Approach Resources, Inc. (NASDAQ:AREX) Q1 2019 Earnings Conference Call May 10, 2019 11:00 AM ET
Ian Shaw - CAO
Sergei Krylov - CEO & CFO
Troy Hoefer - SVP of Engineering
Conference Call Participants
Dave Tanwit - Private Investor
Good morning, ladies and gentlemen, and welcome to the First Quarter 2019 Approach Resources Incorporated Earnings Conference Call. As a reminder, this conference call is being recorded. All participants are in a listen-only mode. The company's earnings release and presentation slides that management will refer to during the prepared remarks can be downloaded from the Investor Relations section of the company's website at www.approachresources.com. Please note that management's remarks include forward-looking statements that are subject to risks that could cause actual results to differ materially from those in the forward-looking statements. Additional information concerning these risks is set forth on Slide 2 and in the company's earnings release.
Reconciliations of non-GAAP measures management refers to and the applicable GAAP measures can be found in the company's earnings release on the non-GAAP financial information page of the company's website and at the end of the company's earnings presentation.
Now I will turn the call over to Chief Executive Officer of Approach Resources, Sergei Krylov.
Good morning, everyone, and thanks for being on the call today. As you may have seen from our recent disclosures, Approach's Board of Directors has made the difficult decision to change the executive leadership of the company.
As a result of the change, we have been able to reduce management expenses and increase corporate level profitability during this very challenging and trying period for the company and ensure a long-term strategic direction that leads to maximizing shareholder returns while protecting company's balance sheet and liquidity.
Joining me on the call today are other three members of Approach's new management team. Troy Hoefer is leading our operations, including engineering, production and drilling and completion functions. Troy has been with the company since 2013 and has over 31 years of industry experience, previously with Mesa petroleum and Pioneer Natural Resources.
Josh Dazey is leading our legal, regulatory, land and administrative functions. Josh has been with the company since 2016 and has over 12 years of experience in the industry as corporate lawyer and outside legal counsel.
Ian Shaw is leading our accounting and information technology functions. Ian has been with the company since 2014 and has over 13 years of experience in the industry and public accounting.
The new leadership team is supported by approximately 100 full time employees, both in our corporate office in Fort Worth and our field office in Ozona, Texas. Our average employee tenure with the company is about six years, which is pretty good for a relatively young company in the E&P industry.
This also highlights that most of our current staff has been with the company since Approach started to horizontally develop and produce in the Wolfcamp shale. This is the same team, that through innovation and foresight, found ways to become one of the lowest cost operators in the Midland Basin. While we don't anticipate the need for any significant changes to our operations, we definitely see opportunities and room for improvement.
We plan to continue harnessing the talent, knowledge base and innovative spirit of our employees, while focusing our business strategy and operations management towards the primary goal of maximizing return on capital deployed. We will not be risking our balance sheet to meet arbitrary production growth targets.
Before we get into operations and our first quarter financial result, I would like to address our ongoing balance sheet restructuring activities. While we want to provide a comprehensive update on company's position and plan, please bear in mind that our current fluid circumstances limit what we can share at this time.
As a result of current market conditions, including the significant Waha differential discount, our financial metrics, as measured in our credit facility, exceed required thresholds, resulting in an event of default under credit facility.
To address our leverage and financial metrics, we believe we will need to significantly restructure our balance sheet. As previously disclosed, we have been engaging constructive discussions with our largest stockholder and noteholder regarding, among other things, a potential debt for equity exchange, and an additional capital fusion to the company.
In addition, we're engaged in discussions with our lenders regarding amendment and extension of the credit facility and the banks have agreed to provide us with additional time needed to find a workable solution.
Those discussions remain ongoing. As reversal leverage and liquidity challenges remain focused on operating our assets safely and responsibly and as long-term owners.
In order to manage liquidity, we have temporarily suspended our drilling and completion activity and have taken decisive steps to reduce our corporate overhead expense.
We have also undertaken a comprehensive operational review to optimize and improve our operating practices and evaluate capital deployment options.
I will now turn the call over to Troy to discuss our first quarter operational highlights and provide additional color on some of these longer term initiatives.
Thanks, Sergei. Good morning, everyone. As you can see on slide five of our investor presentation, Waha gas differential significantly widened and has remained high into the second quarter and is not expected to improve until later this year.
In light of our liquidity management, as well as continued commodity price volatility and the extreme Waha gas discount in the basin, we continue to differ drilling and completion activities in the first quarter 2019. Our capital expenditures on oil and gas properties in the quarter remain very low at $0.2 million, which is essentially flat compared to the fourth quarter of 2018.
