Glori Energy Inc (NASDAQ:GLRI)
Q4 2015 Earnings Conference Call
March 23, 2016 11:00 ET
Lisa Elliot - Investor Relations
Stuart Page - Chief Executive Officer
Vic Perez - Chief Financial Officer
John White - ROTH Capital
Greetings and welcome to Glori Energy’s Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host, Lisa Elliot. Thank you. You may begin.
Thank you, Rob and good morning everyone. On the call this morning are Stuart Page, Chief Executive Officer and Vic Perez, Chief Financial Officer.
Before I turn the call over to them for their opening remarks, I would like to remind you that today’s call will contain statements that maybe considered forward-looking in nature. These may include statements regarding Glori’s future investments, long-term growth and expected results. And although management believes these statements are based on reasonable expectations, they can give no assurances that these statements will prove to be correct. They are subject to certain risks, uncertainties and assumptions as described in the company’s filings with the Securities and Exchange Commission and in this morning’s earnings release.
Also, we undertake no obligation to revise or update these forward-looking statements in light of new information or future events, except as required by law. Information reported on this call is currently as of today, March 23, 2016. So any time-sensitive information may no longer be accurate at the time of any replay. A replay of today’s call will be available via webcast by telephone. And you can find information on how to access those replays in this morning’s news release.
Now, I would like to turn the call over to Stuart Page. Stuart?
Thank you, Lisa and thank you for everybody for joining us today. I hope you all had an opportunity to review this morning’s earnings release as well as some of the operational updates that we put out a week ago. We opted to provide some highlights ahead of our earnings and 10-K filing as we are no longer an accelerated filer.
This morning, I am going to provide some additional color around the items in that March 9 operational update and in particular around our AERO program at the Coke Field. Later, Vic will summarize the quarterly financial results, our financial position and our expectations for the first quarter. There are four important initiatives that I would like to cover today in addition to the financial review of 2015. First, our expansion of the implementation of AERO technology at our Coke oilfield; second, the progress and purpose of our application to the DOE loan guarantee program to accelerate the commercialization of our AERO technology as applied to dormant non-producing oilfields; third, our ongoing search for acquisition candidates as well as partners and lenders to help grow our business and strengthen our liquidity; and finally, the additional cost reduction efforts that we have made to conserve cash in the continued low oil price environment.
Those of you that have been following our company for sometime will know that our mission is to use biology to recover some of the billions of barrels of oil that are trapped in reservoirs around the world using our proprietary AERO technology. We have successfully deployed AERO at many client oilfields and we acquired the Coke Field in 2014 in order to demonstrate our technology in a field that we own and operate. After a long regulatory process aimed at unitizing the Coke Field, we were able to start AERO implementation in July of 2015 in a single injection well drilled for purpose on the Northeast edge of the field. Inspection of the production data from the Coke Field indicated that change and potentially elimination of oil production declined across the field during the first couple of months of deployment.
Unfortunately, the data was interrupted from late September when we lost production due to mechanical failures of certain wells and infrastructure. Prior to the production change caused by these losses, we believe we have had good reason for optimism towards AERO implementation. Now, it’s obvious that much more time is needed to be completely definitive about performance metrics. However, based on the data we felt comfortable initiating Phase II of the project and adding to add our injection wells. For those of you that are technically oriented, we have included a production slide in a presentation that is filed in our website, which was initially presented at the ROTH Capital Conference on Monday, March 14. We shared the specific data with you in order to allow you to observe the production characteristics and interpret your own conclusions.
Phase II of the AERO implementation was achieved through the conversions to shut in producing wells to become AERO injection points. The work was completed at the end of February and AERO injection commenced March 4. We are currently injecting in all three AERO wells. Once AERO is fully implemented at Coke, we think the technology could add as much as 7 million barrels of additional oil recovery through the life of the field. Simultaneously, with starting AERO Phase II, we took a hard look at the cost of the producing wells and decided to take some action to reduce operating costs, although this meant that we would need to reflect the baseline for our AERO production. Specifically, we shut in three wells that were uneconomical at $33 oil and half the production rate in 6 others to reduce cost.
Historically, the Coke Field produced about 60,000 barrels of water per day alongside its 400 barrels of oil and the cost associated with the water production caused the cost of production to be uneconomic. Since making these changes, we have now reduced the production water by about 45%, but decreased oil production only by about 30%. As a consequence of these actions and others, we have improved fuel operating margin by about $720,000 per year. Our current baseline oil production from the Coke equipment field is now about 270 BOE per day. And all future comparisons for AERO performance we used is standard. We look forward to updating you with ongoing results of AERO implementation in future calls.
