Bellatrix Exploration's (BXE) CEO Ray Smith on Q1 2016 Results - Earnings Call Transcript

| About: Bellatrix Exploration (BXE)

Bellatrix Exploration Ltd. (NYSE:BXE)

Q1 2016 Earnings Conference Call

May 13, 2016 11:00 AM ET

Executives

Steve Toth - IR

Ray Smith - CEO

Ed Brown - CFO

Brent Eshleman - COO

Analysts

Brian Kristjansen - Dundee Capital Markets

Jeff Grampp - Northland Capital

Jeremy McCrea - Raymond James

Edward Irvin - Wells Fargo Advisors

Operator

Good morning. My name is Sharon and I'll be your conference operator today. At this time, I would like to welcome everyone to the Bellatrix Exploration Limited First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

Mr. Steve Toth, VP, Investor Relations, you may begin your conference.

Steve Toth

Thank you, Sharon. Good morning, everyone, and thank you for dialing in today to the Bellatrix Exploration first quarter 2016 conference call. Again, my name is Steve Toth, VP, Investor Relations, and in the room with me today are Ray Smith, President and CEO; Brent Eshleman, Executive VP and COO; and Ed Brown, Executive VP-Finance, and CFO.

Management will begin today's conference call with an overview and update of our first quarter operational and financial results, which were released earlier this morning. Following our prepared remarks, we'll open up the call to questions from analysts and investors.

During today's conference call, we will make forward-looking statements within the meaning of the applicable Canadian and U.S. securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Please refer to the forward-looking statements disclosure in our press release and periodic filings for additional information.

With that, I'll pass the call over to our President and CEO, Ray Smith.

Ray Smith

Thank you, Steve. Today Bellatrix released its first quarter 2016 results which continued to validate the company's focus on profitable resource development while managing and significantly improving capital resources. First quarter activities were focused on three principle strategic objectives. First, development drilling activity was once again100% focused on the high impact Spirit River liquids rich natural gas play. The company drilled 10 gross or 5.7 net wells in the first quarter with three of these wells drilled using promoted capital under the Grafton joint venture.

As one of the lowest supply natural gas plays in North America, the Spirit River provides a long term growth engine for our business and with our 380 net drilling locations Bellatrix controls decades worth of development opportunities within our West Central Alberta core area. The second priority was enhanced optimization efforts and sustained operational reliability. Our operations too delivered further optimization improvements reducing drill times in the Spirit River formation down to 13 days. This in turn has reduced total drill complete equipment tie-in costs in the quarter to under CAD3.7 million per well. The continued reduction in well costs further enhances our future economic value of our Spirit River play.

Additionally, our production team achieved nearly a 100% utilization rate at the Bellatrix Alder Flats plant in the quarter which has effectively run at a 100% capacity over the past nine months and clearly proven itself as one of the most efficient gas plants in Greater West Central Alberta. The Bellatrix Alder Flats gas plant has structurally improved NGL recovery and provides significant positive benefits to the cash cost flow in an improving oil price environment. Additionally the ability to redirect volumes during third party plant downtime is materially improved overall operational reliability. Bellatrix remains committed to prudent capital management and liquidity preservation which is our third strategic priority.

Total company net debt at the end of the first quarter was reduced by 3.8 million compared to year end 2015 reflecting capital spending 10% under plan and lower mark-to-market value on the U.S. dollar denominated senior notes. Additionally, announced this morning, it sold certain production facilities which included primarily compression and ancillary infrastructure for net proceeds of 75 million which closed on May the 3rd. Bellatrix remain -- maintains operatorship, preferential access and third party revenue from this facilities. The transaction is expected to have a modest impact of approximately CAD0.40 per boe on company's operating cost which is reflected in our updated first half production expenditure guidance.

