Rice Energy (RICE) Q4 2016 Results - Earnings Call Transcript

| About: Rice Energy (RICE)

Rice Energy, Inc. (NYSE:RICE)

Q4 2016 Earnings Call

February 23, 2017 10:00 am ET

Executives

Julie E. Danvers - Rice Energy, Inc.

Daniel J. Rice IV - Rice Energy, Inc.

Toby Z. Rice - Rice Energy, Inc.

Grayson T. Lisenby - Rice Energy, Inc.

Robert R. Wingo - Rice Energy, Inc.

Analysts

Holly Barrett Stewart - Scotia Howard Weil

Gordon Douthat - Wells Fargo Securities LLC

Kyle Rhodes - RBC Capital Markets LLC

Operator

Good morning and welcome to Rice Energy's Fourth Quarter and Full Year 2016 Earnings Conference Call. At this time, all participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Julie Danvers, Director of Investor Relations, to cover a few housekeep items. Please go ahead.

Julie E. Danvers - Rice Energy, Inc.

Good morning, everyone, and thank you for participating in Rice Energy's fourth quarter and full year 2016 results conference call. With me today are Daniel Rice, CEO; Toby Rice, President and COO; Gray Lisenby, Senior Vice President and CFO; Derek Rice, EVP of Exploration; and Rob Wingo, Senior Vice President of Midstream and Marketing.

Before we begin, I'd like to remind you that our remarks including the answers to your questions contain forward-looking statements and we refer you to our earnings release for a detailed discussion of these forward-looking statements and the associated risks. In addition, during this call, we may make references to certain non-GAAP financial measures. Reconciliations to applicable GAAP measures can also be found in our earnings release.

A few administrative items to quickly cover. First, we have a new investor presentation available for download on our website, which we will reference during today's call. Second, we will file our 10-K with the SEC next week, which will be accessible through our website or the SEC's EDGAR system. Third, as a reminder, the results for Rice Midstream Partners are consolidated in Rice's results. We will host RMP's earnings conference call at 11:00 AM Eastern today. To participate in the live webcast, please visit www.ricemidstream.com and a link will be available on our homepage.

Lastly, we'll be participating in the upcoming Scotia Howard Weil Energy Conference and look forward to seeing everyone in New Orleans.

I would now like to turn the call over to Daniel Rice, IV, CEO of Rice Energy.

Daniel J. Rice IV - Rice Energy, Inc.

Thanks, Julie, and good morning, everyone. Toby and Gray will cover our operational and financial results for the fourth quarter and full year 2016, but I would like to first cover our 2016 reserves, provide an update on our Vantage integration, and wrap up my comments with our strategic positioning for 2017 and beyond.

First, as you all saw in last night's press release, total proved reserves increased by 136% to 4 Tcf, of which approximately 1.4 Tcf in reserve additions came through the drill-bit and 911 Bcf were acquired net of revisions, primarily in connection with the Vantage transaction. Reserves were 54% proved developed with $2.2 billion PV-10 at strip pricing.

Couple other things to note, we recognized positive performance revisions for both producing wells and PUD type curves. For these PUD locations, development costs are estimated to be $0.58 per Mcf, which is consistent with our 2017 CapEx budget. We've grown reserves at a pretty healthy clip over the last two years and 92% of our mapped core Marcellus and Utica locations aren't yet classified as proved, which gives us excellent visibility towards continued best-in-class reserves growth for many years to come.

Turning to the Vantage acquisition, integration of the Marcellus assets has progressed better than expected and has been complete for some time now. We've hit the ground running on the operations side and we have been able to meaningfully increase our asset value by extending lateral lengths of our planned 2017 wells from 5,900 feet to over 8,000 feet.

Just very briefly on the macro fundamentals in the context of the Vantage transaction, one of the appealing factors of Vantage's assets is the absence of any firm transportation arrangements in order for Rice to benefit more so from a pending improvement and local basis differentials. Just to put some numbers to it. Since we acquired Vantage, Appalachian basis differentials have improved $0.60 per Mcf in 2017 and $0.30 per Mcf in 2018. And longer term, in the last few weeks, several large and important out-of-basin pipeline projects received federal approval to begin construction, which provide greater certainty in long-term basis improvements.

So post-Vantage, we control the most core undeveloped dry gas acreage in the basin and on the midstream side, we have more of this core dry gas acreage dedicated to RMH and RMP. So looking ahead, our goal is to maximize value and minimize risk and we think we've done a great job consistently executing on a strategy that best meets these goals over the long-term. Our wells generate strip returns of approximately 95% in the core and we've completely de-risked our acreage position which we've been drilling in full development mode since 2014. With our inventory of roughly 1,100 identified core locations, we have an incredibly high degree of confidence for how much gas each well will produce, what it will cost to develop and when these wells will begin producing.