Moving away from our Coke Field let me put some color around our application for DOE loan guarantee that we announced in the March 14 operations update. The significant part of our opportunity is to use AERO to develop reserves and production from reservoirs that have already been exploited by conventional technologies and are no longer producing some of these oilfields were perhaps bounded in the mid-80s when oil was $85 a dollar. As a reminder, the industry generator needs to be high end around two-thirds of oil discovered when it leave the field. As you know, AERO technology injects nutrients into a reservoir to activate microbiology to enable more oil to be recovered to move residual oils. This should hold equally true in oilfields that are no longer producing oil. The potential for resurrecting production and abandoned oilfields is very promising based on both commercial and test projects that we have completed.
As we reported in the operationals update release, we have now cleared the first two application hurdles in the loan guarantee program from the U.S. Department of Energy that is sponsoring the program to promote advanced fossil fuel energy projects. The emphasis of our project is on developing economic oil production in fields that are being left behind by the industry and with minimal environmental impact. We have applied for a $150 million loan guarantee under the program to acquire and redevelop abandoned oilfields in North America and apply our AERO technology to them. We believe that the unique qualities of the AERO system combined with our proprietary water conditioning treatment make us the strong contender for the program. We have targeted 14 inactive oilfields across the U.S. that fit our criteria and have vast amounts of oil left.
Our project plan is to acquire and redevelop 7 of these fields and to fully implement AERO technology to recover more than 10% of the oil left behind. Based on the loan program office or LPOs evaluation of our Part 1 application amongst the first quarter 2016 we are invited to submit Part II of the application. And in connection with the company’s preparation of Part II, the agency noted that the company should consider among other matters the following. The LPO appreciates the company’s work on Part 1 of the application and looks forward to receiving Part 2 of the application, but cannot predict the ultimate outcome of the company’s application, whether a term sheet, conditional commitment or loan guarantee eventually will be issued for the project.
Now, moving to the third initiative I wanted to discuss this morning. We are continuing to look for ways to expand our asset base even in this difficult market and to set our company on a cost to take advantage of the current commodity price drag. To help us with these opportunities and other initiatives, in March, we retained an investment bank as financial advisor and we are actively exploring M&A alternatives with several potential partners, investors and asset sellers with the goal of improving liquidity and increasing shareholder value.
Let me now switch gears and give a brief update on what we have been doing to preserve cash and modify our cost structure. Although oil and gas prices have improved somewhat in the last 4 weeks, containing cost and conserving cash remains the top priority until we see a meaningful and sustained rebound. During 2015, we were extremely vigilant about tracking our expenses, we aggressively reduced headcount as we walk through to keep our operational activities intact and preserve our ability to work on various growth initiatives of minimizing cash burn. As we turned the corner into 2016, we took additional significant actions to reduce our costs and preserve cash.
In particular, we reduced our headcount by nearly 40% of our non-field personnel taking care of course to retain key employees. We consolidated into one office in South Houston and we have reduced the number of Board members. In the field we eliminated certain contractors. We negotiated the lower costs to chemicals and as mentioned earlier we shortened or reduced production from certain uneconomic wells. Also that cost savings will – our cost saving efforts will save about $3 million per year on a go forward basis. Additionally, we have eliminated all 2016 CapEx through the exception of the implementation of Phase 2 of our AERO project at Coke which is now behind us. Clearly, our ability to successfully pursue our strategy of investing in the application of AERO to our existing fields and to other fields we are targeting will depend upon the availability of operating and investment capital. We are doing everything possible to conserve cash, we are still working to grow our operations and we will continue to do so.
On the services side, although activity has been slow for 2015 regardedly optimistic that this recent small recovery in oil prices sustained that will bode well for our third-party service business. At $40 a barrel investment in our AERO system can yield up to a positive $30 for each incremental barrel produced. And we believe it’s a compelling investment for E&P companies even in this low price environment. We continue to work to raise awareness of AERO technology and associated water treatment technology. We are pleased to be featured February 2014 issue of Journal of Petroleum Technology, the magazine of the Society of Petroleum Engineers which showcased the success of projects in California where production was shown to be significantly increased over the duration of the project. Rigzone, a leading online energy resource also featured Glori’s AERO technology and its joint industry project with Alberta’s Innovates Technology Futures Group which is funding a project in order to asses and test potential of AERO technology to boost heavy oil production. Both articles can be found under the News section of Glori’s webstie.
Before I hand over to Vic to cover our financials, I would also like to take this opportunity to thank Matt Gibbs and Jim Musselman who recently stepped down from our Board of Directors. We have benefited enormously from their experience in the E&P industry. Our Board was a quite bit large of the most companies of our size, we felt it was appropriate to reduce the number of members on the Board, particularly as we have reduced our employee headcount, but we appreciate their wise counsel. We thank them for their service.
With that I will pass over to Vic.
