Rosehill Resources Inc. (NASDAQ:ROSE) Fourth Quarter and Full Year 2017 Earnings Conference Call April 18, 2018 11:00 AM ET
Craig Owen – Chief Financial Officer
Alan Townsend – President and Chief Executive Officer
Jeff Grampp – Northland Capital Markets
Joel Musante – Euro Pacific Capital
[Call Starts Abruptly] I would now like to introduce your host for today’s conference Mr. Craig Owen. Sir, you may begin.
Thank you, Scarlet, and good morning everyone and welcome to today’s conference call to review Rosehill Resources’ fourth quarter and full year 2017 operating and financial performance. After I cover the forward-looking statements, Alan Townsend, our Chief Executive Officer, will review key items and operational results and I will then provide the financial review. We will have a brief Q&A session and Alan will then close the call with some brief comments.
I would like to remind you that today’s call includes forward-looking statements and certain non-GAAP financial measures. We believe our expectations are based on reasonable assumptions; however, number of factors could cause results to differ materially from what we discuss. We encourage you to read our full disclosure on forward-looking statements and our SEC filings and the GAAP reconciliations included in yesterday’s earnings release.
With that, I will now turn the call over to Alan.
Thank you, Craig, and thanks to everyone for joining our call today. I would like to start by recognizing our employees for their dedication and hard work during our first year as a public company. Over the past year, we have faced many challenges that our team is thriving and we are well on our way to becoming a strong public company. I am very proud of all that we have accomplished thus far.
In 2017, we executed our strategy and delivered on our targets. Operationally, we spud 28 wells in 2017 and cut our average days from spud to total depth in half from 30 days to 15 days. We have tested and are fine tuning our Gen-3 completion design to maximize production and improve full cycle returns. We have grown production from just 5,000 BOEs per day in April of 2017 to over 10,000 BOEs per day in late December. Our proved reserves more than doubled to 31 million barrels of oil equivalent at year end of 2017.
Strategically we made our first major acquisition in December by adding 6,500 acres in northern Pecos County, establishing a second core operating area in the Delaware Basin. We also divested our non-core Barnett Shale assets in Q4 and became a pure-play Delaware Basin operator. In 2018, we planned to build and expand on our successes and we are off to a great start. Our primary goal of 2018 is to continue our strong production growth and surpass 15,000 BOE per day by mid year of 2018.
I am happy to say we have accomplished this goal in March sooner than expected. Thanks to robust production rates from several new wells all with 5,000 foot laterals, including a three-well pad on a Weber lease that is on production for over three months and another three-well pad on our Z&T 32 lease that began flow back about 30 days ago. The three Weber wells started in the third Bone Spring strand, the Wolfcamp A (X/Y) and the lower Wolfcamp A. They came aligned in December and after a few weeks of clean up were producing a combined 4,000 to 5,000 BOEs per day. They are still producing strong today at a combined rate of over 3,200 BOEs per day, with 80% oil production.
We have highlighted these three wells in our investor presentation. And as you can see from the Q1 production charges all three wells are performing very well and at or above their Gen-3 type curves. The three Z&T 32 wells just finished initial clean up period and are producing over 5,500 barrels oil per day gross, in early April with 74% oil. All three of the Z&T 32 wells are lower Wolfcamp A wells. We have certainly continued to provide well results and updates as we complete more wells and are able to demonstrate how prolific our Northern Delaware acreage is in Loving County.
I am also very proud of our drilling completions and accomplishments. Our operations team is drilling wells faster, more efficiently than we originally forecasted. In the fourth quarter we averaged 13 days from spud to total depth in the upper Wolfcamp A and 14 days in the lower Wolfcamp A.
By improving our drilling efficiency we are able to lower our cost per well and drill more wells per year without increasing rig count. We continue to fine-tune our Gen-3 completion techniques to maximize our production in EURs per well. We are testing different sand amount volumes – sand volume amounts, excuse me, frac fluid volumes, as well as nanotechnology fluid additives to find the optimal frac design in Loving County.
We also continue to test different perf densities, stage spacing and pump rates utilizing microseismic frac mapping and advance flow testing analysis. We remain mindful of higher completion cost related to additional testing, but believe that the ultimate improvement in completion techniques will lead to increased estimated ultimate recoveries and better economics.
Another major goal for 2018 is to establish operations, grow production and test multiple horizons in our Southern Delaware or White Wolf acreage. We acquired 6,500 acres in Pecos County in December and the team has been hard at work surveying, staking and permitting the acreage. We recently spud our first well on the acreage and we intend to perform extensive data gathering on the first four wells and we’ll clear the Bone Spring, Wolfcamp A down through the Wolfcamp B. Our offsetting peers have shown strong Wolfcamp B results.
