Amplify Energy Corp. (AMPY) CEO Ken Mariani on Q4 2019 Results - Earnings Call Transcript

Amplify Energy Corp. (NYSE:AMPY) Q4 2019 Earnings Conference Call March 5, 2020 11:00 AM ET

Company Participants

Martyn Willsher - Senior Vice President & Chief Financial Officer

Ken Mariani - President & Chief Executive Officer

Conference Call Participants

Jeff Grampp - Northland Capital

John White - ROTH Capital

Operator

Welcome to the Amplify Energy's Fourth Quarter 2019 Investor Conference Call. Amplify's Operating and Financial Results were released earlier today, and are available on Amplify's website at www.amplifyenergy.com.

During this presentation, all participants will be placed on a listen-only mode. Today’s call is being recorded. A replay of the call will be accessible until Thursday, March 19th by dialing 855-859-2056 and then entering conference ID 6466309, or by visiting Amplify's website, www.amplifyenergy.com.

I would now like to turn the conference over to Martyn Willsher, Senior Vice President and Chief Financial Officer of Amplify Energy Corp.

Martyn Willsher

Good morning. And welcome to the Amplify Energy Conference Call to discuss operating and financial results for the fourth quarter of 2019. We appreciate you joining us today. Ken Mariani, Amplify's President and Chief Executive Officer will begin the call with comments on our fourth quarter operating results and full year 2020 guidance. I will follow with an update on our return of capital programs and our fourth quarter financial results.

First, we would like to remind you of some remarks may contain forward-looking statements, and are based on certain assumptions and expectations of Amplify's management team. These remarks reflect management's current views with regard to future events and are subject to various risks, uncertainties and assumptions. While their management believes that the expectations reflected in such forward-looking things are reasonable, they can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this earnings call.

Forward-looking statements include, but not limited to our statement about and our discussion of, full year 2020 guidance. Please refer to our press release and SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books, records and reports. For additional detailed disclosure, we encourage you to read our Annual Report on Form 10-K, which we expect to file later today.

Also non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our press release or on our website at www.amplifyenergy.com.

This in mind, I will now turn the call over to Ken Mariani. Ken?

Ken Mariani

Thank you, Martyn. I appreciate everyone joining us today. My remarks on this call will provide an update of our operational performance for the fourth quarter, year-end 2019 proved reserves and guidance expectations for full year 2020.

Production for the fourth quarter averaged approximately 29,900 BOE per day, which was at the low end of our guidance range for the quarter. This result was primarily driven by challenging operations at our Bairoil field in Wyoming and in Oklahoma. At Bairoil, start-up complications following the planned expansion and unrelated compressor outages materially impacted production. In Oklahoma, production was impacted by incremental submersible pump failures largely related to weather events and power outages. Lease operating expenses in the third quarter was $35.7 million, which on a total dollar basis were in line with expectations.

However, on a per unit basis, Amplify's lease operating expense of $12.97 per BOE was slightly above the high end of our guidance range as a result of lower than expected production.

Capital spending for the fourth quarter was approximately $12 million, which was at the high end of our guidance, due to additional costs related to the Beta capital workovers, new development activity at the company's non-operated Eagle Ford assets in the Bairoil expansion start-up.

Earlier today, we announced Amplify's 2019 year-end proved reserves of approximately 163 million BOE based on flat SEC pricing for crude oil of $55.69 per barrel and natural gas pricing of $2.58 per MMBtu. The reserve mix for our proved reserves was approximately 43% crude oil, 18% natural gas liquids, and 39% natural gas and approximately 80% of the proved reserves were classified as proved developed.

The SEC PV-10 or standardized measure for our proved reserves was $917 million, which was significantly impacted by price reductions. Compared to year-end 2018 SEC pricing for crude oil was down at 15%, natural gas pricing was down at 17% and NGL prices were down at 40%.

Based on this SEC pricing Amplify's year-end 2019 proved developed reserves had a PV-10 value of approximately $705 million, which is 63% or $272 million higher than the company's enterprise value of approximately $433 million as of February 28.

Earlier today, we also issued our initial guided expectations for 2020, including forecast for production, pricing differentials, operating costs and CapEx. Our full year 2020 production forecast is for average full year 2020 production ranging from 26,300 to 29,700 boe per day. As a result of the Bairoil expansion and the low decline rates of our oil properties, we anticipate that our oil will increase from 37% of fourth quarter 2019 production to more than 40% of production by the fourth quarter of 2020.

Our capital forecast for full year 2020 is $40 million to $52 million with the midpoint estimate of $46 million. The 2020 capital program includes $22 million for development projects, and other capital workovers $14 million for cost reduction initiatives, and $10 million for facilities projects, which are expected to create cost efficiencies and production stability.

