator Instructions) The next question comes from [Doug Young] [ph], Private Investor. Your line is open.
Good morning. I’m wondering if you guys have the relationship with Manitok?
At Manitok, we – in our Turner Valley property we did form out a portion of our Cardium rights to Manitok and they now have drilled two wells and have earned some land on that block. And so, for us it was a – it’s a play that we liked, but never seem to be able to get to. They’ve had very good success in the Cardium elsewhere and so it seem like a very good fit where you brought in guys that had in-depth knowledge of the play and but didn’t have the access to the assets and we have the assets, but just never seem to be able to get after that, we always focused on development elsewhere. So we are still working with Manitok on that play and I guess await their results on these wells.
Okay. Thank you.
There are no additional questions at this time. I’ll turn the call back to Mr. Yanko for closing remarks.
And again, I just like to thank everyone and for their participation today. And the results as mentioned have been good and in some instances spectacular. The company is executing on its business plan and doing it very successfully. The amount of upside that we feel that we have in Legacy is second to none in the mid-cap space and especially on the light oil weighted, given the depth of our inventory, the waterflood potential, all these have ability to add $15 to $20 on their own right of new asset value per share to the company. They’re not reliant on LNG takeaway or SAGD, this is light oil development drilling.
So we have a very, very low risk development inventory. Balance sheet is improving; we’re looking at ways to accelerate that. We are very cognizant of where the share price performance has been. Capital flows have not been in our favor, but we are looking at ways to start to leverage all the good work that we’ve done here. And I put in place and are demonstrating not only historically, but we’ll continue to demonstrate in the future.
So I do appreciate everyone’s participation. I also do appreciate shareholders support. And we are working very diligently on moving us and having to another successful year in 2014 and beyond. So thank you, again, and good morning.
This concludes today’s conference call. You may now disconnect. Thank you.
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