PostRock Energy Corporation (NASDAQ:PSTR) Q4 2013 Earnings Conference Call March 27, 2014 11:00 AM ET
David Klvac - IR
Terry Carter - President and CEO
Welles Fitzpatrick - Johnson Rice
Good day, ladies and gentlemen, and welcome to the PostRock Energy Fourth Quarter 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded.
I would now like to introduce your host for today’s conference, Mr. David Klvac. Please proceed.
Thank you, Kate. Good morning, everyone, and thank you for joining us. With me today are Terry Carter, our President and Chief Executive Officer; and Casey Bigelow, our Chief Accounting Officer.
Before we begin, you should know that our yearend earnings release is available on our website at www.pstr.com, and that our 10-K will be made available on the website in the next few days.
Our remarks on today’s call may include forward-looking statements and assumptions that are not historical facts. We base these forward-looking statements on our current expectations and assumptions about future events. We caution you not to place undue reliance on these forward-looking statements as they are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.
Please read our full disclosure on forward-looking statements and risk factors in our filings with the SEC. Additionally, in the course of today’s call, we will refer to certain non-GAAP financial measures such as adjusted EBITDA, which we believe is an important metric for evaluating our performance. Be sure to see these reconciliations in our earnings release. Following our remarks, we’ll be available for questions.
I’ll now hand over the call to Terry Carter.
Thank you, first of all for joining us for our year end 2013 conference call, and I will tell you right up-front that I am not going to spend a lot of time rehashing what you probably already read in our earnings release, and going over all the details there. But what I will try to do is hit what I think are the highlights for 2013 and particularly what the things that we've accomplished in 2013 mean for us going forward from 2014 and beyond.
As we progressed in 2013, probably the most critical thing that we've been able to accomplish was the demonstrated economic success by applying more modern drilling and completion techniques, to redeveloping existing mature fields in Central Oklahoma. And it enabled us to then take some steps to significantly expand our position in Oklahoma and become something more than what we've historically been, which is traditionally a coal bed methane player in south-eastern Kansas. As you know from our press release, we more than doubled our oil production year-over-year, albeit from a modest start. That was effectively what we had gone into the year expecting to do.
We didn’t quite end the year at the peak rate that we anticipated and I will talk a little bit more about the reasons for that in a minute. But we did accomplish a number of things that really are important to us as we go forward. As you know we completed our first horizontal well in the Hunton, which were successful; we talked about that a little bit in our third quarter report. Effectively that well is still performing pretty much as we had anticipated.
As you recall, maybe it had an IP of something north of 170 barrels of oil per day; the reserves on a BOE basis at 27 to 1 and I’ll talk a little bit more about that in a minute. But the reserves are between 160,000 to 170,000 BOE. The tight curve that we've developed from that well would indicate that we have somewhere between a 50% and 60% expected rate of return.
I will note that we have identified ways that we think we can improve on that, still yet to be determined, but we will proceed as we go down that road a little bit later this year. We also applied a number of high rate high-volume water fracs to old wells, some of which were as many as 60 years old, and demonstrated that we could effectively add economic reserves at rates of return greater than 100%. And finally we began establishing an inventory that we believe will take us through this year, into next year, and hopefully beyond.
As you know from the release, we increased year-over-year reserves by 30% at a 6 to 1 traditional measurement and I guess in my view traditional measurements at current oil and gas price differences are effectively meaningless and so we began to look at these things on a more value directed basis to look at the price differences between oil and gas. We increased our oil reserves by over 63% to 4.4 million barrels. And if you look at a more appropriate measurement, in my view, which is really the differential, the price or value ratio, we would have increased our reserves by 45% on a Mcfe basis.
Finally, we also continue to make good progress in reducing ongoing operating cost, our ongoing LOE and gathering cost were down 4%, which continued the trend that we established a few years ago. The largest driver this last year is the substantial compression, compressor reconfiguration project that we initiated, a pilot on actually late in 2012 and really accelerated in 2013.
We expect that project to be fully complete in May of this year. We actually only have one more compressor site, happens to be our largest compressor site finish. It handles about 50% of our total gas in the Cherokee Basin so it is pretty substantial. By the time we get finished with this project we will have saved -- will be saving roughly $380,000 a month in rent and compressor rentals and we will convert roughly 1.3 million to 1.5 million a day of gas from fuel to sales, that process obviously has been ongoing as we’ve gone through the year hence the reduction in cost.
We’ve also continued to gradually decrease our G&A excluding CEP, Sanchez lawsuit and legal cost as well as our workers comp settlement from the years of 2009 to mid-2011 of about $450,000. Our ongoing G&A all cost is down about 2% year-over-year, if you exclude non-cash compensation from both of those years our G&A is down roughly 20%.
Finally, and I think most importantly we’ve expanded land and operations footprint in Oklahoma. At the beginning of last year, we effectively had under 2,000 net acres of leasehold, all HBP on some legacy production.
By the end of the year, we had increased that total to 35,000 acres, about one third of which is now HBP. Since we began work over drilling activity in central Oklahoma in late 2012, we’ve invested just over $11 million in development, 11 work overs, a couple of vertical wells and one horizontal well we discussed as well as two disposal wells and associated facilities and that has helped us to more than double the production in the region and we continuously increase this as we go forward in that area from the same properties. The rate of return estimated on the full investment in that period of time is something north of 60%. So, it’s been a very successful project for us and we think we can continue it and hopefully be able to duplicate it.
