Saratoga Resources' (SARA) CEO Tom Cooke on Q1 2014 Results - Earnings Call Transcript

May.16.14 | About: Saratoga Resources, (SARA)

Saratoga Resources, Inc. (NYSEMKT:SARA)

Q1 2014 Earnings Conference Call

May 16, 2014 10:30 AM ET

Executives

Brad Holmes – Manager, IR

Tom Cooke – Chairman, CEO and Founder

Andy Clifford – President

John Ebert – VP, Finance and Business Development

Analysts

Noel Parks – Ladenburg Thalmann

Evan Richard – Sidoti & Company

Owen Douglas – Robert W. Baird

Joe Dancy – LSGI Advisor

Operator

Good day, ladies and gentlemen. And welcome to the Saratoga Resources Results of Operations for Q1 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this call is being recorded.

I would now like to turn the call over to Mr. Brad Holmes, Manager of Investor Relations. Sir, you may proceed.

Brad Holmes

Thank you, Nicholas and good morning, everyone. And thanks for joining us for the first quarter 2014 conference call for Saratoga Resources.

Before we begin, I need to remind everyone that this call will contain certain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, which are intended to be covered by the Safe Harbors created there under.

To the extent that there are statements that are not recitations of historical facts, such statements constitute forward-looking statements that, by definition, involve risks and uncertainties. In any forward-looking statement where we express an expectation or a belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will be achieved or accomplished.

For a complete forward-looking statement, please see our filings with the Securities and Exchange Commission.

With that, out of the way, I’d like to turn the call over to Mr. Tom Cooke, Chairman and CEO of Saratoga Resources. Tom?

Tom Cooke

Good morning, and thanks for joining us as we discuss the financial results for the first quarter of 2014, and provide an operations update. I’ll begin by providing management’s high-level view of operations and then Andy Clifford and John Ebert will discuss operations and financial results and final proposition in more detail.

As I mentioned in our year-end call, production declines associated with excessive downtime were a major challenge during Q1 and substantial amount of management’s time and attention as well as investments of financial resources were devoured in addressing downtime and other field operating issues that weighed on our production and revenue.

I’m pleased to be able to report that our efforts and investments are paying dividends and we begin to see our runtimes and production rates go up substantially with our runtime increasing approximately 50%.

Andy, will discuss production in more detail but I would note that by the end of March production had increased to 1,875 BOE per day from our average of 1,330 BOE per day for the full quarter and we’ve been able to maintain these rates.

Our Q1 initiatives included number one, numerous personnel changes in the field in our Covington office and significant increases in gas availability for gas lift plus sales and increased water disposal capacity. Our continued focus is to move all major bottlenecks to productivity and runtime.

With field operations coming under control, we are entering Q2 with much greater optimism. Our production is up, the cash is once more growing and we’re back in the field drilling. Rocky 3, our second horizontal well and a look alike to our Rocky 1 well, reached TD on Wednesday evening. And we’re currently in the completion phase of the operations.

Based on what we’ve seen on the logs, we feel very good about Rocky 3 and expect results similar or better than Rocky 1.

We also have a rig in Grand Bay, where we are completing the 19 A-Sand in the QQ24 well, we have just finished our gravel pack completion, all went according to plan. We expect good results.

Immediately following the rig workover on QQ24, we will undertake a re-completion in the 14 A-Sand and the QQ25. We expect to have Rocky 3, the QQ24 and the QQ25 wells, all in production within the next two to three weeks. We expect to be back drilling wells by this fall. And Andy will provide some color on that.

I would also announce – note that we added four highly qualified professionals to our team during Q1, and early Q2. We now have our deepest and we believe most capable professional staff in our history and believe we are well positioned to analyze, select, execute on the most attractive prospects to maximize our bang for the buck on development dollars spent.

I am pleased to report that the company morale has never been better.

As for operating results, John will provide more details, but we did report a sizeable ops to the quarter driven by principally run-time issues discussed and the resulting drop in production and the revenues, production in revenues. As well as the temporary incurrence of higher cost in the field as we turned over substantial portion of field operating personnel and invested in repairs and maintenance to facilities.

With the pain of the first quarter, particularly the first two months of the year behind us, and runtimes production and cash flow once more growing, we are optimistic that we will see improved performance over the balance of 2014.

I’ll turn the call over now to our President, Andy Clifford to discuss operations, after which John Ebert, our VP, Finance and Business Development, will discuss financial results. Then we will take your questions. Thank you. Andy?

Andy Clifford

Good morning, thank you, Tom. Our production was down 48.1% from Q1 2013 levels to 119.7% in BOE. The decline in production was driven principally by decreased run rates in multiple fields and reflected a lack of adequate cash net volumes and a lack of adequate water disposal capacity.

