California Resources Corp. (CRC) Q3 2015 Earnings Conference Call November 5, 2015 5:00 PM ET
Executives
Scott Espenshade - Vice President, Investor Relations
Todd Stevens - President, Chief Executive Officer and Director
Mark Smith - Senior Executive Vice President and Chief Financial Officer
Analysts
Doug Leggate - Bank of America Merrill Lynch
Welles Fitzpatrick - Johnson Rice & Company
James Spicer - Wells Fargo Securities
Brian Singer - Goldman Sachs
Sean Sneeden - Oppenheimer & Co.
Pavel Molchanov - Raymond James & Associates
Gregg Brody - Bank of America Merrill Lynch
Paul Sankey - Wolfe Research LLC
Ravi Kamath - Seaport Global Securities, LLC
Jeff Davies - TPH Asset Management
Tarek Hamid - JPMorgan
Maryana Kushnir - Nomura
Operator
Good afternoon and welcome to the California Resources Third Quarter 2015 Earnings Conference Call. All participants will be in a listen only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn conference over to Scott Espenshade. Vice President of Investor Relations. Please go ahead, sir.
Scott Espenshade
Thank you. I'm Scott Espenshade, Vice President of Investor Relations. Welcome to California Resources Corporation's third quarter 2015 conference call. Participating on today's call is Todd Stevens, President and Chief Executive Officer of CRC and Mark Smith, Senior Executive Vice President and Chief Financial Officer and also there are several members of the CRC's executive team.
I would like to highlight that we have provided slides on our Investor Relations section on our website, www.crc.com. These slides provide additional insight into our operations and third quarter results. Also information reconciling non-GAAP financial measures discusses to their most directly comparable GAAP financial measures is available on the Investor Relations portion of our website and in our earnings release.
As a reminder, today's conference call contain certain projections and other forward-looking statements within the meaning of the Federal security Laws. The statements are subject to risk and uncertainties that may cause actual results to differ from those expressed or implied in these statements.
Additional information on factors that could cause results to differ is available on the Company's 10-K. We would ask that you review it and cautionary statements in our earnings release. We have allotted approximately 30 minutes for Q&A at the end of the call and we ask the participants limit their questions to a primary question and a follow-up.
I will now turn the call over to Todd.
Todd Stevens
Thank you, Scott and thank you, everyone for attending our earnings call. I'm extremely proud of the way our team continues to respond to the challenging and volatile price environment as we've met or exceeded all of our controllable targets.
We recently held an Analyst Day and hosted site tours of Elk Hills in Wilmington field. There were reiterated our strategic goals and showcased our world class assets in the depth of our inventory. The feedback has been very positive and the participants who were able to see first-hand the breadth of our midstream assets and the overall scale, scope and future potential of our vast upstream portfolio.
We continue to execute on our value focused strategy and carry out and accomplish our 2015 operational objectives. CRC has shown its ability to execute on all aspects of the business over which we have control. Again in the third quarter, we generated positive free cash flow even at the midst of renewed weakness in commodity prices.
This enabled us to reduce our debt by slightly more than $100 million compared to the prior quarter end. I want to emphasize we're delivering on our free cash flow pledge. Well many in our industry are just finding this religion. Our team kept our oil production flat with the prior quarter and overall production was at the high end of our guidance range.
Our year-to-date crude oil production increase was accomplished with only 20% of the capital investment that was incurred in 2014. We're reflecting a more value focused approach and capital allocation strategy. Further, we've been running below our planned level of $440 million so far this year.
Largely as a result efficiencies we've implemented across all aspects of our business. We believe, we'll end the year with a lower than announced capital level, while drilling more wells than we had originally planned and delivering higher productions than we have originally envisioned.
Our production cost also came in below our expectations for the third quarter on a gross dollar as well as per unit basis. The operating cost and the capital reduction we've experienced during the year have largely been the result of our teams unwavering focus and generating efficiency throughout the company.
We believe the majority of these reductions to-date are processed oriented and sustainable and the remainder tend to be deflationary. Well second quarter oil prices rebounded slightly from first quarter levels. In the third quarter, prices deteriorated again basically back to first quarter levels. We're continuing to respond to lower prices by focusing on the fundamentals of our business. Protecting our base production and defending our margins.
We're succeeding on both fronts. At the same time, we're focusing on building a development and exploration pipeline of inventory that we can implement in the current environment and even larger backlog, when prices recovered. We feel strongly that there are capital efficient portfolio is very competitive and a lower for longer price environment.
We believe we can maintain essentially flat oil production beyond the next three years with capital between $600 million and $700 million annually. I would like to expand on that last point. Our ability to achieve this begins with our best-in-class base decline rate of 15% historically, which includes downtime.
We too work to maintain our base production and minimized downtime, which add some of the most valuable barrels to our production, as we work toward our engineered base decline of 10%. We believe, we'll continue to bring down our decline rate through more efficient capital allocation using rigorous life of field planning as well as through better equipment failure prevention as we showed on the Analyst Day tour.