We are also acquiring a new 3D seismic survey that will provide important stratigraphic and structural data for our drilling program. Just like we have done in our Northern Delaware acreage, it is all planned to gather and analyze efficient data to aiding the optimization of the well spacing, well orientation, landing zones along with drilling and completion techniques. We are committed to maximizing the value across our acreage and we believe spending the extra time on data gathering and analysis upfront will benefit us tremendously in the long run development of the property.
We’ve been planning in building out the infrastructure as well as negotiating and securing marketing contracts for future productions in the White Wolf area. Looking at takeaway capacity for the new acreage, we have secured a gas market for our forecast in production and we are analyzing various oil marketing options. In addition to the four initial wells, we expect to drill between 12 to 18 additional wells in 2018 in the Southern Delaware area.
The continuous acreage position enables us to drill extended laterals which can significantly improve well economics and we have projecting four to eight extended lateral wells greater than 7,000 foot in our 2018 drilling program. We are excited about our new Southern Delaware acreage and believe there will be accretive to Rosehill and that the full cycle economics of these wells will compete favorably with our prolific Northern Delaware wells.
As I said before, we plan to grow organically as well as through strategic and accretive acquisitions, we will stay disciplined financially as we pursue future opportunities. We are right-sizing the organization for growth and I am confident that we can execute on our operational plans. Operationally, we remain focused on significantly increasing our production volumes and expanding on margins and decreasing our pro unit operating cost metrics. We believe 2017 – we finished 2017 strong and plan to tow that momentum through 2018 and beyond.
And with that, I will turn the call back over to Craig to cover our financial results for fourth quarter and for the full year of 2017 and reiterate our guidance for 2018, Craig?
Thank you, Alan. I’m very excited about Rosehill’s future in the solid foundation that we’ve built by executing on our plan and delivering operational and financial success in 2017 and early 2018.
Fourth quarter revenues are $28.8 million and production totaled 7,352 barrels of oil equivalent per day, 71% crude oil, 14% NGLs and the balance natural gas. Production increased 39% from the third quarter as we started to see the beginning of our significant production ramp. As Alan mentioned, our mark average production has increased over 15,000 net BOEs per day with our drilling and completion program bring on the strong new wells.
We're certainly off to a good start in 2018. And with continued success in our Northern Delaware wells and strong results from our new Southern Delaware drilling, we expect to see a steady increase in production throughout 2018.
For the fourth quarter 2017, Rosehill reported net loss of $5.3 million or $0.87 per diluted share, which included an $18.1 million pretax loss on commodity derivative instruments and $5 million gain on the sale of assets. From a cash flow perspective, we're able to generate adjusted EBITDAX of $18.8 million for the fourth quarter and $46.8 million in 2017. I realized oil price for the fourth quarter 2017 before the effect of hedges averaged $52.69 per barrel. I realized natural gas liquids averaged $21.50 per barrel and I realized natural gas price averaged $2.54. This resulted in a total equivalent price of $42.57 on an unhedged basis.
Rosehill has been actively hedging and company continues to evaluate additional hedging to help mitigate volatility in commodity and basis prices and to protect our cash flows. In the earnings release we included our hedge position as of December 31 and additional hedges added through April 6.
Turning to expenses, total cash operating expenses were $9.9 million or $14.58 per BOE, which consisted of $4.4 million of LOE or $6.51 per BOE, $3.4 million in G&A excluding stock-based compensation or $5.10 per BOE, $600,000 in gathering and transportation expense, $1.4 million production taxes or $2.01 per BOE.
G&A costs were lower quarter-over-quarter due to – primarily due to the impact of higher production volumes. LOE costs were higher quarter-over-quarter primarily as a result of additional water handling cost in the fourth quarter due to short-term facility constraints requiring some water to be trucked for disposal. We expect operating expenses on a BOE basis to decline going forward into 2018 coinciding with our production growth.
As of December 31, we had $20.7 million in cash and an undrawn credit facility. As we previously announced in December, Rosehill secure financing for the White Wolf acreage acquisition. The financing package included $100 million Senior Secured Second Lien Notes and $150 million Redeemable Series B Preferred Stock, with an additional $50 million in Series B to be issued at the company's option. The proceed for used to fund the acquisition of 6,500 net acres to fully repay all amounts under the company's revolving credit facility and partly fund our fourth quarter 2017 capital expenditure program as well as pay related financing cost.
