Vanguard Natural Resources' (VNR) CEO Scott Smith on Q4 2015 Results - Earnings Call Transcript

| About: Vanguard Natural (VNR)

Vanguard Natural Resources, LLC (NYSE:VNR)

Q4 2015 Results Earnings Conference Call

March 07, 2016, 11:00 AM ET

Executives

Lisa Godfrey - Director of Investor Relations

Scott Smith - President and Chief Executive Officer

Richard Robert - Executive Vice President and Chief Financial Officer

Britt Pence - Executive Vice President of Operations

Analysts

Brian Brungardt - Stifel

Nathan Judge - Janney

Jeff Robertson - Barclays

Operator

Good day and welcome to the Vanguard Natural Resources Fourth Quarter and Year End 2015 Earnings and 2016 Outlook Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Lisa Godfrey, Director of Investor Relations. Please go ahead.

Lisa Godfrey

Good morning, everyone. And welcome to the Vanguard Natural Resources, LLC fourth quarter and year end 2015 earnings and 2016 outlook conference call. We appreciate you joining us today. On the call this morning are Scott Smith, our President and Chief Executive Officer; Richard Robert, our Executive Vice President and Chief Financial Officer; and Britt Pence, our Executive Vice President of Operations.

If you would like to listen to a replay of today's call it will be available through April 6 and may be accessed by calling (888) 203-1112and using the passcode 1242022#. A webcast archive will also be available on the Investor Relations page of company's website at www.vnrllc.com and will be accessible online for approximately 30 days.

For more information or if you would like to be on our e-mail distribution list to receive future news releases please contact me at (832) 327-2234, or via e-mail at lgodfrey@vnrllc.com. This information was also provided in Friday's earnings release.

Please note the information reported on this call speaks only as of today, March 7, 2016 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay.

Before we get started, please note that some of the comments today could be considered forward-looking statements and are based on certain assumptions and expectations of management. For a detailed list of all the risk factors associated with our business, please refer to our 10-K, which is expected to be filed later today, and will also be available on our website under the Investor Relations tab and on EDGAR. Also on the Investor Relations tab of our website under Presentations you can find the Q4 and year end 2015 earnings results supplemental presentation.

Also, as a reminder, the company's 2015 K-1 tax packages will be available for immediate download from our website at www.vnrllc.com the week of March 14, with original 2015 K-1 tax packages mailed to all unitholders at that time, as well. We will also be mailing the LRE and EROC 2015 tax packages at that time. For any questions regarding Schedule K-1s, unitholders are invited to call the tax package support help line toll free at 866-536-1972.

Now I would like to turn the call over to Scott Smith, President and Chief Executive Officer of Vanguard Natural Resources.

Scott Smith

Thank you, Lisa. And welcome, everyone, and thanks for joining us for our fourth quarter and year end 2015 conference call. I'll start - with our operational results for the quarter and full year 2015. I will then briefly recap our capital spending during the fourth quarter and our plans for 2016. Richard will then proceed with the financial discussion, 2016 financial outlook and then we'll open up the line for Q&A.

First, I want to say how pleased we are to have successfully completed both the LRR Energy and Eagle Rock Energy mergers in early October. These transactions added over 100 new employees to the Vanguard team.

Although the majority of our new personnel are directly involved at the field level in the operation of the assets, we also added many quality, experienced people in our land, accounting, geology and engineering groups that will help us manage the newly acquired assets, while also helping provide support in our legacy operations.

As I've mentioned before, with the closing of this deal all of our stakeholders have the opportunity to move forward with the combined company that has a more diversified asset base and cash flow profile.

It's really the case, especially in today's environment, to complete not only one transaction but two in a compressed time frame that are accretive to cash flow, improve leverage metrics and add excellent human capital.

I also want to highlight that with the Eagle Rock transaction we acquired a sizable interest in the SCOOP and STACK area of Oklahoma which, as noted in our press release, we are currently in the processes of marketing.