Bellatrix has applied the 75 million in proceeds towards the revolving credit facility reducing the outstanding balance by approximately 20% and saves approximately CAD0.20 per boe on a forecast interest expense. The net result of the transaction is an estimated increase of only CAD0.20 of boe on company cash cost. Bellatrix believes that the material reduction in total net debt provides the company with an improved ability to take advantage of value enhancing opportunities including profitable development and growth of the Sprit River play under favorable commodity price conditions.

Bellatrix remains focused on proactive capital management, to that end I'd like to take a moment to discuss our credit facility re-determination process. Firstly, in conjunction with the facilities transaction and anticipation of completion of the semi-annual borrowing base re-determination Bellatrix agreed to a reduction on the credit facility to 460 million down from 540 million, with adjusted bank debt of approximately 285 million after the facility transaction.

Bellatrix remains -- maintains approximately a 175 million in undrawn capacity on the updated credit facility. The completion of the semi-annual borrowing base re-determination process in ongoing and is expected to be concluded on or before May 31, 2016. The proactive 75 million reduction in bank debt and the agreed upon reduction in credit facility in early May has significantly strengthen the balance sheet ahead of our semi-annual re-determination process.

Finally, Bellatrix’s senior debt EBITDA ration at the end of the first quarter was 3.0 and within the financial covering of 3.5 as committed under the credit facility. Looking forward and imperforating the impact of the facilities transactions Bellatrix anticipates remaining within the covenant throughout 2016 under current strip pricing.

I’ll now pass the call over to Brent for an overview of our first quarter operational and financial highlights.

Brent Eshleman

Bellatrix delivered strong first quarter operational and financial results. First quarter production volumes adverts 38,467 boes a day despite being impacted by approximately 800 boes a day in the quarter given reduced NGL yields at third party facilities we produced. Price for NGL products such as propane remained weak in the first quarter and several third party planned operators purposefully decided to increase plant captures in intern extract less propane from processed gas streams. As an offsets to this reduced liquids volumes, Bellatrix realized a higher heat content for its gas which was increased in cash flow. Subsequent to quarter end several the third party plants had begun reducing plant temperatures, thus NGL yields are expected to return to a more normal levels in the second quarter.

Bellatrix drilled 10 gross 5.7 net sprit river wells at a 100% success rate in the quarter. Three of the wells were drilled under Grafton joint venture, leveraging promoting capital. Total net capital investments of 29 million was 10% lower than planned levels, reflecting continued cost containment efforts, curtailed activity in March due to waning commodity prices and reduced spending on phase two of the Alder Flats plant.

Fund flow from operations was 12. 9 million or CAD0.07 per share, ahead of average analysis expectations a CAD0.05 for the quarter. Cost contemned measures continued across all business units building on the success momentum gained in 2015. As Ray has previously mentioned Bellatrix has reduced average drill time on sprit river wells to thirteen days or a 13% reduction year over year. This has driven total costs to under 3.8 million per valve on the first quarter, further enhancing a long profitability and competitiveness of this low supply cost play. On the operational side of the business our production team continued its strong performance with a near 100% utilization rate at a Bellatrix Alder Flat plant.

The plant continues to anchor significantly, improved volumes liability and mitigate the impact of third party down time in our core area. Cash cost containment efforts continued in the first quarter across all key matrix with operating cost down 14%, transportation cost down 25%, royalty expenses down 61% and net G&A cost down 30% compared with first quarter 2015 results. Bellatrix tires to ensure its business practices are conducted safely and responsibly and I’m pleased to announce their strong first quarter results retrieved with zero lost time incidents for both Bellatrix staff and contractors.

Furthermore Bellatrix achieved compliance for year one of the Alberta Energy regulators in active well compliance program through our proactive efforts to reach target quarter levels ahead of schedule. Safer responsible development in all communities that we’re operate in is a regarding principal of our business.

