Bellatrix Exploration Ltd (NYSE:BXE)
Q2 2016 Earnings Conference Call
August 10, 2016 11:00 AM ET
Shauna Mason - Manager Corporate Affairs
Ray Smith - President and CEO
Ed Brown - VP-Finance, CFO
Brent Eshleman - EVP, COO
Good morning. My name is Melissa and I'll be your conference operator today. At this time, I would like to welcome everyone to the Bellatrix Exploration Limited Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] thank you.
Ms. Shauna Mason, you may begin your conference.
Thank you, Melissa. Good morning, everyone, and thank you for dialing in today to the Bellatrix Exploration second quarter 2016 conference call. My name is Shauna Mason, Manager Corporate Affairs. 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 provide an overview and update of our second quarter operational and financial results, which were released earlier this morning. Bellatrix remain in a period of distribution with respect to its spot deal financing as the principal amounts of both transactions closed on August 9th. However, the overallotment option granted to the underwriters remains open. As such, we will not be hosting our typical Q&A session following our prepared remarks on today’s conference call.
During today’s conference call we will make forward-looking statements within the meaning of the applicable Canadian and United States 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’d like to pass the call over to our President and CEO, Ray Smith.
Thank you, Shauna. Earlier this morning Bellatrix released its second quarter 2016 results, which highlighted two primary activities; first, Bellatrix continue to exercise sagacious capital restraint during the second quarter, while focusing on field activity on optimization activities given persistent low commodity prices. Secondly, management continues to execute on its proactive strategy to reduce debt and enhance its capital resources ahead of a firmer commodity price environment.
On the first point of capital restraint, management made the decision to curtail development drilling activity in late March. Given the protracted commodity price environment, Bellatrix drilled zero wells in the second quarter. Instead the Company focused its attention on optimization of existing assets. This was achieved through several initiatives including well workovers, recompletions, the installation of plunger lift systems, wellbore clean outs and repositioning of pumps to optimize daily rates.
Further optimization initiatives included gathering system modeling, which has maximized deliverability of Bellatrix operated production across the gathering system. Ultimately these optimization efforts delivered positive results, contributing to further attenuation of the base corporate decline rate and assisted in maximizing daily production volumes in the second quarter.
To that end, second quarter 2016 production averaged 38,000 barrels per day, which combined with first quarter volume contributed to a first-half production volume of 38,324 barrels per day, firmly exceeding our 2016 guidance. This was achieved despite drilling zero wells and in the quarter and underspending the first half capital budget by approximately 8%. On the second point of debt reduction initiatives, Bellatrix completed four strategic transactions since the end of the first quarter.
Collectively, these have generated total gross proceeds of approximately $267 million, have increased operating production volumes, increased cash flow and reserves and enhanced our liquidity position while preserving the Company’s core asset base and long-term value platform. These strategic transactions include; the monetization of certain production facilities for $75 million in May; the acquisition of approximately 2,000 barrels per day of complementary Spirit River producing assets from Grafton in June; the sale of 35% minority working interest in the Bellatrix Alder Flats gas plant for 112.5 million; and two fine financing transactions which combined to raise $80 million in gross proceeds which closed yesterday.
On a pro forma basis, these transactions serve to reduce bank debt from $314 million at the end of the second quarter down to the current levels of only $122 million, representing a reduction of 61%. As a result of these strategic steps to reduce debt and reposition the Company, Bellatrix expects to regain a growth trajectory heading into 2017 through focused investment in the Spirit River liquids rich gas play, one of the lowest supply cost natural gas plays in North America.
In mid-July, Bellatrix also announced the completion of the semi-annual borrowing base redetermination and the renewal of its syndicated credit facilities. Following the completion of the Alder Flats plant sale and the bond deal financing, Bellatrix announced this morning the revolving facility has been revised to $160 million on the amount outstanding on the term facility reduced to approximately $13 million. The Company anticipates being able to fully restate the remaining $13 million owing under the term facility prior to the November 11, 2016 through available cash flow, potential overallotment proceeds from the financing and other potential transactions.
Bellatrix continues to work on initiatives to further reduce debt, improve liquidity and enhance its financial flexibility. Supplementing these initiatives include active discussions with existing and new potential syndicate members about establishing a new long-term revolving direct credit facility prior to the next semi-annual redetermination date on November 11th.
I would like now to pass the call over to Brent for an overview of our second quarter operational and financial highlights.
Thanks Ray. Bellatrix delivered another strong quarter of operational and financial results. Second quarter production volumes averaged 30,000 Boe per day, 72% weighted towards natural gas. Production volumes in the quarter were relatively flat compared to first quarter 2016 production levels despite the lack of drilling activity in the quarter. For the second consecutive quarter, Bellatrix maintain production volumes at or above corporate guidance, while underspending forecast capital expenditures.
