Chord Energy Corp

NASDAQ:CHRD

Earnings Call Transcript 2019-Q3

[Operator]

Good morning. My name is Chad and I will be your conference operator today.

At this time, I'd like to welcome everyone to the Third Quarter 2019 Earnings Release and Operations Update for Oasis Petroleum. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the call over to Michael Lou, Oasis Petroleum's CFO to begin the conference. Please go ahead, sir.

[Michael Lou, executive]

Thank you, Chad. Good morning, everyone. Today, we are reporting our third quarter 2019 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 the 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 measures and reconciliations to the applicable GAAP measures can be found in our earnings releases and on our website. We will also reference our current Investor Presentation, which you can find on our website.

With that I will turn the call over to Tommy.

[Thomas Nusz, executive]

Good morning and thanks for joining our call. The Oasis team delivered a strong third quarter exceeding our production guidance and spending below our CapEx projections. We also made progress, lowering our cost structure in reducing debt. The organization continues to focus on per share value drivers of cash flow, cash margins, return on investment and capital efficiency, all of which should drive attractive returns whether at the well project or corporate level. Taylor will get into more operational detail in a minute, but I want to highlight a few key points about our performance and strategy.

First Oasis continues to execute its measured development program in 2019 and has generated strong free cash flow at the E&P level. We reduced debt by $125 million under our Oasis credit facility driven by that free cash flow along with cash from divestitures. Second in the Williston, we executed well across the board. I'll let Taylor and Mike will give more color in a bit, but we've made material progress in reducing our well costs, which should help drive capital lower in 2020. Separately in a tough A&D market, we were able to divest a small portion of Williston assets during the quarter, bringing in about $41 million in proceeds.

Third in the Delaware it's been a little shy of 2 years since we announced the Forge acquisition and we've made tremendous progress. The teams have been able to secure services and drive operational efficiencies, get visibility on takeaway capacity and we continue to make significant progress delineating our position and understanding the subsurface across that position. During 2019, we brought on wells across the Wolfcamp A, B and C intervals. Additionally, we've been able to do multiple small bolt-on acquisitions at attractive prices allowing us to increase ownership and block up DSUs for longer laterals.

Drilling times and well costs have come down significantly which should help drive efficiencies and lower costs going forward. In 2020, we will essentially shift towards development mode focusing on multi-well pads, primarily in the Bone Springs and the Wolfcamp A. Fourth, our midstream assets continue to provide a competitive advantage as seen in our cost structure, netbacks, flow assurance and gas capture where we are currently running about 93% to 95% capture versus a North Dakota average of 81%.

As you know, we've made significant investments in this segment over the last several years and our midstream business has been a critical asset for managing business risk especially as other midstream companies are delaying invest -- have been delaying investment in the Williston Basin.

On the heels of our IPO of OMP in the fall of 2017, our premier midstream assets generated approximately $160 million of EBITDA in 2018 on added basis. Just a year later in 2019, we expect to generate between $260 million and $270 million. We continue to look at ways to enhance the value of our ownership in these assets. Fifth, in August and September, we took steps to optimize our G&A cost structure to better fit our business on a go forward basis.

As part of this initiative, we reduced our workforce by approximately 13% including the elimination of 1 of our 2 OWS frac crews. While these types of decisions are always difficult, we need to continuously look at ways to be as efficient as we can throughout our organization. The team has done a great job and as a result, we're trending below our G&A guidance for the year and these third quarter actions are expected to lower the annualized run rate by about $10 million based on where we are today.

We'll continue to look for efficiency options to meet investor expectations as we move through the structural transition that the entire industry is experiencing today. That includes developing creative solutions and doing things differently than we've done in the past.

Lastly, looking forward to 2020, our anticipated activity levels were essentially unchanged since our August call. We're currently planning to run 2 rigs in the Williston and 2 rigs in the Delaware for most of the year. We would expect fourth quarter 2020 volumes to be up modestly from our fourth quarter 2019 average, this puts us on a path to maintain modest growth, reduce debt and generate free cash flow in a $50 to $55 world or below and we will continue to protect these cash flows with an active hedging program. On the capital side, we noted last quarter that the consolidated 2020 CapEx was anticipated to be shy of 800 million at this point, we expect to deliver essentially the same plan with much lower CapEx.

