Rice Energy (RICE) Q2 2017 Results - Earnings Call Transcript

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About: Rice Energy Inc (RICE)
by: SA Transcripts

Rice Energy, Inc. (NYSE:RICE) Q2 2017 Earnings Call August 3, 2017 10:00 AM ET

Executives

Julie E. Danvers - Rice Energy, Inc.

Daniel J. Rice IV - Rice Energy, Inc.

Grayson T. Lisenby - Rice Energy, Inc.

Toby Z. Rice - Rice Energy, Inc.

Operator

Good morning and welcome to Rice Energy's Second Quarter 2017 Earnings Conference Call. At this time, all participants will be in listen-only mode. 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 housekeeping items. Please go ahead.

Julie E. Danvers - Rice Energy, Inc.

Good morning, everyone, and thank you for joining Rice Energy's second quarter 2017 earnings 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 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 make references to certain non-GAAP financial measures. Reconciliations to applicable GAAP measures can also be found in our earnings release.

A couple of administrative items to cover, first, we will file our 10-Q this afternoon, which will be accessible through our website or the SEC's website, www.sec.gov. Second, as a reminder, the results for Rice Midstream Partners are consolidated in Rice's results. We will host RMP's earnings conference call at 10:30 AM Eastern today. To participate in the live webcast, please visit ricemidstream.com and a link will be available on the homepage.

Finally, in connection with our pending merger with EQT Corporation, we note that on July 27, 2017, EQT Corporation filed with the SEC a registration statement on Form S-4 and a joint proxy statement. These and other documents filed by Rice and EQT Corporation with the SEC may be obtained free of charge through the SEC's website, sec.gov. You should review such materials filed with the SEC carefully, as they include important information regarding the proposed transaction. This communication does not constitute an offer to sell or a solicitation of an offer to buy any securities or a solicitation of any vote or approval.

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. Momentarily, Gray will recap our financial results, and Toby will summarize our operating highlights for the quarter. Given the pending merger with EQT, we'll be keeping our comments brief and to the point, and restrictions around our ability to comment on the deal and the process ahead means that we won't be taking questions on this call.

Briefly on the merger, we have full confidence in the benefits this transaction provides and are fully committed to closing the deal in the expected timeframe, and delivering those benefits to our shareholders.

The combination of two of the United States' largest, lowest cost and most responsible natural gas producers will create an unparalleled leader in shale gas development and the largest U.S. natural gas producer. We believe that Rice and EQT together will realize significant operational synergies given the contiguous nature of our acreage positions in some of the most economic areas in the country.

We expect these resulting operational synergies of the combined company to include, among other things, meaningfully increase Marcellus lateral lengths, thereby significantly reducing per foot well cost and increasing returns in single well PV-10s. We're very excited about our future together with EQT and the benefit that the transaction provides.

So, with that, I'll turn it over to Gray.

Grayson T. Lisenby - Rice Energy, Inc.

Thanks, Danny. During the quarter, our net production averaged 1.35 Bcf per day, a 6% increase from first quarter 2017, driven by turning 25 net Marcellus and Utica wells online on or ahead of schedule.

From a pricing standpoint, we saw our Appalachian basis differentials widen during the quarter, resulting on pre-hedged realized price of $2.83 per Mcf, after deducting an average basis differential of $0.41.

On the expense side, we saw a significant improvement in lease operating expense, declining 30% from the first quarter to $0.14 per Mcfe. This was mainly due to a decrease in cost associated with the well rentals, labor and maintenance during the quarter. We generated strong second quarter adjusted EBITDAX of $230 million, with a healthy margin of 58%. As a reminder, we deduct midstream non-controlling interest related to the Strike Force and the RMP from adjusted EBITDAX.

We invested $243 million of E&P CapEx during the second quarter, including $190 million of drilling and completion capital and $53 million of organic leasing, primarily in the Marcellus. In addition, we invested $44 million through Rice Midstream Holdings focused on continued Strike Force build out. Our disciplined capital allocation and prudent financing helps maintain our strong balance sheet. We exited the quarter with $1.7 billion of E&P and RMH liquidity and low consolidated leverage of 1.5 times.

Shifting to RMH, second quarter gathering throughput averaged 1.18 million dekatherms per day, a 21% increase relative to the first quarter 2017. Third-party volumes, primarily Gulfport, accounted for 62% of total throughput.

Compression volumes declined 21% from the first quarter to 446,000 dekatherms per day due to optimizing Rice's firm transportation portfolio and utilizing less REKCS (5:39) capacity, which requires booster compression. Furthermore, we continue to think this asset is extremely valuable and our plans to drop the Ohio retained midstream assets are on pause until the merger closes.

Continuing with RMP, the partnership increased gathering throughput 10% from the prior quarter to 1.36 million dekatherms per day. RMP generated $56 million of adjusted EBITDA, with low 1.1 times leverage and $49 million of distributable cash flow, resulting in 1.68 times DCF coverage. RMP recently announced distribution increase to approximately $0.27 per unit, a 21% increase above the prior-year quarter.

In July, we completed an acquisition of 16,500 net acres in the Marcellus Shale core in Greene County, Pennsylvania and Monongalia and Wetzel counties, West Virginia for $180 million. This acquisition is highly complementary to our existing position, has an attractive lease profile of 86% NRI and approximately 97% is held in fee or expires beyond 2021. This acquisition furthers our strategy of consolidating Greene County to increase lateral lengths, working interest and NRIs ahead of long lateral development over the next few years.