Although this area offers a significant inventory of drilling that generates attractive returns, even in today's commodity environment, we believe that Vanguard and all of our stakeholders are better served if we can successfully monetize this asset and deploy the proceeds toward improving the balance sheet and providing liquidity.

With that, let me turn to an update on our year end reserves. Using SEC pricing of $50.20 per barrel and $2.62 per Mcf, our total proved reserves stand at approximately 2.3 Tcfe, which is about 13% greater than our 2014 proved reserves of slightly more than 2 Tcf.

Considering that SEC pricing has decreased from 2014 levels by 47% and 40% for oil and natural gas respectively, it's a great accomplishment to still have increased total reserves by over 10%.

From a commodity perspective, our year end reserve mix is 68% natural gas, 17% oil and 15% NGLs. In addition, our percentage of proved developed reserves stands at 72%, and based on our fourth-quarter average day daily production our R over P index is approximately 12 years. At strip pricing the PV-10 of our reserves at year end 2015 was approximately $1.7 billion.

Before I move on, I want to point out that revisions to our reserves due to lower prices in the year was approximately 590 Bcfe, but remember, these reserves didn't go anywhere. They are still in the ground and once prices rebound we'll have positive price revisions.

Additionally at $3 gas and $75 oil our proved reserves would increase over 10% to over 2.5 Tcfe and have a PV-10 of approximately $2.85 billion. I believe this is important to note as it shows the significant upside our reserve base offers once commodity pricing improves to more historical levels.

Now let's review our production results and capital spending for the year. Due to the recent acquisitions, average daily production for the fourth quarter was 511 million cubic feet equivalent per day, up 32% over the 387 million cubic feet equivalent per day produced in the third quarter of 2015, and a 27% increase over the 402 million cubic feet equivalent per day produced in the fourth quarter of 2014. Production for the quarter was approximately 64% natural gas, 18% oil, and 18% NGLs.

During the quarter we did experience some down time, as did other operators, due to the severe winter weather infrastructure issues that negatively impacted operations, primarily in our Permian, Arkoma and Anadarko Basin areas.

On a total basis we experienced roughly a 2% production decline due to down time in October, 3% in November, and 5% in December. Specifically, during the last week of December, all of our areas in the Permian were adversely affected I by severe weather. We were fortunate we did not experience any material long-term damage to our operations.

Average daily production for the full year 2015 was 415 million cubic feet equivalent per day, up 27% over the 327 million cubic feet equivalent per day produced in 2014. Production breakout for the year was approximately 70% natural gas, 16% oil, and 14% NGLs.

Please note that this does not include Eagle Rock and Lime Rock or LR Energy, for a full year and is not representative of the combined company. On a pro forma basis, 2015 annual production was 508 million cubic feet equivalent per day.

Turning to our capital spending, during the fourth quarter we spent approximately $32 million and for the full year we spent $113 million. In 2015 our capital program was highlighted by our activity in the Pinedale where we are a non-operated partner with Ultra and QEP.

For the year, the Pinedale accounted for over 57% of our total capital spend. Additionally, with the inclusion of the SCOOP STACK assets with Eagle Rock acquisition, we spent $13 million in this area in the fourth quarter alone.

As we put together our 2016 capital plan, we spent a significant amount of time high grading the capital program and have deferred numerous projects until commodity pricing improves to more historical levels.

We view it as more important to focus on generating excess cash flow and improving the balance sheet than focusing on growth or even maintaining production at today's prices.

Other than the $2.4 million we have budgeted for 12 operated re-completions in East Haynesville Field, we will be deferring spending operating capital dollars until we see commodity prices improve. Because of this, we do expect to see our total production to decline over the year by approximately 10% to 15% from our fourth quarter levels.

Looking at our 2016 budget, we are anticipating a total capital spend of approximately $63 million, which is 45% less than the $113 million we spent in '15. I'll quickly go into some details on larger capital outlays we have planned.