Stepping back to 2019 volume outlook is unchanged adjusting for the impact of the divestitures and we are currently keeping our capital plan in line with our August expectations. Additionally, we lowered our operating expense guidance yet again as we're beating expectations for the year. Oasis E&P produced approximately $47 million of free cash flow in the third quarter and $68 million year-to-date remaining on track to deliver strong free cash flow for this year. The core business remains strong and we continue to advance our strategic objectives, which includes size and scale, portfolio diversity, asset quality and financial strength.

With that, I will turn the call over to Taylor.

[Taylor Reid, executive]

Thanks, Tommy. Since our last call, we've made considerable progress and our 2019 program remains on track. Our priorities remain running an efficient core Williston program and harvesting free cash flow to fund the Delaware while paying down debt. In the Williston, we continue to be encouraged by delineation results from step out areas. An investor presentation has been updated to reflect the latest data from select emerging areas in the Williston.

As shown on page 8, we and other operators continue to see results in Painted Woods, North Alger, South Cottonwood, and Red Bank, which demonstrate the quality of the inventory versus the rest of the basin. While Oasis will be focused on the heart of the Williston for quite some time, we're impressed by the results observed in these step out areas. As a reminder, substantially all of our 414,000 acre Williston position is held by production, and with the benefit of our position being dominated by fee acreage we have significant optionality on the pace of development and speed of permitting. With only about 3% of our acreage on federal lands, we have limited exposure to longer permitting cycle times.

Turning to the Delaware. We continue to observe strong well productivity across the column, including the Third Bone Springs and Wolfcamp A, B and C. Stepping back and looking at Delaware well performance as a whole. On average performance has been above our expectations and we've been pleasantly surprised by performance in the lower benches. Oasis has essentially shifted to development mode with our next completions focused on the BIGHORN and ARROWHEAD pads in early 2020. These units will be focused on the Wolfcamp A and Third Bone Springs.

Transitioning to our drilling and completions, our cycle times have improved sharply over the past 12 months. Our last 2 mile lateral wells had spud to rig release in the 23 to 27 day range versus our first wells in the basin that were in the 40 plus day range. Drilling time should continue to improve as we optimize well designs and increased focus on multi-well pad development.

We are currently targeting well cost of $9.4 million for a 4 well pad which compares to approximately $11.5 million in 2018. We see this trending to below $9 million in 2020 through a combination of service cost improvements and increased efficiencies along with continued optimization of drilling and completion design. Our tentative 2020 plan includes 2 rigs and approximately 20 to 25 completions.

In the Williston as we spoke about last quarter, we are focused on reducing well cost to design changes and pricing concessions. We've made progress on both these fronts since we last spoke and are on track to achieve a $7.2 million well cost by year-end versus $7.6 million at our August update. We see this potentially turning down another 5% in 2020. Our tentative 2020 plan would have us running 2 rigs during the year and completing approximately 45 to 55 wells.

To close, we continue to execute on our 2019 plan, focused around an efficient Williston program and preparing the Delaware for full-field development. Oasis benefits from our inventory depth, subsurface and operational expertise, as well as the top-notch marketing group.

I want to congratulate the team for significant improvements in well cost and capital efficiency, cost control across the business, combined with a keen focus on production optimization in midstream run times. The strides that we have made since the last quarter have been impressive and I challenge the team to maintain their relentless focus as we move forward.

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

[Michael Lou, executive]

Thanks, Taylor. Operationally, Oasis is executing well and remains focused on delivering our 2019 program. We're driving well cost lower, reducing operating costs, G&A and are generating significant free cash flow which was supplemented by asset sales to further reduce debt.

On the operating cost side, we executed well in the third quarter as a combination of great cost control and higher volumes led us to beat our LOE guidance. The team has made great strides minimizing downtime and being proactive in well maintenance. We lowered our LOE cost guidance range for the year. On G&A we're trending materially below our original full year guidance. In the third quarter, we took a charge of approximately $2.4 million related to a reduction in force which is expected to lower the G&A run rate by approximately $10 million.

