Atlas Energy's (ATLS) CEO Ed Cohen on Q1 2016 Results - Earnings Call Transcript

| About: Atlas Energy (ATLS)

Atlas Energy (NYSE:ATLS)

Q1 2016 Earnings Conference Call

May 16, 2016 9:00 AM ET

Executives

Matthew Kelly - Head, Investor Relations

Ed Cohen - Chief Executive Officer

Daniel Herz - Chief Executive Officer

Mark Schumacher - President, Atlas Resource Partners, L.P.

Jeff Slotterback - Chief Financial Officer

Analysts

Operator

Good day, ladies and gentlemen. And thank you for standing by. Welcome to the Atlas Energy Group LLC and Atlas Resource Partners' First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Today's conference will not have a question-and-answer session. As a reminder, the meeting is being recorded.

I would now like to hand the conference over to Matthew Jelly, Head of the Investor Relations. Please go ahead.

Matthew Kelly

Thank you very much. Good morning, everyone. Thank you for joining us for today’s call to discuss our first quarter results for ARP and ATLS. As we begin, I would like to remind everyone that during this call, we will make certain Forward-Looking statements and in this context, forward-looking statements often address our expected future business and financial performance and financial conditions, and they may contain words such as expects, will, anticipates, and similar words or phrases. Forward-looking statements by their nature address matters that are uncertain and are subject to certain risks or uncertainties, which can cause actual results to differ materially from those projected in the forward-looking statements. We discuss these risks and other factors from time-to-time in our reports filed with the SEC, including our Annual Report on Form 10-K, particularly in Item 1, 1A and 7.

I would also like to caution you not to place undue reliance on these forward-looking statements, which reflect management’s expectations only as of the date hereof, and except as maybe required by law neither ARP nor ATLS undertakes any obligations to update its forward-looking statements or to publicly release the results of any revisions to forward-looking statements that may be made to reflect events or circumstances after the date hereof or reflect the occurrence of unanticipated events.

Both Atlas Energy Group and Atlas Resource Partners' earnings releases provide GAAP reconciliation to the non-GAAP measures we refer to in our public disclosures, such as adjusted EBITDA and distributable cash flow and net free cash flow.

With that, I will turn the call over to Atlas Energy Group's CEO, Ed Cohen for his remarks. Ed?

Ed Cohen

Thanks, Matt. And everyone welcome to our joint Atlas Energy Group, ATLS and Atlas Resources Partners, ARP call. Of course you all know that for many months now in our periodical public calls with shareholders, analysts and other interested persons, we've been warning that the negative conditions affecting the energy business are a serious threat to virtually the entire industry, especially to so called exploration and production, E&P companies and most of all to E&P MLPs like the Atlas entities. The crisis continues and is even accelerating. The year month natural gas futures were trading yesterday at close to $2 per thousand cubic feet Mcf, even $3, a price that we haven't seen for a year would be catastrophic for most producers.

Despite some recent improvement, US oil prices are still less than half those that prevailed during the summer of 2014. Destruction of course is now reached unprecedented levels. About 75 US E&P producers have already filed for bankruptcy. And this phenomenon has a specially affected the E&P MLPs. Just in the last week E&P MLPs Linn, the largest of this group and BreitBurn have filed in bankruptcy. Atlas of course is not immune to this negative phenomenon. But our enterprises have been benefited from proactive efforts. Just within the last 10 days for example, ARP's bank lenders agreed to weight covenance for the first quarter 2016. ARP has been added by its relatively high hedge position. Our hedge book even after sustaining the company, the company is for so many months still has a value of approximately $280 million.

Our long lived, low decline portfolio of diverse assets continuous to perform in line with our expectations. But ARP's existing debt burden is unsustainable at current commodity prices. ARP's fiscal and operational position and results will now be discussed in greater detail by Daniel Herz, ARP's CEO. Mark Schumacher, ARP's President and by CFO Jeff Slotterback. Daniel?

Daniel Herz

Thanks, Ed. And good morning, everyone. As Ed mentioned the energy environment during the first quarter of 2016 was one of the most difficult in recent history. And the challenges for the industry and Atlas remain significant. At Atlas, we remain squarely focused on both the financial area as well as the operating area. Of course, the two are critically linked. I'll start on the financial side with the summary of where we stand today. And Jeff Slotterback, our CFO will provide more details.