We expect to spend approximately 40% of the 2016 budget on activities in the Pinedale where again, we will participate as a non-operator in the drilling and completion of wells there.

As previously mentioned, Ultra and QEP are our operated partners in the Pinedale and we have forecasted our participation in what equates to a one-rig program beginning in April for each operator.

We're forecasting our drilling and completion costs to be an average of $2.75 million per well, which is down over 27% from the $3.8 million we had in our initial 2015 budget last year. Our total net capital spend in the Pinedale is expected to run approximately $25 million and generate an average rate of return greater than 20%.

In addition to our capital spending in the Pinedale, we plan to spend approximately $11 million or 20% of our capital budget participating as a non-operated owner in the Anadarko Basin drilling in wells in the SCOOP and STACK area.

Taking this activity into consideration, we're planning on spending over 60% of our capital budget on non-op activities and the balance on operated properties. For our operated assets, the capital is attributable strictly to maintenance activities. We believe that in the current environment spending CapEx only on projects that provide adequate returns to strip pricing is the prudent decision.

However, should prices rebound later in the year, we have the flexibility and are well positioned so we can increase capital spending on development projects that make sense and generate solid rates of return.

As Richard will get into in more detail, we plan to use excess cash flow to pay down our credit facility and strengthen the balance sheet. With respect to acquisitions, we continue to evaluate transactions, recognizing that with our limited access to capital, any acquisitions of size would be in conjunction with a private equity partner utilizing the acquisition co type structure.

We've had numerous conversations with various parties on several asset packages and believe we have designed a structure that will allow us to move quickly and effectively as we look to buy asset with a PE partner in what we believe is a very attractive time to acquire assets in this low priced commodity cycle.

In summary, 2015 was a great year on the acquisition front, and, as Richard will discuss later, we ended the year strong with ample distribution coverage and excess cash flow despite what was a very challenging commodity environment.

However, as this environment persists, it requires companies to focus on the balance sheet and make the tough decisions necessary to do so. Specifically for Vanguard this decision relates to our distribution policy.

As we noted in our press release, effective with the February distribution, which was to be paid in April, we will be suspending our distributions for both the common and preferred units and redirecting this cash flow to pay down debt.

We believe this is in the best interest of all of our stakeholders in the long run. We will continue to evaluate our distribution policy. And as commodity prices improve and with an improved balance sheet, we look forward to being in a position to reinstate our distributions to our unit holders at sustainable levels.

With that, I'll turn the call over to Richard.

Richard Robert

Okay. Thanks, Scott. Good morning, everyone. Before I start with a recap of our financial results, I want to join Scott and say that we're very pleased about completing the Eagle Rock and LRR transactions, and especially pleased to be seeing the benefits that we had modeled for the combined company coming to fruition.

Through the hard work of some very dedicated employees we integrated not one but two companies in a very short period of time. As noted on our February 29 SEC filing, we had to extend our filing of the 10-K due to the complexity and scope involved in integrating the massive amount of historical data and accounting systems for both transactions. But the integration is now complete and we do not foresee any issues going forward.

Secondly, I want to address a topic that I believe is a most important topic, and Scott's discussed it at some length already. I think the most important topic for this call and ultimately what our focus is on for 2016 is improving our balance sheet.

I want to be clear that in a lower commodity price environment, it has to equal lower debt. We believe that the best use of excess cash for all stakeholders, both equity and debt holders, is paying down debt and reducing leverage. This is what will allow us to get through this cycle and is why we have taken multiple steps to do just that.

As indicated in our 2016 forecast, the good news is that we actually will be generating a substantial amount of free cash flow to pursue this strategy, which I expect isn't the case for many in the oil and gas industry.

With that, I'd like to first discuss our quarterly and annual financial results and then turn to my regular update on our hedging portfolio and liquidity, and then we'll review our outlook for 2016.