In 2019, as Sergei mentioned earlier, we initiated a comprehensive review of our operating practices in an effort to manage natural production decline and surface facility optimization and operating efficiencies.
We also continue to review economics for all capital spending and plan to deploy near term capital on cost effective well repairs, workover and maintenance in the second quarter.
Operationally we are committed to safe and environmentally responsible operations and believe our extensive infrastructure network of centralized production facilities, water transportation, handling and recycling system, gas lift lines and saltwater disposal wells continue to provide a sustainable competitive advantage.
Moving to slide six of our presentation. In 2018, we maintained an industry-leading average drilling and completion cost of $4.6 million from horizontal well. And based on a recent rebate of services, we anticipate that we will be able to reduce this cost to as low as $3.8 million for a standard lateral within existing infrastructure.
Overall, our LOE decrease in the quarter, but due to declining production, the LOE per BOE increased slightly to $5.38 per BOE to $5.21 per BOE in the fourth quarter of 2018.
Production for the first quarter of 2019 was 906 MBOE or 10,100 BOE per day, which is in line with our previous annual guidance.
In light of our restructuring activities and new management's review, we are revisiting our 2019 capital budget and drilling schedule. As a result, we are withdrawing our prior guidance.
Due to the low decline nature of our assets, we believe that in the event no new wells are brought on line in 2019, we anticipate our annual daily production to average 9,400 to 9,600 BOE per day. We were not guiding toward that number, but want to provide a decline expectation in zero completions environment.
Now we will turn the call over to Ian to go over the financial results.
Thanks, Troy. As of March 31, 2019, we had liquidity of $15.7 million, which represents our cash balance the end of the quarter. We believe that we have adequate liquidity from cash generated from operations and our cash on hand for current working capital needs and to support our ongoing operations as we pursue potential deleveraging transactions.
Additionally, we continue to focus on reducing our cash operating expenses and conserving capital. In the first quarter our cash operating costs were $12.09 per BOE, which was 9% decrease compared to the prior year quarter.
We expect our G&A expenses related to management compensation to decrease going forward, due to the changes in our senior management structure, and we are working on other cost saving initiatives.
Net loss for the quarter was $16.8 million or $0.18 per diluted share. Excluding the decrease in the fair value of our commodity derivatives of $4.3 million, restructuring expenses of $6.3 million and an impairment loss of $0.3 million, adjusted net loss was $8.2 million or $0.09 per diluted share.
Lease operating expense for the first quarter was $5.38 per BOE, production and taxes were $2.13 per BOE, cash, general and administrative expense was $4.38 per BOE and DD&A was $15.02 per BOE.
Now I'll turn the call back to Sergei.
As we have in the past, we intend to continue to focus on aligning our capital expenditures substantially within operating cash flows.
Our special committee, which I noted earlier, has been formed to explore additional strategic and deleveraging alternatives, continues to work with advisors and management to identify the best path forward for the company.
As you can appreciate, we will not be able to answer questions regarding our ongoing restructuring and negotiations. However, if you have operational questions, or questions regarding our reported first quarter 2019 financial results, we will do our best to answer.
Thank you for your interest in Approach. And I will now open the line for questions. Operator, open up the line for questions, please.
[Operator Instructions] We have a question or comment from the line of Dave Tanwit from - he removed himself from the queue. [Operator Instructions] We have a question or comment from the line of Dave Tanwit, a Private Investor. Your line is open.
Yeah. Thank you. I have two questions. The first question is, in view of the fact that the company has lost over 90% of its shareholder market value over the past year, I would just like to know, if possible, why the directors decided to reward the CEO and give $1.8 million and a six month consulting agreement?
And my second question, if you can answer, you might not be able to is, that with the results today, what reasons can you give us, and maybe potential new investors, to continue to buy the stock, especially when you have all these problems and the market suggests bankruptcy? I'm just asking them as an interested and a long-term shareholder. Thank you.
We understand your question. At this point, we cannot provide comments on negotiations relating to the transaction, and we'd refer you to our current quarterly filings that we will be filing later today for additional this quarter, relating to these items.
Okay. As respect to this CEO, you can either, even though it's not part of your negotiations going forward?
No, we cannot. Again, we have filed on the SEC website, some of the arrangements related to the departure of those executives, and would encourage you to refer to those documents.
No, I already have, and so I was just wondering what the reasons are. But I won't argue the fact that - I wish you a lot of luck as a shareholder.
Thank you very much.
Thank you. I am showing no additional questions in the queue at this time. I would like to turn the conference back over to management for any closing remarks.
Thank you very much for your interest in Approach, and we look forward to talking to you next quarter.
Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.