We continue to evaluate all options to reduce ARP's debt. With respect to our reserve based credit facility, we've been in discussions with our lead bank and last week received an amendment to our credit facility which waived our maintenance ratios for the first quarter of 2016. We continue to work with our lead bank in regard to our borrowing base re-determination. Our current borrowing base is $700 million, where we have approximately $672 million drawn against that amount. I expect that our borrowing base will be re-determined to a level below our current outstanding amount. Accordingly, we are working with our lead lender to determine how to address this possibility.

Satisfyingly, we generated positive free cash flow in the first quarter. And I expect that amount to rise as we recently suspended our Common and Class C Preferred Distribution. The excess free cash flow may be used to reduce the outstanding debt on our revolver as we move forward. Of course, the major reason for our free cash flow is our significant hedge position. We currently have mark-to-market hedge gain of over $280 million, which provide significant protection through 2018 and extends into 2019.

Now on to the operational summary. Mark Schumacher, our President will provide the full update following my remarks. In working to maximize deposit of free cash flow, we are striking a balance of investing capital to ensure our operations remain strong as compared to capital preservation to reduce debt. We only spent growth capital expenditures in areas that we believe will maximize value including generating a net positive and material return to our stakeholders, as we balance the return versus the benefit of reducing outstanding debt on our revolver. We are fortunate to have position in the Eagle Ford Shale, one of the only remaining attractive oil and gas investment areas in the United States.

While we are currently not operating in rigs in the area, we are considering beginning drilling again in the second half of 2016. As our expected returns warrant such activities at current strip commodity prices. Additionally, we are investing capital in Rangeley our Co2 oil play that we joined -- that we own jointly with Chevron.

Again we weigh with great magnitude each decision to invest capital versus the alternative of debt reduction and the resulting short, medium and long-term impact. Additionally, with respect to operations we are focused on continuing to achieve significant operating and overhead cost reductions. Since the first quarter of 2015, we've reduced total operating expenses to $26 million on an annualized basis. In fact, in the first quarter of 2016 alone, we reduced operating expenses by $3.6 million versus the fourth quarter.

Our production during the first quarter averaged 237 million cubic feet equivalent per day. Importantly, the decline in production was driven in part by our decision to temporarily shut in approximately 4,000 wells, which we can bring back online when commodity prices recover.

With respect to overhead reductions, we've reduced the staff at Atlas by over 160 employees, or more than 20% including a significant reduction during the first quarter of 2016. I expect that we will begin to see the significant savings in overhead as we move forward through 2016. As I said at the beginning of my remarks, it remains a challenging period for the industry including Atlas. I believe we are meeting the challenges each day, and I want to thank all of the Atlas employees for their hard work and dedication as we move through this commodity price cycle.

With that I'll turn it over to Mark Schumacher. Mark?

Mark Schumacher

Thank you. Daniel. The first quarter of 2016 had the same things as did much of 2015. The oil and gas markets continue to be volatile. Our company continued our focus on reducing costs and deploying minimal capital on only low risk projects with immediate impact. The strategy of the company remains the same, preserve value. We continue to reduce operating cost during the first quarter of 2016. Production costs were reduced approximately 9% or $3.6 million quarter-over-quarter. And approximately 20% or $10 million when compared to the first quarter 2015.

This resulted in production cost of $1.69 per Mcf equivalent in Q1, 2016 compared to a $1.82 per Mcf equivalent in the prior year.

Operating expenses continue to be reduced through aggressively bidding services, vendor renegotiations, capturing operational efficiencies and reduction of fixed cost. In mid February, we reduced our workforce by 20% which resulted in a significant reduction in our field labor costs. This reduced cost structure will be more fully realized throughout the year. Very simply stated, the company is focused on aligning resources to do more with less. The majority of our 2016 capital budget is discretionary and is focused on oil directed activity in our Eagle Ford and Rangeley assets. Our teams are currently focused on the development of our Eagle Ford assets. We are now projecting the total cost to drill, complete and equip a 7,400 foot horizontal Eagle Ford well to be approximately $4.8 million. This is an improvement of approximately $800,000 or 15% over the past six months. The cost reductions are a result of process improvements, execution and the hard work by the teams to increase efficiency across the entire well construction process. The teams are evaluating and high grading the drilling opportunities to be developed directly by ARP as well as in our 2016 investment partnership program.