We reported adjusted EBITDA of approximately $133 million for the fourth quarter of 2015, an increase of 6% when compared to the $126 million reported in the fourth quarter of 2014 and an increase of 50% from the $88 million reported in the third quarter of 2015.

For the full year of 2015, we reported adjusted EBITDA of $397 million, which is a 6% decrease from the $421 million generated in 2014.

In terms of our distributable cash flow, the fourth quarter of 2015 totaled approximately $65 million or $0.50 per common unit, generating a coverage ratio of approximately 2.8 times based on the $0.1775 [ph] distribution paid for the quarter.

The fourth quarter distribution assumes $0.1175 [ph] for October, and a reduction to $0.03 for both November and December. For the full year, our distributable cash flow totaled approximately $165 million, generating a coverage ratio of 1.44 times.

Moving on to net income, we reported a net loss for the fourth quarter of $4.02 per basic unit after deducting distributions to preferred unit holders. The fourth quarter includes a net non-cash expense of $566 million that are adjustments to arrive at adjusted net income available to common and Class B unit holders.

The 2015 adjustments include a $485 million impairment charge on our oil and gas properties, a $71 million goodwill impairment loss, and a $44 million loss from the change in fair value of commodity derivative contracts, offset by a $41 million net gain from our acquisitions and mergers. Our adjusted non-GAAP net income available to common unit holders was $0.49 per unit for the fourth quarter.

For the full year 2015, we reported a net loss of $19.80 per basic unit. The 2015 results include net non-cash losses of $1.9 billion that are adjustments to arrive at adjusted net income.

The adjustments are primarily made up of $1.8 billion impairment charge in our oil and gas properties, and the remainder includes a $71 million goodwill impairment loss and a $62 million loss from the change in fair value of commodity derivative contracts, offset by a $41 million net gain on acquisitions and mergers.

As you may recall, on last year's earnings call, I said that I expected impairment losses to be recognized in every quarter in 2016, and we did. I would like to point out that large oil and gas property impairments is not something that is unique to Vanguard, as many oil and gas production companies, particularly those that are using full cost accounting are recording large impairments in light of the current low commodity price environment.

The SEC price used to value reserves for companies using the full cost method of accounting is a trailing 12 month average price. So each quarter a new average price is calculated and used to assess the value of reserves.

As high prices roll off and lower prices are added, the average price goes down and impairments will continue. And based on continued commodity price declines in the first quarter this year, I expect that we will record another large impairment in the first quarter of 2016.

All that being said, please bear in mind that these losses are non-cash and despite the impairment losses the reserves are still in the ground and can generate acceptable rates of return in the future when prices recover and or as drilling costs continue to improve.

I won't go over all the numbers in the release, but I'd like to touch on some of our operating expenses from the fourth quarter and full year. Lease operating expenses were $45 million in the fourth quarter and $147 million for the full year of 2015.

As for our Vanguard legacy operated lease operating expenses, we averaged slightly over $20 million per quarter for the full year 2015. And I'd like to point out our LOE cost savings amounted to almost $21 million for the year on just our Vanguard legacy assets alone. This is a decrease of approximately 20% from 2014 and a tremendous accomplishment on the part of our operations team.

In 2016, we are forecasting a further 15% reduction in LOE for the operated assets recently acquired in the LRE and Eagle Rock mergers. And, similarly, we are forecasting a 7.5% reduction in LOE for the non-operated assets acquired in these transactions from 2015 levels.

Also I'd like to take this time to talk a little about our G&A synergies. As forecasted, we have achieved substantial G&A synergies on an annualized basis to date and we are confident that moving forward we will continue to find ways to further reduce costs, specifically as contract terms expire for services we do not need or require. These synergies are contemplated in our guidance table we issued with our earnings release.

Next I'd like to go into our revenue breakout by commodity. Excluding hedges, for the fourth quarter 58% of our revenue was attributable to liquids, 45% stemming from oil and 13% from NGLs, and the remaining 42% attributable to gas. For the full year 2015, 51% of our total revenue was attributable to liquids and the remaining 49% to gas.

