Delta Petroleum (DPTR) Q2 2011 Earnings Call August 4, 2011 12:00 PM ET
Kevin Nanke - Chief Financial Officer, Treasurer, Chief Financial Officer of DHS Drilling Company, Treasurer of DHS Drilling Company and Director of DHS Drilling Company
Carl Lakey - Chief Executive Officer, President and Director
Broc Richardson - Vice President of Corporate Development & Investor Relations
Daniel Taylor - Chairman, Member of Audit Committee and Member of Nominating & Corporate Governance Committee
Hello, and welcome to the Delta Petroleum Corporation Second Quarter 2011 Earnings Conference Call and Webcast. [Operator Instructions] Please also note that today's event is being recorded. At this time, I would like to turn your conference call over to Mr. Broc Richardson, VP Corporate Development, Investor Relations. Mr. Richardson, please go ahead.
Thank you, and thank you to all of you for joining us for Delta's second quarter 2011 financial and operating results conference call.
Before we begin, I would like to remind you that we are conducting this call under Safe Harbor and that this call will include projections and forward-looking statements within the meaning of the federal Securities laws and are intended to be covered by the Safe Harbor provisions. In that regard, you are referred to the cautionary statement displayed on Delta’s website, which is incorporated by reference with respect to the information provided for this call. Investors are urged to closely consider the oil and gas disclosures and risk factors set forth in Delta’s Form 10-K for fiscal year ended December 31, 2010, as updated by subsequent periodic and current reports on Forms 10-Q and 8-K respectively.
Today's speakers from Delta are Dan Taylor, Chairman of the Board; Carl Lakey, President and Chief Executive Officer; and Kevin Nanke, Treasurer and Chief Financial Officer.
I will now turn the call over to our Chairman, Dan Taylor.
Thank you, Broc, and good morning, everyone. I want to thank all of you for taking the time to join us today on this call on this very difficult market. There are several things I'd like to go over on today's call, all of which are positive for Delta, and I'm enthusiastic about sharing them with you.
First, are the results thus far of our 2C well on the Vega Area. Carl will discuss the specifics of that well and its results to date in greater detail. But needless to say, we're very excited about what we are seeing in this well, the potential it holds and what it means for Delta. While the process to get to this point took longer than we anticipated, we are pleased to have a flowing well that is in the process of confirming substantial quantities of economic reserves in the deeper shale formations of the Piceance Basin.
We are still in an early phase of production and have yet to run a production log and are still clearing fluids. As such, there is still much to learn about the open zones in this well. Other operators continue to report similar results in the Mancos and Niobrara formations and it is gratifying to see the play being confirmed around us.
Second, we have retained Netherland Sewell as our third-party reserve engineering firm. As many of you that follow the industry know, Netherland Sewell is a highly respected engineering firm and known to be among the best and most experienced in unconventional resource plays. Their reserve report provides independent confirmation of our internally prepared proved reserves, probable reserves and total resource potential of the Vega Area.
Third, I'll provide a brief update on our strategic alternatives process. The data room opened on August 3 and the query has begun to have meaningful discussions with interested parties. As those of you familiar with these situations know, the process is very fluid and therefore, no updates will be provided other than those which are required due to materiality.
We will not be taking any questions on the process during the Q&A portion of the call. As you know, last week we completed our overview memorandum, which is available on our website. The memorandum is a marketing document, which will be used during the strategic alternatives process. While it provides detailed information about our Vega asset and its sizable upside potential, it should not be viewed by investors as a substitute for our SEC filings.
Fourth, our Board of Directors and management team have been encouraged by the increase in merger and acquisition activity in our industry and particularly the transactions involving the North American natural gas plays. Since the beginning of the year, several transactions have been announced that support improved and meaningful valuations for North American natural gas players.
The per Mcfe multiple for these transactions have ranged between $0.30 and $0.90 based on total resource. We fully believe that our total resource recently evaluated by Netherland Sewell, coupled with current market conditions, will be driving the valuations in the strategic alternatives process. Our current distressed market valuation levels should not be considered as constraints during the process.
Delta is currently trading at an amazing 50% discount to the lowest of these transactions at only $0.16 per Mcfe of our 2P reserves from the Williams Fork alone. The additional resource of the deeper shale only make our current valuation even more attractive. We believe there is not a better time to be running our strategic alternatives process.
