Emerald Oil's (EOX) CEO McAndrew Rudisill on Q2 2014 Results - Earnings Call Transcript

Aug. 6.14 | About: Emerald Oil, (EOX)

Emerald Oil, Inc. (NYSEMKT:EOX)

Q2 2014 Results Earnings Conference Call

August 05, 2014 10:00 AM ET

Executives

Ryan Smith - VP, Capital Markets and Strategy

McAndrew Rudisill - Chief Executive Officer

Analysts

Mark Lear - Credit Suisse

Ron Mills - Johnson Rice

Steve Berman - Canaccord

Ipsit Mohanty - GMP Securities

Curtis Trimble - Brean Capital

Jason Wangler - Wunderlich Securities

Operator

Greetings, and welcome to the Emerald Oil Second Quarter 2014 Financial and Operational Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ryan Smith, Vice President of Capital Markets and Strategy. Thank you Mr. Smith, you may now begin.

Ryan Smith

Good morning. This is Ryan Smith, Vice President of Capital Markets and Strategy. Welcome to Emerald Oil’s second quarter 2014 earnings conference call. Yesterday afternoon we issued a press release and also the Form 10-Q to report our financial and operational results for the quarter-ended June 30, 2014.

On the call with me today is McAndrew Rudisill, our Chief Executive Officer. Please be advised that our remarks, including answers to your questions may include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings release and conference call. Those risks include, among others, matters that we have been described in our earnings release, as well as in our filings with the Securities and Exchange Commission including the Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

During this conference call, we will also make references to the adjusted EBITDA, which is a non-GAAP financial measure. Reconciliation of these amounts to GAAP measures can be found in our earnings release.

I’ll now turn the call over to McAndrew.

McAndrew Rudisill

Thank you, Ryan, and good morning. We will begin with some general comments, and then we will open the call for questions. We produced an average of 3,781 Boe per day in the second quarter of 2014, which produced total oil and natural gas sales of $31.3 million and $17.4 million of adjusted EBITDA. This is the best financial and operational quarter for Emerald since inception and we expect continued high rate growth.

During the second quarter, weather co-operated and now we've been able to fracture our backlog and drilled uncompleted wells from the first quarter. We remain on schedule for our Q3 drilling and completion program. We anticipate starting our fourth operated rig in the fall in either Richland or Lewis & Clark depending on receiver permits.

During the second quarter, we made great strive in implementing increased hydrocarbon takeaway capacity. We anticipate full compliance with recent state wide gas plant regulations by early Q1, 2015. The increased hydrocarbon takeaway capacity will lower our average transportation differential by approximately $0.50 per Boe and allows to sell increased gas and liquids volumes.

In addition to increased gathering capabilities, currently being constructed we are actively working with the local electric co-op to further electrify the Low Rider and expect this electric development to be completed by the end of 2014. The substation in power lines roll out substantially reduced the cost we used in propane and diesel fuel to power our lifting operations in Low Rider.

On August 1st, we signed a definitive agreement with Liberty Resources II to acquire 31,500 net acres in Low Rider and Lewis & Clark of which 75% is operated. The acreage is currently producing approximately 400 Boe per day and represents 51.5 million of PV-10. This acreage is directly adjacent and contiguous to multiple Emerald operated drill spacing units. Over 95% of the acquired acreage is held by production and 2014 drilling schedule will not change due to this acquisition. We expect to begin developing these newly acquired units in 2015. The transaction added a 157 additional drilling locations to our inventory, bringing the current amount to 854 locations. We now control over a 110,000 net acres in Low Rider and Lewis & Clark, making us one of the largest operators in the region.

In conjunction with the transaction, we sold all of our Easy Rider position Williams County, North Dakota for total $31.6 million. The net purchase price for Emerald is $78.4 million. This amount will be fully financed by cash on hand. We do not need any external equity or debt financing as a result of the transaction. An updated map inclusive of this transaction can be found on our most recent presentation at emeraldoil.com. We expect to close this transaction at the end of August post completion customary due diligence. Accounting for pending and closed acquisitions, we now have approximately 121,000 net acres in the Williston Basin with approximately 91,000 net acres or 75% being operable. We see approximately 15,000 net acres remaining in our Low Rider and Lewis & Clark area that fit perfectly into our current operating area. We will work to acquire these acres over the next 18 months.