Let me move on to a quick hedging update. During the fourth quarter of 2015 and the first quarter in 2016 we took measures to further protect our down side. On the oil side we hedged 2,000 barrels a day of our 2016 west Canadian basis production at a weighted average price of negative $14.26. This was to protect our Elk Basin oil revenues which historically have had very large variations in basis pricing.

On the natural gas side we added 45,000 MMBtu per day in the form of basis swaps to cover an additional portion of our 2016 northwest Rockies production, which was in response to tightening differentials in that area.

As over 60% of our gas production is from the Rockies area, we feel this was another step to providing more cash flow stability. Also during the first quarter we entered into a swap for 7,500 MMBtu per day of our associated production from April 2016 to March 2017 at a price of approximately $2.74.

At the expiry of this contract, the counterparty will have the option to extend the same amount of volume into March of 2018, also known as the swap shift. This was specifically done to lock in our expected returns on recent Pinedale AFEs that we elected to participate in the first quarter.

Today, strip pricing for that same period is around 220, so this trade is doing exactly what it was intended to do, protect the expected cash flows and return of our capital program in the Pinedale. We feel that these measures will help provide more stability in our cash flow and limit additional downside in today's volatile commodity price environment.

However, because we believe we are in the down part of the current commodity price cycle, and at levels that are not sustainable, we are less likely to hedge future revenues to the same extent as our historical and existing hedging arrangements.

As such, our revenues will become more susceptible to commodity price volatility as our commodity price hedges settle and are not replaced. As commodity prices improve and return to a more sustainable level, we will be opportunistic in layering in additional hedges.

Our natural gas is hedged 78% in 2016 and 49% in 2017 at weighted average prices of $4.15 and $3.84, respectively. I will note that this includes anticipated production from our 2016 capital spending and anticipated production from a similar spending plan and expected results assumed in 2017.

In terms of oil, 2016 expected oil production is 67% hedged and 2017 is 21% hedged at a weighted average price of $67.52 and $84.13, respectively. Like the natural gas, this assumes anticipated production from similar capital spending and results in 2017 as that for 2016.

I want to point out that the weighted average prices I've detailed for natural gas and oil take into consideration the negative impact of existing three way collars and short puts, and that is different than how we have provided the information in the past. The negative impact was calculated based on forward commodity strip pricing for 2016 and 2017 as of February 29, 2016.

The natural gas strip pricing on February 29 was $2.05 per MMBtu for 2016 and $2.53 per MMBtu for 2017. The oil strip pricing on February 29 was $36.53 per barrel for 2016 and $42.50 per barrel for 2017.

The actual impact of the three-way collars and short puts will fluctuate as respective prices settled. Specifically, if actual commodity prices are higher than the February 29 pricing used, the impact will be less negative, and, conversely, if the actual commodity prices are lower than the February 29 pricing used, then the impact would be more negative.

More details regarding our current hedge portfolio and percentage hedged can be found in the supplemental Q4 and full year 2015 information package posted to our website.

Let me now turn to our credit facility and liquidity for a quick update. Based on the prescribed calculation in our credit facility, we ended 2015 with a debt to EBITDA ratio of approximately 4.3 times.

Our expectation for 2016 is that our debt to EBITDA will increase over the course of the year, but anticipating the positive impact of selling our SCOOP STACK assets and using all excess cash flow generated over the course of the year to reduce our debt under the credit facility, we are forecasted to remain in compliance with our credit agreement in 2016.

As of today, Vanguard has $1.68 billion in outstanding borrowings under the revolver, which provides us with $100 million in current liquidity after taking into consideration the current $1.78 billion borrowing base, $5 million in outstanding letters of credit and $10 million in cash.

Our next borrowing base re-determination is scheduled for April 2016, and based on projected market conditions, continued declines in oil and natural gas prices, and as existing hedges roll off we do expect a reduction in our borrowing base at the next re-determination.