Lastly, as many of you know, we regained compliance with NASDAQ's listing requirements last week, having traded over $1 for 10 consecutive days after a reverse split of our common stock. Therefore, the risk of delisting is no longer a concern. As we head into the latter half of the year, I am very enthusiastic about our prospects and the strategic alternatives process. I do hope that you share the same enthusiasm.
I will now turn the call over to Carl for his comments. Carl?
Thank you, Dan. I absolutely share your enthusiasm about our progress at Delta. For the past of couple of weeks, I've been looking forward to this conference call. Although Delta delivered another solid quarter, I will defer to Kevin to demonstrate this when he discusses the financial metrics achieved. There is so much more to share with you today.
I will start my remarks with a short update on the 2C well. Initial production from 2C certainly took longer than expected due to previously disclosed mechanical difficulties and more recently, equipment availability. But early results confirm the exciting potential of the shales under the Williams Fork formation. We have already shared with you that production began on July 20 and sales started on July 21. Peak production was obtained on July 28 at 5.4 million cubic feet per day with 8,360-psi flowing tubing pressure on a 7/64-inch choke.
Production has generally ranged between 2.5 million and 3.5 million cubic feet a day at choke restricted rates between then and now. The choke has been opened in 2 small incremental steps and is currently at 9/64 of an inch, with the last 24 hours averaging 6,100-psi flowing tubing pressure and 3 million cubic feet per day.
Lab analysis shows that the oil produced in late July was 38 degrees API gravity with essentially no sulfur content. There has been little to no oil since that time, but shifting water chemistry and changing gas composition suggest that some of the deeper frac stages are just beginning to contribute to production. These are the intervals that the logs suggest would be where we should expect heavier hydrocarbons to be recovered. In the 2-week producing weeks, we have recovered less than 5% of our frac load to date.
I want to emphasize to everyone that this well is certainly capable of much greater production rates than we are allowing. We are intentionally being conservative with our small choke settings to limit the drawdown on the reservoir. We believe this management technique will improve our ultimate recovery from the well.
Understanding the choke control performance however, is only one part of the reason we are so excited to share these results. In addition, it is important to remember that this well is only producing from 1,200 feet of completed pay in the Frontier and Niobrara formations. In addition, the Williams Fork and 2,600 feet of gross prospective pay in the Mancos and Corcoran formations have yet to be completed in this well.
With the recent 2C results as a backdrop, let me now focus on the Vegas shales in a broader context. We have reexamined some older 2D seismic lines that show the shales between the Corcoran and the Frontier to be substantially the same thickness and broadly showing the basin structural features with only minor structural anomalies. These older seismic lines confirm what we are identifying with the drill bit, that we have shale potential across our entire 22,000-net acre position.
We continue to drill the 12B well that will hold the production -- hold with production the recently formed 2,715-acre federal Sheep Creek Unit. It is almost an intermediate casing point below the Williams Fork and is expected to confirm shale potential, first with the shale well drilling, then with logs and finally with production probably in the fourth quarter.
The 2B well has declined in a well-behaved fashion from our previously announced 3 million cubic feet per day rate to a roughly 650 Mcf per day now. It is important to understand that the flowing pressures on 2B declined rapidly upon production and did not behave in the same way that the 2C well is demonstrating. Our team feels that we may have unlocked -- we have some unlocked potential remaining in this well and may devote additional energy and capital to help understand the full potential of this well.
When Netherland Sewell evaluated the shale resource at Vega, their higher upside estimate of 10 Bcf gross recoverable per well and 80-acreage drainage patterns equates to 2.8 Tcfe gross recoverable for horizontal development. Using their low side estimate of 6 Bcfe per well with 168-acre drainage patterns equates to 0.84 Tcfe. These estimates are accretive to the Williams Fork recoveries.
Finally, if Delta can find an economic way to develop these shales in a vertical wellbore, the ultimate resource could be larger still. We think 2C is a great start in that effort.
Now with the shale discussion concluded for now, let me now direct my comments towards the transformed Delta that we have become. Delta has worked hard over the past year to put its house in order. I am so proud of our current team and our former teammates that worked hard on these accomplishments. I would like to share a few of them with you now to help you understand that sense of accomplishment with me.
