PetroQuest Energy Inc. (NYSE:PQ) Q4 2017 Earnings Conference Call March 6, 2018 9:30 AM ET
Matt Quantz - Manager, Investor Relations
Charles Goodson - Chairman, Chief Executive Officer and President
Bond Clement - Chief Financial Officer
Art Mixon - Executive Vice President, Operations and Production
Ron Mills - Johnson Rice
John White - Roth Capital
John Aschenbeck - Seaport Global
Good day and welcome to the PetroQuest Energy Inc. Fourth Quarter 2017 and Year End Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Manager of Investor Relations, Matt Quantz. Please go ahead.
Thank you. Good morning, everyone. We would like to welcome you to our fourth quarter and year end conference call and webcast. Participating with me today on the call are Charles Goodson, Chairman, CEO and President; Bond Clement, CFO; and Art Mixon, EVP of Operations and Production.
Before we get started, we would like to make our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made today regarding PetroQuest’s business, which are not historical facts or forward-looking statements that involve risks and uncertainties. For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors on our annual and quarterly SEC filings and in the forward-looking statements in our press release. We assume no obligation to update our forward-looking statements.
Please also note that on today’s call, we will be referring to non-GAAP financial measures, including discretionary cash flow. Historical non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release included in our Form 8-K filed with the SEC.
With that, Charlie will get it started with an overview of the quarter.
Good morning. During the fourth quarter, we produced 8.6 Bcfe or approximately 93 million cubic feet of gas equivalent per day. The 93 million cubic equivalent per day was comprised of approximately 69 million cubic feet of gas, 1,800 barrels of oil and 2,100 barrels of NGLs. We posted sequential production growth of 15% and our fourth quarter volumes represented 85% increase over our 2016 fourth quarter average daily production rate of 50 million cubic feet equivalent per day. We doubled our production profile from the fourth quarter of 2016 was one of our main 2017 corporate goals. This increased production profile resulted in significant EBITDA growth culminating with our fourth quarter EBITDA of $18 million, which surpassed our EBITDA for the entire year of 2016. These accomplishments are something that we are very proud of especially considering we posted these metrics, while more or less keeping CapEx in line with cash flow if excluding the Austin Chalk acquisition cost, it’s unfortunate the equity market seemed to overlook this outstanding performance, but everyone that participated in last year’s program should see a less sense of pride for their outstanding work. I would like to take this opportunity to congratulate and to thank our Board of Directors, the employees and contractors for tremendous year.
Another significant accomplishment occurred in the end of 2017 with our entry into the emerging Louisiana, Austin Chalk trends. This reemerging world play now stretches across the entire central section of Louisiana encompassing at least 8 parishes. Several premier large cap operators and a number of very experienced private independents have established substantial leasehold positions. PetroQuest, as an early mover in this trend, was able to secure approximately 25,000 acres in what we believe will ultimately be determined as the core of the highest oil concentrated portion of the trend.
Stated another way, as you move from East Texas into the simple part of Louisiana, where our acreage is located, the gas oil ratio moves from under 50% to over 80%. The Austin Chalk in Louisiana has had several peers at development, where the initial program consisting of conventional vertical wells taken place in the 1970s and 1980s. Success during this period was entirely dependent on encountering natural fractures, which obviously had a high degree of variability with vertical wellbores. The next phase occurred in the mid to late 1990s with two primary groups dominating the trend. UPRC aligned with BP Amoco and Chesapeake pushing the technical limits of early horizontal drilling. Again, success during this phase was contingent upon encountering natural fractures albeit the odds of this occurring increased substantially with the horizontal well versus our vertical well. Some vertical wells that encountered significant natural factures produced 350,000 to 500,000 barrels of oil and some early stage unfracked horizontals produced 400,000 to 650,000 barrels of oil illustrating the variability of unfracked horizontal wells. The EURs for all wells in our focus area averaged only 150,000 barrels of oil, again illustrating the variability of unfracked wells.
Low commodity prices coupled with variable results ultimately resulted in activity seizing about the end of 1990. The third phase of development took place in 2010 and 2011 with a couple of operators once again targeting natural fractures with horizontal wells which again due to the lack of fracking resulted in marginal success. So what’s different from this time around, it’s the same thing that revitalized other unconventional fields that previously had limited success, horizontal wells targeting specific zones in modern and multistage fracking. The prior attempts to develop Louisiana Austin Chalk never incorporated fracking into the completion design. To see the significant improvement fracking had on this formation one should study the initial EOG Eagle Ranch well in Golf Course. This well began far back on September 11, 2017 and according to state production data it has schemed approximately 80,000 barrels of oil as of December 31, 2017.
