Bellatrix Exploration Ltd (NYSE:BXE) Q3 2018 Earnings Conference Call November 1, 2018 5:30 PM ET
Steve Toth – Vice President-Investor Relations
Brent Eshleman – President and Chief Executive Officer
Garrett Ulmer – Chief Operating Officer
Maxwell Lof – Chief Financial Officer
Josef Schachter – Schachter Energy Research
Michael Zuk – Athena Capital Markets
Jeremy McCrea – Raymond James
Thank you for standing by. This is the conference operator. Welcome to the Bellatrix Exploration Third Quarter 2018 Conference Call and Webcast. As a reminder all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask question. [Operator Instructions]
I would now like to turn the conference over to Steve Toth, Vice President, Investor Relations. Please go ahead.
Thank you, Shinay. Good afternoon, everyone, and thank you for joining us today for the Bellatrix Exploration third quarter 2018 operational and financial results conference call. Thank you also to those who are participating in our call via our live internet webcast, which can be accessed through our website at www.bxe.com. On the call today is Brent Eshleman, our President and CEO; and Maxwell Lof, our CFO; and Garrett Ulmer, our COO.
For today's call, management will provide a summary of our third quarter 2018 results, which were released earlier this afternoon. Following the prepared remarks, we’ll open up the call to questions from analysts and investors. During today’s conference call we will make forward-looking statements within the meaning of the applicable Canadian and U.S. securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Please refer to the forward-looking statements disclosure on our press release and periodic filings for additional information.
Brent Eshleman will now lead today's call with the summary of our third quarter 2018 operational and financial performance.
Thank you, Steve. Bellatrix’s third quarter highlights our tight focus on cost reduction and debt reduction initiatives and continued improvement in operational performance. Our achievements in the third quarter included production volumes in the third quarter of 2018 averaged 33,530 boes a day, weighted 72% to natural gas.
Average production volumes are 35,848 boes a day over the first nine months of 2018 represents 3% outperformance compared with the midpoint of Bellatrix’s previous full year average production guidance range. Production expenses in the third quarter of 2018 averaged $7.71 per boe down 2% compared to the first half 2018 production expenses of $7.84 per boe. Production expenditures in the nine months ended September 30, 2018 of $7.80 per boe were inline with Bellatrix’s previous full year 2018 production expenditure guidance range of $7.65 to $8 per boe.
Completion of Phase II in the Bellatrix Alder Flats Plant and the redirection of volumes from higher cost third-party plants have contributed to achieved production expenditure level. Bellatrix continues to improve drilling efficiency and reduce costs. During the third quarter of 2018, Bellatrix drilled its 4-23 operated Cardium well, achieving approximately eight days from spud to rig release, representing a 32% improvement compared to the 2017 Cardium drilling results.
In 2018, Bellatrix's Spirit River development program averaged approximately 10 days from spud to rig release. With all-in Spirit River well costs reduced to approximately $3.4 million. Bellatrix reduced total net debt by $11.4 million and increased its liquidity by $1.4 million as of September 30, 2018 compared with the previous quarter. On September 11, 2018, Bellatrix announced that it closed a debt refinancing transaction, which extended the maturity of over one third of the company’s unsecured senior notes due 2020 by three years and reduced outstanding debt by approximately $10.5 million. Our third quarter performance once again confirms a high quality nature of Bellatrix’s asset base, strategic infrastructure ownership and control, combined with ample takeaway capacity and market egress.
So now, Garrett will elaborate on our third quarter operational achievements.
Thank you, Brent. In the third quarter, Bellatrix invested $7 million, which included drilling three gross, one net Spirit River wells and one Cardium well at 100% working interest. Total exploration and development capital expenditures for the first nine months of 2018 were $36.7 million in line with budget expectations. Capital expenditures year-to-date have primarily been allocated to drilling, completion and equipping activity. The combination of structurally lower capital costs and improved well performance have reduced overall sustaining capital requirements for our business.
