Memorial Production Partners LP (NASDAQ:MEMP) Q2 2016 Earnings Conference Call August 3, 2016 11:00 AM ET
Martyn Willsher - Treasurer
John Weinzierl - Chief Executive Officer and Chairman
William Scarff - President
Christopher Cooper - Senior Vice President and Chief Operating Officer
Robert Stillwell - Vice President and Chief Financial Officer
Chad Mabry - FBR Capital Markets
Welcome to the Memorial Production Partners LP Second Quarter 2016 Investor Conference Call. Memorial’s operating and financial results were released earlier today and are available on Memorial’s website at www.memorialpp.com.
During this presentation, all participants will be in a listen-only mode. Today’s call is being recorded. A replay of the call will be accessible until Tuesday, August 9, by dialing 855-859-2056, and then entering conference ID number, 52712193 or by visiting Memorial’s website, www.memorialpp.com.
I would now like to turn the conference over to Martyn Willsher, Treasurer of Memorial Production Partners LP.
Good morning, and welcome to the Memorial Production Partners LP conference call to discuss operating and financial results for the second quarter 2016. We appreciate you joining us today. John Weinzierl, Memorial’s Chairman and Chief Executive Officer, will lead the call; followed by Bill Scarff, our President; Chris Cooper, our Senior Vice President and Chief Operating Officer; and Bobby Stillwell, our Chief Financial Officer. Afterwards, securities analysts will be invited to participate in the question-and-answer session.
Please note that some of the remarks and answers to questions by management may contain forward-looking statements and are based on certain assumptions and expectations of management. These remarks and answers reflect management’s current views with regard to future events and are subject to various risks, uncertainties and assumptions.
Although management believe that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct, and undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this earnings call.
Forward-looking statements include, but are not limited to, our statements about and our discussion of our full-year 2016 guidance. Please refer to our press release and our SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call.
In addition, the preliminary unaudited financial information that will be highlighted is derived from our internal financial books, records and reports. For additional detailed disclosure, we encourage you to read our quarterly report on Form 10-Q, which we expect to file on or before August 9, 2016. Also, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our press release or on our website at www.memorialpp.com.
With this in mind, I will now turn the call over to John Weinzierl. John?
Thanks, Martyn. We appreciate you joining us today to discuss MEMP’s second quarter 2016 results. I’d like to start by updating you on the progress we have made on our goals for 2016. Our primary goals for 2016 are to generate free cash flow, increase liquidity and delever the balance sheet. During the second quarter, we continue to make significant progress on all of these goals.
Over the last year, we have generated significant free cash flow by focusing on what we can control, which are: capital spending, operating cost and credit enhancing asset sales. First on capital expenditures, we have revised the midpoint of our guidance to $60 million, a $150 million reduction versus the level in 2015, while sustaining our commitment to maintaining our facilities and equipment to ensure reliability and safety.
Our commitment to operational efficiencies continues to show in our results. MEMP’s operating costs have been significantly reduced by over 30% year-over-year and reflected on our updated guidance. We will provide additional color on the operating costs later in our remarks.
Moving to asset sales, we completed the sales of our non-core assets in the Permian and Rockies for aggregate proceeds of approximately $55 million. These divestitures provide further organizational efficiencies, lower our cost structure and generate funds for paying down debt. The proceeds from these efforts along with some associated hedge liquidations in our at-the-market equity program had been utilized to significantly reduce our debt over the last quarter.
So far this year, we’ve been able to repurchase $84 million of senior notes as well as reduce our revolving credit facility balance by $113 million, since year-end 2015. These actions reduced total debt by $197 million and provided the partnership with approximately $200 million in current liquidity.
Turning to the second quarter distribution, the Board of Directors of MEMPs general partner has approved MEMPs quarterly distribution at $0.03 per unit for the second quarter 2016, which is consistent with our first quarter distribution.
While many in the industry had been forced to suspend distributions due to the prolonged commodity downturn, our Board continues to believe that providing our unitholders with the quarterly distribution is in the best interest of MEMP, and is pleased that our distribution can be maintained with the support of our strong asset base and hedge portfolio.
As a reminder, the second quarter 2016 distribution will be paid on August 12 to unitholders of record on August 5.
I’m encouraged with our strategic progress and strong results so far in 2016. We’re committed to work hard to strengthen the partnership. While we have made significant steps on our path to improving our balance sheet, we will continue to look at a variety of broader debt reduction solutions.