The moderation of the Elk Hills field decline rate as it continues to move from primary to second recovery, will further add to the moderation of our baseline. As we've noticed since our spin. One of the major items we've changed has been our capital allocation process. We utilized our Value Creation Index or VCI metric to maximize shareholder value for the company over the long run.
It encompasses many of the financial penance [ph] that we believe drive value over the long-term and measures the bang for our buck of every dollar invested. In our earnings slide deck on Slide 8, we show how we build value in our deep inventory. This is a high graded inventory that has met our investment hurdle of 1.3 VCI, but this is by no means all of our inventory.
For example, the next slide shows the greater Elk Hills area, but we have significantly more inventory and excess of 10% cost to capital rate even at today's price or a VCI of 1.0. We want to build value and love to improve the economics of our inventory. Our technical team is focused on refining their estimates and procedures overtime to bring more opportunities or investment that meet a 1.3 VCI hurdle.
In the current environment, we're targeting higher margin, high return and low decline oil projects. We emphasize this in our 2015 investment plan. But it is important to remember, we look at our investment using VCI rankings on a full cycle basis. And our 2015 capital plan, we breakout our capital investments by activity and drive mechanism.
It's also important to note, that our current year plan included only $200 million of drilling and completion plus work over capital to maintain this flat production profile this year. But what about the future? Just like our investors, we manage a portfolio of investment opportunities, we have the flexibility to allocate capital of different drive mechanisms and to change the activity level to meet our objectives, which is to create value for our shareholders, live within cash flow and provide growth in a normalized commodity price environment.
The previously mentioned slide provides a static look at this inventory as of today. But we're focused on increasing this executable inventory overtime. We plan to accomplish this increase by de-risking our exploration set, reducing development cost and applying technology such as our unparalleled 3D seismic database to further refine and execute our life of field plan.
Although, we're currently allocating very little capital to our exploration program. We've still seen notable success in these efforts. As we stated last quarter and more recently at our Analyst Day last month, we have a deep portfolio of both conventional and unconventional opportunities. This is highlighted by recent successful exploration what we talked about, which has continued to produce in excess of 400 BOE per day.
This well is still naturally flowing from a conventional reservoir that has further behind pipe, uphole potential as well as additional offset opportunities. We continue to focus significant intention on our all opportunities delever our balance sheet. Our diverse asset base including both our integrated infrastructure and our significant upstream operations has attracted significant interest from numerous potential investors.
At this point, we've narrowed down the opportunity to a handful. We have been very diligent and reflective in our approach to execute transactions we believe will maximize long-term value to our shareholders as oppose to rushing into any particular transaction. This inevitably has led to a longer process, we're exchanging term sheets in some cases draft of definite documents with these parties and hope to announce at least one transaction by year end.
Our top goal remains to eliminate approximately $1.6 billion of debt by the end of 2016. Make will address our credit facility in greater detail in his remarks, as well as the recent bank amendment and the added flexibly it provides.
As I previously mentioned, not only has our debt level stabilized. It has actually declined slightly in the third quarter. We expect to continue to operate within our cash flow in the fourth quarter and maintain our net debt level comparable to the third quarter, before the effect of any deleveraging transaction.
In the third quarter, we achieved positive free cash flow. After adjusting for the affects in early 2015 paying off the much higher payables left over from 2014, we expect to have positive free cash flow for all of 2015.
Even as highly volatile price environment, we continue to demonstrate our ability to live within our means, another key differentiator for CRC. Our third quarter capital investment amount was slightly below our guidance range. Maintaining a capital program that invest within available cash flows will remain a key tenet [ph] of our strategy in 2016 and beyond.
We continue to focus on reducing our overall cost structure. In the third quarter, production cost and adjust G&A expenses were lower than our expectations on both a gross dollar and a per unit basis. In mind with these cost cutting efforts, we thought it was prudent in this current extended low price environment to suspend our dividend of $0.01 per share per quarter beginning immediately.
This equates to a savings of almost $16 million on an annual basis or approximately $0.30 per BOE. We will re-examine this decision as price is normalized. As we've said before, we believe cutting cost and aligning the company size and structure with market conditions, is essential to defending our cash margins in this highly volatile price environment.
We have now been an independent company for 11 months. When we began the process of spinning off in 2014, we certainly didn't expect to be facing the type of oil price environment that is sprayed out of the gate and continue to deteriorate during the past year.
As a result, we've taken decisive steps to operate more efficiently and bring our cost structure in line with a longer term and more moderate price environment. At the time of the spin off, we had about 2,000 employees. To align our workforce with our normalized view of commodity prices, we will end the year with about 1,700 employees, a 15% reduction.
We achieve this reduction primarily through attrition in our third quarter voluntary retirement program along with limited layoffs. Mark will touch on specifics and the impact on the quarter later in the call. It is important to note that we do not expect these actions to impact our production outlook.