All-in average Spirit River well costs, drill, complete, equip and tie-in, have been lowered to approximately $3.4 million in 2018 from $3.8 million in 2018. In addition to capital cost savings, Bellatrix delivered productivity improvements, with average well performance from the company's 2018 Spirit River well program outperforming expected results by approximately 38% on an IP90 basis.
Enhanced productivity has led to a reduction in the assumed number of Spirit River wells required to maintain corporate production volumes in the mid-30,000 boe per day range, from 15 wells to 12 wells per year.
One of our operational goals this year was to translate the cost and efficiency gains we've realized in the Spirit River program to the Cardium and to improve overall economics from that part of our portfolio. As Brent mentioned, Bellatrix drilled its 4-23 operated Cardium well in the third quarter in approximately eight days from spud to rig release, representing a 32% improvement compared with 2017 Cardium drilling results.
The well will be competed with a high-density cemented liner completion and brought on to production in the fourth quarter. The Phase 2 expansion project at the Alder Flats Plant was fully commissioned and began in mid-March 2018, which has improved corporate NGL recoveries.
NGL sales yields have increased approximately 15% in the second and third quarters to 70 barrels per million cubic foot. The Bellatrix Alder Flats Plant deep-cut process provides enhanced NGL yields of approximately 10 to 35 barrels per million cubic foot over third-party plants in our core area, resulting in an average corporate liquid weighting of approximately 27% in 2018.
With the final wrap-up of the construction, Bellatrix is pleased to announce the project will be completed $9.5 million or 9% under original budget. The Phase 2 expansion was the final stage of Bellatrix' multiyear infrastructure buildout in our core West Central area. Management expects that the completion of Phase 2 of the Alder Flats Plant provides the processing capacity to grow net production volumes beyond 60,000 barrels a day, with minimal future facility-related capital expenditures.
I now invite Max to discuss our financial and risk management highlights.
Thanks, Garrett. Adjusted funds flow generated in the three months ended September 30, 2018, was $7.7 million or $0.12 per basic and diluted share. That compares to $10.1 million or $0.18 per basic and diluted share in the second quarter of 2018. The decrease in adjusted funds flow was mainly driven by a decrease in production volumes between the third and second quarters.
Bellatrix maintains a significant commodity price risk management position for the remainder of 2018 and material market diversification coverage through 2020, which reduces price risk volatility on our business and protects our long-term planning process. In combination, market diversification sales and fixed price hedges cover approximately 85% of natural gas volumes in the fourth quarter of 2018 and approximately 55% in 2019 based on the midpoint of the updated 2018 production guidance range.
Bellatrix reduced total net debt by $11.4 million and increased its liquidity by $14.4 million as of September 30, 2018, compared with the previous quarter. Borrowings under our syndicated revolving credit facilities were $57.1 million, and total net debt was $418.8 million at September 30, 2018.
At September 30, 2018 Bellatrix had approximately $37.9 million of undrawn capacity, approximately 40%, against total commitments of $95 million under the company's credit facilities. For the quarter ended September 30, 2018, Bellatrix' senior debt to EBITDA ratio was 2.78 times, well below the financial covenant of 5.0 times. And Bellatrix' first lien debt to EBITDA ratio was 1.24 times, well below the financial covenant of 3.0 times.
On September 11, 2018, Bellatrix announced that it closed a debt refinancing transaction, which extended the maturity of over one third of the company's unsecured senior notes due 2020 by three years to 2023 and reduced outstanding debt by approximately $10.5 million.
Now back to you, Brent.
Thanks, Max. Bellatrix is announcing today an increase in its average production guidance range and an associated decrease in its full year 2018 net capital expenditure guidance range given strong results year-to-date. Average well performance continues to exceed expectations, resulting in lower sustaining capital requirements for Bellatrix's business. Bellatrix has been stewarding its full year 2018 capital investment level near the low end of its previous guidance range, therefore, the company is adjusting its full year capital guidance to $50 million to $55 million.
Bellatrix was recently highlighted by Exide Technologies, a leading data analytics company, as having the best average producing natural gas wells in Canada in 2018. Not only does Bellatrix rank first in well performance, but our average three months well deliverability of 9.1 million cubic feet per day was 30% higher than the second-best ranked producer. We're proud of this accomplishment as it validates the company's operational success and high-quality asset base.
