Triangle Petroleum's CEO Discusses F4Q 2014 Results - Earnings Call Transcript

| About: Triangle Petroleum (TPLM)

Triangle Petroleum Corporation (NYSEMKT:TPLM)

F4Q 2014 Earnings Conference Call

April 17, 2014 10:30 AM ET

Executives

Jonathan Samuels – President and CEO

Justin Bliffen – CFO

Analysts

Jason Wangler – Wunderlich Securities

Stephen Berman – Canaccord Genuity

Ronald Mills – Johnson Rice & Company

Stephane Aka – Global Hunter Securities

Brian Gamble – Simmons & Co.

Gail Nicholson – KLR Group

Operator

Good morning and welcome to the Triangle Petroleum Corporation Fourth Quarter Fiscal Year 2014 Earnings Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Triangle Petroleum’s President and CEO, Jonathan Samuels. Please go ahead, sir.

Jonathan Samuels

Thank you. Good morning and welcome everyone. We appreciate you taking the time to listen in. My name is Jon Samuels and I’m the President and CEO of Triangle. I’m joined today by our Chief Financial Officer, Justin Bliffen. We’ve a lot we want to cover today as we look at the results for the last fiscal year and discuss where we are headed. Fiscal year 2014 production was in line with our guidance at our core E&P business, Triangle USA, with average net daily production of 5,286 barrels of oil equivalent per day, approximately 75% of which was operated. Fourth quarter fiscal year 2014 average daily production was 7,254 barrels of oil equivalent per day. We also saw a substantial reserve growth over fiscal year 2014. January 31, 2014 reserves totaled 40.3 million barrels of oil equivalent compared to 14.6 million barrels of oil equivalent one year prior. Triangle USA is currently running a four-rig drilling program. We continue to see the benefits of down spacing and the value of the vertically integrated model. As well costs dropped, we capitalized on the benefits of pad drilling and we improved completion techniques.

Transition to cemented liners has delivered wells that are approximately 30% to 40% better than uncemented direct offsets in terms of 30-day cumulative production. Average frac designs with the slick-water tail are yielding similar to slightly improved 90-day cumulative production at a savings of $400,000 per well. We’ve reduced the amount of gel utilized on fracs by approximately 40% further cutting completion costs. We continue to reduce our drill times with latest average spud to TD times of approximately 20 days and the recent McKenzie County wells under 16 days. All of this is part of driving down AFEs and executing on our goal of being the low-cost producer on the basin. We recently set two new drilling records this past week with two wells drilled in 14 days and 12 days respectively. Industry-wide down spacing efforts continue to prove a tremendous value we and our peers see in the Williston Basin. Currently, we have seven DSUs with middle Bakken wells spaced approximately 600 feet from one another providing positive indications that eight middle Bakken wells per DSU will be needed in our core area to develop the acreage. Three Forks tests and lower Bakken dolomite exploration add to our inventory and the opportunity we see. We have lots of exciting things happening on the drilling and completion side of things, and we look forward to discussing in more detail during the Q&A.

We continue to have high capacity utilization in our RockPile Energy Services business as other providers leave the basin and as third parties recognize RockPile’s best-in-class service offerings. Fiscal year 2014 RockPile completed 31 wells for Triangle and 50 wells for third parties as compared to 12 wells for Triangle and five third-party wells a year ago. We see healthy backlog going into fiscal year ‘15 with RockPile’s three-frac (inaudible) fully committed for the coming months and an increasing share of business coming from third parties. RockPile also continues to expand its business as it builds out work over capabilities, its wireline truck fleet, and its pumping business. Caliber continues to prove its strategic value. The inaudible] gas plant is currently online and is gathering approximately 5 million cubic feet of gas per day. At the end of fiscal year ‘14, we’ve connected 31 of our operated wells to Caliber’s Midstream system and we expect to have over 80 of our operated wells in McKenzie County connected to Caliber system by the end of this year. Caliber continues to supply water to Triangle fracs and continues to see strong volumes of produced water into its existing SWD infrastructure.