Runtime for January and February fell to an average of 54% from 71% in Q1 2013 and 75% for fiscal 2013. For the full quarter, runtimes averaged 61% and production averaged 1,330 barrels of oil equivalent per day.

Following the personnel changes, position of gas lift to gas availability and water disposal capacity, our runtimes and production rebounded during the last month of the quarter and it’s continued to improve following the quarter end.

As noted, production volumes averaged 1,875 BOE per day, that’s a 41% increase over the first quarter average, average that volume over the last seven days of the quarter and remained at or near those levels today. These levels should continue to improve.

While we are pleased with the turnaround we’ve experienced in the field, we will continue to closely monitor field operations to show there is no reoccurrence of the issues that adversely impacted our Q1 runtimes and production.

Included in and in addition too, the initiatives undertaken in the field during the quarter, which was successfully completed certain workovers and one re-completion during the quarter with one re-completion in progress at quarter end.

Among the workovers completed, four were water disposal wells which, was expected to provide adequate water disposal capacity to support our production for the foreseeable future. In fact, we are now once again making gas sales and don’t mind doing that with effective gas prices of over $5 an MCF that we are now seeing.

Since getting our arms around the field operating issues, we’ve turned our attention back to our development program and optimistic about the project’s current, ongoing and planned.

We reached TD in our Rocky 3 well on Wednesday evening with a measured depth of 7,178 feet and true available depth of 5,818 feet, giving us 733 feet of lateral beyond the 7 and 5A inter-casing shoot, with 770 foot screen which is going to be gravel pack.

Rocky 3 is our second truly horizontal well in Breton Sound 32 field and (inaudible) to a Rocky 1 well, which initially tested over 600 BOE per day in August and has continued to perform nicely. Subject to satisfactory testing and depreciation of Rocky 3, we are hopeful of having the one online by June 1, 2014.

We currently have a rig in Grand Bay, filings with the 19 A-Sand gravel pack re-completion although state leads 195 QQ24 route 1 wells. After the QQ24 well, we have scheduled a non-rig one on re-completion of the 14 A-Sand in the state leads 195 QQ25 route 2 well.

Our present plans are to resume development drilling by the fall. Our several prospects want to evaluation including frozen horizontal wells with starting the first of our Zeke Grand Bay wells Goldeneye, with completed analysis of the prospect and the presently actively marketing the prospect to prospective partners.

We’re also completing our field studies to optimize well selection and well planning and continue to make progress towards packaging our other deep prospects, including our Gulf of Mexico prospects, for presentation to potential partners.

In Gulf or GoM prospects, we’ve recently completed acquiring shallow hazard 3d surveys in each block, a prerequisite for well permitting.

Finally, as Tom mentioned, as we have previously announced, we have expanded the depth and quality of our professional staff and are already seeing positive results in such additions.

With that, I’ll turn the call over to John Ebert to discuss the financials.

John Ebert

Thank you, Tom and Andy and welcome to those on the call. I’m not going to go through the financials line-by-line, but I will touch on some of the key financial metrics and developments for the quarter.

Oil and gas revenues for Q1 2014 were $10.6 million, down 45% from Q1 2013. The decline in oil and gas revenues for the quarter were directly attributable to runtime and other field operations discussed by Tom and Andy, which resulted in a 48.1% decline in production volumes for the quarter on a year-over-year basis.

The discretionary cash flow dropped to negative $5.2 million or $0.17 per fully diluted share in Q1 2014 compared to $5.1 million or $0.16 per fully diluted share for Q1 2013.

Our EBITDAX for Q1 2014 was $100,000 down from $9.9 million in Q1 2013. Both, discretionary cash flow and EBITDAX were adversely impacted by the production declines discussed and the resulting reductions in revenues.

Operating income for the quarter was down to a loss of $2.2 million from income of $3.7 million in Q1 2013. The decline in operating income and profitability for the quarter reflects the substantial declines in production volumes, together with higher lease operating expenses associated with the various initiatives undertaken in the field during the quarter which were partially offset by lower DD&A and reduced severance taxes resulting from refunds of severance taxes associated with Rocky, Zeke and Mesa Verde wells drilled in prior periods.

The net loss for the quarter also reflected the fact that we have fully reserved against our deferred tax asset and do not reflect any tax benefit associated with the loss for the quarter.

At March 31, 2014, we had $20.4 million of cash on hand and working capital of $14.6 million. We start to fully fund our 2014 development budget to cash on hand and projected operating cash flow.

