Michael G. Edwards - Vice President of Corporate & Investor Relations
Edward O'donnell - Chief Executive Officer and Chief Operating Officer
Timothy A. Ficker - Chief Financial Officer
Venoco (VQ) Q2 2012 Earnings Call August 8, 2012 11:00 AM ET
Good day, ladies and gentlemen, and welcome to the Second Quarter 2012 Venoco, Inc. Earnings Conference Call. My name is Pam and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Mike Edwards, Vice President of Venoco, Inc. Please proceed.
Michael G. Edwards
Hello, everyone. We issued a press release today on our second quarter 2012 results. We also filed our Form 10-Q with the SEC today. On the call to discuss the results, we have Venoco's new CEO, Ed O'donnell; CFO, Tim Ficker and other members of the Venoco management team.
Before we get underway, allow me to make a couple of comments regarding forward-looking statements. All statements made in this conference call, other than statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are subject to a wide range of business risks and uncertainties, including adverse developments in financial markets and general economic conditions. Many number of factors could cause actual results to differ materially from those presented in the forward-looking statements, including, but not limited to, the timing and extent of changes in oil and gas prices, the timing and results of drilling and other development activities, the availability and cost of obtaining drilling equipment and technical personnel, risks associated with the availability of acceptable transportation arrangements and the possibility of unanticipated operational problems, delays in completing production, treatment and transportation facilities, higher-than-expected production costs and other expenses and pipeline curtailments by third parties. All forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update any such statement. Further information on the risks and uncertainties relating to the forward-looking statements are set forth in our filings with the Securities and Exchange Commission, including under the heading Risk Factors in our annual report on Form 10-K for the year ended December 31, 2011. Please see the earnings release for a disclosure about resource potential and other reserve estimates that do not qualify as SEC proved reserves. The earnings release and the relevant non-GAAP reconciliations are available on the Investor Relations page of the Venoco website, which is venocoinc.com.
We are not able to comment on the Go-Private transaction. If you're following the process, you saw our last news release on July 19 announcing the extension of the financing date to August 31, as well as the shortening of the end date from October 16 to September 14. Now let me introduce the Venoco's CEO, Ed O'donnell.
Thanks, Mike, and welcome to all of you who have called in or are listening to the webcast this morning as we discuss our second quarter 2012 results. Our focus in the second quarter continued to be on developing our oily legacy assets in Southern California. During the quarter, we spent $70 million in capital, which included 5 wells, all targeting oil. The 5 wells included 1 at our West Montalvo field, 2 at our Sevier prospect and the onshore Monterey and 2 at our South Ellwood field. Of the total $70 million in capital, approximately $54 million was for drilling and rework activities, $5 million for facilities and $11 million for land, seismic and capitalized G&A.
Capital expenditures in our Southern California legacy fields accounted for $40 million or 57% of total second quarter capital spending. We spud 1 well at the West Montalvo field to an offshore bottom hole location on our state lease. We completed 2 other wells at West Montalvo during the second quarter, both of which were spud in the first quarter. In the first half of the year, we have brought 5 new wells online to West Montalvo. During the quarter, we also completed 3 wells at the Sockeye field and 2 wells at the South Ellwood field. In the second quarter, we spent approximately $25 million, or 36% of our capital spending on the onshore Monterey shale play. We spud 2 wells in the quarter in our Sevier field and completed 3 wells during the quarter, including a well spud in the first quarter. In the first half of the year, we have completed 5 wells at Sevier. We also completed a 28-square mile 3-D seismic shoot in the Salinas Valley during the quarter and we're actively processing the data to help us identify faulting in the Monterey shale portion of that field, as well as to evaluate the extent and potential of the deeper conventional Vaqueros formation. The company's second quarter capital expenditures in the Sacramento Basin were $5 million, including approximately $1.5 million incurred, performing 45 re-completions. We've significantly reduced our activity levels in the Sacramento Basin this year as a result of the very low natural gas prices.