Thank you, Stuart. This morning we reported total revenues of $1.8 million versus $3.8 million a year ago. The decrease is due to lower oil and natural gas prices, slightly lower production and due to lower – and also to lower service segment revenues which were impacted by a sharp reduction in capital spending by E&P customers and prospects worldwide. We reported a net loss of $27.1 million or $0.85 per share versus a reported net loss of $11.7 million or $0.37 per share for the fourth quarter of ’14.
Net results in the fourth quarter included the negative impact of a $22.6 million non-cash impairment charge on our oil properties due to lower oil and gas prices. This was partly offset by the positive impact of a $944,000 gain on the commodity derivatives, the gain in our hedges. Excluding the impact of the impairment and the unrealized gains on commodity derivatives, the adjusted net loss for the fourth quarter was $4 million or $0.14 per share compared to an adjusted net loss for the fourth quarter of ’14 of $4.7 million or $0.15 per share.
Adjusted EBITDA for the fourth quarter was a negative $1.5 million versus a negative $2 million a year earlier. Oil and gas segment revenues declined from $3.2 million in the fourth quarter of ’14 to $1.5 million in the latest quarter. This was due to a 42% decrease in average oil prices received and a 12% decrease in production year-over-year. The average daily production was 461 net Boe which was down about 22 barrels a day from the third quarter of ’14 or about 5%. Oil and condensate represented about 91% of our total production. We expect our production in Q1 to approximately 380 net barrels or so. The average realized oil price excluding the impact of our oil price swaps in the fourth quarter was $39.07 per barrel, which was down from $42.44 a barrel from the prior quarter and down from average realized oil price of $67.04 per barrel a year ago. Our average realized oil price including the gain or including the realized cash settlements from oil price swaps was $64.22 in the fourth quarter of ’15.
We had swaps in place for about 57% of our Q4 oil and condensate production and we also have additional swaps in place at the equivalent of about 218 net barrels a day for the balance of the year at a price of $82.46. In the first quarter of ’16, I would expect our realized cash gain from oil price swaps to be about $1.2 million due to the drop in oil prices in January and February. In the fourth quarter our oil and gas segment operating expenses decreased 27% versus a year ago, mostly due to a 60% reduction in compensation expense and other – reduction in other admin expenses related to our oil segment overhead as well as a 53% reduction in severance taxes.
Direct lease operating expenses were about $1.8 million which was down slightly from a year ago. Lease operating expenses however decreased 19% at the Coke Field compared to a year ago, but we acquired the Bonnie View field in June of 2015 which added about $300,000 to LOE in 2015. Compared to the third quarter of this year, LOE was essentially flat due to some plant and workovers at the Bonnie View field. And as Stuart mentioned we are recently taking steps to decrease LOE at the Coke Field further. Besides LOE, lease operating expenses, our oil and gas segment operating expenses includes $495,000 for overhead related to our non-field oil professional staff and administrative expenses. As I mentioned these expenses were down 60% from a year ago. They will further decrease in the first quarter as a result of recent expense reductions mostly personnel. Other expenses in the oil segment also include ad valorem taxes, severance taxes and acquisition expenses. We gave a breakdown of those expenses in the press release.
Turning to the services segment, we have generated $261,000 of AERO service revenues from the third party E&P clients which was down about $20,000 from Q3 and down about $350,000 from a year ago when we had a larger number of projects. As Stuart mentioned even though our technology makes sense in a low priced oil environment, the third party business was affected by the E&P industry slashing their spending. We expect service revenues in Q1 to get up – to be at about $175,000 in the quarter. Operating expenses for the services segment were about $321,000 which was down from – down about $75,000 from the prior quarter and down about $492,000 from a year ago when we had a larger staff servicing third party business and also we had a reduction in project costs related to a decreased number of projects.
We expect service operating expenses in the first quarter to be about $300,000 and then decreasing to about $200,000 as a result of cost reductions and fewer projects, those are quarterly numbers. Company wide, SG&A was flat from the prior quarter of $1.3 million and down about $400,000 or 22% from the year ago quarter due mostly to a 56% decrease in salaries and benefits. We expect SG&A to be in the neighborhood of $1.3 million in the fist quarter and then as a result of costs reductions we would expect SG&A to decrease over the next couple of quarters to about $1.2 million in Q2 and ending the year at around $1 million per quarter.
Our science and technology expenses decreased 41% from the 2014 fourth quarter. These were the expenses related to our scientists and R&D and also our lab work related to projects. These cost reductions were due to reductions in compensation expense and also a decrease in lab supplies and other expenses related to a decrease in the number of field projects. We expect science and technology expenses to be about $400,000 in Q1. Interest expense was $441,000 in the fourth quarter compared to interest expense of $483,000 in the third quarter and compared to $714,000 a year ago as a result of our ongoing reduction of debt.