We continue to take substantial steps to minimize our exposure to commodity price risks with the establishment and maintenance of hedging program. As of March 31, 2014, we are 45,500 barrels hedged on a fixed price (inaudible) swap averaging approximately $105.68 during the second quarter of 2014.

We are continually looking at the hedging markets and plan to layer in more hedges for 2014 and beyond as we deem appropriate.

Our hedging activity today has been focused fully on oil with the recent strengthening in natural gas prices, we are monitoring natural gas pricing and make it to their hedging natural gas prices in the future.

With that, I’ll turn the call back to Tom.

Tom Cooke

Thank you, John. I think we’ll just open it up to questions. So, please feel free to ask us whatever is on your mind. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Noel Parks with Ladenburg Thalmann. Your line is now open. Please proceed with your question.

Noel Parks – Ladenburg Thalmann

Good morning.

Tom Cooke

Good morning, Noel.

Noel Parks – Ladenburg Thalmann

I know you talked about water disposal as being among one of the issues you were working on in the last call. I guess, I hadn’t really focused as much on that, can you just talk more about what those issues were? And I see in the release you said that you did some of those re-completions to I guess the water disposal wells as well?

Tom Cooke

Yes, what we did, I think it goes back to the personnel issues. We actually had oil flowing over into our water disposal wells which were causing an emotion that we found we really couldn’t treat by coil. So, what we did is, we have substantial zone available to us and permitted so we just went in with a re-completion or not a re-completion but with additional perfs.

Now that still leaves open the option to go deeper but we basically by adding the perfs doubled our water disposal capacity in Breton Sound 32 and we’re looking to doing something similar in Grand Bay now.

So, we’re much better than we were. We have seen temporary results from previous coil work on those wells, but I think that this kind of called for quick solution and a good economic solution. So, what we did is we added perfs to the water disposal sands. And we have, I don’t know, we’re somewhere in the 20,000 to 30,000 barrels a day capacity.

The pumps cool down our need for changing out pumps was delayed or deferred into the future. So, we made a lot of progress by adding the perforations to those wells. And like I said, we’re doing the same thing at Grand Bay, not having to drill any new wells. We’ve got another couple of wells in Grand Bay that are kind of standing by.

So, I can, where we have bottlenecks to production because of water disposal that has been cleared up. And actually, we’re doing some work in Grand Bay as I mentioned but we’re in great shape today.

Noel Parks – Ladenburg Thalmann

Thanks. And in the offshore Gulf properties, the seller has a seismic for permitting. When you acquired those properties, were there any existing permits you got with them or you basically started scratching the permitting process there?

Andy Clifford

No, we investigated previous operators, their surveys for the (inaudible) as the last hurricane, which I guess was Isaac, Gustav and basically of we went to reacquire a new survey after a hurricane. So we did our own surveys and hopefully we could put on to the cost back, some cost back through joint venture discussions.

Noel Parks – Ladenburg Thalmann

Okay. And, also as far as partners you mentioned marketing Goldeneye for a partner. What sort of gross well cost are you looking at for Goldeneye?

John Ebert

Gross well cost in about $10 million to $12 million range with – fully completed and tied back to facilities.

Noel Parks – Ladenburg Thalmann

Okay, got you. And, just how long a process is that sort of doing in completion, about a quarter or so or?

Andy Clifford

I think it’s about 60 days to drill and complete.

Noel Parks – Ladenburg Thalmann

Okay, okay. So, once you get a partner?

Andy Clifford

Yes.

Noel Parks – Ladenburg Thalmann

Okay. Okay, that’s all from me. Thanks.

Tom Cooke

Thank you, Noel.

Operator

Thank you. Our next question comes from the line of Evan Richard with Sidoti & Company. Your line is now open. Please proceed.

Evan Richard – Sidoti & Company

Good morning, guys.

Tom Cooke

Good morning.

Evan Richard – Sidoti & Company

I’m just wondering if you could give some color on what actually caused the runtime issues and kind of what you’ve done to get them up and running again, the hire rate?

Tom Cooke

Replacement of personnel in the field. It was really without going into any great and painful detail. We had to replace basically the entire crew on 32, and strategic people, other strategic people in the field. Morale was really at a low. And there was people just weren’t being focused on what they needed to do.

And so, I think that was primarily the issue and like I said, I don’t want to go into any greater detail than that. But we replaced a substantial number of people in the field. And as a result, we’ve actually seen morale increase tremendously. Of course, when they start seeing results and they start to see production come up, that kind of helps in its own right. But I think its personnel.

Evan Richard – Sidoti & Company

Okay. And then, as for Rocky 3, when should we expect to see results announced on that?