I will now turn the call over to Ryan to review our financial results and outlook.

Ryan Smith

Thanks, McAndrew. We ended the second quarter of 2014 with approximately $134 million in cash and nothing drawn on our revolving credit facility. To account for year-to-date completion activities in the previously discussed transaction, our borrowing base increased from $100 million to $200 million. We expect the borrowing base to continue to grow with our production reserves on our scheduled redetermination in October of 2014.

We believe that our cash on hand combined with cash flow from operations and availability under our credit facility will adequately fund our drilling program for the remainder of 2014 and into 2015, which includes the addition of a fourth drilling rig in the fall of this year. Our current liquidity pro forma for the transaction stands at approximately $256 million. We are maintaining both are remaining quarterly and annual 2014 production guidance. We previously estimated production volumes from our acreage position in Easy Rider coming online starting in the second quarter of 2014.

The future production that divested Easy Rider acreage is now fully replaced by the current production from the acquired acreage. We’re also maintaining our previously stated 2014 capital budget for well development of $250 million and the associated 25.5 net operated wells due to the high percentage of held back production acreage associated with the transaction. We are increasing our 2014 land budget to $200 million, an increase of $50 million to account for the transaction. Approximately $175 million of the 2014 land budget has been spent year-to-date. Our 2015 land budget has been revised down to $50 million.

The land budget is fully allocated to acquire an operated acreage that’s contiguous to our core focus areas and increasing working interests in existing units already operated by Emerald. Our entire capital budget continues to be focused exclusively on the Williston Basin. Revenues for the quarter ended June 30 were $31.3 million, the second quarter 2014 revenue represents a 64% increase over first quarter 2014. Production expenses for the quarter ended June 30, 2014 were 3.9 million resulting in a quarterly per unit basis of $11.45 per BOE. Our average sales price of crude oil was $87.42 per barrel and we are currently hedged at the maximum allowed under our credit agreement approximately 3,860 barrels of oil per day at an average swap price of $96.70 per barrel. We plant to continue adding hedges once our scheduled October 2014 redetermination is completed.

At this time, we would like to open the call for questions. I will turn the call over to our moderator.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Mark Lear of Credit Suisse. Please go ahead.

Mark Lear - Credit Suisse

Good morning, guys.

McAndrew Rudisill

Good morning Mark.

Mark Lear - Credit Suisse

You mentioned in the press release you are going to test cemented liner completion low rider, you have already delivered strong results from the through ramp, just wanted to get an idea from you how you expect this to potentially benefit well performance. Also wanted to get an idea what path this is going to be on, just so we have an idea how to gauge the future result and also wanted to get an idea what the additional cost might be from the test?

McAndrew Rudisill

Okay good question Mark, on the cemented liner so multiple operators in the basin, made comments about positive results that they’ve seen from implementing cemented liners in conjunction with the fracking operations, a lot of these fracs have been done using cross-linked gel in conjunction with the cemented liner and there is some very positive information regarding the combination of slickwater fracs in conjunction with cemented liners particularly in the Williams County, North Dakota, not directly adjacent to any of our operations in McKenzie, but we think that the technology is directly applicable to our area.

So, we are evaluating where to use the cemented liner right now. It's either on the towns longer location or on the (inaudible) location and we'll be putting that in this fall cost about a $150,000 or more per well, put in the cemented liner. And we're anticipating improved results from joint the cemented liner, but I'm going to clear of getting this percentage until we see how it performs relative to the jobs that are directly adjacent to where we put the cemented liner in. It's definitely as fast as we can improve our performance in the area.

Mark Lear - Credit Suisse

Great. Also just wanted to get a sense for, I know you said you are founded through 14, but I guess moving some of these leasehold budget forward, does that in anyway kind of accelerate your plans to tap the capital markets at all as you look out in to 15?