In addition, we entered into a PSA to sell approximately 36,000 net Barnett Shale acres for $175 million. Included in the transaction is approximately 76 million cubic feet per day of second quarter net production. Proceeds from the sale will be used for general corporate purposes and the transaction is expected to close in the third quarter of 2017.

Yesterday, we updated our 2017 capital budget to reflect well costs continuing to trend below budget, and as a result, we decreased our D&C capital budget 7%, from $1.04 billion to $965 million. Additionally, we are increasing our land budget from $225 million to $245 million, due to continued success acquiring leasehold, primarily in Greene County, that extends laterals and reduces cost.

We also expect to spend an additional $115 million on royalty acquisition that lowers our cost structure and improves single well returns.

At RMH, we decreased our capital budget 5% from $315 million to $300 million, as capital projects are trending below budget relative to prior expectations. And in light of the pending merger with EQT, we have discontinued providing guidance and long-term outlook information regarding our results of operations.

With that, I will turn the call over to Toby to detail our operating results.

Toby Z. Rice - Rice Energy, Inc.

Thanks, Gray. Our operating teams continue to deliver best-in-class results and exceed our expectations in terms of cycle times, cost savings, and well productivity. The strength of our team and the sophistication of our development program was on full display in the second quarter, and I'd like to share some of the operational details.

To summarize the quarter, we turned all of our planned operated Marcellus and Utica wells to sales on or ahead of schedule and under budget. We reduced our operating costs and we've managed to lower our well costs in an inflationary service cost environment.

Starting with our Ohio Utica position in Belmont, during the quarter, we turned to sales 11 gross operated Utica wells with an average lateral length of 10,500 feet and average development cost of $1,105 per foot, which is 11% better than budget. Our Utica team has proven they are not done driving down cost.

Of note, in the first half of the year, we modified our drilling assembly, which resulted in a step-change improvement in cycle times. This new bottomhole assembly included a newly designed PDC bit and a larger, more powerful motor used in conjunction with the rotary steerable system. Using this new BHA, we established a new Rice Utica drilling record in the quarter by drilling a 13,700-foot lateral, our longest lateral to-date, which took only five days from kickoff point to total depth.

Turning to Marcellus, we successfully brought online a combo set of 19 wells that were part of our most ambitious development project to-date. Our combo development methodology applied to these wells represents what we believe is the future of development in the Appalachian Basin and is only achievable with a consolidated acreage position. I will cover some of the details.

These 19 wells, all drilled in parallel to one another across our four adjacent pads, had average lateral length of 9,200 feet and development cost of $805 per foot, which is 8% better than budget. All wells were part of a single development run, one of the largest ever completed in the Basin in which we drilled, completed and turned online all wells at the same time.

Because our teams were able to focus on a concentrated area for an extended period of time, we realized significant improvements from one well to the next, while also benefiting from a logistics and supply chain perspective. Because of this, our drilling team averaged three days from kickoff point to total depth for all wells, and our completion teams co-ordinated and pumped 100% of our planned sand volumes, roughly 330 million pounds, without issue for over 1,000 stages.

From a logistics standpoint, our Midstream team provided great service and delivered over 300 million gallons of fresh water to these four pads without issue. Lastly, our improved flowback and water handling procedures, significantly contributed to our reduced lease operating expenses during the quarter.

If we step back and look at the big picture, we simultaneously developed 175,000 horizontal feet for a cost of $135 million. We successfully deployed new proprietary geosteering and completion techniques, designed to maximize production from this type of large scale development. And the wells are currently producing at their designed restricted rates of 265 million gross cubic feet per day.

The wells are incredibly strong, and we believe will produce at those restricted rates into the fourth quarter of 2017. Preliminary EURs for this development run are in excess of 380 billion cubic feet, with an average F&D of $0.41 per Mcf, which is 9% lower than our 8,000-foot type curve.

We think megaprojects like this prove the economic rationale for consolidation. While Rice and EQT both have many pockets of acreage that allow for this type of development on a standalone basis, the combined assets unlock this type of large scale development across our entire Washington and Greene County positions, generating significant value. We think the combined company will be an unmatched powerhouse in the natural gas industry in terms of efficiency and scale.

Lastly, on the leasing front, we continue to successfully add organic acreage during the quarter to lengthen planned laterals, and we increased our core leasehold to 255,000 net acres. We also purchased royalties on 6,000 acres leased to Rice. Both leasehold and royalty additions are concentrated in Greene County, as part of the consolidation strategy with the Vantage acquisition. From a midstream perspective, the acquired Greene County acreage is automatically dedicated to RMP, pursuant to its gas gathering and compression and water services agreements.

With that, I will turn the call back over to Danny for closing remarks.

Daniel J. Rice IV - Rice Energy, Inc.

Thanks, Toby. In summary, we had an excellent quarter with strong results, driven by operational execution. We set new drilling records and completed our largest project to-date with meaningfully reduced development costs and operating expenses.

Furthermore, we completed two strategic transactions, furthering our strategy of consolidating Greene County and divesting non-core assets while maintaining a clean balance sheet. This strong momentum will carry us into the merger, which we expect to close in the fourth quarter 2017.

I'm extremely proud of our team and grateful for all that we have accomplished together on this journey. And it might sound crazy, but it ain't no lie, baby, bye, bye, bye. Thank you everyone for joining us today. This concludes today's call.

Operator

This concludes our conference call. Thank you for attending today's presentation. You may now disconnect.