They will however reduce our production cost and G&A starting in the fourth quarter and enhance our margins. Our third quarter production was at the high end of our guidance range highlighting the strength of our assets. We continue to be pleased with the results of our overall production, in particular the manner in which oil production is holding up with much lower capital levels.
As we continually emphasize protecting the base. I'd like to point out that our base production continues to perform better than our overall anticipated decline of 15%. Additionally, we continue to shift our focus to more oil weighted production profile. As we've said the 2015 capital plan is almost entirely focused on oil production mostly steam floods and water floods.
We believe the low capital intensity of these recovery methods will allow us to deliver high oil, as well as total production in 2015 compared to 2014 and despite of some fourth quarter unscheduled downtime and regional power outages due to severe weather that we experienced across California.
The diversity of our asset portfolio in our capital allocation process allowed us to deliver a high value production and provide operational flexibility throughout the price cycle. We are currently focused on low risk, low capital intensity, oil directed development, while prices remain depressed.
In addition, we have a large inventory of conventional development projects that are expected to be repeatable within, with low technical risk. We have over 130 fields with multiple pay zones which gives us a sizable multi-year development inventory. We're currently deferring many of our higher value projects until prices rise and provide additional cash flow. As we adhere to our commitment of living within our means.
We've also spent a large part of this year, high grading our projects and improving their economics by redeploying some of our best engineers and geologist to devise more efficient and effective ways to develop them. As a result, we're continuing to increase our inventory of projects that can deliver life of field VCI of at least 1.3 in a variety of price environment.
This life of field approach will continue to keep us focused on maximizing shareholder value through effective capital allocation. As we look toward 2016, we again expect to demonstrate our primary financial tenet [ph]. Keeping our investment capital within expected cash flow. We're in the process of developing our dynamic capital plan for 2016, which we'll be able to adjust quickly in response to commodity price changes.
In addition, we believe we'll be able to supplement our - in a capital program in 2016 with joint venture opportunities with strategic partners to co-develop certain of our projects. We also believe, we'll be able to maintain a capital program in 2016 that will hold our oil production essentially flat assuming that the current market conditions persists.
We plan to announce our 2016 capital plan in February following our board meeting. I will now turn the call over to Mark to discuss the details of our third quarter results.
Mark Smith
Thanks Todd. In the third quarter, we showed higher oil production in oil cost in all categories compared to the prior year. Now we continue to live within our means and generated positive free cash flow, while keeping our oil production essentially flat with the second quarter of 2015.
Interest expense was higher year-over-year as a result of the debt we incurred in the fourth quarter of 2014 associated with a spinoff. Results as expected were affected by lower product pricing. We again met or exceeded all guidance categories for the quarter. We came in at the high end of our production guidance and at or below guidance ranges for cost.
Now if we look more closely at the specifics. Crude oil prices in the third quarter were lower than second quarter 2015 prices. The Brent index average for the third quarter was $51.17 or 19% below the second quarter of 2015 average price of $63.50. Our realized oil price followed the Brent decline averaging $47.79 per barrel including the affects to realized hedges for the third quarter, a 16% decline compared with the average second quarter price of $56.73.
Our hedges contributed $1.69 per barrel to a realized oil price. Our crude oil realizations for the third quarter were 90% of Brent before hedges or 1 percentage point higher than the sequential quarter of 93% of Brent after the effective hedges.
NGL realizations followed lower crude prices with third quarter prices averaging $16.92 per barrel down 17% from $20.47 in the second quarter. However, our realized natural gas prices were 14% higher in the third quarter averaging $2.83 per MCF compared with second quarter prices of $2.49 per MCF.
Our natural gas hedges contributed $0.03 toward the realized price in the third quarter. The NYMEX natural gas index was essentially flat for the two quarters, while our realizations improved by 11%. Improvement in the realizations was largely the result of the impact of summer demand on California natural gas prices.
As in the previous quarter on a year-over-year basis, all third quarter average commodity prices were significantly lower. Our realized crude oil prices both with and without the hedge impact were down approximately 50% from $96.27 per barrel, NGL prices were down 64% from $47.20 per barrel and natural gas prices were down 33% from $4.24 per MCF.
Against the backdrop of the continued weakness and commodity prices were very pleased with our crude oil production, as well as total production results for the quarter. Again this is testament to our stable low decline asset base. Third quarter, 2015 crude oil production averaged to 103,000 barrels per day. Now this represents 3,000 barrel per day or 3% increase on a year-over-year basis.
Sequentially third quarter oil production only declined to 1,000 barrels per day or 1%. Third quarter 2015, NGL production was essentially flat compared with both year-over-year and sequential quarters. Our third quarter 2015 natural gas production declined 23 million cubic feet per day or 9% from prior year levels and declined to 8 million cubic feet per day or 3% sequentially.
As we stated previously, this gas production decrease was expected as we're focusing our drilling programs entirely on oil. For the third quarter of 2015, total production was 158,000 barrels of oil equivalent per day compared with 160,000 BOE per day in the prior year period and 161,000 BOE per day in the second quarter of 2015.