What highlights the dramatic impact fracking had on the Eagles Ranch well is that the toe is located only approximately 1,200 feet from the heel of the Dominique well, which was completed without a frac by Anadarko in 2010 and cumulated only 14,000 barrels of oil, that’s a 5x uplift in production in just a little over three months. We believe that when fracking is applied to this formation and a Matrix porosity has the opportunity to contribute along with the natural fractures. This completely changes the performance of this formation. This is why we and others are guardedly optimistic about the future development this time around. We are currently in a permitting process of our initial well and expect to commence the location build-out in the next few months. Our current plans called for our initial well to spread in the second quarter of 2018. While very early, we feel the significant activity will occur as a result of the enormous leasing activity across Louisiana should result in a number of new data points relatively soon. All of which will come very experienced companies that points state-of-the-art technology.
Well, that is the significant transaction happened at the end of January with the divestiture of our Gulf of Mexico assets. As a result of this sale, we eliminated approximately $35 million of undiscounted abandonment liabilities from our long-term obligations and expect to receive approximately $10.7 million in cash related to a deposit to our account that served to collateralize a portion of our offshore bonds. This is comprised of the $8.3 million current asset on our 2000 – 12/31/17 balance sheet plus additional deposits made since year end. $3.75 million of deposit proceeds that we received will be paid to the buyer as consideration for our future abandonment costs. With this divestiture our production reserves are now derived from assets located onshore in Louisiana and Texas.
Now turning to our operations in East Texas where we recently announced two new Cotton Valley wells PQ #29 and PQ #30. These were two that were carried over from our 2017 drilling program. In total, these wells achieved an initial 24-hour gross production rate of approximately 27 million cubic feet equivalent per day. Our PQ #29 and #30 wells were completed in the Eberry bench and posted off-peak 24-hour rates of 15.4 million and 11.5 million cubic feet equivalent per day respectively. On the cost side of the equation these wells averaged $887 per lateral foot establishing a new low cost threshold for our development activity. We continue to evaluate various joint venture structures in connection with the planning of our 2018 Cotton Valley drilling program. At the end of the first quarter of 2018 joint venture partners had now funded all buy-in costs and will be our development partners for life of the project.
A few comments regarding the results, on a well level return on invested capital basis, first you return to approximately 22% when backing our costs for the last five wells, it didn’t contributed significantly to the 2017 program. Those returns increased to over 40%. This certainly indicates the beginning a successful program. We are now in a position again putting in place a partner group for joint venture number two. Since we are actively engaged in these discussions and I respectively request that you will have some [ph] questions on this topic during our Q&A. Lastly, touching on Thunder Bayou where the well continues to flow at approximately 60 million cubic feet equivalent per day. Since the well was recompleted into the upper section of the Cris R2 sand in late February, it has schemed over 20 Bcfe and over $24 million of field level cash flow has been generated net to PetroQuest.
With that I will turn it over to Bond.
Hi. Thanks Charlie. As he mentioned last year was noteworthy in terms of our operational and financial execution. We achieve nearly every internal corporate goal, I would also like to take this time to echo his appreciation to the Board, the employees and all the others involved for tremendous job last year. Looking at CapEx for the quarter, we have met about $11 million net. The breakout of the spend is about 8.2 million of direct CapEx and about $2.8 million of capitalized overhead interest. It’s worth pointing out that netted against our direct CapEx for the quarter was about a $5 million non-cash credit that represented a revision to the way we estimated abandonment costs.
In addition, approximately $3.1 million of the spend for the quarter was in the form of 2 million shares of stock that we issued as part of the consideration for the Austin Chalk acquisition. On a yearly basis, net of approximately $10 million in cash proceeds received from asset sales, CapEx totaled about $49 million or $54 million if you add back that non-cash P&A revision I spoke about and that’s versus a cash flow number of about $51 million. So even considering the $12.6 million associated with the Austin Chalk acquisition which does include the value of the shares issued, we were able to keep CapEx closely aligned with cash flow and non-core asset sale proceeds which has been a long-standing goal for the company. With the various joint venture structures that are currently being evaluated, we are going to defer posting our CapEx guidance until the first quarter of earnings sometime in May as we are able get those all of those options understood more fully.
Looking at expenses for the quarter, LOE totaled $10.1 million or $1.18 per Mcfe, slightly higher than our ball – guidance range due to some GOM LOE that came to see us in the fourth quarter. We are reducing however our fourth quarter per unit LOE guidance ranges – excuse me, our first quarter per unit LOE guidance range to $1 to $1.10 per M to account the divestiture of the Gulf of Mexico properties which carried high LOE burden. Just to put it in perspective Gulf of Mexico LOE during 2017 was about $15.3 million in total and roughly $2 per Mcfe. So obviously this sale on a go-forward basis is going to be very beneficial to our lifting costs.
G&A costs for the fourth quarter totaled $5.1 million, which was above our guidance range due primarily to certain year end incentive compensation accruals. For the first regarding G&A back down to our traditional 3.4 to 3.9 range. Interest expense for the quarter totaled $7.1 million which was within our guidance range for the first quarter of keeping our interest guidance at $7.3 million to $7.5 million of which we are forecasting about $3 million of that to be non-cash peak interest. In February of this year we exercised the final PIK option under our 2021 PIK notes. And going forward the interest payments will revert to 10% cash beginning in August. Finally on hedging front, we have about 3Bs per day hedged for the first quarter on gas at an average full of 324 and for the year about 250 barrels per day hedged on oil and $55 per barrel.
With that I will turn back over to Charles.
Thanks. We are very satisfied with our performance as a company in 2017. The Cotton Valley well performance was solid and all the metrics proving we can deliver growth on a very consistent basis. On the other hand selling the Gulf of Mexico half floor rate short oil reduction and curtailing our Cotton Valley drilling program after third quarter of 2017 will result in production clients as we begin 2017. After nearly doubling production in 2017, we determine that a deferral drilling for a short period of time to utilize cash flow to require sizable core acreage position in the emerging Louisiana Austin Chalk trend was a prudent move. This asset is in our backyard and we expect it to provide all balance to our gas portfolio. By mid-2018, we expect to be active again in both areas with a more balanced production mix.
With that we will open it up for questions.
[Operator Instructions] The first question comes from Ron Mills of Johnson Rice. Please go ahead.
Hi, guys. Just in East Texas, absent a capital outlook provided, what should we think about activities that are there in terms of drilling and completion and as you think about your acreage position, would most of that still be focused on your 100% acreage on the eastern side of your position?
Yes, Ron, this is Bond. Likely, most of the drilling in 2018 as we look out now is going to occur on the, what we call the JV acreage, which is currently owned 75% by PQ. As Charlie mentioned, our initial JV, they completed the fourth and final buy-in payments, so that they have now earned their interest in that yellow acreage. In terms of timing, it’s hard to say right now we feel like we will have a lot more clarity as we get closer to 1Q earnings, which would be sometime in early May. Obviously, we are working as fast as we can. I think the GOM sale certainly slowed down our effort as we had to kind of refocus on getting that one across the goal line, but we are moving as fast as we can to get rig back out in the field.
Yes. And to answer your question, there are really – there are two points in the development, one, the 100% acreage which is right now we feel like we have an additional 92 locations targeted there and then when you move over to the more larger actually joint venture area with Chevron, again, it’s based on our working with them. And as you know, they are developing some deeper painful production too. So, we are talking about when we want to drill, we have a number of wells kind of slated for later in the year. Fortunately for both of us, virtually everything is held by production and so that’s kind of where we shipped right now.
Okay, great. And I think in the recent presentation, I think you said one of the recent conferences you at least put out cartoons of acreage position seem to be surrounded by EOG and [indiscernible] in Louisiana Chalk. Just provide a – just had a curiosity I know EOG has brought one well on. What does it look like from a permitting standpoint, from a lease standpoint, are people more on the clock than you are where we should start seeing an increased activity in Louisiana Chalk just given the new nature of this go around?
Well, I think there is another well drilling kind of north, west of where we are, I think it’s a reentry by private equity backed company. We have heard of several other locations west of us. Landowners have indicated they are getting activity from operators each of us, but I think it’s really incumbent upon others to really recall we haven’t seen any physical permits, but you would imagine that anybody that’s going to get out there is going to want to have a number wells slated and that takes time, because this thing as we all know really only started in September with the success of Eagles Ranch well. And so bear in mind that moving a rig into this part, where we don’t have a lot of infrastructure in place from the standpoint of fracking and things like that. It’s going to take a little time. We know that and that’s a region we put together, acreage, we can operate ourselves, the four blocks we have, as we said in the call, we are targeting starting location in the second quarter and targeting a well later this year to begin. And again, you don’t really want to bring a rig in there and just drill one well and move it out, because of the logistical costs. So, I think it’s a great question, Ron. And all we can say is, is that from a leasing standpoint, there has been a huge amount of activity and we, because it’s in our backyard and we have had a lot of other things going on in Louisiana, there is a lot of activity, a lot of money being paid and has been paid. So, I think that – that you are going to see as the year goes on, you are going to see more clarity to that activity.
And then last from me on Louisiana Chalk, you got in fairly early with what seemed to be an attractive leasing cost of $800 an acre or something if I did the math right a couple of months ago. You talk about increased leasing activity. What is the current market out there for leases or what if some of the recent transactions gone for?
Well, I think it’s pretty competitive out there. And I think there is – as we described there is things going on north of the Cretaceous shelf edge, which is one world and then there is acreage south of Cretaceous shelf edge, which is another world. And then as you get deeper in that down to – where the Chalk comes in at 17,500, 18,000 feet another world. And so there is a huge amount of variability of lease terms out there and so – kind of what we have is focused more on something we specifically wanted that allowed us to operate. There, we had a lot of control with 2D data, subsurface production and fairly easy to put infrastructure in place.
Let me let someone else jump in. Thanks.
The next question comes from John White of Roth Capital. Please go ahead.
Good morning, gentlemen and thanks for taking my call. I was going to ask about drilling activity at the Louisiana Austin Chalk, but Mr. Mills just addressed that. I am excited about the play and about your position there, but moving on to the Cotton Valley, congratulations on the PQ 29 and 30 really strong wells. Are those wells online yet?
Yes, John. We announced those I guess a couple of weeks ago. So they are still producing that.
So additionally on the Cotton Valley you are going to defer your CapEx announcement, as you mentioned. I guess, could you give some color on what options are being considered, I would guess drill co or farm apps if you want to tell us a little bit more about that?
I don’t think there is really anything different than we have said kind of in the last call or so about the various options that we are looking at. Those are all still in play. It’s just very difficult for us to give CapEx guidance at this point in time and you could have a tremendous variability in what our net working interest in the various wells could be.
And I think John I think I described kind of that at the end of the first quarter, finished the partners’ buy-in for the joint venture number one and that kind of put us in a position to then establish who our partners were, which they are all anticipating and we are talking about moving a rig back in along with, as we have said along, we would like to put a second joint venture in place and we have had significant discussions and that really all we want to say at this point in time, because we are currently discussing with the people and there seems to be a lot of interest and because – and it’s also a tax driven return, because of the joint venture and that where we are allocating all of our intangibles to those. So it takes a while to sit down with people and explain how this thing is structured, but returns have basically generated a lot of interest.
That all sounds very understandable. And I appreciate it and look forward to seeing you soon.
The next question comes from John Aschenbeck of Seaport Global. Please go ahead.
Good morning. Thanks for my question. First one is on the Austin Chalk really on the cost side here, I was curious where the well costs were on that first EOG well and then kind of with that how confident you feel you can hit the $9 million mark that you put out there and then also if you see the potential to push those costs even lower?
Well, the costs on the EOG well is what was reported and through the completion of wells, it was approximately $12 million, but it was a result of, I think a vertical well drilled in core and then basically come back and sidetracking and basically kicking the well along lateral and a frac. So, it was a – there was a lot going on with that well and it was a straight well. We have – our team who has been extremely good in Woodford Shale drilling 167 wells up there and driving costs down. You saw and you heard the results of our Cotton Valley wells, those wells were $199 per lateral foot drilled and completed. Our team has a lot of experience in this area having drilled some 50 wells with prior companies through the Chalk into the lower Tuscaloosa in this area. And we have a lot of intellectual capital in our company and we drilled a lot of wells with looking at all the well results that were drilled. And we are comfortable that we can bring our first well at approximately $9 million. And then as we stated we think that eventually after these wells because it’s fairly easy drilling down to the Austin Chalk and laterals should fall in line fairly well and we can drill these wells for $6.5 million to $7.5 million over time. The current commodity price environment based on a frac that along the lines of what EOG did on the Eagle Ranch well over time will determine if that’s a frac is sufficient or is it necessary to reduce.
This concludes our question-and-answer session. So I would now like to turn the conference back over to Matt Quantz for any closing remarks.
Yes. I would like to thank everybody for their time this morning. And please call or e-mail with any additional questions that you may have. Thanks.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.