Adjusting for non-recurring charges, G&A is on pace to be 7% below original guidance. As Tommy mentioned, we were able to divest various asset packages in the Williston for approximately $41 million, which contributed to our overall significant debt reduction during the quarter. Wells associated with these divestments came online very recently. The production impact from those divestitures was approximately 330 BOEs per day in the third quarter and is expected to be 1.7 MBOE per day in the fourth quarter.

Our updated fourth quarter production guidance is unchanged from the August update when adjusting for the divestiture impact. For full year 2020, we would expect the divestiture impact to be about 1.1 MBOEs per day. Volumes for 2020 are still expected to be higher than our fourth quarter average. On 2020 capital, last quarter we had discussed the consolidated number of about $800 million. And given the progress that we've made in reducing costs, we now believe consolidated CapEx could be approximately $750 million.

This reduction would be a combination of lower well costs on the E&P side and optimization of capital on the midstream side. And given the trends of well cost, this number could continue to be biased downward. Clearly the team has been focused on the capital and operating cost side and are doing an incredible job. On the revenue side Williston crude differentials remain strong in the third quarter as our marketing team consistently delivers superior realizations.

In the Delaware, crude differentials generally are at parity or premium to WTI as several new long haul pipes came online this year. Looking in to the fourth quarter, differentials are expected to widen modestly from the strong level seen year-to-date, but it looks like our full year diffs will be better than our full year guidance. As we've discussed we generated significant free cash flow which allowed us to repay a $125 million under our Oasis credit facility. We are further securing our future free cash flow generation with over 80% of the remainder of 2019 estimated oil production hedged at a weighted average floor price of $56 per barrel. For 2020, we've added additional collars and swaps, the details of which can be found in the in the appendix of our investor presentation.

Turning to Midstream, we're excited to report Oasis executed final agreements for the dedication of certain Delaware acreage to OMP via the Panther DevCo. Additionally Oasis continued to move closer to towards a long-term agreement for gas gathering and processing in the Delaware and we will likely be in a position to elaborate more early next year.

Total midstream CapEx was $37 million in the third quarter and we are trending below our previous full year guidance range. Net CapEx to Oasis attributable to its retained interest is expected to range between $14 million and $15 million. This excludes Delaware spending which will be in reimbursed by OMP in the fourth quarter. We'll be talking in more detail on the O&P call shortly and I would also direct you to our O&P press release for more color on our continued success on the midstream front.

To sum things up, Oasis has a laser focus on increasing operational efficiency, reducing costs and maximizing profitability. The team continues to execute well and we're in a strong position to deliver repeatable long-term growth, significant free cash flow generation and continued reduction of debt.

With that, I'll turn the call back over to Chad to open the line for questions.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Derrick Whitfield with Stifel.

[Derrick Whitfield, analyst]

Congrats on a strong update. Perhaps for Tommy or Taylor, could you speak to some of the drivers behind your targeted well cost improvements in the Bakken and Delaware and perhaps split out the structural versus cyclical elements?

[Taylor Reid, executive]

Yes. So really, Derek, it's been a combination to talk about both service cost, certainly getting better on the efficiency and cycle time of the business as well, and also a bit of design. I don't have an exact break out for what the components are. We did talk about early in the year, you saw about a 10% move on the stimulation side drilling contracts in the first half really didn't move quite as much in the second half of the year, you've seen a little bit more acceleration on the service cost side of the business but there's truly been a big move on like say both the efficiency side of the business and cycle time. So roughly, maybe it's is 50-50 in improvement something like that.

[Derrick Whitfield, analyst]

Great. And as my follow up perhaps for Michael was the RBL reduction expected? And secondly, as we look out to the 2020 spring redetermination. What's your level of confidence that you can retain your current commitments assuming similar macro conditions?

[Michael Lou, executive]

Derek, what I'd say is that not unexpected. I think we've talked about some of the things on the reserve side from previous years and spacing that we had, so not surprise on that side. And then the bank certainly have come down pretty considerably on their price deck that they're assuming. I don't expect that to continue. I think they have taken some conservatism, but we'll see where that goes, I mean the good thing for us is that we've been able to reduce significant amount of debt under that revolver where our reliance upon the revolvers getting less than less, and we'll continue to -- as we continue to generate free cash flow. So our percentage utilizes continuing to go down, so we're not as worried about it.