Production cost in the current quarter were $246 million or $16.91 per BOE lower than prior year cost of $271 million or $18.35 per BOE. This represents an 8% reduction on a per unit basis. As well as the case in the second quarter, the decreases came across the board now particularly in well servicing efficiency and energy use. Production costs were also aided by lower natural gas prices compared to prior year levels.
Third quarter production cost in a sequential basis were slightly higher as we previously guided, this was mainly due to the seasonal effect of summer power rates in California. However, our third quarter production cost were better than expected largely due to our continuing efforts to reduce cost and improved efficiencies.
In light of prevailing low commodity price environment and as Todd noted. We took additional steps in the quarter to better align our workforce with a longer term or moderate price environment. Our third quarter workforce reduction primarily through voluntary retirements resulted in the total pre-tax charge of $62 million in the quarter, which is excluded from adjusted G&A calculation.
Accordingly, our adjusted G&A expense in the third quarter was lower both sequentially as well as on a prior year basis. The expense raised for $67 million for the third quarter compared to $75 million in the second quarter of the year and $78 million in the third quarter of 2014. A significant portion of these costs will be paid to the effective employees over the period of 18 months. Beginning in the fourth quarter, we expect total annual pre-tax savings of approximately $50 million of which roughly $15 million will affect production cost and $25 million will affect G&A.
Taxes other than income largely reflect ad valorem taxes which were also lower on a sequential and prior year basis. Even lower commodity prices and the mid-year reassessment of the ad valorem taxes. Third quarter taxes registered $42 million compared to $53 million in the second quarter of 2015 and $56 million in the prior year quarterly period.
Taxes other than on income also include greenhouse gas and production taxes, which remained relatively flat between the periods. Exploration expense declined on a sequential and year-over-year basis, third quarter 2015 exploration expense was $5 million was compared with $7 million in the prior quarter and $25 million in the third quarter of 2014.
Decline from the prior year was due to our latest drilling activity. As I mentioned, the interest expense in the third quarter totalled $82 million which was consistent with the prior quarter. As a result of all these factors in the third quarter 2015, we recorded an adjusted net loss of $86 million or a loss of $0.22 per diluted share compared to an adjusted net loss of $51 million or a loss of $0.13 per diluted share for the second quarter and adjusted net income of $188 million or $0.48 per diluted share for the prior year period.
Third quarter adjusted EBITDAX was $212 million and cash flow from operations registered to $180 million. Adjusted EBITDAX was lower than the prior quarters level of $270 million and the prior year $662 million due to lower commodity prices, which were partially offset by the positive impact of hedges and our lower overall cost structure.
For the first nine months of 2015, adjusted EBITDAX was $680 million compared to $2.1 billion for the first nine months of 2014. Our capital investment registered $95 million during the quarter, which was the same as a previous quarter. I want to emphasize again at the third quarter capital investment was within our operation cash flow. Our drilling rig count from the third quarter remained unchanged at three rigs and as in the prior quarter delivered more wells than planned.
As a nine months point, our investments of total $323 million or 73% of our $440 million capital for 2015. And we would call this plan was front end loaded. But for the full year we're on track to come in below our capital plan.
On the hedging front, we continue to be opportunistic in the face of a challenging strip commodity price in the second quarter. We added an incremental Brent crude oil hedge for the fourth quarter and initiated a small crude oil hedge for 2016.
Since then, we've extended the existing hedge program to protect our 2016 capital plan using costless collars and a swap. For the first half of 2016, we've hedged 30,500 barrel per day at a weighted average 4, $52.38 per barrel and 35,500 barrels per day at a weighted average ceiling $66.15 per barrel.
Additionally, we entered into collars for 3,000 barrels per day in the second half of 2016 at a weighted average 4 of $50 and a ceiling of $74.42 per barrel. We also entered into a swap for 1,000 barrels per day at $61.25 from the period. Our debt decreased modestly from the second quarter as our operating cash flow exceeded expenditures, as Todd said, we continue to focus significant attention on deleveraging efforts giving thoughtful consideration to select opportunities that will maximize value to our shareholders.
Many of you realize that there is a springing lien feature in our credit facility. Our facility is positioning to $3 billion secured borrowing base facility consisting of the $1 billion term loan and the $2 billion revolver. We're in the process of providing mortgages to secure the facility. We'll then have an annual review process for our borrowing base with our first annual of borrowing base redetermination in May.
As part of this process, we held conversations with members of our 20 bank credit facilities to discuss an amendment to the facility. The amendment was subsequently approved our banking group on unanimous basis and became effective on November 2. We appreciate their ongoing support.
The amended financial covenants during the borrowing base period will include the first lien covenant of 2.25 times and a fixed charge covenant of 2 times. We've maintained a pathway to investment grade at which time the covenants revert to prior level, with total debt to EBITDAX covenant of 4.5 times and an interest expense covenant of 2.5 times.