However, the precise amount of the reduction is not known at this time, but we do expect that the amount will be significant. As such, we began a process to sell the SCOOP STACK assets at the end of 2015 that we acquired in the Eagle Rock transaction.

As Scott pointed out earlier, these assets provide a great potential opportunity, but we feel they are not well suited for our MLP model. The sale of these non-core assets will greatly improve leverage and has the added benefit of lowering our capital expenditures and lowering our corporate PDP decline rate.

We believe that this divestiture will close around the same time as the April 2016 re-determination, and upon closing will allow us to reduce borrowings under our credit facility in a meaningful amount, thereby mitigating the reduction in the borrowing base in the upcoming re-determination.

I expect that liquidity will continue to be low throughout the year. Although liquidity is obviously a very important measure, I'd like to remind everyone we do not need liquidity to fund our daily operation as we anticipate generating significant excess cash flow this year.

However, there can be no assurances that our banks will not re-determine our borrowing base at a level below our outstanding borrowings, either in the spring or any subsequent re-determination, and should this deficiency occur, our credit facility requires us to repay the deficiency in equal monthly installments over a 6 month period.

As previously stated, our internal forecasts show that we will generate a substantial amount of excess cash flow over the course of 2016, which will be used to reduce borrowings and we expect should be sufficient to repay the deficiency, should one exist.

Lastly, I'd like to talk about the results of our recent debt exchange. On February 10, 2016 we issued approximately $76 million of new 7% senior secured second lien notes due 2023 to eligible holders in exchange of their outstanding 7.875% senior notes due 2020 of approximately $168 million. The implied exchange ratio is 0.45 times or put in a different way, $450 of new notes were exchanged for every $1,000 of old notes.

Interest is payable on the new notes on February 15 and August 15 of each year beginning on August 15, 2016. The net impact of the exchange lowered our debt by approximately $92 million and lowered our annual interest expense by about $8 million, a great outcome in our mission to reduce leverage and improve cash flow.

That being said, it does come with a cost. Investors holding common units on February 1 will be allocated cancellation of debt income on a pro rata basis. Preliminary estimates suggest that approximately $1 of income will be allocated to each February 1 common unitholders. But I'd point out that man of our common unitholders have cumulative taxable losses generated in prior years in excess of $1.

So, for those specific people, the cancellation of debt income allocation on a standalone basis would not generate a cash tax obligation. Every common unitholder has a different tax situation and should consult with a tax advisor as to their specific circumstance.

Turning to our expectations for this year, I'll not go into all the details of our forecast outlined in our press release, but I'll highlight some of the key components now.

First, as stated in our press release and as a matter of policy, we do not attempt to provide guidance on a variety of items, but most notably we do not include the impact of any potential future acquisitions or divestitures or the impact of unrealized non-cash gains or losses from hedging activities or oil and gas property impairments.

Our guidance does, however, include the benefit of the SCOOP STACK assets as though we owned them throughout the year. So to be clear, our forecast in this press release includes production and EBITDA related to these assets as if we didn't sell them.

Assuming that they are sold, obviously they will no longer contribute to our cash flow and a new forecast will be released when the sale is consummated. For production, with that in mind, for production we are anticipating a range of 421,600 to 467,200 Mcfe per day, with approximately 67% attributable to gas, 18% oil, and 15% NGLs.

Due to our plans to reduce capital spending in 2016, we anticipate our annual production will be 10% to 15% lower than our fourth quarter 2015 average daily production of 511,119 Mcfe per day.

As for our operating expenses, we are estimating lease operating expenses of $1 to $1.10 per Mcfe for the year, which will increase slightly over the course of the year as production declines.

In absolute dollars, we are anticipating total LOE in a range of $163 million to $179 million. Cash G&A expenses are anticipated to be approximately $0.24 to $0.26 per Mcfe or a range of $40 million to $42 million.