That’s a brief summary of where things are in our operations. I’ll pass it over to Justin to discuss the financials.

Justin Bliffen

Good morning. I will walk through the financial results from fiscal 2014 ending January 31, of 2014. As Jon mentioned, we saw substantial growth in Triangle USA, our E&P and core business with annual sales volumes of 1.93 million BOE, representing approximately a 300% growth year-over-year. This represents average daily production over the year of approximately 5,286 BOE per day. Triangle USA generated revenue of approximately $161 million and adjusted EBITDA of $112 million. Triangle spent approximately $313 million in consolidated operated and non-operated drilling and completion CapEx during the year, which includes approximately $35 million in intercompany eliminations from RockPile and Caliber. We calculated our F&D cost at approximately $14 per BOE for the fiscal year which we believe is below Bakken comp averages. RockPile Energy Services, our wholly owned oil field services subsidiary generated standalone revenue of approximately $194 million and adjusted EBITDA of $42 million. In Q4 fiscal 2014, RockPile’s third party revenue crossed the 50% threshold of total revenue for the first full quarter of RockPile’s history. Caliber Midstream Partners, our 30% owned joint venture generated approximately $4.7 million in revenue and $2.7 million in adjusted EBITDA net to our 30% interest for the full year.

As I’ve stated before, standalone business segment reporting offers a clear snapshot of discrete business performance and provides a measure against previously stated standalone guidance. Allocation and elimination detail can be found in Note 4 of our consolidated financials. On a consolidated basis, our basic earnings per share was $1.07 for the fiscal year. When adjusted for non-cash and non-recurring items, including our $39.8 million gain on our Caliber investment and other smaller items, we earned adjusted net income per basic share of $0.58 for the fiscal year. Our balance sheet and liquidity position continued to be in great shape. At year end, we had over $80 million in cash and approximately $140 million in revolver availability. Excluding the NGP notes struck at 8, which is convertible into shares of common stock, we have approximately $214 million in debt at year-end. Leverage metrics remained conservative at 1.5 times total debt to annualized second half fiscal year ‘14 adjusted EBITDA.

Our strong liquidity position will continue to improve in the coming fiscal year. In late March of 2014, RockPile closed a new five-year term, $100 million revolving facility with an accordion feature that allows for the expansion of the credit facility up to an aggregate of $150 million. Additionally, Triangle USA is currently undergoing its quarterly credit facility redetermination and expects to close in a revised and increased borrowing base by the end of April. As we’ve discussed in the past, our longer term financing plans likely include accessing the term debt markets be that second lien or high yield. We continue to use zero cost collars and swaps to provide more certainty around price realizations. For fiscal 2015, using zero cost collars, we had approximately 3,300 barrels a day hedged with volume weighted average floors around $85 and ceilings close to $100; and using swaps, we had approximately 1,100 barrels a day hedged with a weighted average price of $95.65. Overall, the three business segments continue to outperform and cash generated by each will allow us to reinvest in growth without sacrificing our disciplined approach to our balance sheet.

With that, I’ll hand it back over to Jon.

Jonathan Samuels

Thanks, Justin. We’ll open it up for prepared remarks – for questions in a minute. I just want to give some high-level comments that we’re doing very well in the business, we’re coming off one of the worst winters in record, that’s not news to anyone on this call. We report a lot later than the rest of the folks you’ve heard all before. Things are great and shaping up to be a great spring and a great summer. You see some emphasis on our earnings release on Q2 because it will be the best quarter in our company’s history and that starts in about two weeks. We still think Q1 will be good and better than Q4, which was a tough pricing environment and just a very tough winter environment, but we are pretty excited about where we’re headed this year, feel very good about our guidance and very good about the overall business.