McAndrew Rudisill

It doesn't really accelerate our plans, because our borrowing base grew more quickly than we have initially anticipated in our modeling. So, that's the $100 million acreage, we got this quarter. In conjunction with the increase that we're going to receive in the third quarter and then the fourth quarter should provide us ample liquidity to take the timing as to when we want to access the debt capital markets then we pushed our planning on doing that in the early part of 2015.

Mark Lear - Credit Suisse

Understood, thanks guys.

Operator

Thank you. The next question is from Ron Mills of Johnson Rice. please go ahead.

McAndrew Rudisill

Hey Ron.

Ron Mills - Johnson Rice

Good morning McAndrew. Hey the question on the acquisition, just to when we look at the capital and operating guidance, no changes there, is it safe to assume that with the acreage you’re contributing with Ron Burgundy well similar production levels as what you’re acquiring from Liberty down in Low Rider and Lewis & Clark is first. And secondly, when you bring the fourth radian here at the end of the third quarter, so any changes on where that’s going to go, is this acquisition directed more towards the newly acquired acreage or are you plan on circling the Richland County?

McAndrew Rudisill

Okay. All good questions, let me try come up and answer it piece by piece.

So in our production forecast we had modeled production coming on line from Easy Rider starting in the second quarter of 2014. Now we’ve adapted all the Easy Rider properties and the Ron Burgundy well. We obviously do not have that production going forward. But that production is fully replaced by the production that we acquired in the Liberty transaction, it is the reason why we didn’t revise guidance associated with the transaction as it basically swapped up the Easy Rider production for the newly acquired acreage production.

And then on guidance we’ll set our guidance annually in November similar to last year and this coincides with the planning of the drilling and the completion schedule for all of 2015. So we revised our guidance upwards on the first quarter call this year to reflect the acceleration in our growth schedule that spread during the winter and which created the backlog of fracking opportunities. And we feel post to completion of this really strong operational quarter, we feel very comfortable with the guidance that we haven't placed for the remainder of this year.

And as to your question about where the fourth rig is going to go. I'd say that it’s very say high probability that that rig will probably go to work with first given the way that permits are coming in right now, we have options to start it in Richland County if we need to do so. I think from a planning perspective or going to be able to start drilling in the Liberty acreage immediately just because it takes the couple of months to get all of the planning and permitting done and in place on the acreage before we can move a rig in there.

I do think it will start to work its way into the drilling schedule by the second quarter of 2015 and then that rig will be focused a lot of those areas. And then I'd add with the transaction, if you look at the map on the presentation on page 10. One of the acres that we acquired is directly offset and in many cases, we're working interest our merged and units that we already had operational control. So in a lot of cases that increased the working interest in some of the areas where we already have plan to do some operations and then in mid-year is that new operated drillings which we're planning out now.

Ron Mills - Johnson Rice

Okay. And then Ryan maybe for you. On the you talked about (inaudible) of the field so on to be done by year-end. I know it's jump down in LOE, is what we improvement expected to continue here in he third or fourth quarter or is that really struck to get better once all those field enhancements are completed as we look into 2015?

Ryan Smith

I think it will get better once the filled enhancements are fully in effect which we are expecting early 2015. I think you will see us we’re pretty confident where we have been in the last two quarters for the remainder of 2014 in regards to just LOE per BOE metrics.

Ron Mills - Johnson Rice

Okay. And then one last one just a relative performance of the Three Forks versus the Bakken you have had pretty IP rates for both in 30 day rates and what’s your early I guess grade with the Three Forks versus the Bakken and how do you think you focus your activity between the two zones going forward based on what you have seen?

McAndrew Rudisill

Ron this is McAndrew. On the Three Forks the well performance has been, you can look at the IP rates and then the longer term performance in our presentation it’s been pretty consistent across the acreage, it looks like the Three Forks wells are on average 500 to 550 EUR wells there are smaller wells than what you get from the Middle Bakken well I think that’s consistent across the entire Williston Basin. The upper Three Forks is a inner zone than the middle Three Forks and inherently because it’s been just a little bit more difficult to say and done when (inaudible) so keep in mind we were going in the Middle Bakken we are staring to 20 foot interval in those places the upper Three Forks in a lot of these areas is 10 to 15 deep feet. So I think we have a strong (inaudible) but diversions that we get in a single well bore can create variance in the Three Folks results. Then I would also say that I think we need to drill more Three Forks wells on all of our acreage to really conclusively decide what is the right EUR to assign to Three Forks in this area of the Williston Basin. And as a percentage of total wells to be drilled, I think we’re planning on drilling about a third of our wells, as Three Forks wells going forward and the balance as Middle Bakken. As you move farther the south, that ratio will probably increase as there will be kind of a more even split between Three Forks and Middle Bakken because you start getting them [beginning] in the Three Forks as you heads out.