A summary of the top-ranked well performance is included in our updated November corporate presentation on our website. Bellatrix' fourth quarter drilling and completion program includes plans to drill up to three gross operated wells, including a 2-mile Spirit River well. Capital investment in the fourth quarter will also include the completion of the 4-23 Cardium well drilled in September and tie-in all three operated wells previously drilled in the third quarter.
Two of these wells drilled in the third quarter were brought onstream in late October. After the initial cleanup period, production rates for the wells are as follows: our one of 22 Spirit River wells averaged approximately 13.8 million cubic feet per day at 2,400 psi flowing pressure, with 350 barrels per day of free condensate over a two-day period; for 15 Spirit River wells, averaged approximately 12.4 million cubic feet per day at 2,200 psi flowing pressure, with 260 barrels per day of free condensate over a two-day period also. These strong results continue to demonstrate Bellatrix' top-tier operational performance.
We announced the extension of approximately one third of our 2020 notes back in early September, and we continue to work on initiatives to address the remaining 2020 note maturity. This remains a top priority for management over the near term.
Our third quarter results once again reinforce importance that our three funded – the foundationals our dollars provide, which include a high-quality asset base in one of the most profitable natural gas plays in North America, underpinned by strategic infrastructure ownership and control and supported by ample takeaway capacity. These elements provide the necessary ingredients for long-term profitability.
In closing, I'd like to thank our employees, our shareholders and our stakeholders for their continued support, and thank everyone for participating in today's conference call. Thank you.
Sinead, that concludes our prepared remarks. We will now open the line to questions from analysts and investors.
Thank you. We will now being the question-and-answer session. [Operator Instructions] Our first question comes from Josef Schachter with Schachter Energy Research.
Good afternoon guys. And thanks for having the conference call. Brent, I'm trying to get my head around some of the numbers. First thing, where are you right now, and how much production do you have behind pipe that's going to come on in Q4?
Yes that’s really a good question Josef. So I think, Garrett, what's your approximation? I think Garrett's the best one to give us an approximation. We just had those two wells come on here in the last few days. And we're about to complete our two-mile Cardium and our two-mile Notikewin well, followed up by – with a couple more drills. So I think, I mean, all we can really say, Josef, is I mean, these wells haven't been completed yet, but we have very high expectations for them.
And building that off of the first two wells there that were one-mile wells, which were, again, exceptional wells, it's hard to peg a number. I'm sorry, I don't think I can really peg a number for you, except that we think they will be quite robust right now. Yes, and I'm sorry, I mean, that's all we can really say. I mean, these – they look very good, their outlook's very good, and they will be on here shortly.
Hi, Josef, it’s Steve. You'll note that we did take up our production guidance for the year. So if you look at where we pegged the full year at 35,000 to 35,500 it would imply a Q4 average rate of about 34,000.
Yes, okay. because the reason I'm asking that is the Grafton deal, which goes back to an effective date of August 1 and adds in 2,200 boes a day. So would you be adjusting your Q3 number? And is that in your forecast for your Q4 number?
Yes, that’s a great question, Josef. So we've announced the Grafton acquisition. It has not closed. We have not announced closing of that transaction. When we do close a transaction, that becomes the effective date for our production adjustment. Anything beyond that, the effective date of the transaction is when you have working capital adjustments and other adjustments to the deal. So from a closing perspective, if you assume we close in November, that would be under two months of production contribution from that asset. And we would look to potentially adjust guidance upon closing of the transaction.
Okay. So one more follow-up related to that. If you take into account your guidance of $50 million to $55 million and the spend so far of $31.4 million, that gives me $19 million to $24 million in Q4 spend. Is that related to drilling? Or does that include that $13 million of spending for the acquisition?
No, the acquisition is not in there. And in terms of the first nine months, we have spent just under $37 million on E&D spending.