With that, I will turn it over back to the operator and Justin and I are happy to answer questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Jason Wangler of Wunderlich Securities. Please go ahead.

Jason Wangler – Wunderlich Securities

Good morning guys.

Jonathan Samuels

Good morning.

Jason Wangler – Wunderlich Securities

Just curious and I appreciate your comments with RockPile. I mean it looks like you guys have a decent backlog both for them of your own wells and then others. Are you just seeing and maybe you’re starting to work through that now, pretty big backlog of wells that were maybe drilled but not being able to be completed because of that weather, and could you maybe just comment what you see the backlog looking like maybe even today?

Jonathan Samuels

Yeah I mean if you want to kind of zoom out from RockPile and just talk about the basin, the number of wells waiting on completion has continued to go up, and I think there is -- as you pointed out, winter is a big part of that, but also as people shift to pad drilling and drilling four, five, six wells at a clip, that means that a rig may have showed up on location last September or October for one of our customers or someone else in the basin and still hasn’t left that pad yet, so you’re not completing those wells. So the rig count in the basin is flattish to slightly up, but people are drilling wells a lot faster, so it’s sort of an overall trend that we see.

Jason Wangler – Wunderlich Securities

Sure. And then just -- you commented at least about infilling and also the better completions. I mean are you – the 600 feet, that seems pretty obvious, but as far as the new completions, are you shifted all the way to that for everything now, is that pretty much the plan going forward?

Jonathan Samuels

I think the preview is yes. We’re trying to follow some scientific method here and it’s kind of challenging because you’d like to get a statistically significant sample set when you’re testing a data point, and with that being 13 in the last textbook I read, that’s a lot of wells to make a decision. So we’re trying to isolate different components of completion designs if you go from how we did a well six months ago to all the things we’re talking about, you don’t necessarily know which element or variable you changed and what it impacted, so we’re trying to do that, and for some of these things, it is becoming real obvious, cemented liners are becoming real obvious, but we haven’t formally shifted at all, and it’s still early in the production history. We just don’t have a ton of wells and they don’t have a ton of data behind them. So we want to be deliberate, we want to get better, and we are excited about what we see, but to kind of do this we’ve got to be careful about taking individual data points and swiping it with a broad brush.

Jason Wangler – Wunderlich Securities

Sure. I appreciate it. Thanks guys.

Operator

Our next question will come from Steve Berman of Canaccord. Please go ahead.

Stephen Berman – Canaccord Genuity

Good morning guys. Hey, Jon can you talk about with two weeks left in the quarter, what current production looks like which – since you used like the average 21 days and maybe that equates to something close to an exit rate for the quarter. Just any color there would be helpful.

Jonathan Samuels

Yeah we’re trying to pull that up, just give us one second. Yes, we’ve averaged for the quarter between 8,200 a day and 8,300 a day and the leading edge is a little bit higher.

Stephen Berman – Canaccord Genuity

Okay. And unless I was looking in the wrong place on your website where you’ve had operated well results, I haven’t seen anything recent there. Are you still planning on updating that so we can see some of these newer wells with higher rates etcetera?

Justin Bliffen

Yes Steve, we do update it quarterly with our earnings call. So, today you’ll likely see our webpage updated with the 30, 60, 90-day wells [in for the Q3] (ph).

Stephen Berman – Canaccord Genuity

Terrific. And Justin now that you look like you’re starting to book income taxes, what should we assume in this fiscal year for tax rate, any color there?

Justin Bliffen

Yeah, exactly so as you pointed out, as of our Q3 now we are booking book taxes, so we’re looking at a 37.5% income tax. Effective tax will of course be much less than that, and cash tax will be de minimis if not close to zero, we maybe hit with some AMT.

Stephen Berman – Canaccord Genuity

Great. That’s it for me. Thanks guys.

Operator

[Operator Instructions]. The next question will come from Ron Mills of Johnson Rice & Company. Please go ahead.