This certainty in future performance gives us much greater accuracy in our capital budgeting and ensures the appropriateness with our financial structuring. The output of investing in our low-risk high-returning inventory is a high degree of certainty in achieving production growth in excess of 2 Bcf a day in 2019, within cash flow neutrality and leverage under 2 times. This growth isn't predicated on improving gas price or local basis environment that's improving because we've protected the story through 2019 and beyond with one of the largest natural gas hedge books in the industry.

Through 2019, on average we have approximately 60% of our gas hedged, providing stability in a range of gas price scenarios. Our CapEx is protected with 60% of our anticipated service costs locked in for the next 12 to 24 months. And our embedded midstream value is significant, with a $2.5 billion to $3.2 billion of estimated potential value, which includes our GP that is owned by Rice Energy. In short, we believe Rice is not only incredibly unique on the return side of the equation with robust production, cash flow and midstream value, but also on the risk side with our 100% core de-risked acreage, service contracts locked in and leverage below 2 times.

So with that, I'll turn it over to Toby to cover a few of our operational achievements during the year.

Toby Z. Rice - Rice Energy, Inc.

Thanks, Danny. Our E&P team delivered another superb quarter with all projects completed safely, on time and on or under budget. In the Marcellus, our 2016 development costs averaged $800 per foot, which was 30% below our original budget. Approximately half of the reductions were efficiency based, including a 70% reduction in horizontal drilling cycle times per rig, a 50% increase in stages completed and the balance of cost reductions resulted from a favorable service price environment. Fourth quarter D&C costs were $775 per foot for 9,500-foot laterals. Looking forward to 2017, our planned 9,500-foot laterals are budgeted at $825 per foot, around a 6% increase when you normalize for lateral length. On average, we expect to drill 8,500-foot laterals in the Marcellus for an average cost of $875 per foot.

In the Utica, our 2016 development costs averaged $1,205 per foot, which was 17% below our original budget. Similar to the Marcellus, half of our cost savings were efficiency driven and half were from decrease in oilfield service costs. We continue to drill some of the longest, most productive and certainly the most consistent repeatable Utica wells in the game.

Fourth quarter D&C costs were $1,100 per foot for 11,000-foot laterals. Full year 2016 laterals were an average of $1,205 per lateral foot. Looking forward to 2017, our planned 10,500-foot laterals are budgeted at $1,235 per foot. Our budgeted well cost is driven by higher anticipated hedged and unhedged service costs.

In both areas, we think our budgeted costs appropriately reflects both the certainty we've gained by hedging 60% of our expected service costs and our remaining exposure to a rising service price environment. We're confident in our ability to execute this plan highlighted by our track record. We are planning to spud 105 wells in 2017 and will turn approximately 80 wells to sales over the course of the year.

To achieve this activity, we've locked in most of our critical services for 2017, which includes three top-hole rigs, four horizontal rigs, three frac spreads. And as you may have seen, we entered into a purchase agreement to procure 80% of our sand needs through 2019 at prices favorable to the spot market today. In totality, we have roughly 60% of our oilfield services locked in for 2017 and we expect to continue adding services on a rolling basis over time.

Our 2016 lease operating expense averaged $0.17 per Mcf, which is 25% lower than our 2015 rate and marks our sixth consecutive year of LOE reductions. Our LOE improvements are the direct result of two things: first, it's spreading a fixed cost element over a larger production base and second, it's a reduction in our variable operating cost, as a result of economies of scale and improving operating efficiencies.

While our current LOE costs are in line with our larger peers in the basin, we expect to become the lowest cost Appalachia operator in the coming years for a couple of reasons. First, our production growth is occurring in the same concentrated production areas as our historical wells, which allows us to leverage our existing teams and service provider relationships in these two areas. Second, we've invested heavily in smart technologies that allow us to more intelligently manage our production, including remote management and digital surveillance.

Turning to lands, in 2016 we added approximately 100,000 net acres in the dry gas core, which we believe to be more economic acreage added than any of our peers. Approximately 85,000 acres came from the Vantage transaction and the remaining 15,000 acres came from leasehold acquisitions. Of note, we increased our Appalachian acreage in the fourth quarter by 13,000 acres bringing our total counts at year end 2016 to 248,000 net acres. And the land team continues to have success leasing in each of our three focused areas of Belmont, Washington and Greene.