In late March, we entered into a new $500 million revolving credit facility maturing in 2022, with an initial borrowing base of $150 million. The facility was provided by syndicated five financial institutions led J.P. Morgan. This double our borrowing base in $75 million in our first redetermination of the borrowing base is scheduled to occur on or about August 1. We believe that with the continued increase in production and crude reserves are credit capacity, under the facility will increase further strengthen our balance sheet and liquidity position.
Our guidance announced on December 14 remains unchanged. Our 2018 guidance for production, it’s 15,500 to 17,000 BOE per day, which is over 135% higher than 2017. Our 2018 adjusted EBITDAX guidance is between $170 million and $190 million more than a 225% increase over 2017. This results in forecasted peer-leading growth in production EBITDAX on both a pro rata adjusted share basis and a rate basis.
Our 2018 capital guidance of $350 million to $375 million includes drilling and completing around 50 wells continued build out about production facilities and infrastructure as well as some capital earmark for acreage. We continue to target a strong credit profile with our guidance for leverage ratio between 1.4 times and 1.6 times and expect that to be below the average of our peers. We continue to execute on our strategy and believe that there is a significant value in Rosehill Resources strong Delaware Basin acreage. We have the expertise as well as the operational and financial capacity to deliver strong, profitable and sustainable growth.
And with that, Scarlet we are ready to take questions.
[Operator Instructions] Our first question comes from Jeff Grampp with Northland Capital Markets. Your line is now open.
Good morning guys and nice update.
We appreciate your attention. Thank you.
Yeah, I guess just kind of starting that on the White Wolf area, you guys kind of spud the first well here. Can you guys maybe talk a little bit about maybe what zones you initially planned to target with these first batch of wells and maybe just generally that development plans here in 2018, are you guys kind of do more of a delineation program to kind of go across the acreage footprint or do you go right into kind of multi well pad development or just any kind of color there would be helpful?
Sure. The first four wells were kind of scattered out on the acreage, if you look at our IR deck, you can see the locations and those first four wells will be drilled down through the Wolfcamp B and into the Wolfcamp C, we'll be taking several well cores. We’ll be doing some site well coring and we’ll be doing some extensive logging on it, including as neutron-dipole sonic logs to determine the struck fields that exist in each of those areas. The reason for those are primarily to give us an idea of what horizontal direction north-south or east-west is optimal in each of those locations. Those wells will then be plugged back and drilled horizontally into Wolfcamp B zone, which has been basically de-risked by – not particularly direct offset operators, but in the area, and after the analysis of the data collected from those four wells will be further delineating our development program. But you can expect it to be a little widespread initially before we go into full phase development.
All right, great. Appreciate those comments. And then you guys kind of alluded to some pretty impressive efficiency improvements. I know that CapEx is a little higher in 2017, but just kind of wondering as you guys see the plant playing out in 2018, it seems like obviously, I had discussed on the production front, are these efficiencies likely are to – I think put an upward bias on the production spending profile on 2018 as well, or do you guys feel like some of those efficiencies are maybe already captured in the guidance that you had reiterated today?
Basically, the efficiencies on a time basis from drilling already captured in our forecast and our guidance. We'd like to be surprised and a little bit better than we forecast, but we can't say that at this point. Again, we like everybody else are dealing with the increase in costs associated with services and supplies in the areas. So, we’ll see some increasing costs from that standpoint. We don't see the same kind of acceleration of our capital program in 2018 that we had in 2017, when we really did get a lot of drilling improvement, and hence we ended up – how many more wells that we have six more wells completed then we had original planned. So that kind of boosted our capital program.
Got you. That’s helpful. If I can sneak one more in here. Just on the capital front, obviously, you guys have this S-1 out there. Can you just maybe give us little update just in terms of timing of one that could potentially be effective? And then any thoughts on utilization about – as a source of liquidity or how you guys generally view that piece of the puzzle on the liquidity front?
Yes, Jeff. this is Craig. Our S-1 that’s on file has our September financials in it. So it would be need to be updated for year-end financials and as we discussed in that S-1 that the use of proceed would be for development, capital as well as general corporate purposes. But really, beyond that we can’t comment on it, other than just to say that it has to be updated with year-end numbers and we would anticipate doing so. Just to refresh that.
All right, fair enough. Thanks for the time, guys.
Our next question comes from Joel Musante with Euro Pacific Capital. Your line is now open.
Hi guys. Just have couple of questions. In building on your acreage position, as of wondering, if you’re still focused on the White Wolf area or you kind of expanding outside of that area, looking – go ahead, go forward I mean?