Amplify's development capital will primarily be spent in the Eagle Ford, where Amplify has budgeted a $11 million CapEx program, which includes drilling and completing 78 gross 1.7 net wells in 2020. As of year-end 2019, Amplify had received proposals for 60 gross 1.3 net well projects. A substantial increase in development activity in this area demonstrates the superior well return potential from Amplify's acreage in the core of Karnes County, Texas.

The cost reduction capital will be spent in Oklahoma, where we anticipate spending approximately $14 million for additional rod lift conversions and electric submersible pump optimizations. The rod lift conversion project initiated in late 2018 has been successful in significantly reducing operating and maintenance costs, which further enhance our margins in the area. The remaining capital budget will be spent across our operated properties at Beta, Bairoil and East Texas. Approximately $10 million will be spent on capital workover projects to bring offline wells back on production and another $10 million will be spent on facility projects, primarily at Bairoil and Beta.

In East Texas, we have budgeted an additional $1 million to complete the previously drilled and non-operated Viper 2 Jones well which offsets Amplify's acreage.

As I look towards 2020, I firmly believe that our proposed capital program is prudent in the current price environment in a cost-effective way to maximize production and reduce costs, while also allowing the company to drive shareholder value by continuing to execute on its return of capital and corporate consolidation strategy.

The successful Midstates merger and integration demonstrate the value creation potential of our PDP weighted operating platform in that capturing cost synergies can lead to strong free cash flow generation, despite falling commodity prices. We strongly believe that recent market events will intensify the push for industry consolidation.

And with that in mind, we have retained Evercore as our financial adviser to pursue accretive consolidation transactions. Evercore's outstanding team will further position Amplify to capitalize on consolidation opportunities and generate additional value for Amplify shareholders.

With that in mind, I will now turn the call over to Martyn to discuss our financial results.

Martyn Willsher

Thank you, Ken. I'd like to first discuss the update on our dividend policy and the progress we've made on our return-of-capital programs, followed by an update on our fourth quarter financial results, liquidity and hedge positions. Amplify paid its quarterly dividend of $0.20 per share or approximately $8 million on December 18 to shareholders of record on December 4.

As announced in our press release earlier today, we decided to reduce our first quarter 2020 dividend to $0.10 per share which while reduced still provides for an effective dividend yield of approximately 10% which is among the highest in our industry.

While recent price reductions related to coronavirus induced demand destruction may prove to be transitory, we believe the best course of action at this time is to conservatively manage Amplify's balance sheet and liquidity to maximize the long-term value for our stakeholders.

The upcoming quarterly dividend of $0.10 per share will be paid on March 30 to shareholders of record as of the close of business on March 16. Amplify had initiated an open market share repurchase program at the closing of the merger to repurchase up to $25 million of the company's outstanding shares of common stock. As of February 28, the company had repurchased approximately 4.2 million shares of common stock for a total cost of approximately $24.9 million.

Moving on to our fourth quarter results, net cash from operating activities was $21 million and our adjusted EBITDA for the fourth quarter was $27 million both of which were below expectations due -- largely due to the production results discussed earlier.

G&A for the fourth quarter was $8.3 million which included $1.5 million of transaction and severance costs which were primarily the final onetime adjustment from the Midstates merger. Excluding the onetime merger-related costs and $0.3 million of non-cash compensation expenses fourth quarter cash G&A was $6.5 million or $2.38 per BOE which was below the midpoint of our guidance.

We had previously anticipated $7 million in recurring cash G&A for the fourth quarter as we finalize the integration of the merger. But we were able to execute on our promise and delivered a $6.5 million run rate for G&A, one quarter earlier than projected.

Due to additional cost reduction initiatives we believe that after expected first quarter 2020 cash G&A of approximately $6.5 million, we will be able to reduce cash G&A to approximately $6.1 million per quarter for the remainder of 2020. Free cash flow which we define as adjusted EBITDA less CapEx and cash interest expense was approximately $11 million for the fourth quarter which was below the low end of our guidance range.

This was driven by our previously discussed operating results coupled with slightly higher-than-forecasted capital expenditures.

As of February 28, 2020 Amplify had total debt of $280 million under its revolving credit facility with a current borrowing base of $450 million. Amplify's liquidity was $176 million consisting of $6 million of cash on hand and available borrowing capacity of $170 million. Our next regularly scheduled redetermination is expected in April 2020. And at this time, we are forecasting a decrease in our borrowing base due to material reductions in bank price forecast. However, despite this anticipated degrees Amplify will maintain sufficient liquidity moving forward and we will continue to generate incremental free cash flow that will reduce our outstanding borrowings.