Turning now to production. Oil production was up 8% in the second quarter compared to the first quarter and up 13% compared to the fourth quarter of 2011. The second quarter increase was mainly attributed to our West Montalvo and Sockeye fields. Company-wide production averaged 17,080 BOE per day, which was a decrease of 2% from the first quarter of 2012 as anticipated declines in Sacramento Basin natural gas production offset increases in Southern California oil production. We also sold a small property, the Santa Clara Avenue field in Ventura County early in May that had been netting us just over 140 BOE per day in 2012. Our production mix in the second quarter was 45% oil, up from about 40% in the first quarter of the year. During July of this year, our production mix rose to 50% oil. With continued low natural gas prices, oil barrels bring in approximately 7x as much revenue as natural gas equivalent barrels. So even with higher per BOE operating cost for oil and oilier mix greatly improves EBITDA.
In terms of expenses, we saw lease operating expenses come down significantly to $12.93 per BOE compared to the first quarter figure of $15.42 per BOE. If you recall, in the first quarter, we had nonrecurring maintenance at Platforms Gail and Holly, as well as costs related to discontinuing the use of our Ellwood Marine Terminal, following the commissioning of our new Ellwood pipeline. We're still forecasting LOE to be slightly higher in 2012 compared with full year 2011 due to the higher oil to natural gas volumes that we expect this year.
Now I'd like to spend a few moments discussing operations in a bit more detail. With the South Ellwood pipeline project behind us and the associated new crude sales contract in place, we've been able to get back to drilling at South Ellwood. Our first PUD well, which we drilled to the west of the platform had initial production rate of about 100 barrels of oil per day and it since gradually increased to about 160 barrels per day. We have the well on gas lift, but we believe it is capable of higher production rates once we were able to lift with an electric submersible pump. Our second well, another PUD, was drilled east of the platform and was placed on production near the end of the quarter. In July, it averaged more than 1,700 barrels of oil per day and is currently around 2,000 barrels of oil per day with no water production. We are currently drilling a third PUD well, that's also east of the platform in the same general area as the last well, and we expect to complete it in late August. We have one additional well planned at South Ellwood this year. This fourth well is to a probable well location and has the potential to prove up a new fault block, as well as additional PUD locations in the field.
At our West Montalvo field, we've been drilling continuously there since the second quarter of 2011 and have spud 9 wells in that time. Of the 8 wells that have been completed, all of them productive and the economics are very solid and consistent with our expectations. The production in the second quarter from West Montalvo was 1,830 BOE per day, which is an increase of approximately 60% since the second quarter of 2011. Even though that's a significant year-over-year increase, the production profile of West Montalvo tends to be a bit drawn out due to the nature of the operation there. Although this field has produced since the 1950s, these new wells have sufficient reservoir pressure to flow for weeks or months without artificial lift.
Since regulations require the wells to stop flowing before installing artificial lift, the wells may produce at lower rates for quite some time until they finally stop flowing and we can install lift equipment to maximize production. As an example, one of the wells we drilled earlier this year flowed for 4 months, much of that time at low rates before it stopped flowing in late July. Now that it is on pump it is producing over 400 barrels of oil per day, and overall field production now over 2,000 barrels per day.
We completed our 2012 drilling program at our Sockeye field in the first half of the year. We've drilled and completed 2 horizontal wells into the upper M2 portion of the Monterey, and we drilled a dual completion well producing from the M4 Monterey while injecting into the Upper Topanga waterflood. Production from Sockeye ticked up in the second quarter as a result of the incremental 425 barrels a day from the rig program.
Moving to the Sacramento Basin in Northern California, as we discussed on our first quarter call, we drilled 3 wells and then released a drilling rig so we currently have no active drilling rigs in the Sacramento Basin. However, we did re-complete 45 wells in the second quarter for a total of 140 in the first half of the year. Our full year 2012 budget includes a total of 200 re-completions in the Sacramento Basin and we have one additional well to be drilled during the second half of the year.