Ronald Mills – Johnson Rice & Company

Good morning guys. Hey, I don’t know if you want to take a stab at this whether it’s on both the infield or the completion or on a combined basis, obviously big improvements on the IP 30s from both. Is this also something you think is going to have an impact -- positive impact in the EURs? Do you think it’s more of an acceleration of what your current expectations are or any more color around what the impact of these higher initial rates could mean?

Jonathan Samuels

I mean you hope to translate to higher EURs in your production of (inaudible), that’s one of the reasons why we’re somewhat hesitant to draw the conclusions now, because you just don’t have a ton of history, but I think as you see in the basin as it evolves, there is a pretty strong correlation between 90-day and 180-day teams, some people might use a longer period than that a year or whatever, but we use the 90 to 180, that it is going to be correlated to EURs. So that means you need at least three to six months of history before you want to start drawing those conclusions. Some of these things are pretty new for us. So we certainly are positive towards that, but again you got to let the data support the thesis which is early on in the data collection.

Ronald Mills – Johnson Rice & Company

And then on the infill side, the fact that the infill wells have come online at 15% higher at least IP – P 30 grades] [ph] what do you think is driving that? And you talked about up to eight wells in the core, do you consider to your 45,000 acres in that Williams-McKenzie area is that what you consider your core where you think most of your acreage would have that type of spacing capacity or capability?

Jonathan Samuels

Yeah I mean we do think that and then the Three Forks, Lower Bakken dolomite being other targets that will evolve over the next year. In terms of 15% better infill that’s really completion design changes but we put that stat in there to highlight that as we drill infill wells they are not performing worse than a standalone well would, i.e. they’re not robbing reserves from nearby areas when you drill a single well. So, we have not yet done a downspace well with a cemented liner, all the cemented liners have been in new units that we drill one well with cemented liner, at the same time we drill another well without a cemented liner and that should yield about 30% to 40% difference, and the wells where we may be drilled one well a year ago or 18 months ago or whatever it is now to reoccupy that unit, those wells were changing other things; we have a slickwater tail; we have changed our chemical mixture, other things like that and we are seeing a 15% improvement. And it’s one of things you want to when you go infill you start to say, well are we - is all the infill wells are going to be as good as the previous wells and they are better. So that was the reason we highlighted about 15% point.

Ronald Mills – Johnson Rice & Company

Perfect. And lastly just on RockPile, like the E&P side the RockPile side was also impacted by the weather but you have your third spread in now and operational little bit sooner than expected, your third spread was forecasted in your guidance. But is the third spread and the timing there of - able to make up the probably a little bit slower start in terms of completion activity to get to your targeted guidance for the year?

Jonathan Samuels

For RockPile you mean?

Ronald Mills – Johnson Rice & Company

Yes.

Jonathan Samuels

Yeah, I mean so for RockPile February was the top month in the basin as you guys know. So we - that was tough but March quite good and so overall for Q1 for RockPile we think it’s flat to maybe slightly up from Q4, and then Q2 is going to be far and away the best quarter in the company’s history. So in terms of us meeting our guidance this year I think we feel good about it; we are still obviously for the last two weeks or so of operations we are not going to have financial results so it doesn’t - to say anything other than that we remain very comfortable with our full year guidance for RockPile.

Ronald Mills – Johnson Rice & Company

Thanks.

Operator

Our next question will come from Stephane Aka of Global Hunter Securities. Please go ahead.

Stephane Aka – Global Hunter Securities

Good morning guys. Thanks for taking my question. Just one quick one for me, I know you guided to 42 to 46 gross completions for fiscal ‘15, just wondering if we could get a net count for those wells?

Justin Bliffen

Our average working interest is around 65% to 70%.

Stephane Aka – Global Hunter Securities

All right. That’s helpful. Thanks. That’s it for me.

Operator

Our next question will come from Brian Gamble of Simmons and Company. Please go ahead.