So when you're looking at your guidance of $50 million to $55 million, you're assuming total net CapEx, not taking into account the property dispositions and – because when you have the – you have a line there, total CapEx net, $31.4 million.
Correct. So you would assume, based on our guidance, fourth quarter capital related to E&D activity being about $15 million.
Okay, got it. Super, thanks very much, guys. Thanks for the clarity.
Our next question comes from Michael Zuk with Athena Capital Markets.
Hi, guys. Thanks for taking my call. I just had a quick question on the 4/23. Are you going with a press release news around that? Or is it kind of immaterial in the grand scheme of things?
All the wells have been fantastic wells for us. And we just – we're highlighting the continued operational – exceptional operational performance of the wells that we keep drilling. And so we've had a lot of questions. People rightfully ask. And so that's why we thought we would mention those wells, and we'll give updates accordingly as we get more information. But really, it's just, thankfully, more of the same fantastic wells and results, which was highlighted in that recent report that was sent out on the – Bellatrix having the number one wells.
Okay, great. And you guys are 1% higher on the liquids weighting on the updated guidance. It's about 350 barrels a day. Is that a function of the NGL recovery at the plant? Or was that really your wells?
No, it's primarily a function of the recovery at our plants. It’s just the exceptional performance of our plants that we've been able to achieve as we move majority of our production behind our operated plants.
Okay, great. That’s it for me. Thanks guys.
[Operator Instructions] Our next question comes from Jeremy McCrea with Raymond James.
Hi guys. I was just hoping you could provide some better clarity on kind of the next couple of years here in terms of growth and spending plans, just in light of differentials, AECO prices, where NGL prices are looking like here right now and just in terms of how you plan to adjust your budgets accordingly, I guess, just to square all the volatility in commodity prices here.
Yes. Good question, Jeremy, and that's really a tough one to answer. I mean, it all depends on prices, right. I think we all believe that we've seen a bottom and a trough here in the differentials in oil and gas. And as the system and everything starts to expand, I think we all believe, and the data shows, that these differentials start to narrow. Now we're very mindful of what the time frame it takes to do that and when that starts kicking in, in here.
And so our plan right now is to really stay flat with production in this environment. As we see prices improve then we'll look at potential growth in our production volumes. It's just really nothing we can give you with clarity right now due to this pricing environment. It does not make sense to grow in this current pricing environment. And we have not this year, so we've been able to sustain our production within our cash flow, and that's what we look to do here in the future until the prices improve.
And so I wish I could give you a more clarified answer than that, but it really just hinges around the commodity prices, and as you pointed out, really, the – it's those differentials on those commodity prices.
Yes. Okay. So I guess I just kind of expect the cash flow budget almost in a way here is kind of what I'm hearing. Is that the best way to kind of clarify it?
Well, it is, yes. We are not looking to incur any more debt, Jeremy, and we're very mindful of the market and the prices. And we just have to be nimble and react accordingly. I mean, the big benefit that we have is, I know you know, is we have a plethora of inventories sitting on existing pads and sites. And so we can cycle our production forward very quickly in the right pricing environment. In a pricing environment, depending on how long it stays challenged, we just kind of hunker down and you know what, react accordingly.
Okay. And just maybe on – one last question here. Just with – you guys bought Grafton now. Is there any other working interest partners that you could maybe buy out for some pretty good prices here just as everyone gets squeezed and ultimately, that could potentially help you at – and somehow make it accretive, I guess? Is there anybody else that you could typically buy out here for as, call it, 2x or 3x, those kind of thing.
I mean, we look at everything. And there's always opportunities. And just to be clear, that the Grafton deal has not closed yet. We believe it will, but it has not closed yet. And so we always look at the other opportunities, and of course, there's other opportunities that we take a look at. And as they unfold and if we can strike a deal, we would naturally do so. So we look at everything.
Okay. Thanks, Brent.
This concludes the question-and-answer session. I would like to turn the conference back over to Steve Toth for any closing remarks.
Thanks, Sinead, and thank you for everyone participating in the call. If you do have any follow-up questions, please feel free to reach out to us. Thank you.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.