EP Energy Corp (EPE) CEO Russell Parker on Q1 2019 Results - Earnings Call Transcript

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About: EP Energy Corporation (EPE)
by: SA Transcripts
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Earning Call Audio

EP Energy Corp (NYSE:EPE) Q1 2019 Earnings Conference Call May 9, 2019 10:00 AM ET

Company Participants

Jordan Strauss - Manager, IR & Corporate Finance

Russell Parker - President, CEO & Director

Kyle McCuen - Principal Accounting Officer, SVP, CFO & Treasurer

Conference Call Participants

Operator

Good morning, and welcome to the EP Energy First Quarter 2019 Results Conference Call. [Operator Instructions]. Please note, today's event is being recorded. I would now like to turn the conference over to Jordan Strauss, Manager of Investor Relations. Please go ahead, sir.

Jordan Strauss

Thank you, Rocco, and good morning, everyone. Thank you for joining us today for EP Energy's First Quarter 2019 Financial and Operational Results Conference Call. Joining me on the call this morning are EP Energy's President and Chief Executive Officer, Russell Parker; and Senior Vice President and Chief Financial Officer, Kyle McCuen. I hope you've had a chance to review the earnings release and the supplemental presentation that we published yesterday. The earnings release and presentation are available in the Investors section of our website at epenergy.com. Also, like last quarter, we intend to communicate our key points on this call today, we'll not be hosting a Q&A session after our remarks.

I'd like to remind everyone that on today's call, we'll discuss forward-looking statements and certain non-GAAP financial measures. We encourage everyone to read our full disclosures on forward-looking statements and GAAP reconciliations, which can be found at the end of the company's earnings release and in our documents on file with the SEC. These documents are also available on our website.

And with that, I'll now turn the call over to Mr. Russell Parker.

Russell Parker

Thanks, Jordan, and good morning, everyone, and thank you for your continued interest in EP Energy and for joining us on this call. I'm going to start by providing an update on the overall business and performance of our asset program, and Kyle will then go over some of the details of our financial results and provide more information related to our second quarter outlook.

Also, we're going to continue a similar approach to the last call and refer to certain slides in our presentation that we posted to our website yesterday to make sure that key points are understood. Looking at Slide 4 of our results for the first quarter. You can see we came in above the high end of guidance for production and below the low end of guidance for capital. Our drop in production quarter-over-quarter is a direct result of our reduced net completion count.

On Slide 11, we highlight our lower net completion count per month during the fourth and first quarters compared to prior periods. We plan to continue that trend into the second quarter. We have built a significant DUC inventory over the last couple of quarters, and we expect the second quarter to be the peak of our inventory build this year. Right now, we continue to evaluate the decision on adding another frac crew to accelerate the completion of that DUC inventory during the back half of 2019.

We'll maintain our focus on capital efficiency, building off of the success and completion design improvements seen in 2018 as well as our expanding horizontal program in Northeastern Utah.

We refreshed the Northeastern Utah horizontal cumulative oil production chart, again, this quarter. Slide 6 includes the early performance of our second 2 wells that came online in the latter part of the first quarter. For reference, the 4 Northeastern Utah horizontals in green and purple are compared to every other horizontal well drilled by the company in both the Eagle Ford and the Permian in gray. We'll continue to put Northeastern Utah horizontal wells online in cadence with what our gas gathering system can handle. We're actively working with our gatherer to increase capacity on this system. While IP 30s are not always the best indicator of EUR, it is worth noting that when compared bench-by-bench, our third and fourth laterals are outperforming the first and second. In addition, this second pair of wells was over $1 million per well less expensive than our first pair. We should have 3 more horizontal wells online by the end of Q2 in Northeastern Utah.

Slide 7 shows the continued outperformance of our new completion designs compared to the historical offsets in the Eagle Ford. 2 of our 3 rig contracts in the Eagle Ford expire at the end of the second quarter, and we do intend to slow our drilling pace in the basin as we work off our DUC inventory. In the first and second quarter, we have focused these rigs on our southern and eastern acreage. In addition, we are completing several locations as required by continuous drilling commitments, as we are committed to maintain our acreage footprint and continuously operate efficiently. With the drop in completion pace, the CDC wells do make up a larger portion of the completed well mix in 2019.

