Whiting Petroleum Corporation (NYSE:WLL) Barclays CEO Energy - Power Conference September 4, 2019 3:05 PM ET
Brad Holly - Chairman, President and CEO
Correne Loeffler - CFO
Conference Call Participants
Jeanine Wai - Barclays Capital
All right, good afternoon, everyone. We’re very pleased today to have Brad Holly, Chairman, President and CEO of Whiting Petroleum, as well as Correne Loeffler, CFO. Whiting is an oily E&P that has the third largest position and producer in the Williston Basin as well as it also has operations in the Denver Basin. So we're going to have the format today, Brad is going to come up and do a presentation. And then we'll have a little bit of Q&A and then we'll move straight to the breakout room and then you guys can have fun with that. All right. Without further ado, let me introduce Brad.
Well, thanks Jeanine and thanks Barclays. We're very excited to be here today. And thank you for attending our presentation. We know we're later in the afternoon, you probably had a long day. We have a brand new slide deck though. So every slide, you'll see today is brand new as of this morning and so really excited to run you through the Whiting story, what we are seeing and the significant opportunity that we think is in front of us.
First of all, the forward-looking statement, which obviously you see, but we rarely spend any time on the actual results could differ materially from those express or implied. Certainly this is true sometimes. Therefore, I think it's important to understand the background and the historical performance of the company making the statements. So I want to start with a little bit of review of Whiting, and a very consistent and solid track record over time. Since the fourth quarter of 2017, these assets have generated in excess of $350 million of free cash flow. It's a portfolio of very high quality assets that make and can continue to make free cash flow, we're an organization that is focused on and serious about reducing our absolute debt. We reduce debt 50% since 2015, and we're on a march again to continue to reduce our debt.
We have a very strong liquidity position today with an undrawn revolver with additional borrowing base headroom north of that $1.75 billion commitment. And then our experience in the Bakken of over a decade continues to create attractive investment opportunities in the basin, you can see in 2018, wellhead returns of greater than 40%. And that's very consistent with what we've been able to do over the last four years. And so, those kind of returns generate great performance and generate us to be able to make progress on the three goals to the left of that.
So we feel like at Whiting, we are positioned for success, Peter Drucker said the best way to predict the future is to create it. And building on our past, we have continued to take proactive steps to position us for success. Let's first look at the financial metrics. On the financial side, everything we are currently doing in the company is meant to return us to a free cash flow positive position this year, we have a very strong liquidity position as you've already seen. On the operational side today, the 2019 well results are tracking with the best of our results over the last four years, which generated the returns that you saw on the previous slide.
So the subsurface and the wells are performing very well in the Bakken. We'll see more of that as we move forward. On the infrastructure side this year, we have built plants, we have loop lines, we have added combustors. We've changed our development plan, and we've worked closely with our third-party midstream provider to alleviate constraints in the field. Cost improvements as well as completion, innovation, or generating additional inventory on our existing acreage which is exciting thing, many times the great fields continue to get better.
On the strategic side, we have proactively addressed our cost structure by eliminating $50 million or $1.20 per barrel to improve our competitive position throughout -- through the use of both technology as well as innovation. We also have moved non-strategic or non-core assets out of the portfolio to pay down debt and improve our balance sheet. In the second quarter, you saw us do two transactions, it was less than 7% of our non-op position in the Bakken for north of $50 million and that money went directly to address our debt.
At Whiting, we're going to have a relentless pursuit of industry leading cost structure. So over the last 12 months, we've had an entirely new senior executive team join me at Whiting with a variety of experience and a wealth of knowledge and as we looked at the portfolio, we did not like where we sit on this plot, almost $10 a barrel on LOE and G&A per barrel produced at Whiting. And so we went about trying to attack this and through technology, through automation, through being able to see our data appropriately and think about how to operate an oil field, we've been able to pursue an industry leading cost position. What you've seen so far is only step one of a process.
We have moved down from the first, on the far right, the first blue line to the second one, that's where we are today. But we’re actively working on LOE initiatives across the field. We have 10 major LOE initiatives and 10 internal champions in the company that are working on all aspects of LOE to work on reducing that in the Bakken.
And we believe we know where as a peer-leading operators are in the basin and throughout the North American shells, and we're working to get there and to be leader of the pack and cost structure. So all that to say that, if you want to compete today, the portfolio of assets are very important. And we believe Whiting has one of the strongest portfolios in the field. And this slide is designed to depict why, the first slide on your far left is BMO study of oil rate based declines.