Now the credit amendment provides increased liquidity and flexibility for CRC to manage through the price downturn and preserves the ability to right size our capital structure. Now the facility contemplates the sale or monetization of midstream assets with no adjustment to the borrowing base.
Our team continues to take the proactive steps necessary to reduce our cash cost and enhance our margins. We believe our active cost management and deleveraging actions will position CRC favorably for our 2016 opportunities. Please note, we provide a key fourth quarter 2015 guidance information in the attachments to our earnings release and I'll be happy to take any questions you may have. On that information, on the other aspects that results during our Q&A portion of the call.
I'll now turn it back over to Todd.
Todd Stevens
Thank you, Mark. In the third quarter as in the first half of the year. Our organization executed exceedingly well and the objectives, that were within our control. Our team has continued to drive efficiencies throughout the organization reducing cost in a manner that has sustained both our high standard for safety and environmental protection in our production.
As a result of our cost reductions and efficiency improvements. We believe, that CRC is well positioned to weather this downturn and pursue the vast opportunities that are asset based provides once commodity price is normalized.
We really appreciate everyone who's able to attend our recent Analyst Day in site tours. The response was overwhelming and we think, the time we spent together was invaluable and educating in the investment community that what CRC truly has to offer. This concludes our prepared remarks and we now will welcome your questions.
Question-and-Answer Session
Operator
[Operator Instructions] and our first question will come from Doug Leggate of Bank of America Merrill Lynch
Doug Leggate
Todd, the CapEx is clearly trending a bit below your full $40 million that you targeted for this year. So I guess looking into 2016, you talked about $500 million to whole production flat. Where is the risk to that number now, I see - I know it's little early for the guidance but just in the context of the trend that we're seeing, where do you see that $500 million, moving to?
Todd Stevens
Well as you said, we haven't provided any guidance but if the current trend continues, clearly there is a downward bias, but at this time. We still want to stick by our $500 million.
Doug Leggate
Under 6 to 7, beyond that, would there be downward bias to that as well?
Todd Stevens
I think at this current price environment sticks clearly. I mean, you got to think there's going to be biased downward.
Doug Leggate
Great stuff, my second - my follow-up if I may. Your comment, I guess in the text though the release and also in your prepared remarks. It seems like things are taking a little bit longer in the assets sales, but you did I think, if I heard you correctly, you have exchanged term sheets. So I'm just wondering if you could, that sense pretty much like you have agreements in place. Can you give us some line of sight, as to how things play out from here? And whether or not you're targeting in terms of the order of how you would prioritize things.
You're targeting midstream first and maybe any update on the exploration joint ventures at the same time. Just looking for a sort of game plan as to when we should see line up sight for getting to that first hurdle, if you like?
Todd Stevens
I don't think there is any magic to which one comes before the other one. When it's off the midstream or upstream. I do think we're pretty confident, we'll get one signed up announced by year end. I think if you look at the order of events Mark talked about, when we talked about our credit amendment. Clearly, when you have a springing lien occurring in all of this. You need to make sure you put a credit amendment in place that allows you to continue to pursue these activities.
So I would argue that there was a little bit of a slowdown in the whole process just for that factor because the priority of getting that done was more important and critical to the overall process. So as Mark said, we just recently accomplished that. So I don't think we're any different than we talked about on Analyst Day, but again we probably had a minor downward shift there, as we had to get the credit agreement and amendment squared away.
Operator
The next question is from Welles Fitzpatrick of Johnson Rice
Welles Fitzpatrick
Can you give us any kind of guide on the California ad valorem tax reassessment as far as timing and do you have any sort of indication as to, what that might flow through to you all on either a per unit or total basis in 2016.
Todd Stevens
This is Todd, it's a lagging change, but I'll let Mark address what we've seen so far this year in the back half of the year.
Mark Smith
Mark here, the ad valorem tax is like Todd said is mid-year and if you look at, I was just trying to grab my numbers here. If you look here, you saw that we went down from $56 million to $42 million year-over-year. We think, it amounts to about another $0.40 a year on a BOE basis.
Welles Fitzpatrick
Okay, that's perfect and just one follow-up. The well that you referred to in the prepared comments. Is that the deep sandstone test and then, it's so, do you guys have any plans to test? I think you said it was 10 offsets that you were looking at.
Todd Stevens
Yes, that is what we're talking about and we do have plans in place that we're progressing to love to test the offset locations and also uphole and downhole in offset wells they currently exists.
Welles Fitzpatrick
That's perfect. Thank you so much.
Operator
And the next question comes from James Spicer with Wells Fargo
James Spicer
I'm looking at Page 10 of the presentation, the pie chart total capital budget breakdown by activity. And I'm wondering what this looks like with a $500 million budget potentially next year or $600 million to $700 million on an ongoing basis. Particularly the infrastructure component and trying to understand how much of that is fixed versus variable?
Todd Stevens
So I think as we said in the fixed versus variable in our operations. We think the fixed is about a third and the variable is about two-thirds. If you looked at historically and you thought about facility spending, it was about 30%. But I'll say there were some heavy facility spending over the last 5 years to 10 years.
So going forward, I would anticipate that number would be closer to 20% or even less percent overall. And then obviously, there's not going to be ton of exploration happening because that's something that we can save for ourselves for later. So hopefully, that gives you a flavor.
James Spicer
Yes, that is helpful. and for my follow-up. I'm wondering if you can provide color on your current production level. How much of your production is coming from your core steamflood and waterflood projects that you're, that are the focus of your capital spending right now versus unconventional exploration place.
Todd Stevens
I think our exploration as we said historically, was right around 20,000 or slightly less than that BOE a day. What floods and I think steam floods are around is about half of the waterfloods and steamfloods are about half the production overall.
Operator
And the next question will come from Brian Singer of GS
Brian Singer
Wanted to see, if you could just provide a little bit more color on the new credit agreement specifically the covenants and how the debt-to-EBITDA compares with where you're now and the adjustments that we shall be making, when thinking about where you are within that and then, what the ramifications are if there's any breach?
Mark Smith
I think what's important to recognize Brian is that, with the security. What we did as we move from total debt-to-EBITDAX ratio back to first lien leverage ratio, just on the senior bank facility and that goes to 2.25 times. And then the interest expense ratio was amended down to 2 times as opposed to previously 2.5 times. So those are the changes in the financial covenants.
Brian Singer
Got it and that's versus total company EBITDA versus the specific of the facility as opposed to the total debt for the company overall.
Mark Smith
Yes, right. Total bank, the way to look at it is, total bank debt-to-EBITDAX as opposed to total debt to the company to EBITDAX
Brian Singer
Sure and then, just going back to the more in the operation side. Can you just talk about production mix over the next few quarters? We didn't really see it, as you expected we didn't see that much of a decline on the oil side, how that's, how you expect that as overall total production start to come off.
Todd Stevens
Yes, as we think about the production and the different drive mechanism. Clearly, we're investing most of our capital in steamfloods and waterfloods, so that's creating an oilier [ph] mix. I think if you looked at, how our gas is trending from a decline rate. I think you could argue that will continue and I think you could look at the oil and I think that's going to continue very similarly. Given the investment we've been making and I think the trends towards becoming slightly more oilier [ph] and enterprise we'll continue as we continue these types of investment.
Operator
And the next question is from Sean Sneeden of Oppenheimer
Sean Sneeden
Maybe as a follow-up to the question on the revolver, but when you guys look for next year. I guess, how comfortable are you with maintaining compliance with a 2.25 times covenant. In your minds, does that kind of necessitate when you run - in asset sale but maintain compliance or how are you guys thinking about that in general terms?
Mark Smith
As Todd indicated in his remarks, we felt like getting the amendment was a key part of our overall deleveraging strategy. Couple of things, it relaxes some covenant. It looks at the senior bank to EBITDAX gives us more runway there. But it specifically contemplates the sale or monetization of midstream assets or non-borrowing base assets and so there is no reduction to the borrowing base going forward for a sale of monetization to allow us to continue moving forward on those transactions.
We believe that the amendments that we negotiate with the banks that were unanimously approved gives a nice runway through 2016 to continue executing our business as we've been doing through 2015.
Sean Sneeden
Okay and so if I'm understanding you correctly, regardless of in essence or not, you feel that you have runway through 2016, currently right.
Mark Smith
I certainly feel that way, yes.
Sean Sneeden
Okay, that's helpful and then maybe I guess, just lastly. I think, it was Slide 11 talked about deleveraging the balance sheet. I guess Todd or Mark, could you maybe walk us through the decision tree in terms of, what we would cause you to do. One of those three options, that you've kind of highlighting. I guess specifically what I 'm thinking about is, what we would kind of make you guys go after option number three, capital markets.
Obviously the amendment gives you significant amount second lien capacity, when would that really become an attractive option in your mind?
Mark Smith
I think we've indicated that we're actively considering all options to improve our balance sheet that's what you see on Slide 11 and we've not ruled out any alternative that would help us to meet those objectives going forward.
Todd Stevens
Yes, I mean if you think about it. What we're trying to do, we're trying do the thing that's best for our shareholders and it could be, when we pursued any and all options that are potentially available to us and we're trying to do that in a way that's most tax efficient, provides the highest level of operational controls and gives us the most proceed. We're going to pursue again, what makes the most sense for our shareholders. It accomplishes levels of objectives.
Operator
Your next question is from Pavel Molchanov of Raymond James
Pavel Molchanov
The timetable for closing, if you announce as you said one or more transactions by year end, when would the cash get in the bank so to speak.
Todd Stevens
That's a little speculative but from many, many years of doing transactions. If we're really opportunistic it could be by year end. If we're little less pessimistic, the lawyers do their thing and fill the all available time. It could go into the first quarter.
Pavel Molchanov
Okay, understood and just kind of small housekeeping items. Last two quarters LOE per unit actually picked up. Any specific reason for that?