Moving on to our latest hedge positions. Since our last earnings call, Amplify has opportunistically added to our hedge positions on crude and natural gas. These positions allow us to lock in a certain percentage of our future cash flows, while also allowing us to benefit from the upside and mitigating exposure to the downside. Across commodities, we are approximately 61% hedged in 2020 based on our full year 2020 midpoint guidance production of 28,000 BOE per day. On oil specifically, we are 77% hedged at attractive pricing relative to our oil production guidance midpoint of 10,950 barrels per day.

As of February 28, our hedged mark-to-market value was a net gain position of $58 million. Amplify's fourth quarter 2019 hedge presentation contains additional details on our current positions and was posted on our website earlier today under the Investor Relations section. During the period of significant market turbulence, Amplify is taking proactive steps to maintain this commitment to our shareholders by prioritizing balance sheet stability and reducing risk.

As we continue to weather market headwinds, we consider the dividend reduction and lower capital budget to be prudent and conservative response. While these steps will help, we have also intensified our efforts to identify additional cost savings opportunities, which will further boost the free cash flow profile of the company during this challenging environment.

This formally concludes our prepared remarks for this morning's call. We would now like to invite analysts and investors to ask any questions they have for the management team. Operator, please open the line for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Jeff Grampp with Northland Capital. Please go ahead.

Jeff Grampp

Good morning guys.

Ken Mariani

Good morning, Jeff.

Jeff Grampp

I was wondering first I'll start on the dividend front. And obviously I appreciate where you guys are coming from and maintaining the balance sheet integrity. But just really wanted to focus on kind of two specific topics within evaluating, how you guys are kind of thinking about the dividend after this $0.10 rate that they're looking at least for the first quarter. Can you guys just talk maybe high level, how comfortable are you I guess with kind of maintaining or seeing maybe even if leverage creep up to maintain or improve that dividend? Or is leverage reduction something that you guys would prioritize over getting that dividend back up after towards that $0.20 a quarter rate?

And then kind of a related topic, if you guys have given any consideration internally or at the board level to more of a maybe a fixed plus variable type of strategy in terms of the dividend whereby -- and you can have a more sustainable dividend rate and maybe use kind of periods of cash flow outperformance to layer on a variable component?

Martyn Willsher

Jeff, I'll take that. Obviously, we had long discussions about the dividend and whether we felt we should maintain the $0.20 dividend or be a little bit more conservative in cutting it back down to the $0.10. Obviously, we're in a period of a lot of uncertainty with where -- what's happening globally on supply chains and the demand destruction.

While we -- this could rebound quickly. We also realize that sometimes these things can take a long time to play out. And we want to make sure that our balance sheet and our leverage remains at a reasonable level. And so we just took a proactive what we thought was a reasonable step to kind of balance the two, leverage liquidity, while also maintaining our commitment to return capital to shareholders. So, really a combination of all of them and really just not wanting to take additional risk during a period of increased uncertainty.

Ken Mariani

And Jeff this is Ken, I'll just add to that. Our dividend decisions are made on a quarterly basis by the Board. And obviously, we have a lot of robust discussions centered around company performance, external factors, et cetera, et cetera. So, everything is on the table on a quarterly basis.

So, to Martyn's point you never want to get ahead of your skis to make short-term decisions that have significant long-term implications. But I will assure you the Board is along with the management team monitors the situation closely. And our next quarterly discussion regarding the dividend again everything will be on the table.

Jeff Grampp

Got it. Appreciate those comments. And for my follow-up on the operational side how should we think about kind of the ramp progressing for Bairoil given, I guess, a little bit of a slower start that you saw in the fourth quarter. Can you kind of maybe give us a little bit more sense of maybe what's baked into the first quarter guide in terms of kind of incremental production from that field? And how you guys are maybe seeing that ramp play out over the remainder of the year?

Ken Mariani

Yes, great question Jeff. We basically deferred that ramp about three months. We're still very excited about the project. As you can imagine it was a very large complex project. It had some start-up complications some of which we anticipate some which we didn't. And just as importantly, while we were going live with the expansion some of our legacy compressors had some unexpected outages that we were able to overhaul and revamp during the start-up timeframe.

So, basically these waterflood, CO2 floods, it's not like flipping a switch once you get everything lined up there is a delay in seeing the benefits of your work at the wellhead. And so to be specific with your question we're forecasting a three-month lag in our initial forecast.

But our expectations have not changed with regards to peak rates, ultimate benefits, ultimate recoveries, et cetera, et cetera. And we're still really excited about the project. With the exception of the three months delay. Did I answer that question Jeff?

Jeff Grampp

No, that's perfect. I'll let someone else hop on. I Appreciate it.

Ken Mariani

Thank you.

Operator

[Operator Instructions] The next question will come from John White with ROTH Capital. Please go ahead.