We thank our stakeholders for the continuous support as we position MEMP for long-term success.
Now, I will turn the call to our President, Bill Scarff.
Thank you, John. Memorial continues to outperform by driving down our costs and managing our cash flows effectively. The partnership delivered excellent results in the second quarter. Net cash provided by operating activities outpaced first quarter results and adjusted EBITDA exceeded our expectations based on previously announced annual guidance.
In addition to our operational progress, we closed the purchase of MEMP’s GP from our prior sponsor Memorial Resource Development Corp. We believe this transaction will have numerous benefits for unitholders, including a more focused employee base, elimination of the incentive distribution rights, as well as a more streamlined corporate structure.
We are very pleased to have concluded this transaction and we believe the resulting organizational structure will make the partnership more nimble, more efficient and more effective going forward.
Turning our attention to operations, total lease operating expenses for the partnership decreased 18% to $29.4 million in the second quarter, compared to $35.7 million in the first quarter. These results are the culmination of numerous strategic and operational improvements enacted over the last year and reflect the strong efforts of the entire organization.
As John mentioned, MEMP recently closed non-core divestitures in the Permian and the Rockies for combined proceeds of approximately $55 million that exceeded our expectations. These divestitures had minimal impact on our financial position with only a small borrowing base in 2016 cash flow impact.
Operationally, these divestitures will reduce our cost structure going forward and allow us to increase our focus on the core assets that will drive future growth. In aggregate, the divestited properties had total proved reserves of 44.1 Bcf equivalent and average net daily production of 17.9 million cubic feet equivalent per day.
G&A for the second quarter was slightly lower than first quarter 2016 after excluding one-time non-cash bad debt expense that was recognized primarily as a result of the asset divestitures. Following the conclusion of the MEMP GP purchase, our separation from MRD and the asset divestitures, we expect G&A to trend down to approximately $9.5 million per quarter on a recurring cash basis for the remainder of 2016.
We are also reducing our capital forecast for the year, as we have pushed project cost lower than anticipated. We are now forecasting capital cost for full year 2016 of $55 million to $65 million versus initial guidance of $65 million to $75 million. As already mentioned today and on prior calls, our plan this year is to generate positive free cash flow, drive down cost, reduce debt and enhance liquidity.
Our entire workforce is focused on all of these drivers. And I want to thank each member of the Memorial team for your efforts and contributions. Following another successful quarter, I’m pleased to say that we remain on track to accomplish our goals for the year and we look forward to continuing to deliver positive results in future periods.
Now, Chris Cooper will walk you through our operating performance in greater detail. Chris?
Thank you, Bill. As previously mentioned, we delivered very strong operating results this quarter, especially with respect to cost and along with the sale of the Permian and non-core Rockies assets took positive steps to further improve the operating efficiency of our portfolio. The impact of which will be more fully realized in future quarters.
Production for the second quarter averaged approximately 231 million cubic feet equivalent per day, a decrease of 5% from the previous quarter and 7% lower than second quarter of 2015. Production for the quarter was in line with our expectations and included the impact of the annual 14-day turnaround at the Bairoil facility for maintenance and regulatory purposes, as well as the sale of the Permian asset in June.
Production guidance for the full-year 2016 has been adjusted to be between 215 and 230 cubic feet equivalent per day, primarily to reflect the divesture of the Permian and non-core Rockies assets as well as other production trends across the portfolio.
Lease operating expenses in the second quarter were $1.39 per Mcfe a decrease of 14% from the previous quarter and 30% lower than the second quarter of 2015. We are very pleased with the results of our ongoing cost reduction program, that included further service provider cost discounts, a reduction of compression facilities in East Texas, prudent management of discretional activities such as well workovers, better-than-expected performance of the saltwater disposal system in East Texas, and the sale of the higher-operating-cost Permian asset in June.
Lease operating cost guidance for the year has been adjusted to be between $1.55 per Mcfe and $1.65 per Mcfe to reflect asset sales as well as recent cost trends across the portfolio. This guidance implies slightly higher cost per Mcfe in the second-half of 2016, due to increased workover activity and the impact of declining production.
Gathering, processing and transportation charges in the second quarter were $0.42 per Mcfe, which is in line with expectations and flat from the first quarter. Our updated guidance assumes that this will remain flat through the remainder of 2016, but reducing our GP&T cost is an area of focus for the partnership and we hope to make material improvements in future periods.