As we've mentioned previously, our technical staff is using this time to evaluate and high-grade the hundreds of drilling locations we have in the basin so that we are fully prepared to ramp up drilling when natural gas prices improve.
In the Monterey, we remained focused on delineating our Sevier field, which is our onshore prospect in the Western San Joaquin Valley. Including prior years, we spud a total of 11 wells in Sevier and have continued to advance our completion and stimulation techniques. We're in the process of installing artificial lift in several wells, building centralized production facilities and laying pipelines for transporting our oil, water and natural gas. We're also finalizing sales and marketing agreements for our crude oil and natural gas. We expect production from Sevier to remain at modest levels until we get facilities and pipelines installed later this fall. In the interim, our production is limited by our air permits, which impose low daily limits for natural gas flaring. Production is also impacted by other activity on the well pads, including drilling, completion and testing activity. During the first half of the year, we've had some daily peaks of about 400 gross BOE per day, but for the second quarter, our gross production rate was about 175 barrels per day. We've yet to have all wells on production at the same time due to the drilling completion and testing activity ongoing in the field.
Elsewhere in the San Joaquin Valley, we completed a 28-square mile 3-D seismic shoot in the Salinas Valley during the second quarter. As we discussed in the first quarter call in May, we began selling the majority of our crude oil on April 1 on our contracts based on California, Buena Vista postings adjusted for gravity in marketing. During the second quarter, average Buena Vista postings were $14.70 per barrel, higher than West Texas Intermediate. The average Buena Vista premium to WTI reached over $16 in April of 2012 and was around $13.40 for the month of July. As we've noted before, the only exception to the Buena Vista postings as a basis for sales contracts is our South Ellwood crude, which started with a new contract on February 1. The South Ellwood contract is tied to Napo, a waterborne crude from Ecuador that is routinely imported to California. Napo has been selling at a slight premium to WTI for much of 2012. Our net after transportation at Ellwood is currently about even with WTI, which is an improvement of about $15 a barrel over our old contract for barge deliveries. In the second quarter of 2012, the company-wide weighted average premium before hedging was about $7 above WTI. Our net realized price in the second quarter before hedging was $100.38 per barrel compared to $98.66 per barrel in the first quarter of the year. Our hedges include basis swaps and the differential between WTI to Brent that impact our after hedging realizations. In the second quarter, the hedges cost us $9.56 per barrel.
By 2012, production and LOE guidance is unchanged, as is our capital budget at $255 million. Since setting production guidance in December and diverting capital away from the Sacramento Basin in January, we expect our production to be in the lower end of our 17,750 to 18,250 BOE per day range. We do have planned maintenance shutdowns scheduled in the second half for both of our Sockeye and South Ellwood fields and no shutdowns were incorporated in our original production guidance.
Currently, with everything up and running, we're seeing net volumes over 18,000 BOE per day, so we expect a stronger second half of the year. LOE guidance remains in the range of $15 to $15.50 per BOE. And G&A guidance remains in the range of $5.25 to $5.50 per BOE. Production and property taxes are expected to be between $1.65 and $1.70 per BOE. And in a moment, Tim Ficker will discuss why our property tax guidance is slightly higher than original. Our DD&A guidance is still expected to be between $15 and $15.50 per BOE. As we've been discussing, the lower production expectation is due to reduced activity in the Sacramento Basin and resulting lower natural gas volumes. However, with stronger oil volumes heading into the second half and stable California oil prices, we expect to have solid revenues in the second half.
Now I'd like to introduce Tim Ficker who will go over the financial highlights for the quarter. Tim?
Timothy A. Ficker
Thanks, Ed. I'll quickly review some financial highlights.