For Q1 interest expense is expected be about $340,000 as a result of the decreased debt. Capital expenditures in Q4 were about $300,000 related to preparation for Phase 2 implementation of AERO at the Coke Field. We came in at $5.8 million of CapEx with the full year, consisting primarily the acquisition of the Bonnie View field and the implementation of AERO at the Coke Field. For 2016, we had trimmed our CapEx quite a bit and focused strictly on implementation of Phase 2 at Coke and we have budgeted roughly $1 million of CapEx for the year. We had about $8.4 million in cash on the balance sheet at December 31. As Stuart stressed earlier we are focused on conserving cash and reducing costs where we can. Our most recent wave of cost reductions implemented in the first quarter are expected to save approximately $3 million on an annual basis.
With regard to our debt, during the quarter we paid down $4.4 million on our term loan. We currently have $10.3 million of Fannie on the loan and no other debt. During the quarter, we sold or monetized our 2017, 2018 hedges and prepaid the debt by $2.7 million with the proceeds. As described in the earnings release last week we emended the credit agreement to eliminate all financial ratio covenants and semi-annual collateral value borrowing base re-determinations until maturity a year from now. While we are in compliance with our covenants at year end, we likely would not have been in compliance for all of 2016 and we felt it was prudent to amend the agreement now. This debt is owed by our wholly owned subsidiary Glori Energy Production and is not guaranteed by Glori Energy. The amendment provides financial flexibility and as we eliminate any issues over our debt in 2016. As part of the amendment the interest rate increases 200 basis points to 13%, the additional 2% at our option can be paid in cash or by adding it to the principal amount.
Before we go to questions I would like to give a quick update on our status on the NASDAQ. As previously disclosed on October 23, we received the notice from the NASDAQ Stock Exchange that we were out of compliance with listing standards as a result of our stock price dropping below $1 per share for 30 consecutive business days. We have until April 20 to regain compliance under the original letter, but we currently expect to ask for an additional 180 days additional period to get back into compliance and this is for the NASDAQ procedures and rules where you are permitted to request a second 180-day compliance period. If needed during the second 180 day period, one of the remedies that’s permitted is to get back over $1 is to execute or implement a reverse stock split. Of course, shouldn’t we decide that we need to do that, we will need shareholder approval to execute the stock split.
This completes our remarks. And I think we will open it up for questions now.
Thank you. [Operator Instructions] Our first question comes from John White with ROTH Capital. Please proceed with your question.
Good morning, everyone and thanks for taking my call. I took note that you have added two injection wells pretty recently about the 1st of this month can you refresh me when was the first injection well up and running?
Yes, thanks for joining us on the call. Thank you for questions. The first injector, nutrient injector was started on July 4, 2015. So, we first started AERO implementation at that time. It’s a small volume of water that’s used to carry the nutrients into the reservoir and the additional two wells were added on March 4.
Well, that’s interesting, Stuart. Being a Brit, did you pick July 4 as the date?
I celebrate every holiday I can.
Thank you. One last question, I don’t believe you have provided guidance, but just looking at the cost – the operating expenses for the fourth quarter of 2015 on an annualized basis looks like most of the line items are going to come in lower than for the full year 2015 a year, is that my reading, is that right and is that in line with the continuation of focusing on cost reductions you were talking about?
Absolutely. Actually, most of the cost reductions that we mentioned on the press release and on the call will begin to be seen in March and then going forward. So, we will get a partial year of the 3 million we mentioned and then the 3 million is a full annualized run-rate of those cost reductions. And that – we will see that largely in the oil and gas segment expenses and we will see that as a result of reductions in LOE and professional compensation expense and so on and we will see that also in SG&A expenses. That will be the biggest area that we will see those reductions, primarily starting in March 2016 as we will begin to see those.
Thanks for that additional color. And as you know, you guys are doing what everyone else in the industry is doing and I congratulate you on your efforts so far and look forward to the next call. Thanks. Thanks, again.
[Operator Instructions] There are no further questions. At this time, I would like to turn the call back to Stuart Page for any closing remarks.
Thank you. So, I appreciate everyone participating on the call today. As you all have heard, we really got two exciting contingent initiatives that we are working on to build value for the company. One, of course, is deployment of AERO at Coke and the other one is the DOE application that we are working diligently on and hope to create the best possible applications we can to maximize the probability of success in that initiative. Clarity on both initiatives should interestingly emerge around about the same time in the back end of the summer into Q3 and we look forward to talking more about that at that time. There is no question that 2015 has been a difficult year and our efforts to reduce costs across the board have been painful, but we have a great technology. We have got an extremely talented and accomplished team. And the team is committed to the mission. We have a good and supportive and engaged board that’s been doing a lot of work in the background to help us think through our options. And we are doing everything that we can to make progress towards our goals and we will continue to do so. So, thank you for your interest and your support.
Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines and have a wonderful day.
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