Capital spending for the quarter was approximately $10 million compared to $24 million in the previous quarter, and $59 million in the second quarter of 2015. The bulk of the capital spend this quarter was associated with upgrades implemented during the Bairoil turnaround.
Current capital spending levels are reflective of prudent management of discretional projects and the current commodity price environment and our goal to maximize free cash flow. As Bill mentioned, capital cost guidance for the year has been reduced to be between $55 million and $65 million, which includes an $8 million contribution to the Beta decommissioning fund.
With that, I’ll now hand it off to Bobby Stillwell to walk you through our financials. Bobby?
Thank you, Chris. I’d like to start by summarizing some additional financial results for the quarter, followed by an update on our liquidity, hedge positions and updated guidance.
Net cash provided by operating activities was $79 million for the second quarter, a $2 million increase from the first quarter. Adjusted EBITDA for the second quarter was $84.1 million, which was a significant beat versus our previously announced annual guidance expectations and an increase of $2.8 million from the first quarter. The increase in net operating cash flow and adjusted EBITDA was largely a result of the previously discussed operating cost improvements.
G&A in the second quarter was $15.2 million, but included non-cash charges for bad debt expense or $1.6 million, transaction-related costs of $900,000 and non-cash charges of $2.5 million for unit-based compensation expenses. So that’s the recurring cash run rate of $10.2 million per quarter, in line with our annual guidance expectations.
As Bill previously stated, we expect to see that run rate total dollar figure trim down over the course of the year.
Now, moving on to a discussion of debt and liquidity, since year-end 2015 we’ve made great strides lowering total debt by $197 million. This has come through free cash flow generation, open market repurchases and asset divestitures. Lowering total debt remains a key focus and strategy for the partnership going forward. As we are able, we will continue to execute on open market repurchases of our high yield notes, whether it’d be through our ATM equity program or as the credit facility allows.
And as was the case with the recent divestitures, we will continue to evaluate further asset sales that are credit and liquidity enhancing. In regard to MEMP’s revolver debt, outstanding has fallen by $113 million since the year-end. As of July 29, our revolver balance currently sits at $723 million, leaving availability of $200 million after including the impact of $2.1 million in letters of credit.
Given the ongoing success for our cost control measures and our ability to continue to generate positive free cash flow in future periods, we believe that level of liquidity supports our strategy going forward.
Our next regulatory schedule borrowing base redetermination will occur later this fall. Last on the revolver, our credit facility matures in March 2018. We will be discussing extending this maturity with our credit banks later this year and likely into the first quarter of 2017.
I’ll also add that we are in compliance with all of our financial covenants and do not forecast as being an issue in the near-term, assuming strip pricing around current levels. We’ve also been actively reducing our senior unsecured notes and currently have $1.1 billion outstanding.
We’re able to retire approximately $84 million in second quarter with aggregate consideration of $41.5 million, applying a repurchase price of approximately 48% of par value. The senior note repurchases were partially funded by $1.7 million in sales of common units under MEMP’s at-the-market program with the balance of $39.8 million funded through the monetization of 2016 oil and NGL hedges.
Last on the senior unsecured notes, it’s important to remember that we do not have any maturities until 2021 and 2022.
Next, I’d like to discuss the potential for Cancellation of Debt Income or CODI for MEMP’s debt repurchases. Please note that we’re not tax advisors and you should consult your own tax professionals regarding your tax situation. CODI is generally the difference between the price we paid to repurchase debt and the price at which the debt was issued.
Since we are a partnership and each per unitholders are limited partners, this income will be included on our 2016 scheduled K-1s. The senior note repurchases completed year-to-date will generate approximately $41.7 million of CODI or $0.50 per unit. This CODI will be allocated to unitholders of record during the month in which repurchase is closed.
Please note this has $0.50 per unit of taxable income not $0.50 per unit of tax liability. We anticipate that most unitholder depending on when they purchased their units will have offsets to this taxable income driven by ordinary losses from operations generated this year along with taxable losses from our divestitures completed during the second quarter.
These divestitures because of the value at which they are carried on our balance sheet may create substantial tax yield at year end. That said, I would like to note that each individual unitholder does have a unique cost basis among the assets and depletion amount for the calculation of their specific ordinary income or loss each year.
Next, I’d like to talk about our hedging strategy and execution.