Adjusted EBITDA for the quarter was $55.8 million, which is down about $32 million compared to the first quarter. However, included in adjusted EBITDA are gains realized upon early settlement of hedges of approximately $11 million in the second quarter and approximately $41 million in the first quarter. After adjusting for those settlements, adjusted EBITDA was down about $2 million for the quarter. I'll note that in connection with those hedge settlements, we entered into oil collars with $90 floors on volumes through the calendar 2015. I won't list off those new hedges here, but we do lay them out on a contract-by-contract basis in the 10-Q for your review.
Adjusted earnings for the quarter were $13.3 million, which is down about $25 million compared to the first quarter. However, after considering the hedge on volumes I just mentioned, adjusted earnings are up about $5.8 million. That increase is largely due to improvements in LOE and transportation expense, partially offset by additional production and property taxes recorded during the quarter, which I'll discuss more shortly.
Oil and gas revenues were $80.9 million for the quarter compared to $83.4 million for the first quarter. I might point out here that each quarter, our revenues include adjustments related to oil inventory. Sometimes those adjustments are positive and sometimes they're negative, but usually, they're fairly small. However, the inventory adjustment in the first quarter was larger due to the inventory we sold as a result of emptying the tanks at the South Ellwood field in connection with completion of the new pipeline I had mentioned earlier. After adjusting for that, revenues actually increased by approximately $3 million from first quarter to second quarter. That increase results from higher oil production, which is up about 8% compared to the first quarter and higher realized oil prices, which were up about 2% from the first quarter, and that's partially offset by a 9% decline in natural gas production and a 14% decline in realized gas prices.
Lease operating expenses decreased by about $4.4 million from the first quarter. This was due in large part to costs incurred in the first quarter for nonrecurring maintenance performed on 2 of our platforms. On a BOE basis, we reported LOE of $12.93 per barrel for the second quarter. And for 2012, our guidance for LOE remains at $15 to $15.50 per BOE. Transportation expenses decreased by about $4.2 million from the first quarter and that decrease results from the elimination of barging operations, which we discontinued in the first quarter in connection with the completion of our new South Ellwood pipeline. Production and property taxes increased by about $3.7 million from the first quarter and that increase is the result of supplemental taxes accrued during the quarter in connection with the completion of the South Ellwood PUDs that Ed mentioned earlier and other successful drilling during the quarter. That accrual to supplemental taxes during the quarter caused a fairly significant increase in our production and property taxes per BOE from $1.02 in the first quarter to $3.41 per BOE in the current quarter. As a result, we've increased our full year 2012 guidance for production and property taxes to a range of $1.65 to $1.70 per BOE. G&A expense decreased from $12.4 million in the first quarter to $9.9 million in the current quarter. And excluding stock-based comp and Going Private related costs, G&A decreased slightly to $8 million in the second quarter from $8.5 million in the previous quarter. On a BOE basis, G&A expense, excluding stock-based comp and Going Private related charges was $5.15 for the quarter compared to $5.37 in the first quarter.
For 2012, our guidance for G&A remains at $5.25 to $5.50 per BOE. Looking at the balance sheet quickly, compared to year end 2011, our biggest change was in PP&E, which is up as a result of our drilling programs, net of proceeds received from the sale of a small property during the quarter. On the debt side, we have approximately $136 million currently available under our revolver, so we continue to be well positioned on the liquidity front. Finally, we've received a few inquiries about restricted payments basket under our bond indentures, so I thought I'd mentioned that at June 30 we calculate that amount to be approximately $330 million. That's a brief financial overview, I'll turn it back to you, Ed.
Thanks, Tim, for the financial overview and now let's open up for questions regarding our second quarter results.
[Operator Instructions] And your first question comes from the line of Steven Hurwitz with PrinceRidge Group.
I know you've said, and you've been consistent in this in saying that you can't discuss the deal. But I guess we're getting sort of close to the end of the extension period and I guess I'm sort of sitting here saying it's the elephant in the room. At the end of the day, following the stock doesn't make any sense if I'm going to get cashed out on September 14. So I guess I'm trying to understand why it is firstly that you don't feel that you can't discuss it, I mean, it's an integral part of the story of the company. And then secondly, I guess, I'd like to know what you can say because that's really why we're all on this call. And I am a bond holder, by the way.