Tom Cooke

I would say the first week of June.

Evan Richard – Sidoti & Company

Okay. And then, could you touch on the workovers, kind of how they’ve gone and what you expect the rest of the year as far as how many of those to do and with your budgeting?

Tom Cooke

Well, we’re continually upgrading those. And we have brought in a new engineer, actually two new engineers that are also reviewing all of our workovers now. The only thing that we have in the near term is the 24, which has been perforated gravel pack and actually we’re running the production tubing on that well as we speak. So that will be setup to go into production very quickly.

Now, we share the same key-way with the 25 well, so we will probably finish that and not actually bring it online until we do a wire-line uphold completion in the 25 well. And that should be a very quick and inexpensive operation and then we’ll bring both of those wells online. We also – we anticipate having both Rocky 3, the 25 and the 24 coming online approximately the 1 June.

Evan Richard – Sidoti & Company

All right, that’s helpful. That’s it from me right now. I’ll hop back in the queue.

Andy Clifford

Okay.

Tom Cooke

Thank you.

Operator

Thank you. Our next question comes from the line of Owen Douglas with Robert W. Baird. Your line is now open. Please proceed.

Owen Douglas – Robert W. Baird

Hi guys, thanks for taking the questions.

Tom Cooke

Yes.

Owen Douglas – Robert W. Baird

I just wanted to ask a little bit on your cadence for the CapEx spend and you said that you don’t expect to really start drilling until the fourth quarter of the year. But could you give me a sense on what we should be expecting to the remainder three quarters?

Tom Cooke

Well, I think what we’re drilling now we’re just not completing the Rocky 3 as far as drilling wells are concerned. But I think what we’ll do is we will kind of reevaluate the results. But we’ve got a lot of work to do in-field as part of the new focus we’re going back and we’re able to find some production and wells that have been previously shutdown, some of them for over a year.

And frankly, as we’ve gotten our water disposal up and our gas lift supply, which is really a deep supply. Now, as Andy mentioned, we’re selling gas. And we’ll be bringing on more gas with 24 and 25. So, we can look to open up new wells, or wells that produce a lot more water with the water disposal, additional perforations and the rework of the water disposal wells.

So, the number that we’re alluding to, the 1,875 is still work in progress. We anticipate that will continue to increase and we consider that to be our baseline. So, I think much of our attention is going to be focused on bringing that baseline production up and resting decline. And then we’ll have the addition of the re-completions that we added.

But you’ll see us do some additional re-completions. But I think we’re going to try to focus on bang for a buck, and getting our baseline production up through the end of the second quarter.

Owen Douglas – Robert W. Baird

So, what type of CapEx spend do you envision then to just…?

Tom Cooke

It could be, I think most of the capital expense is the bulk of the capital expense for the first half of the year, you’ve seen with the rig workover on 24 and Rocky 3 well, which appeared to be coming in at AFE.

Owen Douglas – Robert W. Baird

Okay, I see.

Andy Clifford

There were certain rigs conclusion work we’ve done sort of.

Owen Douglas – Robert W. Baird

Okay, I see. Because just looking at even if you guys were operating around that 1,875 number, it still sounds like that’s going to be a little bit challenging with regards to getting to the point of cash flow generation?

Tom Cooke

We’re going to believe so. We think that the results of Rocky 3, 24, 25 and the additional production that we’ll see increasing on our baseline. We think we’re in good shape.

Owen Douglas – Robert W. Baird

Okay. That’s it from me. I’ll hop back in the queue. Thanks for taking the questions.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Joe Dancy with LSGI Advisors. Your line is now open. Please proceed with your question.

Joe Dancy – LSGI Advisor

What’s our current production rate today roughly?

Tom Cooke

I think it’s in and around the 1,875 barrels a day that we alluded to.

Joe Dancy – LSGI Advisor

Okay, that’s what I thought. Going back to the Rocky 3, in the release and I think some of your comments you mentioned that the drilling information and the logs look really good, or looked as good as better. I think there is the words in the press release, what are you seeing there, there is a geology, is it the formation, is it where you’re hitting the formation, what looks good about the Rocky 3 that underlines that statement?

Tom Cooke

Well, first of all, I’ll talk a little bit about the way this well drilled and then I’ll turn it over to Andy a little bit to talk about the formation. We were able to stay in the very comp of the formation. We actually kind of – the formation kind of dropped on us a little bit. And so, we had about 85 feet of shale that we went right back into an ice-cleaned sand.

So, and I would say a really prime good clean sand in the Rocky where we had less than 300 feet, and the Rocky 3 well, we’ve got 575 feet of clean sand. So, our closure to the formation is approaching the double. So, we think that alone, we actually were high to the Rocky, Rocky 1 well as well.