And most notably, since closing the Vantage acquisition, we've picked up 4,000 acres at an average cost of around $5,000 per acre and continue to have excellent momentum heading into 2017. Our land team's primary focus is to add acreage to extend the lateral lengths of planned development and enhance our net revenue interest across these units.

I will now turn the call over to Gray to discuss fourth quarter financial results.

Grayson T. Lisenby - Rice Energy, Inc.

Thanks, Toby. Jumping right in, I will cover three topics; our 2016 results, 2017 guidance and our outlook on how Rice is positioned to continue generating peer-leading value. First on 2016 results.

During the fourth quarter, we turned to sales 18 net wells and our net production averaged 1,145 million cubic feet per day. This strong fourth quarter production was primarily driven by turning wells online ahead of schedule and seamlessly integrating the Vantage assets into our portfolio. The Marcellus accounted 61% of our portfolio production and 32% was from the Utica. Full year 2016 net production averaged 831 million cubic feet per day, which was 4% above the high end of our 2016 guidance range. Our hedge book continues to enhance our revenue structure with fourth quarter post-hedged realized price of $2.75 per Mcf compared to a pre-hedged price of $2.42 per Mcf.

We generated fourth quarter adjusted EBITDAX of $202 million which was a 53% increase over fourth quarter 2015 with a strong adjusted EBITDAX margin of 71%. During 2016, we generated a EBITDAX of $576 million.

Fourth quarter CapEx totaled $234 million, comprised of $159 million in drilling and completion, $4 million in non-op activity, $38 million in land and $33 million at Rice Midstream Holdings. Full year 2016 CapEx was 10% better than guidance, totaling $791 million, with the combination of $504 million in drilling and completion, $67 million in non-operated activity, $115 million in land and $105 million at Rice Midstream Holdings.

Looking at our year-end 2016 balance sheet, we exited the year at 1.5 times leverage with $1.9 billion of liquidity excluding RMP. In December, the upstream borrowing base was increased to $1.45 billion, which represents a $450 million increase from Q3, primarily from incorporating the Vantage assets.

Shifting to Rice Midstream Holdings. We delivered 904,000 dekatherms per day of throughput during the fourth quarter, a 180% increase over the prior year quarter and an 11% increase relative to third quarter 2016. Third party volumes, primarily Gulfport, accounted for 59% of total throughput. During 2016, we delivered 708,000 dekatherms per day of throughput.

At RMP, the partnership had a strong quarter of approximately $46 million of EBITDA and 1.58 times DCF coverage. The quarter was driven by higher water volumes due to accelerated Rice water services activity. RMP recently announced a distribution increase to approximately $0.25 per unit, a 6% increase over the third quarter 2016 and 27% over prior year quarter.

On a combined basis, RMH and RMP have dedications totaling 377,000 acres, with approximately 40% from third parties. These dedications are in some of the most active counties in the core of Appalachia and we believe the development of these dedications today position RMP as the highest growth dry gas gathering system in the country.

Comparing our full year results to guidance, we did an excellent job executing across all fronts. Our production was 4% above the high-end of our guidance. LOE, gathering and transportation and G&A all came in at or below guidance. Our CapEx was 10% lower than guidance as a result of well cost decreasing 25% relative to guidance.

Our teams hit it out of the park in terms of improving efficiencies and debundling our services to take full advantage of a low service cost environment. Our acreage increased by 100,000 net acres in three of the top four dry gas counties in the country. 2016 was truly a transformative year and we are excited to build on that success in 2017.

With another year of operating history under our belt, we've once again updated our economic assumptions for our Marcellus and Utica assets, as highlighted on slide 47 of the presentation. Total undeveloped horizontal footage increased by 72% to 7.4 million net horizontal feet. Marcellus lateral lengths increased 14% to 8,000 feet, while Utica laterals remained unchanged at 9,000 feet per well. Marcellus well costs decreased 24% and Utica well costs have decreased 15%. And lastly, our all-in operating costs have declined by 12%.

Turning to 2017 guidance, I'll talk through the figures for Rice E&P, RMH and lastly touch on RMP. Our budgets exclude any potential uplift from dropdowns and assume a 15% increase in oilfield service prices. Our 2017 estimated E&P capital budget of approximately $1.3 billion is comprised of $1 billion in drilling and completion and $225 million in land. The D&C budget is two-thirds focused on the Marcellus and one-third Utica.