Bellatrix announced its updated risk management position this morning. The Company enhanced its risk management program through the early part of the first quarter, providing additional projection against commodity price volatility, in greater predictability over future cash flows. Today Bellatrix is hedged approximately 55% of gross natural gas volumes, an average fixed price of approximately CAD2.96 per Mcf from April 1, 2016 to December 31, of this year. Furthermore Bellatrix maintains its solid base level of risk management projection in 2017.

With over 30% of forecast gross natural gas volumes hedge at average price of CAD3.37 per Mcf. At the end of the first quarter or mark to market fair value of Bellatrix portfolio risk management contracts was approximately CAD36 million. Year-to-date operational and financial results demonstrate the strength of Bellatrix as underlying business and showcase the significant achievements made by all staff in reducing cost and optimizing value in every activity we undertake.

I'll now turn the call back over to Ray for his concluding remarks and outlook.

Ray Smith

Thank you, Brent. Commodity prices for both oil and natural gas remained at what Bellatrix believes to be unsustainable low levels. In response to continued weak pricing Bellatrix prudently curtailed capital investment and drilling -- development drilling in March thereby firmly preserving value in Spirit River play. Bellatrix has no drilling or completion activity plan through the seasonal breakup spring period. As such Bellatrix has revised down its capital expenditure program in the first half by 13% to 40 million while adjusting down first half production guidance by only 2.6%.

Bellatrix plans to provide second half 2016 capital spending and production guidance mid-year with a continued emphasis on profitable returns while prudently managing capital resources. Bellatrix has proactively managed its business through this challenging part of this cycle and maintained three differentiating value drivers that position the company for long term value creation.

First Bellatrix has built a diversified asset base with highly profitable natural gas opportunities in the Spirit River and oil weighted opportunities in the Cardium play. Bellatrix can quickly adjust capital spending to maximize internal rate of return expectations.

Secondly, the company’s strategic infrastructure position in Greater Ferrier has created significant barriers of entry to competitors, improves operational reliability and have structurally reduced cash costs thereby enhancing with sustainability of the company during low points in the commodity price cycle.

Thirdly, the strategy is proactively to acquire and maintain firm service capital which provides optionality to facilitate future growth and accelerate value creation as commodity price strengthen, the facilities, the transaction and 20% reduction in bank debt provide further enhanced stability to capitalize on a gentle accelerated development or other accretive opportunities as we strive to deliver superior value over the near and medium term.

In closing I want to thank our employees and our partners for their continued diligence during these very challenging times. Bellatrix continues to position the business to capitalize on firmer prices and enhanced shareholder value. Thank you for attending.

Steve Toth

Sure, and that concludes our formal comments. We'd like to open up the lines for questions from analysts and investors.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Brian Kristjansen from Dundee Capital Markets. Your line is open.

Brian Kristjansen

Brent can you remind me how much facility capital you intend to expand this year and rest of this year and in 2017?

Brent Eshleman

So right now there is approximately gross CAD75 million daily of facility capital left to complete phase 2 the plan. So, just to make the math easy let's just go with the 80 million and our 60%, 48 -- let’s call it 50 million. So we had 50 million planned for 2016, approximately 25 million planned for 2017 and then finishing off in 2018 with CAD10 million with the planned operational we anticipate it to start in Q2 in 2018.

Brian Kristjansen

With respect to the first quarter activity it looks like Grafton participated in about 30% of your wells, is that the sort of ratio you would expect them to participate in the second half?

Brent Eshleman

It’s just something we're looking at here right now, Brian as we're preparing our second half program and talking about it here in June, as you're aware the others, you've got 90% of the Grafton deal is complete leaving about 10% of that funding that we’re looking at for the -- right now for the second half of this year, price dependent.

Brian Kristjansen

And then would your guidance come out in June, I imagine?

Brent Eshleman

About the third week in June Brian.

Operator

Your next question comes from Jeff Grampp from Northland Capital. Your line is open.

Jeff Grampp

A question on the asset sale fronts, great job on something creative like that done, and can you just kind of talk about future opportunities or do you guys feel good with what you've complete or do you think there's some other kind of things that you can shake lose to further supplement your liquidity position?