As you have heard from us many times, we have a tremendous asset in our hedge portfolio, which continues to play an integral role in MEMP’s strategy in this environment and at a recent mark-to-market value of approximately $524 million. On a percentage of total production hedged basis we remain approximately 70% to 95% hedged through 2018 and almost 60% hedged in 2019.
During the 2017 to 2019 time period, we are hedged on crude oil prices of approximately $85 per barrel and natural gas prices above $4. As I previously mentioned, MEMP recently liquidated certain crude oil NGL hedges primarily related to the assets we divested for the period July 2016 to December 2016 and utilize these proceeds to buyback senior notes.
It’s important to note, these near term hedges do not carry any value on our borrowing base due to the banks rolling off the first six months of production in their valuation. Subsequent to these transactions, MEMP partially re-hedged the oil volumes with swaps and puts for the same period.
The swap contracts were executed at strip pricing and cover approximately 2,000 barrels a day. The put contracts are at a floor price of $40 and also cover approximately 2,000 barrels a day. In addition, basis hedges related to the divested properties in 2016 and 2017 have been terminated and settled.
Additional detail relating to our hedge program is posted on our website under the Investor Relations section.
Due to our strong results in the first-half of 2016 and the recent asset divestitures, we’ve updated our full year 2016 guidance.
While production is lower due to the asset divestitures and development activity, our full-year cash flow remains strong. MEMP’s forecasted distributable cash flow less our anticipated distributions, we’re left with $127 million to $137 million of free cash flow available to reduce leverage. This is significantly higher than our initial guidance expectations and it’s driven by the substantial progress we’ve made in reducing MEMP’s cost structure.
Note that today’s updated full-year guidance includes actual results for the first-half of the year and our internal forecast for performance in the second half of the year. Wrapping up with strong and more focused asset base, the strong hedge portfolio, our continued gains in operational efficiencies and the cash flow forecast we’ve laid out today, we are optimistic that we are positioning ourselves for success through this downturn.
As John mentioned, we will continue to review all options at lower leverage and enhanced liquidity.
This concludes our formal remarks regarding MEMP’s second quarter 2016 earnings call. Thank you for your time. And operator, we’d now like to open up the line for any questions.
[Operator Instructions] Your first question comes from the line of Chad Mabry, your line is open.
Thanks, good morning. Congrats on a strong quarter and nice work on the debt buybacks this quarter. My question has to do with the…
…the ability to make any more progress on this initiatives. Bob, you touched on this, but just curious if you can share with us order of magnitude on the asset sales that you have left in the portfolio or maybe an update on the Beta bonding?
Absolutely. Hi, Chad, this is Bill. Well, first, let’s talk about divestitures. We mentioned we closed a couple in the quarter. Permian was a complete exit for us and we closed the non-core Rockies. These total proceeds from those transactions totaled $55 million. With respect to prospective divestitures as a result of the Permian exit, we are now on four basins.
From day one, asset rationalization has been part of our strategy. So that’s going to continue. But particularly in this environment asset sales; we look at asset sales in this rationalization, it must be credit and liquidity enhancing. So there is a filter there that we employ and we want to be thoughtful about the process. But as we work through the balance sheet issues, we’ll continue to consider additional divestitures with obviously a bias towards non-core assets.
I can’t guide you to number of divestitures, but that should probably help you with respective strategy.
Yes, that’s very helpful. And then, I guess, any updates on Beta? Is that still on the table of the bond funding?
Yes. It is. I think when you talk with Bobby and the team here, we’ve got $152 million funding obligation by year-end. We believe that there is an opportunity to issue surety bonds for some part of that obligation. But there are multiple parties involved. The couple of federal agencies, some predecessors entitled, the trustee of the account, so a lot of moving parts. But with that being said, we’re working hard and we hope to have this resolved by yearend.
And a follow-up, if I could, you touched on CapEx coming down a little bit. Anything specific, cutout of the budget, is that non-off or just any color there that you could add?
Really, just really being more judicious about the capital project, particularly workovers that we’ve undertaken this year, particularly in Q1 when prices were as low as they were, it really didn’t make sense to lock [ph] project, so fully driven by economics and being extremely judicious about discretional projects.
Yes, and just more clarity on that, the CapEx program has always been front-half weighted for the year.
All right, thanks, guys. That’s all I have.
Ladies and gentlemen, this brings us to the end of the Q&A portion. I’ll now turn the call back to the presenters for final remarks.
Thank you everybody for joining us on the call today. As always, please don’t hesitate to reach out to us if you have any further questions. We’re always available. Thank you.
Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.
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