We’ve also invested about $13 million in cash and stock for land and producing properties in the region which we began to work and it's really put us in a position of where now we have a significant level of oil opportunity going forward and we began to diversify ourselves into something other than just a coal bed methane gas company. I will say that coal bed methane gas is still the primary production that we have and the work that we’re doing to reduce operating cost there touches the compression project we’ve been undertaking is really intended to continue to maintain or improve margins in the region and keep that option on gas price and make us better able should an opportunity rise at some point in time even to do additional consolidation.
So, what’s all this mean going forward for us? So, as I said we’ve made material progress this year in transitioning the company to be a more diverse E&P business that can add substantial value outside of the coal bed methane business. In fact our capital plan exclusive of any special invested capital like acquisitions or a significant incremental land cost, our capital plan this year is expected to be about half of what it was in 2013 but and will be funded almost entirely out of cash flow, in fact it will be funded entirely out of cash flow. However, it will nearly double our development capital employed in central Oklahoma.
We expect, we’ll do 10 to 12 more workovers, as you saw in our release we did about nine of those last year, the average rate of return is something north of a 150%. We’ll do at least 3 undirected horizontal wells, could be more depending on success and timing. And we will likely participate in two to three Woodford directed horizontal wells, operate at least one of those and possibly two, it really just depends on the timing of our operations and as well as the timing of partner operations as we go forward.
So, with that, and I believe we’ve really gone a long ways in the last year to really position the company to build on its position in central Oklahoma, we will continue to look for small opportunistic acquisitions of HBP acreage in production and the reason for that is that if you look at the legacy production that we have or that we’ve acquired in Central Oklahoma in particular, we had an old field that was discovered in 30s that we’ve now doubled and I think will effectively triple and maybe quadruple production by the time we’re finished with it at great returns, we had another old field not far away where we have 25% ownership that we recently doubled the production on, just threw some upgrades and some additional work that we’ve done there and it has a number of horizontal targets as well. The little acquisition that we bought, the properties that we bought late last year we began to work on just doing work on existing wells and we’ve added roughly 30% to 40% to the production rate that existed there with a very moderate amount of capital invested.
So we believe that anytime that we have the access to HBP land where we’ve identified the types of opportunities that we already understand well, we can create a significant amount of shareholder value with those and with the land position that we have, we have targets of up to north of 20 potential producing horizons throughout the region, not all in one place, that we believe we could potentially exploit with that.
The predominant drivers of value probably would be the carbonates in Central Oklahoma which would be the Hunton and Viola, but also the Woodford shale as well as numerous Pennsylvanian sand sections.
So we think we put the Company in great position to add shareholder value going forward. I think we’ve made meaningful progress for probably the first time since I’ve been where I can say that we have a plan that's exclusive entirely of dependence on investment in the Cherokee Basin coal bed methane.
With that, I will turn it over to you and answer any questions you might have.
(Operator Instructions) Our first question comes from the line of Welles Fitzpatrick with Johnson Rice. Your line is open.
Welles Fitzpatrick - Johnson Rice
If I remember now you guys have said in the past that you need a few rigs to hold together the Central Oklahoma acreage. Is that still the case with the recent acquisition or does that move up?
The real issue I think is how we actually go about doing the development. We’re actually although it’s very early, we’re discussing partners about swapping interest in areas where we can actually drill more wells and protect more acreage with the same amount of capital. We have two things that we’ll try do here. One is be able to capture and hold more acreage with the same amount of capital that we might expense. We have lesser than 100% interest for instance in some of the acreage. The other is we obviously have the ability to extend all of the leases that we have there and we have the capability to extend them. Our anticipation is that our first choice is going to be to begin to exploit them and HBP them. My view right now is that it’s probably going to take anywhere from five to eight wells in the Woodford in the areas where we’re talking about to really determine just how productive and how economic that process will be.
But we’ll also be combining that with a more conventional vertical development at the same time because, and remember this is really a multi-pay area, not just a single Woodford or Viola horizontal target. So I don’t know that answered the question. The number of rigs that it's going to take is really largely going to be dependent. The amount of money we have to spend for the rigs that would take is largely going to be dependent on just how much interest we have per well. This year I would expect that we’ll participate in at least three to four wells on this acreage and that will take us a long ways towards really understanding what the long-term impact will be.
Welles Fitzpatrick - Johnson Rice
That’s perfect. Thank you. And then, are you guys still planning for a horizontal Woodford in the front half and have you seen any increase in third-party offsetting activity?
Well let me address the first question first. Our plan right now doesn’t have us rigging up to drilling Woodford well into the second half of the year. What we’ve really done is managing our process so that we know that we’re going to be doing things that have what we really fully understand the risk and we can drive up our production rate and our cash flow, which means that in May of this year we’ll pick up a rig and begin drilling horizontal wells and that are nearby the Hunton well that we drilled last year, that particular field is going to be able to contain anywhere from six to seven up to maybe 12 or 13 wells horizontal in the Hunton alone. I don’t expect it will have it fully exploited certainly until sometime next year.
And then we’ll move into the Woodford area in the latter half of this year. It could be that we participate in a well earlier in the year but it will likely be a non-operated well from a party that we participate in through a forced pooling. There are a number of things going on right now that will cause me to believe that activity in a couple of the areas is significant enough from offset operators that we will probably be pooled in a couple of areas where we have smaller acreage positions and that could happen in the first half of the year, but the operated wells we will drill largely be in the second.
(Operator Instructions) One moment for question. And I’m not showing any further questions from the phone lines at this time. I would like to turn the call back over to management for closing remark.
Well again, we think that we’ve had a transition year this year to put ourselves in a position to really begin to grow the Company’s value in the future with both oil and gas and we do appreciate your attention and attending our call. Certainly if you have any questions that come up after this call, let James Stewart hear or myself know and we will try to accommodate you with an answer. And we really appreciate again and thank you very much.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a good day.
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