Ray Smith

Jeff this is Ray here. We continue to work very diligently on improving our balance sheet, we have a lot of irons in the fire that we hope to bring to fruition in the near term that includes the sale of additional facilities and/or includes sale of non-core assets and we continue to do that year-in and year-out, but it looks to us like the market is improving slightly in some of these areas, so there is may be a better chance to getting some things done with a little bit luck. So we’re working hard on it but at the same time we’re doing ever thing we can, not to harmed shareholder value, because to us that’s one of the main stages of our business, projecting our shareholders interest.

Jeff Grampp

Definitely, and then on the borrowing base fronts, I just want to make some kind of understanding what’s going on it, you guys going to preemptively agree to cut it here ahead of the spring re-determination, but I think you mentioned in the release that you guys are still expecting it to maybe creep down a little bit lower. Should we expect, when you are talking about it going lower is that affectively in this upcoming spring or do you guys feel like you are pretty well insulated here going preemptively and that was more in reference to, I guess what would be the next re-determination, how should we think about the moving parts there?

Ray Smith

Well we’re in the middle of the process with the banks and that is due to, we completed by May 31, of barring and any changes. So this was just moved to initially going down, I think under current bank pricing, they’ll probably be may be some more erosion, we’re not sure and we have to waiting until the process reaches its natural conclusion before we can make any statements.

Jeff Grampp

Okay fair enough, and then last one is for me, may be a question for Brent, on the continued drilling efficiency and cost front, can you guys just talk about, how much more or less is there in the system to kind of squeeze out some incremental wins there. Do you guys feel that most of those gains flush though or just talk at a high level on additional efficiencies you guys may capture?

Ray Smith

Yeah done, it’s really good question Jeffery, when you look at our last two years and were cost were at over CAD5 million and then we’ve steadily brought those down to, as mentioned under the CAD3.7 million. The big games have been captured, without a technological new break through into the system.

But that being said, I mean we continue to try to be more efficient on how we drilled the wells and you know the types of bits, just the whole technical nature of it, so that costs are not solely driven just by the nature right now of reduction on everybody’s from labor, just to equipment, because prices are down. So we continue to drive those down. I think you have to look at it and say that’s been a big reduction, we’ve dropped by over 25% on the cost, we’ll keep going down this year, yeah we think so, but probably modestly for where it’s at right now, we’re becoming very efficiently. Drilling these Spirit River wells at you know twenty four hundred meters or a mile and half and going out, you know full -- close to a mile horizontally. Getting those down to the 12-13 days, is fantastic, you know what to move another day or to below that, that’s about probably all you could really achieve. Unlike there is some new technological breakthrough, it’s become a very efficient place.

Operator

[Operator Instructions] The next question comes from Jeremy McCrea from Raymond James. Your line is open.

Jeremy McCrea

Hi, guys, just a bit of a follow up question and another question, is there any active data rooms open right now and if there are, is there any bit dates you can give us by chance?

Ray Smith

Yeah, we have -- at AltaCorp, we have all of our non-core assets, we have a data room open, they are being reviewed by numerous players at any given time and that’s basically all that’s those going on.

Jeremy McCrea

And then in terms of your other income related to the processing fees from the third party, how should we think about this just going for the rest of the year and into 2017? It just seems like it jumps around a little bit here, and seems like pretty good this quarter, just may be if you could have a bit of guidance into, how we think over the next year? That’s all.

Steve Toth

Hi Jeremy it’s Steve, from quarter to quarter, you can see a bit of lumpy in that, but if you average it over the last five or six quarters, it’s averaged in that 2 million to 2.5 million range, so I think go for that, that gives you some kind of indication on where it’s been in the past.

Jeremy McCrea

Okay and [indiscernible] JVs coming to an end, is that still probably a pretty good number then?