Brian Gamble – Simmons & Co.

Hey guys I think you mentioned the fourth rig coming on already as planned. Did that come in on schedule as far as, actually referring to the last question, getting to that 42 to 46 gross number? And maybe you can also relate that to the overall CapEx you mentioned a couple of cost improvement items, drilling days coming down, how does that influence cost per well and then the overall CapEx guide for the year?

Jonathan Samuels

Yeah, that’s a timely question because it is actually a conversation we had yesterday, we’re drilling wells so much faster than we were even three or four months ago when we set the budget. I mean the gross wells for the year there is going to be no problem hitting that, and the net – net as well. It’s really just going to be a question of do we need to keep four rigs for the whole year to do it because a single rig is just a lot more productive for us today than it was. So the rig count is the thing that’s going to change before the CapEx and the well count would if that makes sense.

Brian Gamble – Simmons & Co.

It does.

Jonathan Samuels

I mean [we’ll adjust] [ph] as needed; we have plenty of flexibility in our rig contracts to do that.

Brian Gamble – Simmons & Co.

Why not the other way around, this comfort level with that 510 million level and where you’re planning on being from that standpoint at the end of the year or how does – why does that number not necessarily move up if you just decide to drill more wells?

Jonathan Samuels

Yeah, I mean you could definitely increase your budget. That requires us going back to the board and we also just want to look at all the knock-on effects we’ve had and we haven’t really had time to do that, so we have a kind of planning process, so we start our budget before the year starts. The messaging internally is like those are holy numbers, do not go over; and we adjust accordingly if we get further into the year and we’ve gotten our high yield or a second lien gone and there is no advancing risk and crude prices remain strong and differential is good and a lot of the other variables that impact the business over the year, and I think you get more comfortable further into the year than you are today. Our new year started February 1st so we’re just not quite prepared to say that we’re willing to take CapEx up yet but we certainly – it’s certainly a discussion to be had at sometime.

Brian Gamble – Simmons & Co.

And then maybe more of a macro question on the crude side, maybe any differential movement that you guys are seeing out there that you are exposed to or that you’ve just seen that aren’t exposed to that either worries you or excites you as we go through this shoulder season?

Jonathan Samuels

I wouldn’t say it necessarily worries or excites me. Our Q4, our differential blew out as we have been talking about for some time, certainly since our pre-release last week, to $16 oil differential and since then for Q1 it’s come back in, it’s probably closer to $10 which is closer to our last 12 month average or so. So I guess on that front - and we kind of expected that any time over the last few years, we’ve seen the differential blow out, thus far it has kind of corrected in fairly short order. I guess on the excited side is as the Caliber system builds out and more of our barrels move through that system up to the medium haul line up to Alexander then we take more ownership of and control of that differential and cut out some of the middle man oil purchaser pricing. So we expect that our realized price will increase dynamic as we get through the year as these barrels are dynamically getting into the Caliber system.

Justin Bliffen

I’ll just add our financial guidance is based off an $85 realized oil price and even with the $10 dip off to 102, 103 we’re still north of 90.

Brian Gamble – Simmons & Co.

That would be it guys. Appreciate it.

Operator

Our next question will come from Gail Nicholson of KLR Group. Please go ahead.

Gail Nicholson – KLR Group

Good morning gentlemen. I’m going to ask a different question in regards to station. I know the plan was to spend about $10 million this year. I was just kind of wondering the status and regarding the seismic data that you guys plan to do out there and then when do you or have you already drilled one of the exploratory wells or when is kind of the plan in regards to that?

Jonathan Samuels

Well fortunately our seismic company went bankrupt, so we’re not going to be getting that data anytime soon and so that’s sort of up in the air whether we actually get those wells drilled this year. So really don’t have any more information for you than that but it is what it is.

Gail Nicholson – KLR Group

Okay, great. Thank you very much.