John White

I caught your hedge position on oil at 77%, but I missed your hedge percentage on a boe basis?

Martyn Willsher

Hey, John this is Martyn. We're at approximately 61% hedged across commodities. So, if you're including that gas and NGLs to the component, so we're between 40% and 50% hedged on gas and NGLs with the rest obviously hedged on oil.

John White

Thank you. And again on the dividend. In fourth quarter 2019, admittedly with higher commodity prices, I had modeled a dividend coverage for 2020 of 1.7 times free cash flow divided by the dividend. And I was pretty well updated my numbers this morning with your new CapEx and your new dividend and $2 gas and $50 oil. And I see about 2.4 times dividend coverage. So it looks like you're being more conservative at this point in time with dividend coverage than you were in the fourth quarter and if you could comment on that? And given the 2.4 times coverage, what are your – if commodity prices stay flat, what are your expectations on maybe increasing the dividend later this year?

Martyn Willsher

Hey, John, this is Martyn again. We obviously look at some of those same metrics. And it's a balancing between – obviously, when you're looking at $47 oil and $1.80 gas. And we're looking at where that strip could go over the course of the year, we are being a little conservative. But at the same time we want to make sure this is a long-term decision here in regards to maintaining a dividend for our shareholders.

We will obviously look at potentially raising it back up if prices come back to a more reasonable level. But what you're seeing obviously with the coverage is low as well as obviously wanting to maintain leverage and with overall EBITDA dropping due to the price drop, we want to make sure that we're managing our leverage profile adequately as well, as well as maintaining that free cash flow cushion that you're referring to.

John White

Okay. Thanks very much.

Operator

Next question is a follow-up from Jeff Grampp with Northland Capital. Please go ahead.

Jeff Grampp

Hey, guys. Just one more quick follow-up. On the capital side is it fair to conclude that the capital program is maybe a little bit more resilient or kind of locked in relative to commodity price fluctuations? And I guess, I'm just kind of thinking since a lot of the capital is more kind of non-D&C related and a lot more driven on kind of optimizing efficiencies and the cost structure that is maybe not necessarily dictated by what the front end of the curve is necessarily moving up or down on is that a fair conclusion? Or – and if not can you guys just talk about the level of flexibility in that program?

Ken Mariani

Yes. Jeff, this is Ken. I'll take that question. When you look at our guidance of $46 million. We already – you can break that up into four buckets. One bucket is what we call discretionary and it's related to drilling and completions. And obviously, $12 million of the $46 million is focused in the Eagle Ford in our non-op position that we have in Karnes County.

And these are some just very superior well economics that makes sense even at $47 oil, they have very attractive returns. So taking that aside, we have another bucket of capital what we call cost reduction initiatives. That's predominantly related to our Mississippi Lime position, where we're replacing submersible pumps with rod-lift installations. And what happens there is, you have a significant savings, cost savings with regards to power and electricity.

In addition to that, we mentioned in our fourth quarter, we had weather and power-related issues in Mississippi Lime that affected a lot of our operations. That impact from weather and power outages is much reduced when you have rod-lift installations versus submersible pumps. So, again, that initiative is independent of commodity price. It's related to cost savings and making our operations more resilient relative to weather and power outages.

And then the third is, what we call, just, when wells go down, good wells go down; we look them on a case-by-case basis. We want to return those good wells back to production. And again, so that's -- a typical example might be a submersible pump going down and we run the economics at the current strip and it makes economic sense to return that well to production.

And oftentimes, that may include purchasing a new submersible pump or a larger pump. So, again, that is evaluated on a case-by-case basis. And, again, it's related to our existing production versus new production. And then, the last bucket is just basic facility expense type expenditures, to maintain our operations.

So, that was a long-winded answer. But to answer your question, a chunk of the money is related to great well economics in the Eagle Ford that makes sense even at current prices. And the rest of the three buckets I detailed are basically independent of oil prices. They're more on the cost savings side, or returning wells to production.

Jeff Grampp

Got it. Yes, understood. I appreciate it, Ken. Thank you.

Operator

There are no further questions at this time. I would like to turn the conference back over to management for any closing comments.

Ken Mariani

Thank you, again, for joining us today. I want to thank our employees for making 2019 a transformative year, successfully integrating all the Midstates assets and operations within 90 days, while also delivering annual cost savings of more than $22 million for our shareholders, with an outstanding accomplishment for our team.

Although, the overall environment presents many challenges, we remain focused on executing our strategy of free cash flow generation and are ready to execute on a new consolidation opportunities. We believe this platform will create long-term value for our investors and we appreciate your support as we move forward. This completes our earnings conference call today. And as always, please don't hesitate to reach out to us with any additional questions. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect.