Chord Energy Corp

NASDAQ:CHRD

Earnings Call Transcript 2018-Q2

[Operator]

Good morning. My name is Keith, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Second Quarter 2018 Earnings Release and Operations Update for Oasis Petroleum. [Operator Instructions] Please note, this event is being recorded. I will now turn the call over to Michael Lou, Oasis Petroleum CFO, to begin the conference. Thank you. You may now begin your conference.

[Michael Lou, executive]

Thank you, Keith. Good morning, everyone. Today, we are reporting our second quarter 2018 financial and operational results. We're delighted to have you on our call. I'm joined today by Tommy Nusz and Taylor Reid as well as other members of the team.

Please be advised that our remarks on both Oasis Petroleum and Oasis Midstream Partners, including the answers to your questions, include statements that we believe 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 disclosed in our earnings releases and conference calls. Those risks include, among others, matters that we have described in our earnings releases as well as in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements.

During this conference call, we will make reference to non-GAAP financial measures, and reconciliations to the applicable GAAP measures can be found in our earnings release and on our website. We will also reference our current investor presentation, which you can find on our website.

With that, I'll turn the call over to Tommy.

[Thomas Nusz, executive]

Good morning, and thanks for joining our call. Oasis completed another solid quarter as we continue to execute on our 2018 plan. Performance in our cornerstone Williston asset remains strong and our subsurface understanding in the Delaware is accelerating, putting us closer to a formal development program on this world-class asset. I'd like to start with 4 key points this morning.

First, our update last night showcases the capital efficiency of our program, with production guidance up 10% in the fourth quarter of 2018, while we flexed capital up by $80 million.

Second, we're capitalizing on strong Williston margins and realized pricing, with great LOE and diffs driving great cash flow from that asset.

Third, we are realizing financial improvements driven by disciplined capital allocation, our divestiture program, reduction in net debt-to-EBITDA and growth within cash flow on our E&P business.

And lastly, OMP has done a great job executing and landing 3 third-party contracts. It remains an excellent, competitive advantage for us, and we as Oasis shareholders participate in its growing success with our ownership of 69% of the LP units of OMP.

Focusing on production, Oasis produced 79,400 BOEs per day in the second quarter, an all-time high for the company. Great well performance, coupled with running towards the high end of our completions cadence, put us in a position to raise full year 2018 production guidance approximately 4%, adjusting for the expected loss of approximately 2,000 BOEs per day in annualized 2018 production related to recently announced divestitures. Said another way, production guidance for the full year is still higher than the original guidance on an absolute basis.

And as I mentioned earlier, our exit rate is up 10%, consistent with our increase in CapEx. Importantly, we're driving meaningful growth while maintaining capital discipline.

We are maintaining our projection of being free cash flow positive on our E&P business for 2018 and in 2019. Additionally, internally controlled infrastructure through OMP continues to provide flow assurance in a tight processing market, lead to reduced costs and provide access to liquid marketing points with direct access to premium markets.

As noted in our press release, we're up across the board on our production guidance in both the Williston and the Delaware, again, a testament to our strong capital efficiency. Our measured approach to our new Delaware asset has played out as we had originally planned. Delaware well performance remained strong, our subsurface knowledge is growing and we've been able to secure the services needed to execute on our plan. We continue to gather the necessary information needed to formulate the optimal long-term development plan for this tremendous asset.

As a result, we're now raising our 2018 exit rate in the Delaware to 6,000 BOEs per day, a 20% increase over prior guidance and raising our 2019 exit rate from 10,000 BOEs per day to 11,000 BOEs per day.

Since we announced our divestiture program, we have agreed to approximately $360 million in asset sales, primarily in our fairway and nonoperated acreage. The team did an excellent job on this front. We feel this is tremendous progress thus far and continue to have discussions regarding other select noncore assets. These divestitures help strengthen our balance sheet and accelerate asset value while we focus on efficient deployment or development of our core inventory. We're in a strong position on that front, with nearly 15 years of core and extended core inventory capable of generating attractive rates of return even in low pricing environments.

Oasis continues to be returns-focused, with our capital efficient development driven by an exceptional operating team. We have an excellent operating legacy in our Williston position and look forward to transferring our expertise to the Delaware basin.

As noted earlier, our measured approach to development in the Delaware has proven to be a good call given the relative price weakness and as our learning curve is accelerating through both internal activity and that of other operators. Well performance continues to be strong. We just added our second rig with the plan to accelerate completions into the back half of 2019 when we expect regional pricing to improve with expanded takeaway.

Oasis continues to deliver great cash margins and high returns. We're executing ahead of original expectations, leading us to raise guidance for the second time this year. And as I mentioned earlier, we're in a great position to be able to deliver meaningful growth in cash flow and volumes while being E&P cash flow positive through 2019.

With that, I'll turn the call over to Taylor.

[Taylor Reid, executive]

Thanks, Tommy. Our first half performance was strong this year, and we look forward to executing our plan in the second half of 2018. As Tommy mentioned, overall, we are delivering results ahead of plan, leading us to raise production guidance despite the loss of nonoperated and nonaccrual volumes associated with divestitures. We continue to integrate the Forge assets into our portfolio and remain impressed with the well performance.

During the quarter, we completed 2 gross and net wells in the Delaware. We added our second rig in late May, and we expect to stay on track with our previous guide of 6 to 8 wells completed for the year. In the Williston, we're primarily focused in the quarter and now expect to complete around 110 gross operated wells in 2018, at the high end of our original 100 to 110 well range. Remaining completions are expected to be pretty evenly spread across the remaining quarters.

We are flexing capital up in 2018 by $80 million, at the midpoint of our guidance, in order to capture the value that our Williston Basin well performance, cost structure and margins provide us in this current pricing environment. By employing the excess cash flow generated by higher Williston volumes and realized prices, we are more than replacing the production loss from the divestitures with higher capital efficiency. This speaks to the quality and inventory life of our core acreage, along with the company's operational efficiency.

Our frac efficiency continued to be strong, driven by solid performance from OWS. Our third-party frac performance has been very good as well, and we've actually been able to leverage our Bakken relationships to engage quality frac crews in the Delaware.

As far as well performance, Wild Basin continues to be a strong core area for us along with Alger and Indian Hills. Our 2018 program remains weighted towards Wild Basin, where we are able to deliver oil growth with a higher gas oil ratio compared to the rest of the basin. To accommodate the increased gas volumes, Oasis Midstream Partners' second gas plant is expected to come online in November of this year.

Outside of Wild Basin, we continued to complete wells with great results in both Alger and Indian Hills. In addition, we're in the process of completing 3 Painted Woods wells, including a spacing test, and we plan to complete 5 Red Bank wells later this year.

In addition to our own activity, we continue to watch other operators across the play implement enhanced completion technology and are excited about the early time results and the potential implications for our extended core and fairway acreage.

In the Delaware, our Wolfcamp wells continue to exceed our expectations, significantly outperforming the industry 1.2 million BOE type curve. All wells are still naturally flowing, with our Bighorn well still flowing after more than 2 years on production. We expect to continue to improve returns through the use of longer laterals and optimizing completion techniques.

On the operational cost front, the team did a tremendous job of reducing lifting cost during the quarter, with LOE per BOE of $6.11, coming in below the low end of our guidance range on the year of $6.50 to $7.50 per BOE. In light of our continued operational success, we're further lowering our full year LOE guidance to $6 to $7 per BOE. We also continue to realize attractive oil price differentials with our second quarter average being $2.42 per barrel despite relative weakness in the Delaware Basin.

We continue to capitalize on the ability to move most of our Bakken barrels to coastal markets. Going forward, we expect to see oil differentials of around $1.50 to $2.50 per barrel. While Delaware differentials are high right now, we see sufficient long-haul pipelines being built. By the second half of 2019, we're taking advantage of opportunities to lock in flow assurance at attractive pricing.

To that end, earlier this year, Oasis committed to the Gray Oak Pipeline, representing our first commitment to long-haul takeaway in the Delaware. The increased pipeline capacity coincides with the timing of activity acceleration in our Delaware program. For now, approximately 95% of our production enjoys the tight differentials of the Williston Basin.

To close, it is a very exciting time at Oasis. We continue to integrate our world-class Delaware asset and are pleased with the progress to date. In the Williston, we continue to focus on full field development in the core, which is especially attractive given the premium pricing being realized there. Oasis continues to demonstrate that it has the team and the assets to deliver on its plan in both the Williston and Delaware Basins. Our operational excellence, culture of innovation and organizational discipline are differential and will serve us well as we move forward.

I will now turn the call over to Michael.

[Michael Lou, executive]

Thanks, Taylor. Production growth is exceeding our expectations. Operating costs are trending lower, and we successfully executed multiple asset sales. This confluence of factors puts us in the position to be free cash flow positive on our upstream business in 2018.

We continue to enjoy strong liquidity levels with a total borrowing base of $1.6 billion, with only $651 million drawn as of June 30, 2018. Oasis had a net debt in the second quarter annualized EBITDA multiple of 2.8x. Adjusting for the divestitures, pro forma leverage in the second quarter would have been 2.6x net debt to annualized EBITDA.

During the quarter, Oasis was successful in refinancing over $400 million in various maturities, further pushing back our average debt maturity. The tender process was funded by our $400 million offering of senior notes due 2026, which priced at the tightest level Oasis has seen since going public, and by drawings under the revolver.

We have no significant near-term debt maturities at this time. Our 2018 program remains secure given our prudent financial risk management, with approximately 65% of the remainder of 2018 estimated production hedged. We have added collars in 2019 with higher oil price ceilings, which still ensure program success in lower price environments while also allowing us to capture more upside in higher price environments.

On the midstream front, we continue to leverage Oasis Midstream Services, or OMS's ability to improve our world-class operating margins and full field development capabilities. OMS gives us the competitive advantage supporting flow assurance in tight gas processing market in North Dakota.

Oasis Midstream Services' second gas plant remains scheduled to be online in November. Additionally, we announced several new third-party agreements with attractive build multiples in June, and we continue to have discussions with multiple parties across all commodity streams.

As we noted in the last call, gas production continued to increase in the core of the Williston Basin and is starting to push up against existing processing capacity. Additionally, North Dakota gas capture regulations are getting tighter. We're starting to field more questions on the issue and how Oasis is positioned. Our team has done a tremendous job getting in front of these requirements. We plan to use our new $200 million a day processing plant in Wild Basin to maintain our gas capture rates and to partner with other industry participants to meet their processing and gas capture requirements.

We'll be talking in more detail on the OMP call shortly, and I would also direct you to our OMP press release for more color on our continued success on the midstream front.

Going forward, we expect to continue to be free cash flow positive on our upstream business while growing production. Midstream capital is expected to be funded by OMP through drops to OMP over time. Oasis continues to execute well and remains on track to provide best-in-class capital-efficient growth.

With that, we'll turn the call back over to Keith for questions.

[Operator]

[Operator Instructions] And today's first question is from Jeoffrey Lambujon with Tudor, Pickering and Holt.

[Jeoffrey Lambujon, analyst]

On the increase in the expected Delaware Q4 production rate, can you just talk more about the drivers there? How should we think about well performance versus the timing component, just thinking about the 2 wells put down in Q2?

[Taylor Reid, executive]

So as we talked about, the well performance has really been good, and we've continued to see outperformance relative to that 1.2 million barrel type curve for the Wolfcamp. In terms of the timing, the cadence has been about what we planned. And so -- and I guess, currently the wells are on average performing better than we expected.

[Jeoffrey Lambujon, analyst]

Great. And then on the Painted Woods and Red Bank wells planned for the back half of the year, can you just remind us what you're testing there on the spacing front? And are there other ongoing tests in some of the other wells? And then any color on timing, that would be helpful as well.

[Taylor Reid, executive]

Yes, so for Painted Woods and Red Bank, again, both spacing test and prior to going in and drilling those areas, we just want to get a better understanding of what that inter-well relationship is going to be. On our inventory, it's spaced somewhere, those areas, between like 8 to 10 wells, and so we're testing in that ballpark. But importantly, it's with the bigger fracs. So historically, when we were in those areas, we were doing more around 4 million pounds fracs or 400 pounds per foot. These wells are going to be testing 1,000 pounds per foot or more and do that with independent wells and wells in spacing. So we're really looking to see how those results look as we do the bigger fracs. Now in terms of the timing, these wells are going to come online third but mostly fourth quarter, so meaningful results won't be until sometime maybe middle of next year.

[Operator]

And the next question comes from Noel Parks with Coker & Palmer.

[Noel Parks, analyst]

I just wanted to ask about the additional infrastructure CapEx. And so the $80 million, that's incremental on top of the original OMP plan, is that right?

[Michael Lou, executive]

Yes, the $80 million is on the E&P side. We've already communicated the midstream increase in our third-party announcements in the June time frame. And so that's all associated with basically third-party deals that have come on sub-2x build multiples on that front. So really, capital-efficient projects that we're able to execute on that side for OMP.

[Noel Parks, analyst]

And the incremental E&P, is that gas infrastructure or around the oil side? And I was wondering, is that spending contained mostly to this year or is there going to be another portion into 2019 for those projects?

[Michael Lou, executive]

So the E&P capital $80 million increase is to basically, call it, the D&C budget. So that's a combination of things. A little bit of it is kind of timing and bringing a little bit more wells on. Taylor mentioned drilling 110 wells in the Williston rather than, call it, around 105. There's a little bit of changes to well design. We talked a little bit about Painted Woods and Red Bank doing some of these higher-intensity completions, so a little bit larger jobs. We had some nonop that's a little bit higher. And so just a few things that are increasing that E&P capital budget. But you can see that we're -- even though the E&P capital budget is going up by $80 million, incredibly capital-efficient growth. And you look at kind of our exit rate growth is up 10%. Obviously, from a capital efficiency standpoint, you're really performing both in the Delaware and in the Williston in big ways. And all this capital increase is focused in the Williston, where you're getting incredible margins.

[Operator]

And the next question comes from Gail Nicholson with KLR Group.

[Gail Nicholson, analyst]

The compositional mix in '19 at 74%, is that driven to a larger percent of the gas capture coming post the processing plant coming online in November? How should we think about that evolution on a go-forward basis?

[Michael Lou, executive]

Yes, Gail, I think that's a great point. We've been talking for a while now that the gas, especially in the middle part of kind of the core of the core of the Williston, the gas levels are high and the processing is tight. Given that, you're still flaring some right now. In kind of that Wild Basin area, obviously, we're coming on with a 200 million a day plant that will help us make sure that we have flow assurance and we can continue to operate in that area efficiently and capture all the gas. So we've kind of started talking about a 74% type oil cut for 2019, and that's really kind of through the whole year. So you can apply that to the full year number, you can apply that to also the exit rate that we kind of disclosed. But what you can't see is that while our oil is growing very rapidly and very capital efficiently, we're also able to capture more and more of the gas, as you mentioned, which is fantastic because then we can monetize that through selling the NGLs and the residue. So it really just helps our economics overall by being able to capture all that gas.

[Gail Nicholson, analyst]

Great. And then looking at '19, you guys talked about adding potentially 1 or 2 rigs in the Williston. What's the driver, I guess, versus 2, versus 1? And then any thoughts on timing there?

[Taylor Reid, executive]

Yes, so we're still working on what the schedule looks like. And really, the driver in terms of the activity is cash flow. So as we talked about, we're going to spend within the E&P cash flow. And if you start with the Delaware, we're going to have a metered program there, kind of 2 rigs running next year and likely picking up the third rig late in the year or later in the year as the pipeline bottlenecks are eliminated there. Then, we'll ramp activity in the second half of 2019. So the incremental cash flow left above that, we will spend up in Williston. And so with the additional volumes and the growth that we've talked about today, we obviously have incremental cash flow that will allow us to run more rigs than what we are doing this year. So we're going to go from -- we started the year at 5, dropped to 4 and likely pick up 2 rigs next year. And in terms of the timing, maybe one early in the year and a second, middle, but we're still working through exactly what that looks like.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Tommy Nusz for any closing remarks.

[Thomas Nusz, executive]

Thank you, Keith. With assets focused in 2 of the best oil basins in the U.S., a team with a proven operating track record and exceptional realizations in the Williston Basin, we're set up for an impressive exit to 2018 and a strong performance through 2019. Our full field development activities in the Williston are on plan, and we're expanding outside of Wild Basin with impressive results, as evidenced by our increased guidance. Our approach to our Delaware operational plan has played out as expected, with well results exceeding expectations. I'm really proud of how our team came up with a measured plan in the Delaware and stuck with it, defying conventional thinking of immediately accelerating activity on the heels of our acquisition, especially now as we're seeing the effects of constrained takeaway capacity, which we identified as a business risk going in.

Additionally, I'm very proud of how the team worked to anticipate gas processing constraints in the Williston and made the decision to deploy midstream capital to provide flow assurance along with giving us the opportunity to accelerate activity and capture third-party opportunities for Oasis Midstream Partners.

In summary, we remain focused on developing our extensive core-to-core inventory with a returns-focused mindset and dedication to capital discipline. This complements the great progress we've made on strengthening our financial position. Additionally, our midstream asset base serves as a competitive advantage, providing flow assurance to our core areas.

Our Permian entry provides us a great platform to continue to build scale. And finally, the quality and diversity of our asset base and the strength of the team we've assembled give me great conviction around the future success of Oasis. Thank you again for joining our call.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.