So, drilling three horizontal without a pilot hole, we don’t know exactly where the water contact point is. But with that being an offset in being high structurally, we think that there is a lot of things going to Rocky 3.

Joe Dancy – LSGI Advisor

Okay. The Rocky 1 came in at what 600 barrels a day, and how is the decline curve on that is that pretty well holding up?

Tom Cooke

Well, it didn’t hold up 60 I wish. But it’s one of the things that we’re doing is we’re looking at bottom hold draw-downs. And we’ve really taken a very careful approach to these wells. I think it’s producing over 200 barrels a day. And I think it probably could produce more than that.

Joe Dancy – LSGI Advisor

Okay.

Tom Cooke

But we’re just being very careful of the good well and it’s going to be there a long time.

Joe Dancy – LSGI Advisor

Right.

Tom Cooke

One of these horizontal wells are still producing 100 barrels a day after 20 years that were previously drilled by Kerr McGee. We have every reason to believe that we’ve been able to duplicate that effort and hopefully improve on it before we learned offer Zeke and Rocky and Rocky 3.

Joe Dancy – LSGI Advisor

Okay. Yes, refresh me to on the 24 and 25 well, on Grand Bay, what type – is this gas or the oil or both, what’s the production out of those?

Andy Clifford

They’re principally gas condensate wells. And that’s what we expect from the current rig completion in the 19 A-Sand. But there is a mix of similar of what it was and some gas condensate. 25 is more shallower, more gas than liquids.

Joe Dancy – LSGI Advisor

Okay. And you’re getting $5 Mcf for that?

John Ebert

Yes.

Joe Dancy – LSGI Advisor

Awesome, awesome, that’s interesting.

Andy Clifford

In fact.

Joe Dancy – LSGI Advisor

Okay. Let me ask you a – this is a question you guys are actually in my finance textbook for (inaudible). And here is a question for, and it’s sort of 1,000 foot overview. You guys have the third party registered professional engineers put out the reserve reports, the PB10 of your proved reserves.

You take that number and you subtract out debt and you come out to like $7.52 per share, the stock selling right now at $1.27 a share. How are we going to – I know you have a plan to somehow because you own 35% of this outstanding shares, to get the share price closer to the – that’s the proved reserves, I mean, we’re not talking about probable reserves. What does that – do you have like an overall plan to somehow get that share price a little bit closer to the asset value is what I’m trying to ask?

Tom Cooke

Well, I think it’s – I think its performance. We’ve had a bad year and we’ve had a bad quarter. I think that you’re going to see the market respond to us being able to prove that we can produce more barrels and reach those objectives that we’ve outlined. So, we’re hopefully, have seen the bottom. We have definitely seen a sharp turn.

I could say if you go back to runtime alone with 50% increase that means you got 50% basically shut in at any given time. So that’s in the 70s now. So, I think you’re going to start to see performance and it’s – I can’t stress enough how much I believe that’s been tied to morale and performance in the field.

Joe Dancy – LSGI Advisor

Okay. I mean, because the discrepancy between the asset value and the stock, I mean, it’s substantial and it’s – you really see it this large which to me presents opportunities. And it’s interesting analysis. So, thanks guys, good luck, I appreciate the help.

Tom Cooke

No, thank you.

Andy Clifford

Thank you.

Operator

Thank you. (Operator Instructions). And pardon me, I’m not showing any further questions in the queue. I’d like to turn the call back over to Mr. Tom Cooke for any closing remarks.

Tom Cooke

Well, I think that this has been a difficult call for us, one that we weren’t looking forward to. At the year-end I think you heard us refer to the fact as we were looking at a pretty miserable quarter coming up or that – not to expect any big turnaround.

I’m happy to announce today that we have affected a turnaround in our minds. And I think the number speak for themselves with our average production being 1,330 barrels and thus lifting it up and touching 2,000 barrels with probably an average around 1,850 over the last 30 days. We used 1,875 because that’s a short period.

But all of this stuff that’s – it’s not just waving a magic wand and bringing all this stuff online. And we’ve got to point to how much we appreciate the hard work and enthusiasm of our PO personnel and the new people that have come into the office with a renewed attitude and bigger towards making our company successful.

With that, I will just like to thank everybody for participating. I beg your indulgence. Look forward to a better quarter. And we will talk to you again. If anybody cares to give us a call and talk offline, we’d be happy to talk to. Thank you.

Operator

Thank you ladies and gentlemen for participating in today’s conference. This does conclude the program. And you may all disconnect.

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