So the lower your base decline, obviously comes with much advantage, the more revenue you have that's residual, the less maintenance capital that you have, the easier it is to build-off of that portfolio. So you can see there's a pretty wide range of oil declines anywhere from the 30s to north of 50%. We sit at 37% or toward the top of that with 1,500 operated Bakken wells.
Moving to the middle, not only do we have a shallow base decline, but we also are 81% liquids, which puts us near the top of our peer group on a liquid performance. So every barrel produced generates more revenue. And so that helps us as well. When you translate those first two over to free cash flow on the far right, you can see that over the last six quarters, we've done very well relative to the peers in free cash flow generation. It is a portfolio that can and will generate free cash flow. And we expect this trend to continue in the future. And we're actively working on everything to generate more free cash flow.
We’re taking action to strengthen our balance sheet. Here is our debt moving forward and our plan to attack it, a kind of a five-step process that we're working on the first one. You may have saw last week that we tend to have an offer for our convertibles on August, the 29th. The idea here is to bring in some converts at a discount and take away that near-term maturity. We are comfortable using our RBL for these because of our free debt, free cash flow generation opportunities and our desire to reduce our overall debt load.
The second thing we're doing is working with our lenders on a technical amendment that we hope to get done here in September for the credit facility to add flexibility to consider our refinancing. November 1 will be our fall redetermination of our bank line. Number three, we’re working on a strong third quarter to deliver third quarter results that continue to give us opportunity and moving back to the free cash flow positive position.
As I mentioned, we have a few asset sales and a challenging A&D backdrop, we will continue to pursue asset sales that are credit accretive and help us along the way on this path. And finally, we’re opportunistically looking to launch a refinancing of our debt when the market allows. So all that to say, a strong liquidity position today, but actively attacking that strength in our balance sheet. One of the big challenges in the Bakken has been gas and NGL takeaway, part of this is due to increased well performance, we're producing more oil and gas than we have historically out of individual wells, as well as a slowdown about two to three years ago when there wasn't a lot of investment in infrastructure.
That kicked-up about two years ago. And in the next seven months, we expect over a BCF of processing capacity to come to the basin, you see a map there of the basin and all the new gas processing plants that do over the next two quarters. Most important for Whiting is the Oneok facilities, you see different likes one and two on the map about half of the new processing capacity is Oneok and that goes into Oneok super system.
So we don't expect a lot of Whiting volumes to go through the two new plants on the east. But it will lower the pressure in the entire system. It will alleviate some of the bottlenecks. And we'll be able to get our gas out of the basin. Coupled with that is an NGL pipeline of 240,000 barrels a day, the Elk Creek line that's due at the end of the year as well. And so with both the gas and the NGL being relieved, we see future opportunity in the Bakken to get those two products to market.
Still Whiting is not going to sit back in discount on third-party, we are actively taking steps to further alleviate the bottlenecks by shifting our development plans to the East, or to Sanish where we have more capacity. We've also loop lines in the field to lower pressure to be able to get our volumes to the plants. We have built and filled our own processing plant at the Ray Gas Plant. And we maximized individual pad production through the use of equipment like gas combustors onsite to keep us from having to flare the gas but be able to combust it onsite and move our oil to market. And so all of those things, we're working on to continue to de-bottleneck the field and make sure that we can get our product to market.
So if you look at Whiting's asset overview just to remind you, our 2010 Capital plans up there, 2Q production was right at 127,000 barrels a day and scale can be very important in delivering superior results. And Whiting enjoys a long history in the Bakken development, currently being the third largest producer as well as the third largest acreage holder in the basin. Through our modern completions as well as our Sanish Field redevelopment and positive stimulation of our parent wells from child completions, there's much excitement today in the Bakken about continuing to develop here with very attractive returns and well performance.
Although we haven’t invested recently in Redtail, there is economic wells to drill in the Northern DJ Basin, about 100,000 acres that's Blackie there, a gas plant in the middle of the basin in a very rural part of Weld County. And so that's certainly an asset in Whiting’s portfolio as well. Our old commitments at Redtail expire in April of 2020 which annualizes about $60 million of free cash flow generation back to the company that we have not been realizing. And so that will certainly help our free cash flow generation as well.
Very exciting about the expanding Bakken inventory. Many times you hear large oil fields get larger over time. And we're certainly seeing that with some really positive results in the Bakken. So what you're looking at is our acreage position in blue and then three different projects that we have investigated over the last year or so to increase performance. So you can see at Cassandra, we have significantly better wells than the offset wells that were drilled there. You've got two things going on in Sanish which is one of the only places I know in the country that this is happening. But the blue lines are your existing wells that have been online for six to seven years, you can see they have a very predictable and stable performance. Until we drill the child well, the child wells are in red.
And you can see that we've had a massive uplift in the child well performance over the original parent wells. But don't miss what's happening to the parent wells, the way out there year six or seven was actually positively stimulated the parent wells through the child wells. Those wells were not refraced, all they were done was shut in, they were pressured up with water, there would be pressure sink and then we frac the child wells. We had enough performance data now in Sanish, almost two years of data tell us that we're actually getting new reserves.
It is not just rate acceleration, as the parent wells now produce more oil than they would have produced if left alone without any redevelopment. And so we do have reserve at growth here. That's significantly helping us and also further exciting down south of the lake in Item three, we made the only acquisition that we've made in the last two years we made down there picked up about 55,000 acres in Foreman Butte to go with our own existing land down there.
And our thought process was there, as we saw an acreage of land that hadn't had any modern completions in the last five years. And we thought if the new simulations work, it could be very significant. We modeled for a case maybe 30%, 40% uplift, to date, we've seen 120% uplift, and it appears to continue to grow.
So early times in Foreman Butte but that really puts 100s of wells on the map that we can take into development in the Foreman Butte area that weren't there before. So all in all, it's really nice. The cheapest inventory we can add is on acreage that we already own. And our teams are actively working through cost reductions, as well as completion techniques to generate more inventory on Whiting's existing acreage. So I'm very proud of the technical teams that have done that work.
I think also, in order to be a basin leader and a most effective developer, you must be excellent at operations. And this is a staggering slide to me, if you think there is 60 rigs running in the Bakken today, what you're looking at on the right is the top 10 rigs in the basin on number of footage drilled for the entire quarter. And you can see that Whiting has a fleet of four and they’re four out of the top five rigs in the basin. This comes from years of relationships with all these rigs have been multiple year rigs for Whiting. And this comes from a key relationship with the rig contractors to really optimize be willing to try new things, that technology, motor technology, mud technology to drive this.
But four out of the top five rigs in the basins certainly gives Whiting a competitive advantage. I think in the first quarter probably of 18 people said, we've reached the technical limit on the drilling side, we were kind of stagnated at 10 day wells, and that's 20,000 feet measure depth to drill in that 10 days. So fairly good but we challenge that, we said that there's more to get here. And we really think we could break instead of stagnant and at a technical limit, we could be continuously improving, what we've seen over that time is a phenomenal 30% decrease in time to where these four rigs average 7.3 days per well, in the last quarter.
Some of those wells have come in under six days. So there's still more to go. But we'll continue to work on our entire fleet to drive down our drilling time and our cost. So not to be out done on the completion side or on the drilling side, our completion guys have gone to work as well. And they've done an excellent job. What you're looking at here on the graph is an all of 2018, we averaged about six stages per day in the Bakken and this includes winter operations as well. You can see what we've done this year, through the relationships through listening, through partnering with our operators, with our service contractors, we've been able to almost double the amount of stages that we get in any given day.
This essentially cuts the completion time in half, and significantly saves on cost having that horsepower out there on location. So again, tremendous uplift on the execution side both in drilling and completions, our latest generation completions, what we've been working on is reducing the CapEx and getting the same results as we were in the previous generation. And so we've seen a reduction in CapEx on our completion side, the same early time well results and so we're very encouraged by what we see there.
I wanted to cover this slide in that, there's a lot of words that people talk about ESG today, there's a lot of reports out there. But Whiting, we are serious about ESG. And we put our money where our mouth is and this is just one example of many commitments that we have as a company to the environment, we were out of compliance with state regulations in 2014. We took that serious at 2015, we complied and we've been compliant every year since then and every quarter since then.
This takes millions of dollars to actually do. But we're very proud of the accomplishment and we think to be a sustainable long-term company in the Bakken, you need to meet state regulations. And we have continued to do this and the current regulation is 88%. As a operator group, we are out of compliance with the state fairly significantly, the last numbers were reported at 76%. So there's a lot of gas being flared outside of state rigs. But we are above that threshold. And we work every day to drive that North.
Our goal is to capture all of it if we can, and continue to move forward in that. And so finally, Whiting's value proposition and summary we are positioned to deliver sustainable returns to investors, while driving our long-term value, we plan to do this squarely through free cash flow generation, we're going to be very disciplined on capital spending, we realize it's a margin game and it's a value based proposition. We're focusing on our strategic opportunities that we see in the Bakken, we're building on cost and being a cost and technology leader in the basin, using our scale to help us with that developing the assets properly with the right infrastructure and living our values every day.
We plan to drive long-term value in the same way this portfolio has delivered in the past. And that's what disciplined investments. It's worth improving our cash margins as we move forward, strengthen the balance sheet. And we'll add organic inventory in an actively managed portfolio. So with that, I thank you for your time and listening today. I look forward to a couple of questions. And then we'll be in the breakout session thereafter.
Q - Jeanine Wai
All right, thanks very much, Brad. We’ll put you in the hot seat now.
So I just have a few questions, maybe we start out on some operational stuff, we’ll hit a little bit on the balance sheet, and then maybe broader, broader items. So just starting off, I think one of the challenges of operating in a more mature basin is core inventory, which is a big subject these days. However, Whiting has been really optimizing its completions. And you've not only been able to extend your core inventory, but also increase the recovery from largely developed areas through infill drilling. So can you just talk a little bit about what opportunities there are in some of your core areas like Sanish to do more infill drilling, while also increasing the parent wells?
Sure, I’d be glad to. I think if you look at any shale play, you see that your overall recovery, especially in the old shales are very low. And depending on what play you are, 7%, 10%, 12%, maybe 15%. And we look at that as a great opportunity. As you've seen the conventional basins develop, they've continually got more and more of the oil in place out. We think there's that same technology revolution coming to the shale plays.
And that's what we've been trying to do through better completion. And so we know with near field and far field diverse, we're keeping more of the sand in the formation, we're also cracking more rock, we're placing more proppant, we're initiating more tracks along that. And we think in Sanish for instance, we've seen something go from a 10% to 12% recovery to maybe 18%, 19%, 20% recovery.
And so that really is a distinct advantage and some of these plays to get back at, there's a lot of ways to try to get back at it to you re-drill the parent well, you go in and refrac the parent well, you can refrac the child well and stimulate the parent, all that we're working in kind of reservoir simulation. But I think there's a great opportunity in these oil fields, we know a decade ago, that the completions were very ineffective. We know that by a fact now until how do we get at those reserves where pressure may be depleted. But how do we go back in and get those reserves economically.
And we're very excited of what we've seen in Sanish, we were concerned that it might just be rate acceleration, and you would quickly fall down. But after two years, as I've said, we've already recovered more oil in the parents than we would have ever recovered out to 2040. And so we know that we're attacking new, we're getting new reserves that we wouldn’t have gotten for.
And getting up to that 18% is that unique to Sanish, there's something about the rock qualities there versus your other areas that may be up to 12% or maybe other areas or 25%. I'm just throwing out numbers.
No, you’re exactly right. I mean anybody that has looked at the Bakken and those that Sanish is the sweet spot. So start in the place that you have the best opportunity to win. But the techniques that we're applying in Sanish well, I think we applied in other parts of the Bakken and other shale plays. But that is where the most whirlwind places in the Bakken. And so that's the place to start and learn and it gives you the most, it's probably the most forgiving environment to try it in. What we're trying to do now with full scale development is do it right the first time, so you don't have to come back. But anything that hasn't had latest completion technology over the last couple of years, I think would be a right candidate to go in and try to increase recovery.
Okay, and then maybe moving to gas processing. I know you mentioned it during your prepared remarks. Can you just review for us again the line of sight you have, we've got a bunch of new plants coming online. You mentioned the Oneok Demicks I plant and that’s 4Q, 2019 I believe. But I guess what I'm really getting at is for your investors, when do you think you'll have a better sense of your own 2020 plans?
Yes, so we're in the throes of working our 2020 plan right now. So more to come in the next few months. But the infrastructure is really key because we're going to deploy capital in places where we think we can obviously get the production of the market. We're excited about what's coming in that oil has always been taking care of in the Bakken because rail was such a large part of its early career. And so through pipe and rail, fine on oil, really is gas is the limiter and NGLs and so we're excited about the Oneok facilities because that's our primary provider.
And as those things get up and running, they want is really important getting those things outlined, where they run at 98%, 99% is going to be really important. And so bringing those up the right way and moving the right amount of gas through them early time is important to us. But what's nice about the Oneok system, it's kind of a super system that everything's tied together. And so there's plants today that are running at 110%, 120% of capacity and Demicks Lake will really be able to alleviate that pressure, be able to lower pressure throughout the field, and we'll get gas through existing plants that we can't today.
Okay, and then Correne, it wouldn't be fair to not spread it around. So, in terms of balance sheet, you've initiated a process already to tender some of your 2020 convertible senior notes. Can you just talk about what the processes for tendering the rest of the convertibles as well as the 2021 notes? And this is a 10-part question is my question usually tend to be, how much availability do you have on your revolver to say if you need to use that for the senior notes?