Todd Stevens
Mostly it's California power pricing.
Mark Smith
Yes, that's right.
Operator
I'm sorry about that. The next question is from Gregg Brody of Bank of America Merrill Lynch
Gregg Brody
I just flipped back to Page 22 in the presentation and I see some of the amendments that you have in there for potential second liens and debt repayments with asset [indiscernible]. Can you walk through those a little bit and sort of, I'm trying to figure out whereas the [indiscernible] second lien, then there is an excess cash sweep concept of $250 million. How that works and then, the baskets for carve outs for paying down debt looks like you have to pay down half during your debt, half term loan, just walk us through that little bit.
Mark Smith
Well I think, I think the underlying premise whenever you look at the amendment Gregg is that, there are certain baskets that were out there within the company's senior notes and so those baskets were largely preserved as we went through the amendment process with the banks. And so that's why you're seeing a $2.25 million basket well the permitted second liens. And you talked about repurchasing of the junior debt.
The banks allow $150 million initial basket and then 50% of the proceeds to repurchase debt.
Gregg Brody
What is the excess cash sweep concept of $250 million, I don't understand how that works?
Mark Smith
They just want to make sure that proceeds from any assets sales go first to repay the term loan and to make sure that the company doesn't leave any excess cash on this balance sheet.
Gregg Brody
So if you raised [indiscernible] you have to pay down $250 million, you have to pay down first lien with that.
Mark Smith
I think the better way to look at it, as if we monetize significant amount of our assets. Looking on midstream asset and the significant amount, we have to repay the term loan and then we can't leave more than $250 million sitting on the balance sheet.
Gregg Brody
And then just one more for you. On the asset sales so, I appreciate things that might be pushed out a little bit. The sort of the language you used previously was one to two by first quarter in yearend or first quarter and now you're talking about one, is that, is anything materially changed or is that just sort of what you're willing to promise by that time period?
Todd Stevens
Gregg, this Todd. In our mind nothing is materially changed, like I said we just feel with the credit amendment there was a little down shift there for little bit, while we worked to get that done to ensure that we can continue on these other path, with these other opportunities and we feel comfortable saying that we'll get at least one signed up by year end.
Operator
And next we have a question from Paul Sankey of Wolfe Research
Paul Sankey
I was just wondering, if somehow to keep it simple for me. You could estimate what your oil price breakeven is in terms of not having any trouble with debt and to sort of balancing the books and how that's changing overtime. But also, your realization basically exceeded our expectations this quarter. I was wondering if you could sort of relate that breakeven concept to your price versus WTI [ph] brand or whatever. Thanks.
Todd Stevens
On the breakeven you were saying, Paul I didn't understand you're trying to say without any interest coverage or what were you trying to refer to?
Paul Sankey
No, I think covering everything that you need to keep going this in oil price level. I mean, I'm assuming at $50 it doesn't work for you without perhaps the monetization. The ex-monetization what's your oil price breakeven, just to keep flatten to stance still in terms of your debt requirements and interest payments and everything else. Thanks.
Todd Stevens
Yes, I think what you want to do is, if you walk through what we said on our operating cost. We're 16 in change you add production taxes to that, then you add G&A, you're probably. When you add that altogether, in the new world you're probably 24, 25, then you take our differential and everything else. I think you’re in the well 30s on a cash basis and then you're going to layer in interest and so, I think you're talking about mid-30s. Well on a cash basis.
Paul Sankey
Right and then once you add in the interest payments and everything else.
Todd Stevens
Yes, I was. I think that's when you add it altogether.
Mark Smith
Yes, Paul I mean just from a high level. Our cash cost were running just over $30 of barrel currently and then if you, add interest expenses of just over $300 million, just over $6 of barrel, so that gives you the mid-30s that Todd was talking about.
Todd Stevens
Then if you wanted to assume in F&D on top of that, obviously we - you looked to some of our projects, you can layer that into. But we're talking about here is on a cash basis, breakeven like you're referring to.
Paul Sankey
Yes, okay and so then and I apologize for not attending your offsite by the way. I did intend to attend it but then it sidetracked. If I was to, again just keeping it so simple if I was to layer in the F&D and what I was also getting it's how that's going to change overtime, given what you've been saying about projects. What numbers should we use to that?
Todd Stevens
Like if you look at it and what we've been saying talking about our typical waterfloods and steamfloods, those are high single-digit approximately double-digit F&D. So if you want to be conservative or aggressive in that range. So you're talking about mid-40s kind all in, including an F&D cost.
Operator
And next we have a question from Ravi Kamath of Seaport Global
Ravi Kamath
One question on the, well on the credit facility, is that something that you will be filing in Form 8-K?
Mark Smith
The credit facility will be attached as a material agreement when we file the Form 10-Q.
Ravi Kamath
Okay, perfect.
Mark Smith
It's being filed - the Form 10-Q is being filed today.