Ron Mills - Johnson Rice

Perfect. Thank you.

McAndrew Rudisill

Yes.

Operator

Thank you. The next question is from Steve Berman of Canaccord. Please go ahead.

Steve Berman - Canaccord

Good morning, guys. McAndrew, can you talk a little bit about total drilling complete cost at Low Rider in the second quarter and then also what your expectations are for the Pronghorn wells in terms of total cost as you start drilling there?

McAndrew Rudisill

Sure. So the DMP costs in Low Rider have held right around the $9.5 million level for over the last two quarters. We expect that will gradually start to go down as we transition into pad development, but because we're still in the HBP base, most of the rigs you’ve got that embedded move cost of about $0.5 million every time then move units. So with our current planning, we drill typically two to three wells per unit and then move the rig. Once we get into a place later in 2015 where we can sit on a unit and drill six wells, you should start to see a little bit with further reduction in the well cost.

On the Pronghorn wells, I think we’re estimating that these wells are going to cost right around $9 million is what we're targeting and highlight on one of these wells and the Christmas well. We're actually going to be doing a coil tubing frac; it’s a 90 stage job. We want to maximize the well bore conductivity and high growth with the frac in that Pronghorn zone just to test the Pronghorn and then right next door to it we’re doing a similar frack job to what you’re seeing some of the other offset operators do (inaudible). So, all-in we’re thinking $9 million is the right cost number for the Pronghorn as we start developing that.

Steve Berman - Canaccord

And once you start in Richland, would you anticipate that being any different from this $9 million to $9.5 million you just talked about in these areas?

Ryan Smith

That should be the same because well frack rates on giving volume first and slick water so all the cost structure will be pretty similar to the Low Rider area.

Steve Berman - Canaccord

All right, great. That’s it for me. Thanks.

Ryan Smith

Thank you.

Operator

Thank you. Our next question is from Ipsit Mohanty of GMP Securities. Please go ahead.

Ipsit Mohanty - GMP Securities

Yes, hi. Good morning guys. Great quarter. Maybe if I could stay on the transaction a little bit and clearly very attractive neighborhood given the recent (inaudible) transaction. And so just a little bit more color, I’m curious to see how you manage the transaction and the background behind it. And associated general view on the M&A landscape in division please?

Ryan Smith

Okay. Well, I’ll address sort of part of your M&A landscape, the transaction went relatively smoothly. It’s been in process for a couple of months now. And I think it’s a very positive transaction for both Liberty Resources too and for Emerald because it allows both of us concurrently consolidate our respective acreage positions and I look forward to work with these guys with Liberty in particular going forward on more transactions.

And then from a basin wide perspective, the widening transaction I think was a huge positive for everyone in the basin; it's further continued the trend of acreage consolidation throughout the entire basin. I’d expect that you’d see more consolidation in the future given the large economies of scale that you have both from an infrastructure perspective and then from drilling and completion perspective with larger pools of acreage and then larger capital planning.

Ipsit Mohanty - GMP Securities

Okay, thanks. And then I apologize if I missed it. How much of the beat was improving well results versus maybe and aggressive completion schedule due to the better weather, maybe the higher working interest, if you can detail it out please?

McAndrew Rudisill

Ipsit, the majority [beat] was actually just the wells that we have on line and we brought on line performed better than what we had initially modeled in our production guidance. So some of the wells with the longer life span are producing to a higher EUR curve than what we had initially modeled which is a great thing. And then well, this is middle Bakken/Three Forks wells that we brought on stream. They just came on a bit stronger than what we initially anticipated.