So lots of different parts to the question there. And really, the first thing I want to start off with is that we're not really looking at just the 2020 or 2021 in isolation. It's more taking a holistic view on the full $1.4 billion and how we want to tackle that. And so we've got a combination approach, we're going to use for that, yes, we're going to set us up for an execution of refinancing. Yes, hopefully later this year, early next year when markets turn around, which is one of the reasons that we went ahead and launched the tender process is to make sure we could optimize an execution going forward.
In addition, we had already planned on using part of the credit facility. So we don't mind having some borrowings underneath the credit facility, we have a borrowing base that is $2.25 billion, we have electric commitment underneath that $1.75 billion. So we have ample kind of flexibility underneath that. So having some borrowings underneath the credit facility, given the fact that we’re going to be focused on getting back to cash flow generation, allowing us to be able to pay that off over time.
In addition, we looked at some non-core asset sales, you guys saw in the second quarter, we actually were able to announce and then subsequently close on those asset sales that we can use those proceeds directly to pay-off the debt. So having some flexibility with some of the outstandings underneath that credit facility makes a lot of sense for us. All of that is setting us up for the ability to execute upon the refinancing in the best way possible later on, once we see market conditions improve, and we have a lot of different options available to us. So we're exploring those options then I think will be set up for a strong execution.
Okay, great. And then maybe we just brought him back out a little bit. We've talked about this a lot today on just where certain bases are on the maturity cycle, where is the Bakken in terms of the maturity cycle?
I think it's in a great place, it's in a kind of maximum cash flow state, and that the operators are fairly stable. You've seen for the last two years, you've seen fairly stable rig count and completion count. You've seen that, we haven't really seen an inflation in cost, or that much of a deflation but the Bakken is isolated enough where it costs a lot to move equipment in and out of the Bakken. And so I think the industry has done a good job of utilizing what's there without making big demands on other things.
We've seen stuff like sand prices come down. And so we're in a real sweet spot, I think it's a mature basin, where we get the infrastructure in place, we’ll be able to move our product, you can see the efficiencies that we've been able to drive into the program. So instead of drilling 30 day wells, we're drilling six, seven day well. And so we're in a place where I think we could really with infrastructure, we can maximize the free cash flow generation in the basin. And with the redevelopment and expanding Bakken Core, there is ample additional inventory that's coming to bear. So I think it's a great time to be in the Bakken.
And so what are your thoughts on consolidation, I learned the new term today. Somebody one of your peers used the term Cramco and I guess we’re talking about private equity and that there is some distress in the private equity market as well as with some of the public and one of the places that it came up when was maybe in the Bakken or in just another basin. So how do you view consolidation in the Williston. I know, it's already a pretty cord up basin with less number of players and others, but how do you see that? And then, are there do you see the opportunities potentially, for Whiting down the line?
Yes, I think hopefully, you see today, we're very excited about our own portfolio, it was very shallow base decline, it’s very oily and we're doing excellent on the operation side. The goal is really get our cost position into a peer-leading, industry leading position. And then I think we're well poised to either really benefit from what we currently have or existing inventory, or potentially take advantage of that down the road, what we want is a pristine balance sheet with excellent execution, and excellent operations.
And then I think that gives us some, some flexibility in operations, flexibility and options down the road. But today, we're firmly focused on our own inventory building our team out getting this to be a world-class performance was really a world-class asset.
The Cramco is in reference to private equity companies kind of smashing, when smaller ones together to larger ones. I just thought it was neat. I think I'll just close, we're almost out of time here. Just generally speaking, we've had this conversation today with a lot of people in energy. We've talked a lot about what needs to happen to get the incremental fire back. And what do you think that is for E&Ps and how does Whiting fit into that picture?
My personal opinion, I'll go and then Correne if you want to add some, you're welcome to? I mean, I think we've got to run a business for business sake. I mean, I think we need to, I mean I think we need to compete in the broad market out there. And I think a lot of times, maybe we have chased growth for growth sake or being allowed commodity price to swing us way too much. I think we ought to be about all those fundamentals of business that we need to be largely being free cash flow generation. I mean, this needs to be value based. We need to be focused on the margin. Everybody has a finite inventory and that manufacturing process of doing it right and maximizing our returns on capital employed, I think is very important.
I don’t really have much to add to that. It's been prudent users of capital and being able to build the trust over time that we know how to grow and grow responsibly.
All right, great. Well, we're just about out of time. So the breakout room is in Riverside Ballroom and Brad and Correne, this is a real pleasure. Thank you very much.