As previously mentioned, there’re no wells drilled in the second quarter given low natural gas prices. Bellatrix continue to exercise capital restraint with field activity focused on optimization initiatives, including the completion of 65 plunger lift installations and 15 wellbore clean-outs, which combined help to show the base corporate decline rate in the quarter. Additionally, Bellatrix completed gathering system modeling which help to optimize hydrocarbon directional flows and maximize deliverability at Bellatrix operated production across the entire gathering system.
Finally, the Company continue to actively manage nominations on the transmission system during periods of firm service restrictions, which serve to minimize production impacts to Bellatrix. Our production team also continued its strong performance, delivering a 97% utilization rate at the Alder Flats plant in the second quarter. And since July 2015, the plant has averaged 100% capacity utilization.
Fund flows our operations in the second quarter was $9 million, or $0.05 per fully diluted share. Cost containment efforts continued and I am pleased to announce in the first-half of 2016; production expenses averaged $7.91 per Boe, down 8% year-over-year; two, transportation expenses averaged $0.90 Boe, down 20% year-over-year; three, royalty expenses averaged $1.01 per Boe, down 68% year-over-year; four, G&A costs averaged $1.35 per Boe, down 26% year-over-year; and five, cost to drill complete equipment high end wells was reduced by approximately 22%.
Total cash capital expenditures were $7.8 million in the second quarter, which included $4.3 million invested directly on the phase 2 expansion project at the Alder Flats plant. The phase 2 expansion will more than double the inlet capacity of the plant from 110 million cubic feet a day to 230 million cubic feet a day and remains on time and budget, scheduled for completion in the first-half of 2018. Corporate operating costs are expected to recognize a step change reduction in the first-half of 2018 further enhancing the Company’s long-term competitiveness.
Furthermore, this project increases the expected rate of return and the future drilling projects within the liquids rich natural gas formations such as the Spirit River and Cardium where Bellatrix holds an estimated inventory of approximately 521 net identified locations within close proximity to the Company’s core infrastructure network in the greater Ferrier region. I am pleased to announce the second quarter results were conducted safety and responsibly with zero loss time incidents for both Bellatrix staff and contractors.
Bellatrix continues to execute on our inactive well compliance program and have successfully achieved our target quota. In July, the Alberta Energy Regulatory assessed Bellatrix as liability management ratio at 80.8. This is more than double the industry average of 4.2 and significantly above the industry threshold of 1.0, demonstrating Bellatrix’s continued strong position. Bellatrix’s strategic planning continues to be as active risk management strategy, which reduces commodity price volatility and provide greater predictability to future revenue and cash flow.
As at August 9, 2016, Bellatrix had strong risk management protection in place for the second half of 2016 with approximately 60% of gross natural gas volumes hedged at an average fixed price of approximately $2.96 per Mcf. Additionally, Bellatrix maintains a firm level of risk management protection in 2017 with approximately 35% of gross natural gas volumes hedged at an average fixed price of approximately $3.37 an Mcf. Given an already strong hedging position, Bellatrix did not add to its risk management portfolio during the second quarter given weak spot and forward strip natural gas prices.
Management continues to monitor, market pricing with the intent to enhance the level of risk management protection in 2017 and further fortifying our portfolio with inaugural base level of 2018 risk management protection over the next several quarters. Our operational and financial teams have done an excellent job in optimizing our assets while minimizing capital investments and containing costs in all areas of our business through the first and second quarters of this year.
I’ll now turn the call back over to Ray for his concluding remarks and outlook.
Thank you, Brent. Bellatrix has phased its second half 2016 development plans and on stream delivery of new Spirit River wells to coincide with stronger forecast natural gas pricing later in the year by delaying the on stream delivery of new flush production to the later part of 2016. Bellatrix plans to maximize the rate of return of the second half production and capital program. Production volumes are anticipated to regain a growth trajectory through the fourth quarter, which will position the Company to capitalize on an anticipated stronger natural gas pricing environment through 2017.
Management decided to make some difficult decisions on how to most effectively reduce outstanding debt and the potential increased level of constraint that debt could have on our business. Management spent a significant amount of effort analyzing and scrutinizing the impact and effect of all of its potential de-levering options. We believe the measures undertaking to-date have achieved an optimal out-term of maturity reducing outstanding debt while preserving ownership in the core fundamental foundation of our Company. While we recognize the short term impact some of these measures have taken on a per share basis, we believe the long term value and profitable growth platform of the Company remains largely intact.
With ample firm service capacity, strong natural gas pricing, and a significant inventory of high rated return drilling locations in the low cost Spirit River play, Bellatrix is focused on delivering accretive and profitable growth to our shareholders. In closing, I would like to thank our employees, partners and stakeholders for their continued support and we successfully navigate through this commodity price cycle. Bellatrix has completed several strategic transactions, which have materially reduced debt while maintaining and preserving the Company’s top tier asset base. We remain confident in our people, financial resources and assets. We’ll collectively deliver long-term sustainable creation of value for our shareholders.
Thank you very much for attending today.
Operator, that concludes our comments this morning. As previously discussed, we will not be hosting our typical Q&A session, given our current distribution status. Thanks everyone and have a great day.
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
End of Q&A
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