Ipsit Mohanty - GMP Securities

Thanks McAndrew.

McAndrew Rudisill

The majority to beat.

Ipsit Mohanty - GMP Securities

Sure, sure. where I was going with this is you can imagine as probably right to see [Technical Difficulty] is that something specific in the year, next year as well?

McAndrew Rudisill

I don't think that we’re in position to change our view on guidance right now; there is a good slide in the presentation on slide nine that shows the variance between all the Middle Bakken wells in the Low Rider area and then you got some outperforming between a 450-500 type that quite a few are performing well above the 600 in BOE type curve. And so we went through this process last evaluating the EUR type curve for all the wells in the area and certainly a data driven process we just need a longer time for data until we have made - to stay at about increases in the average for the area but we feel comfortable even using 600 BOE type curve right now.

Ipsit Mohanty - GMP Securities

Understand that. And then one final as you mentioned probably more critical need of funding I mean more critical need of sort one of the capital markets of funding yourselves in ‘15 but if you do that then you is again the beginning of the year the next time that we get any clarity in regards to that?

McAndrew Rudisill

Just in terms of filing on the bond yes, it will be in the first half of 2015 is our anticipated timing of issuing a bond and the minimum size of that bond is probably $215 million.

Ipsit Mohanty - GMP Securities

Okay, great. Thank you.

Operator

Thank you. (Operator Instructions). And the next question is from Curtis Trimble of Brean Capital. Please go ahead.

Curtis Trimble - Brean Capital

Sure good morning everyone just looking at the guidance and obviously a really nice number of completions in the second quarter can you tell me the number of net completions expected for third quarter and then for fourth quarter as well?

McAndrew Rudisill

Curt I don’t have that number right in front of me but I can get back to you offline.

Curtis Trimble - Brean Capital

Okay, and then looking back at your Analyst Day earlier there was some discussion side ball possibly about another horizon that might be giving some interest in addition to the Middle Bakken and the various Three Forks, Have you seen any additional information come across your desk on that, I think that was the deeper well or which horizon that was?

McAndrew Rudisill

I think it would the Red river and what we have been doing is processing prior to the 3D seismic in and around Low Rider directly to the south, to the west and the to the east of Low Rider, where we've got conventional Red river wells that are online and producing for tested 15 years. So we're using a lot of that well information to analyze the Red river formation underneath on the acreage that we currently have. And once we get on processing the 3D seismic, we will probably make a decision at some point in early 2015 about how we want to go about testing on that formation in this area.

There has been quite a few successful Red river wells drilled by multiple different operators in that acreage now and then directly to the west. It's not as much as the structural formation as you have with the Bakken and the Three Forks, you do need to shoot 3D seismic to do it, but where it does exist the new wells with the newer completions has been quite large and the well cost have been lower than what you see on these 10,000 foot laterals of Middle Bakken and Three Forks.

So, it's an exciting thing to think about, we're going right now and I'd anticipate to more details to talk about early next year.

Curtis Trimble - Brean Capital

Good, I appreciate it.

McAndrew Rudisill

Okay.

Operator

Thank you. Our next question is from Jason Wangler of Wunderlich Securities. Please go ahead.

Jason Wangler - Wunderlich Securities

Good morning guys. Just curious at Pronghorn, obviously exciting time as far as your first well, what are the plan for the rest of the year, are you going to look at that well and see what it looks like and wait till ’15 or just kind of the activity level down that way going forward?

McAndrew Rudisill

We’ve actually got a quite a few wells coming onstream in the third and the fourth quarter because we’re leading the rate down there to drill (inaudible) in the down locations as well as so we’re doing some spacing tests right now on those pads and then like I talked about earlier what we’re trying two different kinds of fracs and then once we make decisional I think we’ll keep the low results and we’re finding frac body used than more consistently as we fully develop in 2015. The first information will be able to talk into market about should be in the third quarter of this year.

Jason Wangler - Wunderlich Securities

Great. I appreciate it.

McAndrew Rudisill

All right, we’d like to thank you all for joining us on this call and for your interest in Emerald Oil.

Operator

Thank you. Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. And thank you for your participation.

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