Slide 8 shows the continued outperformance of our new completion designs compared to their historical offsets in the Permian. We continue to monitor the improvement of in-basin differentials that will allow this inventory to compete with our other opportunities in our portfolio. In addition, we have experienced short-term gas delivery bottlenecks, similar to other Permian producers, which has impacted our second quarter production. This temporary issue and the net cost differential are critical parts of the evaluation of the timing of deployment of additional capital into the Permian basin. The timing of our completions in Northeastern Utah and the bottlenecking issues in the Permian, I just mentioned, has caused us to widen our guidance range on production for Q2. In addition, the slower pace of net completions in 2019 has caused the year-over-year drop in both barrels per day and BOEs per day. We had another solid quarter on LOE. Absolute LOE was up versus Q4 of 2018, but lower than the other 3 quarters of 2018 and below our 2018 average. The increase over Q4 of 2018 was primarily driven by an increase in well repairs.

Despite the recent increase in oil prices over the last couple of months, we are still managing capital to minimize our outspend and preserve our liquidity. The board and management will continue to operate and respond in a dynamic fashion and as such, we will continue to issue guidance on a quarter-by-quarter basis.

With that overview, I'll hand it off to Kyle.

Kyle McCuen

Thank you, Russell, and good morning, everyone. Today, I will walk through Q1 '19 financial details and review second quarter guidance. We incurred a net loss of $140 million for the quarter, including a $95 million mark-to-market noncash loss from the change in value of our hedge book from year-end 2018. It's important to note, we netted a positive $8 million for hedges that settled during the quarter. Our Q1 adjusted EBITDAX was $148 million. We had a good quarter on costs, most of our Q1 adjusted cash cost metrics coming in at the low end of our guidance range. A couple of items to note included our reported G&A of $21 million net of capitalization, includes $4 million of noncash comp expense. Second, our taxes other than income of $11 million includes severance tax credits totaling $4 million in the quarter.

Our run rate for taxes other than income will be closer to $15 million to $16 million going forward at current prices, which will cause a slight bump in adjusted cash cost from Q1 to Q2. We ended the quarter with $4.5 billion of debt and $440 million of available liquidity. In April, we reaffirmed our borrowing base at $1.36 billion and with the bank commitments holding at $629 million through October 2019. To date, in 2019, we have purchased $50 million of May 2020 unsecured notes. Going forward, we will continue to evaluate all options to improve our balance sheet and improve our financial flexibility.

Slide 9 is our hedge position. We continue to monitor opportunities to add oil, gas and basis price protection. We feel comfortable with our hedge position with most of our oil production locked in for 2019 and 2020 oil production now approximately 80% hedged using the midpoint of our Q2 '19 oil guidance. Our average floor price for 2020 oil hedges is $56 and allows for significant upside participation through $66 WTI.

As Russell mentioned, we will continue to be issuing guidance on a quarter-by-quarter basis. Slide 10 includes our guidance for Q2 '19. We are projecting CapEx of $140 million to $150 million, down slightly from Q1 given that we reduced our rig count from 6 to 4. It is important to note we are maintaining the active rigs and frac crews at the end of Q1 into Q2. We expect to build our drilled but uncompleted inventory of wells from 46 at the end of Q1 to a peak of approximately 65 during Q2. Our rate guidance for Q2 is 38,000 barrels of oil at the midpoint, which is slightly down from Q1, and we expect to bring online 13 net completions in the quarter.

This total includes 3 horizontal wells in Utah that are expected to come online near the end of the quarter. In addition, as Russell mentioned earlier, the timing of our completions in Northeastern Utah and the bottlenecking issues in the Permian have caused us to widen our guidance range on production for Q2. Additionally, the company expects to complete the last of the Eagle Ford DrillCo JV wells during the quarter. And with that, I'll turn the call back over to Russell for closing comments.

Russell Parker

Thanks, Kyle. To conclude, we executed well versus guidance for the quarter. We continue to focus on our capital allocation as well as liquidity. And we are very pleased with our operational results, especially with our horizontal program in Northeastern Utah. We appreciate the support of our employees and vendors as we continue to evaluate options to improve our balance sheet. Thank you for your time and attention this morning. We will now close the earnings call. Thank you.

Operator

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.

Question-and-Answer Session

End of Q&A