In terms of our CapEx budget for the year, we are anticipating a little more than $23 million or 37% being put into operated projects. The remaining 63% will be dedicated to non-operating projects for a total of $63 million.

All in all, based on 2016 strip pricing as of February 29, again, which was $36.53 for oil and $2.05 for natural gas, we anticipate generating in excess of $145 million in excess cash flow over the course of 2016 that will be used to pay down borrowings under our credit facility.

As I stated at the beginning, a lower commodity price environment must be met with lower debt. We believe that the key to ultimately participating in the commodity price recovery revolves around strengthening our balance sheet and all of our resources must be directed to this end.

In 2015, we did this through our initial reduction in the distribution, a lower capital budget and realizing operational efficiencies in the field. At the end of 2015, we completed the Eagle Rock and LRR acquisitions, which also greatly improved the balance sheet of the combined company.

In 2016, we have already taken steps including our debt exchange, which lowered our debt by approximately $92 million. We reduced our capital budget by approximately 70% on a pro forma basis from 2015 levels.

We initiated a SCOOP STACK asset sale that we believe are better suited in a different business model, and now the suspension of our common and preferred distribution. As Scott mentioned, the suspension of our distributions was a very difficult decision, but we believe will prove to be a prudent one.

As a reminder, the management team at VNR represents some of the largest common unitholders. So we are very cognizant of the sacrifice we are asking all unitholders to bear.

We wouldn't be asking our unitholders to do this unless we felt it was in everyone's long-term best interest. All of the actions that we have taken are in an effort to extend our runway long enough for VNR to be part of the recovery when it occurs.

We are confident that there are better times ahead and we hope that our unitholders that are sacrificing today will benefit with us in those better times ahead.

This concludes our comments. We'd be happy to answer any questions you may have at this time.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We'll take our first question from Brian Brungardt with Stifel.

Brian Brungardt

Good morning, guys. Appreciate you taking my questions here.

Scott Smith

My pleasure.

Brian Brungardt

I guess, regarding the targeted asset sale, what was the production associated with that acreage during the fourth quarter?

Richard Robert

It was in the $40 million to $45 million a day range on an equivalent basis.

Brian Brungardt

Got you. Appreciate that. And where does the corporate decline rate stand at today? Is 15% still a good number to use or with the recent mergers has that ticked up modestly?

Richard Robert

Yes. I mean, with the SCOOP STACK assets they have a higher decline rate. So I'd say it's ticked up modestly. But obviously the impact - one of the positive impacts of the SCOOP STACK sale, should it occur is it will reduce that number back down to the more historical level.

Brian Brungardt

Okay. And then, lastly, and I'll jump back in line here, with regards to the CapEx budget, and appreciate the color around the timing of the spending in your earnings release. How should we think about the production profile throughout fiscal '16?

Richard Robert

Its - as we indicated, we anticipate production will decline throughout the year. And as the impact of the lower spending becomes more apparent, I suspect the decline will be higher at the end of the year versus the beginning of the year.

Brian Brungardt

That is all I have for now. Thank you, guys.

Scott Smith

Thank you.

Richard Robert

Thank you.

Operator

That does conclude today's Q&A session. At this time I'd like to turn it back over to our speakers for any additional or closing remarks.

Scott Smith

There is one more question.

Operator

Just one moment. We'll take a question from Nathan Judge with Janney.

Nathan Judge

[Technical Difficulty] If the STACK SCOOP assets aren't sold, what's the workout there, basically you're paying that off in six months, is that right?

Richard Robert

Yes, I mean, essentially that is what's required under the credit facility. If there is a deficiency, then you have six months to come back in compliance or work out some other situation.

Nathan Judge

And so, if you look at your distributable cash flow forecast, assuming that there's a difference or a delta between what you think you'll produce, and you're not able to sell the SCOOP assets, what other options would you consider?

Richard Robert

We feel quite confident in our ability to sell the SCOOP STACK assets. So we really hadn't contemplated a different result. We're very happy to say we had a significant amount of interest in those assets and we anticipate being able to relay that in the near future as to what the outcome on that sales process was.