Our maintenance CapEx holds Q4 2016 production flat through 2018 and beyond as $400 million, and the remaining $635 million drives growth in 2017 and 2018. Our land budget of $225 million is 60% adding new acreage and 40% holding and extending leases. As we've previously discussed, we expect 2017 to be our most significant year of lease extensions and renewals, primarily in Ohio, and will be lower going forward.

Our 2017 estimated revenue is well protected with 90% of our production hedged at an average NYMEX floor of $3.24. At strip pricing, we expect our basis to be $0.40; our production guidance is 1,290 million to 1,355 million cubic feet per day, with 58% reported growth over 2015. Our LOE plus gathering and transportation cost and production taxes are $0.90 to $0.98 per Mcfe. We expect E&P to exit 2017 below 2 times leverage.

At RMH, net of our ownership interest, our capital budget is $315 million and adjusted EBITDA is $90 million, doubling over 2016. The majority of the budget will be focused on building our midstream joint venture with Gulfport, Strike Force Midstream. 75% of the budget is building out trunklines and compression at attractive build multiples of 5 times to 6 times, which drives 2018 EBITDA and beyond.

At RMP, our capital budget of $315 million and adjusted EBITDA is $185 million to $200 million. We expect to grow distributions 20% with 1.35 times to 1.45 times coverage, and exit leverage below 2 times. RMP expects to continue growing distributions 20% through 2023.

In summary, I would echo Danny's previous comments that we believe Rice is positioned to deliver differentiated risk-adjusted growth and returns because of our 100% core acreage, significant production growth in 2017 and beyond, leading edge technical expertise and well results, disciplined hedge position, significant embedded midstream value and sub 2 times leverage. These attributes are unmatched versus our Appalachian peers and even the broader E&P industry. Our entrepreneurial ownership culture and core values of seeking excellence, team work, innovation and stewardship guide all that we do.

We appreciate your time this morning, our shareholder support and our hungry to drive value in the future. Operator?

Question-and-Answer Session

Operator

Thank you. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue. At this time, we will pause momentarily to assemble our roster. And our first question will come from Holly Stewart of Scotia Howard Weil.

Holly Barrett Stewart - Scotia Howard Weil

Good morning, gentlemen and Julie. Maybe just kind of starting off high level. Danny, I think you've been fairly vocal on Rice's view of narrowing differentials and less FT over the long-term, you highlighted a lot better differentials for 2017 and 2018 that you're seeing in the market since the acquisition was announced. So maybe just high level, is there anything on the macro side that you could see out there that would prolong this kind of thesis or changes for you right now?

Daniel J. Rice IV - Rice Energy, Inc.

No, I think we're still pretty darn comfortable with kind of how we see basis improving over time. And I think for us it's probably less on where the differentials go and more of it's inevitable that you guys see our production growing beyond 2 Bcf a day. It really becomes a matter of, you see a point where you're going to want to step up as a company, take on more FT. And I think kind of our inclination was no, we don't really want to commit to another 10 years or 15 years of long-term FT that is $0.50, $0.60, $0.70 an Mcf, because we see differentials improving markedly within that. And so, we are starting to see that happen, and I think directionally I think we're going to continue to see that happen as more of these pipeline projects get approved at the federal level. That certainly just provide a lot more certainty around when that basis really starts to improve in 2018, 2019 and beyond. So we're pretty happy with how things have really transpired post-Vantage.

Holly Barrett Stewart - Scotia Howard Weil

Perfect. Great. And then just on the leasehold side, there was a bump in the guidance for leasehold spending. Can you just talk about maybe what you're seeing there on the leasehold side and then maybe a good rate kind of on a go-forward?

Toby Z. Rice - Rice Energy, Inc.

Sure. This is Toby. Post-Vantage acquisition that gave us a lot of good opportunities for us on the ground. And our land team has had a lot of great success picking up those opportunities. So we're just trying to keep up with the acreages they're grabbing. So the pace of what they lease this year is over 4,000 acres in Greene County. The budget that we've set allows them to keep pace, because everything they're picking up is the most valuable acreage we can grab, which is add-on leases that extend laterals. And as far as pricing is concerned, there we're having success in the $4,000 to $6,000 an acre range, averaging around $5,000 per acre.

Holly Barrett Stewart - Scotia Howard Weil

And then maybe just thoughts on a run-rate going forward?

Toby Z. Rice - Rice Energy, Inc.

Yeah, I mean we think the pace that we're leasing is probably going to lead us to hopefully 15,000 acres in 2017 on the ground.

Holly Barrett Stewart - Scotia Howard Weil

Perfect. And then maybe just throw this out there for Rob, because there's obviously a lot of questions out there around Rover. It looks like they filed a few days back for an expedited notice to proceed. Haven't seen anything in terms of them getting that, so any color or any comments you could provide on Rover?