Steve Toth

Yes.

Operator

[Operator Instructions] Your next question comes from Edward Irvin from Wells Fargo Advisors. Your line is open.

Edward Irvin

I missed the first part of the call. So I might ask a couple of bad questions, but you always pretty good on estimating prices, prices that were getting affirmed, at what level can you start see price and get to level where you might be able to sell some of that secondary production?

Ray Smith

That’s hard to tell, typically when you get into these protracted down turns, when you’re in the bottom of the taught, the buyers are very sticky and would like to get the best price possible, sellers were not willing to go that deep unless they’re trading at below what the banks would even lend on. So, you generally don’t get very many transactions other than companies enhancing their position in their core areas, buying out their own partners. When you see transactions start to improve, that's where you see these prices start to move up a little bit. As you're aware gas on Nymex is up about CAD0.35 over the last three or four weeks, the price of oil has steadily improved from CAD30 six or seven weeks ago not it's trading at CAD47 this morning.

So as oil prices continue to affirm I expect many more transactions to occur because it will be level where oil companies think they are getting proper value for the assets, even though it is a little bit distressed and these sellers still believe that they are getting in at a reasonable time in order to enhance their value as well. So, I expect you're going to see more transaction occurring as the price continues to creep up.

Edward Irvin

Did you all put in more -- I'm sorry I missed this, but did you all put in more hedges on the lease prices?

Ray Smith

We did, we got a little bit concerned near the end of the first quarter in March and decided that we could see a dollar price for some period of time in the summer. 30 to 90 days was our kind of thought and might be slightly longer as we get rid of this excess storage that’s been building in the U.S. natural gas storage caverns and that's come to fruition. So we did in March, run out and bring in another 10,000 GJs [ph] of storage to top us up a little bit through the summer and we prefer not to make any money on our hedges, unfortunately we are making money on those hedges right now.

Edward Irvin

It sounds like you bought storage instead of hedges is that right?

Ray Smith

No, no we bought hedges, and what our concern was the storage levels.

Edward Irvin

The fire has any effect on your EOL [ph]?

Ray Smith

The fire effect has had effect on -- short term effect on gas pricing in the province. Due to the fires as you are aware there was about a 1 million barrels shut in, but they use a lot of natural gas in the processes of extracting the heavy oil. So they were shut in somewhere 900 million cubic feet a day and a 1 billion cubic feet a day and that resulted in very week inter-province pricing, that has since started to firm up nicely, a lot of that production is now being brought back on, so it was just a short term kind of blip.

Ed Brown

And it should be noted that we have firm service through all of our gas, so none of our gas was shut out, throughout the fires or currently. We have already moved from that and we have adequate firm to move all of our products. As Ray said it was just affecting the pricing in the province for a few days there.

Edward Irvin

It must have been a hell of a fire though.

Ray Smith

It's still burning.

Edward Irvin

It's still burning?

Ray Smith

Yes but it’s moved away from the oil field, so we're happy with that. But they'll get it other thing, get little bit of wet weather.

Edward Irvin

Well, the well -- I didn’t hear how many wells do you plan to drill in this second half?

Ray Smith

We do not have plans for the second half yet, a lot of it depends on pricing. We will be meeting with our Board in mid-June making some final adjustments on what we're going to spend in the second half and how many wells we're going to drill, we'll do that in concert with our partners, such as Grafton our joint venture partner and then we'll make a pronouncement to the marketplace, probably around the third week of June so everybody knows what's happening in the second half.

Edward Irvin

Thanks so much. I appreciate. You all have a good second half there, just wait for the CAD65 oil.

Ray Smith

Can’t come soon enough.

Operator

[Operator Instructions] We do not have any questions at this time, I will turn the call over to the presenters.

Steve Toth

Thanks everyone for joining, if you have any additional comments or questions please feel free to reach out. That ends the conference call.

Operator

This concludes today's conference call. You may now disconnect.

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