I appreciate your question, Steven. But unfortunately, it's just impossible for us to discuss the pending transaction at this point. But I'd certainly welcome any other questions you might have.
Well, I'd rather not just drop it at that. I guess what I'm -- the board must be thinking about the plan -- maybe I can phrase it differently, what is the plan to go forward if the deal does not close?
Timothy A. Ficker
Steven, the plan to go forward would be to operate the company as we have in the past. We have -- we continue to operate as business as usual. We are, for example, in the midst of beginning our capital expenditure budgeting processes and we will continue to operate as business as usual until such time as the transaction is either completed or not.
Okay. I just -- I can appreciate what you're saying, I just think that you have to understand, from this side of the phone, someone who is involved in the credit and the stock, the real question is whether or not the financing can get done and where you are in that process because that's going to openly determine sort of the value, or lack of value that I have in my securities. So I will yield the floor to someone else.
And the next question comes from the line of Alfredo Scialabba with GFI Group.
I have one question regarding the update that Danbury provided about the Hastings properties. If you can give us an update on the -- what's the interest that Venoco has of that property and if you have a range of when you plan to book the property on your own reserve. And also, based on the last deals in valuation of proved reserves, if this property would relate -- how this would relate to the valuation that you indicated in the past, to around $200 million, $250 million. And if you think that this could actually make it easier to complete the financing for the buyout.
Yes, thank you for the question. In regard to Danbury, we understand that they booked or moved 43 million BOE from probable to proved in their mid-year reserve update and I understand, at least what I've read, that, that has a PV-10 value of a little over $1 billion. So while we have not completed our mid-year reserve update yet, our third-party auditor has not yet finished our mid-year reserve update, so we don't have numbers yet to share with you in terms of how we'll be impacted at Hastings. But we're certainly encouraged by the news from Danbury and we have, I believe, it's a 22.3% reversionary interest as you probably know and, of course, when that kicks in, depends on a variety of variables, including the cost they incurred that have to be recouped to be followed back in and, of course, oil prices going forward and a number of other variables, including the field performance. But everything we've seen so far from the field performance is, I think, exceeded certainly Danbury's original forecast and we're encouraged by that project and we would expect to book some measure of reserves, both at mid-year and year end here going forward.
Okay. And in terms of getting the financing for the deal, do you think this event would be something that needs to be considered?
Well, I can't comment on the Take Private transaction. But yes, certainly, if we book reserves there, it's going to add value to our company and it will have some net present value associated with it. And that's good news, I think, for everybody.
And the next question comes from the line of Albert Merovitz [ph] with MM Capital [ph].
I'm just trying to understand the difference in terms of Marquez's financing, the difference between the signed term sheet then the highly confident letter, and then Marquez saying that there's multiple parties looking at the transaction. To me it sounds like multiple parties looking at it is a step back from the highly confident letter and the signed term sheet. Can you just go into more detail just to explain what you meant by those press releases?
Albert, we're not going to be able to go into those details. Again, what we're talking about today is the quarterly results for the company. Tim Marquez is not here. Tim Marquez is at Go Private efforts and, again, we're not going to be able to go into detail about the financing of the transaction.
No. I'm just trying to understand what those terms mean. Like if -- the company press released that publicly. Just a little more explanation as to what your understanding is of those terms.
Timothy A. Ficker
That came as a result of discussions between Tim Marquez and the special committee, and again, given that it's Tim Marquez's financing, we're not in the position to discuss that.
[Operator Instructions] And the next question comes from the line of Sachin Shah from Tullett Prebon. And the caller is no longer on the line. With no further questions in queue, I'd like to turn the call over to Mr. Ed O'donnell for closing remarks.
All right. Well, thank you for your questions this morning and thanks to all of you listened to the webcast. Replay information on this call will be posted on our website on the Investor Relations page. Have a good day, thank you.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.