Ravi Kamath
Okay, perfect and then follow-up. You said, that the new agreement contemplates the monetization of midstream assets. Is there a cap to that as it $2 billion? I mean is there some sort of cap to how much in midstream you can sell?
Mark Smith
No, there is no cap on that.
Operator
And the next question comes from Jeff Davies of TPH
Jeff Davies
So just back to the production cost. Remember that you guided the fourth quarter to midpoint of 17, so just again kind of curious on a sequential basis taking up again while I expect power prices coming down in the context of the recent layoffs.
Todd Stevens
Yes, you have to remember production is coming down a little bit and the other part is, we do have some capturing, make sure we capture all the layoffs and early retirements and like.
Jeff Davies
Well that one and if you baked into the production cost. All right.
Todd Stevens
It actually is, when you think about what happened is, we had a G&A reduction and we got number of people who are tied to wellbores that are actually in operating cost, even though you might consider them overhead. So, part of what happened in the downsizing was personnel that were technically reported as operating cost and there's also folks who are technically reported as capital because they're in the drilling function.
So that you have a breakout of approximately half of it is related strictly to G&A and also you got to remember, the summer prices come off about May quarter. So we're still going to get about half a quarter of summer power pricing for California.
Jeff Davies
Got it okay and on the hedges just curios the first half 2016 hedges did you sell, more calls then puts you back to push up the foot price effectively?
Todd Stevens
It was complicated because if you remember, we had a slot for the entire year. So it was a combination of trading that in and executing new transactions as you can see, there's slightly more calls then there is plus and that's where it ended up. But that's effectively what happened.
Jeff Davies
Okay, thank you.
Operator
And the next question comes from Tarek Hamid of JPMorgan
Tarek Hamid
Most of my question have been asked, but on the capital budget for 2016 sort of roughly talking about $500 million, should that hold production at 4Q'ish 2015 levels in your view or is it sort of too hard to call, given the fact that production is been frankly better than you thought this year, in terms of decline rates.
Todd Stevens
Well we've haven't really given guidance. We've just said $500 million, is what we think keeps the oil production flat next year. So that's the, we're willing to commit to at this time, we'll give lot more guidance here in February.
Tarek Hamid
Got it and then, on the second lien fronts. I know Gregg asked few questions on that earlier, as you stick through kind of your options, is the goal in terms of any kind of future lien issuance to be to ultimately reduce the ultimate quantum of debt not necessarily just raise money for the sake of putting more liquidity on the balance sheet.
Todd Stevens
No, I mean our stated goal is Mark and I've said many times. Long-term we'd like to get to 2.5 times, 2 times obviously, it seems like a bridge pretty far at this point, but in the medium term our goal is to get rid of ours. Otherwise deceased in some fashion, $1.6 billion of debt by 2016. And as we've said before we're willing to do anything and everything on the cost of our assets and cost to balance sheet.
Operator
And our last question today will come from Maryana Kushnir of Nomura
Maryana Kushnir
I just wanted to clarify, I couldn't find [ph] reconcile EBITDA versus cash flow from operation, what's their significant positive effect from working capital or any other items that contributed to the strong cash flow generation?
Mark Smith
We've got a reconciliation that kind of coming at it from both directions in our earnings.
Todd Stevens
In our appendix.
Mark Smith
In our earnings release, if you look at Page 8. You'll see it coming from both.
Maryana Kushnir
There is about $50 million of other items and I guess, what are those items?
Mark Smith
Are you referring to the, when you referred it $50 million, you're referring to the income tax expense or benefit?
Maryana Kushnir
An adjustment that's listed as other.
Todd Stevens
Other, Page 26 for the quarter, 26.
Maryana Kushnir
I guess, I'm looking at reconciliation EBITDA versus net cash flow provided by operation.
Mark Smith
Yes there is.
Todd Stevens
So is that - is it, 46, is that what you're referring, the other net, is that what you're looking at?
Maryana Kushnir
Right. So what are those items?
Todd Stevens
Those are just non-cash charges, that [indiscernible] to get back to - crew for equity comp and things like that through the quarter that are non-cash charges.
Maryana Kushnir
Okay, thanks.
Operator
And we actually do have another question that comes from [indiscernible] of Susquehanna.
Unidentified Analyst
So you guys had talked about some work on steam injection rate optimization and I was wondering, if that something you're implementing now and how should we think about impact on LOE going forward from that?
Todd Stevens
I mean, if you listen into our analyst day, you would heard adjust and Vic [ph] talk about this and I think it's something, we're working diligently and it continues to get better for as we look through maintain and optimize the steam levels and the heat rates in the reservoir. So I think overtime you're going to see that get better and ultimately bring our cost down. But we're also very tied to the price financial gas.
So the financial gas prices go up that can obviously override any of our benefits from better steam utilization in the reservoir.
Unidentified Analyst
Thanks.
Operator
And this will conclude would question-and-answer session. I would like to turn the call back over to Todd Stevens for any closing remarks.
Thanks everyone. Look forward to seeing your or talking to you soon.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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