We are expecting this development to take place during the second half of the year. As a reminder, we have nine net Eagle Ford wells that were included in the 2015 investment partnership program that we expect to complete later this year.

Production during the first quarter was approximately 237 million cubic feet equivalent per day which is comprised of 82% gas, 12% oil and 6% liquid. We continue to focus on production margin which involves only investing in work overs to have quick payouts.

In closing and as I stated at the beginning, we are focused on preserving value in this challenging environment. We have made a lot of progress and continue to evaluate and implement cost savings and revenue enhancing opportunities throughout the enterprise. Thank you for being a part of our call this morning.

And I'll now turn it over to our CFO, Jeff Slotterback.

Jeff Slotterback

Thank you, Mark. During the first quarter 2016 ARP generated adjusted EBITDA of $43.7 million, or $0.42 per unit. Including both growth and maintenance capital expenditures as well as preferred and common distributions attributable to the quarter, the partnership generated positive free cash flow of $600,000. In response to the continued low commodity price cycle, the Board of Directors has elected to suspend the common unit and Preferred Class C unit Distribution starting with the month of March, 2016.

Production margins declined approximately $10 million to $58.3 million for the first quarter as compared to the fourth quarter 2015. Overall, production margin was negatively impacted by further declines in natural gas and oil prices as well as a modest decline in the cash settlements from our hedge position. During the period, realized natural gas prices before hedges decreased to $1.78 per Mcf, a nearly 10% decline from the fourth quarter 2015. Including hedges we realized $3.41 per Mcf for the first quarter.

Our natural gas production was approximately 76% hedged during the quarter at a realized price of $3.93 per Mcf. Regarding oil, our realized price before hedges decreased to $29.51 per barrel, a nearly 20% decline from the fourth quarter 2015. Including hedges, we realized $77.16 per barrel for the first quarter.

Our oil production was approximately 99% hedged during the quarter at a realized price of $77.74 per barrel. Our hedge book which had a fair value above $280 million as of yesterday has positioned covering approximately137.6 billion cubic feet of natural gas production at an average contract floor price of approximately $4.17 per Mcf for period through 2019. And approximately 3.8 million barrels of oil at an average contract floor price of over $76 per barrel for period through 2019.

These positions which are exclusively fixed price swaps are the result of our hedging strategy over the last several years. Please see the tables within our press release for more information about our hedges.

As Mark indicated during his remarks, we continue to be very focused on our efforts to reduce costs throughout the business. Total production costs for the quarter declined an additional $3.6 million from the fourth quarter of 2015, which is approximately $10 million less than the comparable prior year quarter. Production cost per Mcfe fell to a $1.69 for the first quarter, down from $1.82 during the first quarter 2015.

Turning to production volumes, we generated just under 237 million cubic feet of equivalent per day during the quarter, which was in line with our expectations for the period. Regarding G&A expense, net cash G&A was approximately $16.5 million for the period or $1.3 million higher than the fourth quarter 2015 due to timing of fund raising activities at the end of year for our investment program and other seasonal costs.

Total capital expenditures were approximately $30 million for the first quarter compared with approximately $25 million for the fourth quarter 2015 and $42 million for the prior year comparable quarter as we continue to drive lower spending throughout the business.

As Daniel mentioned during his remarks, we are currently going through the process of our spring borrowing base re-determination and will provide update as that process concludes. As of March 31, we had approximately $19 million of cash on our balance sheet with $672 million drawn under our $700 million revolving credit facility.

Quickly turning to our financial position at ATLS. At March 31, ATLS had a debt balance of approximately $70 million with the cash position of more than $4 million. We expect to use any excess cash flow generating from ATLS' ownership interests to reduce its debt balance.

With that I thank you for your time and return the call to our CEO of Atlas Energy Group, Ed Cohen. Ed?

Ed Cohen

Thank you all very much for participating in our call. We will be in touch I am sure. Bye. Bye.

Question-and-Answer Session

Operator

Q -

Operator

Ladies and gentlemen, thank you for participation in today's conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

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