Operator

Our next question will be a follow up from Ron Mills of Johnson Rice & Company. Please go ahead.

Ronald Mills – Johnson Rice & Company

Justin, can you just do a quick read through of the Caliber accounting which resulted in the gain and what that means from a trigger unit standpoint? I know you - I think you own 32% now with the ability to – so that to increase upon the exercise of those trigger warrants over time. Is any of that gain that was reported related to exercise of trigger units or can you just I guess better educate me on what happened there?

Justin Bliffen

Yeah, I mean basically Ron, we – true, there are several components of our investment in Caliber and true, those components got reclassified as derivatives, and so you mark those to market. The deal on September in which our private equity partner put in 80 million of new money, we put in zero and our ownership went up that’s kind of the big event that sort of changed things. In terms of the methodology, it’s a typical derivative valuation and I don’t have a lot of comments besides that. I mean you’ll see the quarter-to-quarter changes if any and there is really not [to be] [ph] material. I mean I think what it does point out is that beyond the common units that we own in Caliber what you see is our reported 30%, 32%, and we had a big upside stake in this business and the warrant and the triggers as those vest and the company has the option to exercise the future, you know that means we can [lock] [ph] more of the system. So as it grows I think it’s just a piece of our portfolio that has been fully overlooked. So from an earnings perspective we don’t think it’s material but hopefully it calls attention to what is a increasingly valuable piece of our business.

Ronald Mills – Johnson Rice & Company

Will it be like a lot of - these derivatives, it will be a quarterly mark to market then?

Justin Bliffen

Correct.

Ronald Mills – Johnson Rice & Company

Okay. And then what are some of the triggers on those units that would allow you to do exercise those units and then increase that ownership because given the fact that you don’t have any additional capital contributions required to go to an eventual 50% increase, that’s a huge jump?

Jonathan Samuels

Yeah, so our - the trigger units, so when we go from 30% to 32% basically the money that [we’ve] [ph] put in late last year they’ll get issued their units, at the same time we could issue our triggers which could be by the end of June. There is a time based component to that but no other risk. So at that point in time there will be 22 million units outstanding and Triangle will own seven of them and that’s about a 32% interest. Separate from those 7 million common units that we own against our partner’s 15 we also have 15 million warrants and those behave just a stock option, the strike price will decrease with distribution so we can exercise them anytime we want by writing a check or if there is a third party evaluation of that whether that be in a third party investment or an IPO or something else that prices Caliber units external from the company we could execute a cashless exercise. And the cashless exercise components actually what is required to be classified as a derivative. So you know really past this past June we will be our 32% and we’ll own these warrants and the strike price will drop over time as distributions come out and it’s just a math exercise to when is the best time to exercise.

Ronald Mills – Johnson Rice & Company

You’ve already had two cash distributions from Caliber, is that something you expect to continue and is there any chance or possibility that you end up making distributions from RockPile up to the parent?

Jonathan Samuels

Yeah, RockPile made a $10 million distribution this week and that was something that we put in our financial guidance, was $25 million distributions this year from RockPile, and I think the press release had 10 to 15 million from Caliber. So that’s the source of liquidity when we look at a lot of models out there in the street and it’s not taking that liquidity source into account, [inaudible] things like outspend so that’s something that we’ve been trying to talk to folks about and get in there, but yes, those distributions they don’t show up in our income statement, all of Caliber’s profits and all of RockPile’s profits associated to Triangle are a reduction of CapEx and everyone who has been a few of these calls is familiar with how that works. But that cash is real and we got our distribution $10 million two days ago.

Ronald Mills – Johnson Rice & Company

Perfect. All right, thanks for the clarification.

Operator

And ladies and gentlemen that will conclude our question-and-answer session. At this time, I’d like to turn the conference back over to Jonathan Samuels for his closing remarks.

Jonathan Samuels

Appreciate everyone dialing in and listening. Thanks for your time and look forward to visiting in early June. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

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