Nathan Judge

So, thinking about the exit production rate in Q4 '16, is it fair to say that without SCOOP you'll be roughly 10%, something like 25% below year end 2015 levels?

Richard Robert

Yes, that's probably a closer number. But again, when we sell, when we consummate the sale, we will put all of that information in a press release, but that's probably pretty close.

Nathan Judge

Okay. Just wanted to clarify that. Thank you.

Richard Robert

Okay. Thank you.

Operator

We'll take a question from Brian Brungardt with Stifel.

Brian Brungardt

Hey, guys, thanks for letting me get back on here. Just two follow up questions here. If the targeted asset sale does proceed, would you anticipate including any hedges in the asset sale that were acquired with the Eagle Rock merger?

Scott Smith

That is not contemplated, no.

Richard Robert

And so your question is appropriate in that, our percentage hedged will go up after the sale.

Brian Brungardt

Right, thank you. Looking at the upcoming credit re-determination, you mentioned you anticipate having a shortfall. What is the level of reduction that you are using in that analysis?

Richard Robert

We're not going to – quite happy to tell, the banks come up with their own analysis, so my telling you what we think its going to be is irrelevant at the end of the day. Its really, what's relevant is what they come up with.

And again, we made comments with respect to based on our internal forecasts and where we think things are going to come out, we think things will - between our excess cash flow and the asset sale we think we'll be fine. But until they've come out with their own assessment I don't want to talk about what the possibilities are.

Brian Brungardt

Okay. Maybe a little bit different way to ask this then, do you anticipate making up the shortfall with just the targeted asset sale or are you also forecasting the use of excess free cash flow there?

Richard Robert

Again, until they come up with their own numbers, I can't say. Its…

Scott Smith

It's hypothetical.

Richard Robert

It's hypothetical. I mean, they have not told us what the number is. And I - we've been surprised in the past and I don't want to say a number today and then be wrong, frankly.

Brian Brungardt

Okay. Fair enough. And lastly here, do you anticipate receiving additional covenant amendments in the upcoming re-determination or is that not being pursued?

Richard Robert

As I've mentioned in my scripted comments, we anticipate that we will be in compliance with our covenants over the course of 2016. So no covenant relief is anticipated in 2016.

Brian Brungardt

Thank you very much, guys. And, again, appreciate taking the questions here.

Richard Robert

Thanks.

Operator

We'll take our next question from Jeff Robertson with Barclays.

Jeff Robertson

Thanks, Richard. You just answered my question. I was going to ask whether or not you anticipate having room under the credit facility once it's revised downward and you sell the SCOOP and STACK.

Richard Robert

Yes. I mean, that is the expectation. Clearly, the sale of the SCOOP STACK is important to us. And kind of as I've suggested we think it will mitigate the impact of the downward re-determination.

And between that and the excess cash flow we think we're going to be fine. But, again, until the banks tell us what the numbers are I can't say with complete confidence because I don't know what the numbers are. But in terms of covenants, we feel pretty comfortable about where we stand from a leverage standpoint.

Jeff Robertson

Okay. Thank you very much.

Richard Robert

Thank you.

Operator

That concludes our question-and-answer session. At this time I'd like to turn it back over to management for any additional or closing remarks.

Scott Smith

Thank you. Again, appreciate everyone joining us on the call this morning. I think you know the end result – I want to conclude now, 2015 was challenging, but obviously we think we accomplished a lot with the mergers of the two companies.

Challenging times ahead, but we're going to act on the course that we plotted out here and I think, look forward to coming out with some new guidance later this year with respect to the results of the SCOOP STACK process. And, again, all of us keep our fingers crossed for higher prices. Thanks again, everyone. And we'll visit with you at the next quarterly call.

Operator

That concludes today's conference. We appreciate your participation.

Scott Smith

Thank you.

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