Extraction Oil & Gas, Inc. (XOG) CEO Matt Owens on Q3 2019 Results - Earnings Call Transcript

Nov. 10, 2019 10:16 PM ETCivitas Resources, Inc. (CIVI)
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Extraction Oil & Gas, Inc. (XOG) Q3 2019 Earnings Conference Call November 7, 2019 4:30 PM ET

Company Participants

Louis Baltimore - Director IR

Matt Owens - President & Acting CEO

Marianella Foschi - VP Finance

Conference Call Participants

Welles Fitzpatrick - SunTrust

Brad Heffern - RBC

Betty Jiang - Credit Suisse

Leo Mariani - KeyBanc

Marshall Carver - Heikkinen Energy Advisors

Operator

Good afternoon. I am Carmen, and I will be your conference facilitator today. I would like to welcome everyone to the Extraction Oil & Gas Third Quarter 2019 Financial and Operating Results Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer period. [Operator Instructions]

Please be advised that the remarks today, including answers to your questions, include statements that the Company believes to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. Those risks include, among others, matters that the Company described in this financial and operating results news release, issued this afternoon, and its filings with the Securities and Exchange Commission. Extraction disclaims any obligations to update these forward-looking statements. While the Company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, general economic conditions, competition, technology and environmental and regulatory compliance. The Company's drilling schedules, capital plans and other factors that may cause its results to differ materially.

I would now like to turn the call over to Louis Baltimore, Extraction's Director of Investor Relations.

Louis Baltimore

Thank you, and good afternoon, to everyone. We're glad you could join us today for our third quarter earnings call. With us today on the call, we have Matt Owens, our President and acting CEO; Marianella Foschi, our VP of Finance; Tom Brock, our Chief Accounting Officer; and Eric Jacobsen, our SVP of Operations.

I'd like to remind you that today's call, in addition to the aforementioned forward-looking statements, also includes the discussion of certain non-GAAP financial measures. Please be sure to read our full disclosure on forward-looking statements and GAAP reconciliations in our earnings release, and in our filing on Form 10-Q, which we provided earlier today, after the close of trading.

I'll now turnover the call to Matt Owens, our President and Acting CEO, to go through some of the highlights for this quarter, our 2020 plan, along with an update on Mark's health.

Matt Owens

Thanks, Louis. Good afternoon, everyone. Welcome to our third quarter earnings call. I would like to start off by thanking all of our investors and partners for your continued support for Mark, during this time. Everything is still progressing as expected, and we hope for him to make a full recovery in the coming months. I'd like to quickly touch on our third quarter results, and then go into the details behind our 2020 program, and the longer-term strategy that we introduced here, in our redesigned investor presentation. You'll also get to hear from Marianella Foschi, our recently appointed VP of Finance. She is new to many of you out there, but she has been with us at Extraction, since near the beginning. I'm looking forward to many of you getting to know her better, in the upcoming months, as we get back out on the conference circuit, to talk about all the great things we have going on currently at the Company.

During the third quarter, our upstream drilling and completion operations were executed as planned, as we turned on 22 high-quality wells in Greeley. However, we were negatively impacted by a large scale unplanned outage on the western gas system, that reduced our production during the quarter by over 8,000 BOE per day. This outage was resolved by the very early part of October.

If you turn to Page 10 in our investor deck, you'll find our midstream diversity map that most of you are very familiar with. We spent the last few years working tirelessly to assemble the most diverse gas processing portfolio in the DJ Basin. It took a tremendous amount of hard work and negotiation with the various third parties involved, but I am proud to say that the transformation, we've all been waiting for is here. All of the projects you see on this map, are now fully operational.

We are sending volumes from East Greeley down Rocky Mountain Midstream's East Greeley pipeline. We are moving incremental volumes from our Windsor area to RimRock's Pierce plant. And Elevation Midstream's Badger CGF is running beautifully, servicing our Broomfield area. We are now producing all of our wells without any significant production constraints. To give you an idea of what that looks like, during the last week in October, we produced over 126,000 BOE per day, including over 57,000 barrels a day of crude oil. That being said, I still point you to our revised guidance range, which implies about 100,000 BOE per day during the fourth quarter.

It took some time for us to ramp our production up through October, and we'll have to see how the rest of the quarter goes with respect to weather. However, I do look forward to showing you longer-term production data from our newly unconstrained Greeley wells to validate how prolific the acreage under the city really is.

Focusing on capital, I think our expenditures during the third quarter came in nicely below, what most of you out there were modeling, despite similar levels of activity. For those of you that have been following Extraction since the beginning, it's my world-class technical team that really sets us apart. We built this Company with the goal of constantly innovating our designs, and I think that these cost reductions really demonstrate that. As a result of our well-designed optimization efforts, we were able to reduce our 2019 D&C capital budget by 15% with only a 5% impact to our production, which is largely explained by asset divestitures and midstream outages.

On the regulatory front, we once again demonstrated our ability to successfully navigate the Colorado regulatory environment. During the third quarter, we entered into an operator agreement with Commerce City in Adams County, covering about 152-mile locations. This is our second large scale operator agreement outside Weld County signed after Senate Bill 181 was passed.

Turning to our 2020 guidance; our plan is to invest just enough to maintain our operational momentum, and use the incremental free cash flow to bolster our liquidity and pay down debt. The overarching theme of our plan for the future is free cash flow generation to drive production growth per debt adjusted share. Over time, we expect to grow our free cash flow via modest production growth, lower base declines, and meaningful reduction in interest expense as a result of paying down debt.

I've also continue to challenge my team to squeeze every bit out of our cost structure, further maximizing our capital efficiency without sacrificing well performance. I look forward to seeing what ideas we come up with.

Before I turn it over to Marianella, I'd like to quickly touch on our ongoing asset divestiture program. During the third quarter, we divested the majority of our 2019 non-operated program for approximately $22 million. This brings our year-to-date divestiture total to approximately $46 million, which is right in line with our land expenditures to-date. Offsetting our land expenditures with asset sales, has been our plan, and we continue to execute on that with additional potential divestitures in the hopper.

I'll now turn it over to Marianella, to discuss our financial position.

Marianella Foschi

Thanks, Matt. We ended the third quarter with $450 million undrawn on our revolving credit facility. On November 4, as part of the Fall redetermination process, our borrowing base and elected commitment were reduced to $950 million, despite a 20% increase in PDP reserves, since the Spring redetermination. The decrease was driven primarily by an approximate 60% reduction in the NGL price that used by the bank group.

Despite the borrowing base reduction, given our plan to generate significant and growing free cash flow in the fourth quarter, and into the future, we remain comfortable with our liquidity position. That being said, reducing the balance on our revolver is one of our top priorities. And we intend to use free cash flow generated during the fourth quarter to reduce our revolver balance by over $70 million, bringing it to just under 50% drawn by the end of 2019. Our preliminary 2020 guidance implies between $40 million and $60 million of free cash flow next year, on a fully consolidated basis, which represents a free cash flow yield of over 15%. As we continue to decrease interest expense with debt reduction, we expect to further improve our free cash flow profile.

We also have full common equity ownership in Elevation Midstream, including a 25% equity stake in Platte River Midstream. These systems move volumes from our Greeley and Broomfield areas, which we expect to continue growing. Consistent with what we said in the past, we think these midstream assets have considerable value today, but would be worth more next year, as these volumes continue to increase. So with everything we've outlined here, we have a clear path to continue improving our liquidity, while reducing leverage.

With that, I'd like to open it up for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And our first question is from Welles Fitzpatrick with SunTrust. Please go ahead.

Welles Fitzpatrick

Good afternoon. So you guys talked about the asset sales being 1,000 to 2,000 barrels a day. Is that range? Is that just a timing of the close issue?

Matt Owens

It was a 1,000 -- roughly a 1,000 barrels of oil per day, and about 2,000 BOE for the full year.

Welles Fitzpatrick

Okay, I apologize. And then on Coyote, it looks like those inflected at around month nine. Is that a function of the ongoing -- or I guess, it's not ongoing anymore, but of the midstream issues that would have been present at that time? Or is that a function of what you think that the well profile will look like?

Matt Owens

No. That actually -- we drilled 10 wells on the Coyote pad initially. And we came back in and drilled the remaining six wells that we're going to the south of that pad. So that was the wells being shut-in for the offset fracs, and then coming back online and cleaning up afterwards.

Welles Fitzpatrick

Okay. Okay, got it. I'll hop back in the queue. Thanks.

Operator

Thank you. And our next question is from Brad Heffern with RBC. Your line is open.

Brad Heffern

Good afternoon, guys. So Matt, the numbers that you quoted for that last week of October, obviously, well above either the 4Q guide or the 2020 guide. So is that just conservativism? Or is this just flush production, and we're going to see declines with the stabilization of the production base sometime during next year?

Matt Owens

It was mostly flush production. So during that month of October, we turned on about 50 wells, and then we also had the production that was constrained on the western gas system coming back online at the same time. So we did have a lot of flush production coming on. But I'd say the majority of it was due to the new wells that we're bringing on that we've been completing during the second and third quarter. And it was really just kind of the Eastern Greeley pipeline system, and the Badger system, all kind of coming online right around the same time.

Brad Heffern

Okay, got it. And then as far as the trajectory goes in 2020 with this CapEx plan, do you see it being relatively flat production throughout the year? Or how do you expect it to trend?

Matt Owens

We'll expect probably a slight decline in the beginning of the year, just given what we're exiting as. But for year-over-year basis, we're focusing on flat oil production, and then we'll have a slightly larger than that on our BOEs, just given the areas that we're focusing the drill bit right now in Greeley and Broomfield, which are areas that make a little bit more gas and NGLs, and what our traditional production mix has been.

Brad Heffern

Okay, got it. And then just finally, I wonder if you could put a little more color around the decline in CapEx for the fourth quarter. Obviously, it's pretty late in the year, and it's a pretty low implied number for the fourth quarter, so how did you achieve that?

Matt Owens

For the fourth quarter, it's -- we don't have a lot of frac activity happening in the fourth quarter. Most of our capital plan for this year was the big dollars that were spent in the second and third quarter, getting ready for all the volumes to time up and come online with the two midstream facilities that we were in the process building. And then in the fourth quarter, we're back to mostly drilling, and then we'll be back to completions again, in the -- full-time in the first quarter.

Brad Heffern

Okay. Thank you.

Matt Owens

Thanks.

Operator

Thank you. [Operator Instructions] And our next question is from Betty Jiang with Credit Suisse. Please go ahead.

Betty Jiang

Hi, I have a follow-up just on the 2020 production profile. Just wanted to make sure -- are you expecting the oil production also to be flattish at 42,000 barrel per day through the year, after a little bit of decline early in the year?

Matt Owens

Yes, there won't be huge amounts of fluctuation. But like I said, the first quarter might be a tad bit low. But on a year-over-year basis, we're guiding 2020 to be, the midpoint at 42,000 barrels. So basically flat year-over-year to what we're guiding in 2019.

Betty Jiang

Got it. But it's -- but it won't be declining -- like -- by 4Q20 production will not be declining sub 42,000 barrels per day?

Matt Owens

We're not anticipating that at this time.

Betty Jiang

Got it. And can we expand on the PDP oil decline. Looking at Slide 5, if a year in '19 your PDP oil decline is in the high 40% range, by year-end '20, a lower PDP decline, how would that translate to a potentially lower maintenance CapEx for '21?

Matt Owens

Yes, that's exactly what it would do. So our base decline has come down each year, and as we're slowing down and focusing more on free cash flow, we don't have as much as flush production coming on each year which, therefore, would also translate into a lower base decline. And from this plot, you can see we were kind of in the upper-40s at year-end 2019, and then we're forecasting that to be somewhere around the mid-40s, maybe a hair lower at the end of this year. So, yes, lower maintenance CapEx to keep that flat going forward.

Betty Jiang

And what would that be -- are we talking about $50 million lower or just directionally? Could you help us with some sort of magnitude?

Matt Owens

Well, for this, this is a -- this decline that you're looking at here is oil only. And for the CapEx range that we gave next year, we're also guiding to pretty much flat year-over-year production. So, we're fairly close to -- our capital plan next year is fairly close to the maintenance CapEx for oil.

Betty Jiang

Okay. All right, thanks.

Operator

Thank you. And you have a question from the line of Welles Fitzpatrick from SunTrust.

Welles Fitzpatrick

Hi guys, thanks for let me hop back in. You hit on this in the prepared remarks, but it's fair to assume that the $100 million to $120 million of cash flow in Q4 and then the $50 million next year goes to take down the revolver, and then you can put the Series As on the revolver. Is that the kind of game plan as it stands now?

Matt Owens

We haven't determined it exactly how we're going to move forward with that. We're still evaluating what we're going to do with the Series A. But as far as the free cash flow goes for the fourth quarter this year, and what we have next year, we're going to be focused on enhancing our liquidity, and then also looking at potentially reducing debt in other ways.

Welles Fitzpatrick

Okay, great. And then the decision on the Hawkeye elevation build out, if that went forward, is it safe to assume that, that would fall almost entirely or entirely in '21 and beyond?

Matt Owens

At this point, with the plan that we have right now, slowing down and focusing more on delevering and generating cash flow, it's pushed some of our development outwards, and that would include Hawkeye. So it has been pushed a little bit from what our initial plans were a year or two ago.

Welles Fitzpatrick

Okay. And then just one follow-up. You guys have talked about monetizing elevation in the past. Is that something that you would want to sell as kind of one piece or given that Hawkeye is kind of moving a little bit to the right, could you sell Platte or maybe SWW independently?

Matt Owens

They can be -- it can be done either way. So we have the option to do Platte River independently, or we could do it as a combined system. It's really going to depend on what the cash flows look like that, and what kind of valuations people are going to put on it. Platte River is a larger system than Elevation is right now. It's got a lot more production history and more total barrels moving through it. But we do expect the volumes to continue ramping in the Elevation system throughout next year and the following. So we do have the option to do either one, but potentially might be able to get a better value, if we combine both together.

Welles Fitzpatrick

Okay. Thank you. Very helpful,

Operator

Thank you. Our next question is from Leo Mariani with KeyBanc. Please go ahead.

Leo Mariani

I was hoping you could provide a little bit more color around kind of rough activity levels in 2020 in terms of what you're going to run on the rig side, as well as the frac crew side, and how many wells you might expect to turn in line next year?

Matt Owens

Yes. If you look at -- turn to Slide 8 in our new investor deck, we outlined that. On there it will be -- between 1.25 and 1.5 rigs and frac fleets is where we'll be for the year in 2020. And then the gross wells drilled and completed then turned in line are listed right down there on the page, but they're all right around 90 wells, and a little bit over two-mile average lateral length.

Leo Mariani

Okay. And I guess just in terms of debt reduction, I know you guys had a program to buy back bonds that's been in place for a while, where do you kind of stand there? Have you kind of bought back -- I think it was a $50 million left in the authorization as of last quarter. And obviously, just where your bonds are trading, do you want to kind of get more aggressive and buy those in the open market with free cash flow? What's your plan for the bonds?

Matt Owens

We do still have an authorization outstanding to repurchase more bonds in the open market. But I'd say, right now, our near-term focus is enhancing our liquidity to the range that we're comfortable with. And then after that, we will look at, opportunistically, reducing debt, whether that's buying bonds at a discounted price or something else. But once we get liquidity taken care of, and in a comfortable range, then we'll evaluate the next methods.

Leo Mariani

Okay. And I guess just you kind of talked about 100,000 barrels a day average production, I guess, BOE per day in the fourth quarter. Do you kind of have any kind of tighter CapEx range for fourth quarter that you might be able to provide here? Just trying to make sure, I get my arms around how you get to the free cash flow number there in 4Q.

Matt Owens

Nothing tighter than the three quarters that we've already reported now, and then the revised guidance range for the full year.

Leo Mariani

Okay. Thank you.

Operator

Thank you. And we have a question from the line of Marshall Carver with Heikkinen Energy. Please go ahead.

Marshall Carver

Yes, thank you. With regards to the CapEx next year and the turn in line schedule, do you expect CapEx and turn in lines to be steady through the year? Or is it going to be -- is either going to be dramatically first-half or second-half weighted?

Matt Owens

Yes. We try to do the best that we can every year to keep that that steady. But I think it will be fairly close to around 50-50 in the first half and the second half, but that's still is being fine-tuned given the pace that our rigs are going, and if a pad shifts up 20 days or 30 days or not, it could shift that around a little bit, so we'd be able to give more color on that as we get into the first quarter.

Marshall Carver

Okay. But as far as -- and that's look like goes for both completions and for CapEx dollars.

Matt Owens

Yes.

Marshall Carver

Okay. And as a follow-up, last quarter you talked about the oil pricing dynamic in terms of differentials getting better into next year. Do you still see that being the case?

Matt Owens

Yes. We've seen that trend to continue to get better. Second quarter was when our differentials were at the highest. I think we were right around $9 in the second quarter. We've seen that come down into the low-8s for the third quarter, like we were anticipating. And I think for right now, we're seeing it stay right around the low-8s through the end of this year, and then hopefully getting a little bit better in our favor as we go into the first quarter and second quarter of next year.

Marshall Carver

All right. Thank you.

Operator

Thank you. And we have a question from the line of Gabe [ph] with Cowen. Your line is open.

Unidentified Analyst

Good afternoon, guys. Just back to the October rate, did you guys -- sorry if I missed this, but did you give an oil mix on that and should we expect, I guess, something similar to what you put up in 3Q about 48.9%?

Matt Owens

Yes, that rate -- it was 126,000 BOE a day, and 57,000 on the oil. So it's right around the mid40s for the percent oil. But again, remember that is just because the all of the turn in lines that happened right at that time were in our Greeley and Broomfield areas, which is traditionally have larger or higher GORs than our traditional production mix. But the oil volumes are still similar to what our traditional oil mix or production volumes have been.

Unidentified Analyst

Okay, thanks. That's helpful. And then just a quick follow-up; so you closed $46 million year-to-date on asset sales. I guess, was there -- what was the exact timing, I guess? Like when do those asset sales closed? Was it in 3Q or was it something earlier this year, and then just kind of revising guidance now. Just a little bit of curious on the timing.

Matt Owens

We had one divestiture that closed in the first quarter that we announced that was around $22 million. And then we had the -- some very minor ones in the second quarter, but then in the third quarter is when we just had this second sale, that was also right around $22 million close.

Unidentified Analyst

Okay, got it. Thank you.

Operator

Thank you. And sir, I'm not showing any other questions in the queue. I would like to turn the call back to Matt Owens for his final remarks.

Matt Owens

Thank you, everybody, for your time today. That concludes our conference call. Have a good afternoon.

Operator

And thank you ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

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