First and foremost, we have paid down roughly $106 million of debt in the past 13 months and initiated a new bank facility with Macquarie. This was largely enabled through 2 non-core asset divestiture transactions totaling $173 million of gross proceeds. In addition, we eliminated non-core, non-producing assets and liabilities across the remaining Delta portfolio as we have become even more focused on Vega as our core asset. That asset is -- that work is now also essentially complete.
Delta has worked hard to reduce our Vega LOE from year-ago levels by roughly 60%. We have reduced our normalized G&A by approximately 35% from year-ago levels.
The team at Delta was not content with simply eliminating cost and liability. We also looked at ways to create upside value. The team stewarded a very limited capital investment budget with a strategic eye. We increased per well EUR by 22% in the Williams Fork and created economic development opportunities in the current price environment.
The team also accomplished with the deployment of a portion of that same limited capital budget -- we have discovered, confirmed and are starting to quantify a shale resource below the Williams Fork that could someday exceed that of the Williams Fork. Lastly, we retained one of the finest independent engineering firms in Netherland Sewell to help the company quantify the value of its -- of this work in anticipation of the strategic alternatives process. It turned out to be significant.
Taken collectively, it should be clear that our focus on our clear asset has improved our company in many important metrics. As I reflect on Delta's transformative body of work, I am so proud of our team and what Delta has become. I hope you now have a sense of the excitement that I feel every day.
This work was essential to build value in the core asset of the company for our shareholders. Dan earlier pointed out that our current share price is apparently not in alignment with the value of the asset and the company. I hope this helps you understand why we feel this way.
With these accomplishments in clear focus, I'm sure you can appreciate that we feel we have created the best value environment possible as we move forward with the strategic alternatives process. I am confident that our advisors at Macquarie and Evercore are keenly focused on taking these accomplishments and translating them into value for our shareholders. Kevin will now describe in detail our essential financial metrics. Kevin?
Thank you, Carl. Good morning. In June, we announced that the remaining Gulf Coast non-core assets were sold for $43.2 million, of which a portion was used to pay down our credit facility and the remainder will be allocated for Piceance development. At quarter end, and today, we have $18 million undrawn available under our borrowing base, which is sufficient for our current capital development program and debt service obligations for the remainder of 2011.
EBITDAX from the continuing operations for the second quarter was $3.6 million, which compares to a first quarter EBITDAX of $4.8 million adjusted for the non-core asset divestiture in late June. The decrease in EBITDAX during the quarter was primarily due to a 7% decline in production from continuing operations and realized financial hedge losses absorbed in continuing operations.
For the second quarter, we reported total production of 3.18 Bcfe, slightly under our guidance. We anticipated completing our 2 remaining inventoried wells. However, with limited frac crews and a focus on the shales, we decided to leave the 2 completions for a later date.
As Carl mentioned, operating metrics in the Piceance have improved. For the second quarter in a row, Vega lease operating expense came in under $1. Second quarter averaged $0.87 per Mcfe. We expect to continue to maintain these levels. With the addition of the shale production, we believe these numbers can improve, given the large fixed component in our cost.
We reduced our G&A cost to $6.5 million in the second quarter, of which $2.4 million was non-cash equity compensation. This equates to a Delta stand-alone cash G&A for the second quarter of approximately $4.1 million, which is slightly lower than the cash G&A guidance of $4.5 million per quarter given at the beginning of the year.
DHS sold its trucking company during the quarter, generating approximately $3.3 million in proceeds, which were used to reduce debt. Over the last quarter and a half, DHS has been working with a group that had interest in a number of our rigs. Recently, they informed us that they were having trouble obtaining their financing. As such, both Delta and DHS's other significant shareholder are in discussions as to a path forward.
Regardless of the path, Delta does not believe that significant upside exists above the debt. As such, it should also be known -- or noted that all DHS debt is nonrecourse to Delta. Over the next several months, we look forward to working with Macquarie and Evercore on our strategic alternatives process to bring value to our shareholders.
With that, we will open it up to questions.
[Operator Instructions] And at this time, I'm showing no questions. I would like to turn the conference call back over to management for any closing remarks.
Thank you very much for attending our second quarter conference call today. We do appreciate you taking the time to listen and we look forward to speaking with you again later. Thank you.
The conference has now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.
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