Robert R. Wingo - Rice Energy, Inc.

Not really anything additional other than what they've already told the public. I would say, though, that they're saying that mid this year for phase 1, and I think we're probably expecting by end of year. So we're a little less optimistic about the in-service date than they are.

Holly Barrett Stewart - Scotia Howard Weil

Okay. That's perfect. Thanks, guys.

Daniel J. Rice IV - Rice Energy, Inc.

Thanks, Holly.

Operator

And the next question comes from Gordon Douthat of Wells Fargo.

Gordon Douthat - Wells Fargo Securities LLC

Thanks. Good morning, everybody. Just another question on leasehold. And Toby, I think you just mentioned targeting about 15,000 net acres from on the ground leasing this year, which if I did my math correctly on the spacing assumptions you laid out, that more than replaces kind of what you had planned to drill, or at least spud this year in the Marcellus. So my question is, are there opportunities out there to kind of replace what you have on a go-forward basis beyond 2017? And how do you feel about your inventory life as it stands right now?

Toby Z. Rice - Rice Energy, Inc.

Yeah, I'll just say that the opportunity that we're doing, I mean we're pretty optimistic with our units and our ability to drill these long laterals. A lot of the leasing that we're doing is increasing our NRI in those existing units and that's just filling in the holes within those units. And the second part of your question was?

Gordon Douthat - Wells Fargo Securities LLC

Just the opportunity to replace what you drill on a yearly basis out there?

Toby Z. Rice - Rice Energy, Inc.

Yes. And right now, I think that we still see a lot of runway in front of us. When we went public a few years ago, the goal was max out at 150,000 acres and here we are today with 248,000 acres. So it's nice that the larger we get, the more success we have on leasing leads to more opportunities. And I mean, we're just focused on picking up those opportunities that are in front of us today.

Gordon Douthat - Wells Fargo Securities LLC

All right. Good to hear. And then my follow-up question is just on the midstream side, as far as the GP goes, and the overall valuation, you laid it out pretty clearly on slide 29. And just wanted to get a sense on strategically, how you're looking at that valuation, and anything you're looking at from a structural standpoint to perhaps bring forward that value, what options you might be looking at?

Grayson T. Lisenby - Rice Energy, Inc.

Hey, Gordon, this is Gray. I think the page lays out sort of the three levers of value between IDRs, LPs and drop downs and we'll just evaluate the markets as we go forward. And I think we have a track record of doing what we think makes sense that maximize shareholder value. I think that those three levers of value are very real and feel highly confident in being able to deliver what's on that slide. And so, we're pretty excited. We think it's a really big part of our story when you think about our enterprise value today at just over $6 billion, and there is about $3 billion of midstream value on that page. So it's something we're looking forward to continue to deliver on as we have so far.

Gordon Douthat - Wells Fargo Securities LLC

All right. Thanks for the color.

Grayson T. Lisenby - Rice Energy, Inc.

Thanks, Gordon.

Operator

And our next question will come from Kyle Rhodes of RBC Capital Markets.

Kyle Rhodes - RBC Capital Markets LLC

Hey. Good morning, guys. Maybe just one for Toby. I think you had mentioned mineral acquisitions as part of your 2017 land budget. Just curious what the size of that opportunity set is and maybe remind me what your current average royalty rate is for the Marcellus and the Utica? Thanks.

Toby Z. Rice - Rice Energy, Inc.

So current burdens right now in the Marcellus is 17% and in the Utica, I think, it's closer to 20%. As far as minerals, I think, we approach these on a deal by deal basis, sometimes it makes a little bit more sense instead of just doing a lease to pay a few thousand dollars acre more to acquire the minerals. Our focus, like I said before, for the land team is to increase our NRI in existing units. Two ways to do that, acquire working interest through leasing and acquire minerals in those leases. So that's sort of the game plan, but it's tough for me to say exactly what the size of that opportunity is. It's a case-by-case basis for us.

Kyle Rhodes - RBC Capital Markets LLC

Got it. I appreciate the color. Thanks.

Operator

I'm showing no further questions. This will conclude the question-and-answer session. I would like to turn the conference back over to Daniel Rice for any closing remarks.

Daniel J. Rice IV - Rice Energy, Inc.

Thanks, everybody, for joining us on this call. We have the RMP call in a couple of minutes, and we hope you all can join us. And if not, we hope to see you all at the Howard Weil Conference at the end of March. Have a good day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Oil & Gas Drilling & Exploration,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.