Good to hear from you, Joel. The answer that basically is, at this point, we would be focusing on selling out White Wolf area from just a straight organic leasing situation. We are also looking at accretive acquisitions that might come around which would be situation we could establish our new cooperating area associated with the expansion.
You had some optional acreage there. What was the – I guess, what happen with that. I don’t think you exercised that options?
Well, actually the options was if the – for original sale of Whitehorse energy was able to obtain additional acreage than they would have the option to put it to us so to speak, at their original price of $17,000 an acre. They did not acquire any additional acreage after the second closing, second tranche in closing which we picked up 1,940 acres in December as well. So there was no additional possibility or no additional acreage was available to us. Now to put that in perspective, the current holders of that acreage knew what Whitehorse had sold the other acreage to us for and I think they were good reluctant to sell out the Whitehorse for a lower price and then Whitehorse turnaround and sell it to us for $17,000. We're now in conversation with those parties.
Okay, all right. Great. Good to hear. And can you give us an update on the status of the infrastructure build out at White Wolf and I mean you're looking at a pretty steep ramp up in production, I was just wondering you know how that – how that's going to work with the existing infrastructure?
Sure. The infrastructure focus is on gas gathering, and water both delivery and disposal obviously. The gas gathering is going to be installed by Brazos Midstream. We – we have some acreage we acquired was already dedicated to Brazos Midstream. And so we expanded it, they're up in the field right now laying the main trunk lines, and then we’ll start laying the lateral to the well locations where we have our batteries for delivery. We don't see any significant delays in immediate gas hook-ups at this point, and our technical teams are working close with Brazos to do that.
On a water side, we are in the process of – in the same right to the way as the oil and gas gathering will be putting into water lines as well, and that’s in process as we go. We're also in the process of building our frac tips and containment for the water to enable to allow us to – and be able to hit the kinds of the water rates needed during a frac job. And of course building locations, taking well locations and building roads in place. From a oil side of claims, we're in conversations with the market at this point to get that lined up and likely that will be piped in as well.
Okay. And I think in some of our previous conversations, you’ve mentioned that you know you're looking to use submersible pumps in the White Wolf area as opposed to Loving County where you're on gas lifts. So I was just wondering if you have the power infrastructure to handle at this point or even something that you would have to maybe spend some sort of capital on.
At this point, we are looking at potentially putting some submersible pumps up in Loving County, but only in two or three wells at this point. The only wells up that aren’t yet – everything is on – not everything, but the wells that are no longer flowing naturally oil and gas looked up and Loving County with a couple of guy – couple of wells that are rounded wells that here and just being testing the submersible pumps. When we get down to White Wolf, we don’t anticipate artificial lift will be needed there at least within the first year of production. So that’s one more down the road, so we haven’t completely ascertained that yet.
All right and just you had such a significant increase in production and I was just wondering how you’re – if you’re still kind of it at the same production mix now is you reported in fourth quarter or should we be modeling something little different?
I think our production mix, because why now it’s still our Loving County, and it’s primarily Wolfcamp production with some Bone Spring is pretty much equivalent to what we said in fourth quarter.
We may have a little bit of upside to that is our base production really – before 2017 production or drilling was some of that Avalon zone. So, it’s a little bit gassy. But as Alan said, it should be pretty equivalent with some minor step-ups through our 2018 and then maybe in the 2019 as well as we get down more in white Wolf and that’s a bigger percentage of our productions remain.
And this might be old news, but we have not seen any increase in GORs on our Wolfcamp production.
Okay. Yeah. That was my next question actually, if you were – it was going to get gas here, I guess with time, but…
And matter of fact, we think White Wolf will be less gas. So, we think the Wolfcamp in Loving County is the GORs in 2000 and 2500 range, our initial expectations in White Wolf were of 1000 and 1500 type GORs, and that’s another reason and ultimately we may be looking at submersible pumps versus gas lift. But that’s an engineering technical question that we haven’t addressed just yet.
Okay, great. Thanks a lot. I appreciate it.
And I’m showing no further questions. I’d like to turn the call back over to Alan for closing remarks.
Well, thanks. I want to thank everybody for joining us today and as our results have shown, we are delivering on the goals that are reset out and we are focusing on improving everything that we do operationally. We are significantly increasing production and EBITDAX driving down costs, improving well results and performing our jobs safely and as good stewards to our neighbors and the environment. We believe that we have a very compelling growth in value creation story with significant upside potential. We are pure play Delaware Basin company with a strong acreage position and experienced operational management team employees to create considerable value for our shareholders. Thank you all for your time and good bye.
Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everyone have a great day.