[Operator]

The next question comes from Michael Hall with HEA.

[Michael Hall, analyst]

Maybe just quickly. Following up on that line of thought, any commentary or maybe target around line of sight on additional debt reduction in 2020.

[Michael Lou, executive]

Yes, we don't have a specific number right now. Michael. Obviously, we haven't given kind of full guidance, we're still working through plans, but it's a balance of all the things that we've talked about, how do you over time generate kind of a moderate growth and kind of its repeatable over a long period of time but generate significant free cash flow and repay that debt. So it's going be a combination of things we haven't come up with exact numbers quite yet, but that will be over the coming months.

[Michael Hall, analyst]

Okay, and are there any similar transactions to what we saw in the third quarter that maybe you have in your sights?

[Michael Lou, executive]

Right now we don't have additional sights on kind of additional sell downs if that's what you're referring to. No, we don't have any more right now.

[Michael Hall, analyst]

Okay. And then I was also curious just on the kind of cadence of activity. I guess through 2020, that's helpful disclosure around the expected -- still expect to see some growth for 4Q versus 4Q, what's the timing of the Delaware Basin completion specifically in 2020 plan currently?

[Taylor Reid, executive]

So the Delaware completions, we'll get on those wells and start fracking in first quarter and probably kind of January timeframe and we've got a couple of units, the ARROWHEAD and the BIGHORN that we'll be fracking and those are all multi-well units. So, you're probably not going to see production on those until really second quarter timeframe.

[Michael Hall, analyst]

Okay. And then from the second quarter, is it kind of even cadence from there I guess, if we just kind of spread the targeted completion to the rest of the year?

[Taylor Reid, executive]

Yes, you're going to have fair amount of activity from a stimulation perspective in the first half of the year, a lot of those wells coming on second quarter and maybe some third and then you're likely to have a bit of a gap until completing some additional pads in 3Q and 4Q. As we've talked about in the past, we're really go into development and getting the benefits from a cost perspective of doing more wells in these units at a time, you just get groupings of wells coming on, so it's not perfectly spread through the year. But -- second quarter, third quarter, you may have a bit of a gap and then more in the third and fourth.

[Michael Lou, executive]

Okay, Michael from a production profile standpoint, I don't think we've changed anything from our last quarter. I think we said a fourth quarter exit rate, I think at that time, those were implied, 46 previous divestments that would be -- sorry, -- 86 would be kind of a little bit higher than that for next year and what I would say is that you would expect kind of the first half of the year to be a little bit lower and it kind of ramps to the back half of the year. So fourth quarter 2020 over '19 should be increasing a little bit more.

[Michael Hall, analyst]

Okay, that's helpful. Appreciate it. Michael. And then I guess on the, as we just kind of think big picture about the 2020 Williston program, is it pretty similar program as it relates to kind of the different areas where we see completions over the course of 2020 relative to 2019. The mix across the basin, I guess now.

[Taylor Reid, executive]

Yes, the program next year is really focused. It's primarily Wild Basin and Indian Hills. And as we talked about. We'll have a couple of rigs running and one frac crew. So you know it's probably relative to this year, maybe we had a few more wells in Red Bank, then what you may see next year, but not a big difference in overall weighting really.

[Michael Hall, analyst]

Okay. I appreciate it. Congrats on the progress.

[Operator]

Our next question will be from David Deckelbaum with Cowen.

[David Deckelbaum, analyst]

Tommy, Taylor. Michael, just wanted to follow up on conversation around the Delaware the previous exit rate guidance you basically hit in 3Q. I just wanted to confirm, where you see Delaware volumes now in the fourth quarter and then I'll just ask a follow-up on that.

[Taylor Reid, executive]

Yes. So, we saw where we average for the quarter 8500 and we did our 9,000 plus during the quarter that we were kind of targeted in -- you've got the benefit of getting more work done early cycle times have really come down. And so we're able to drill these wells earlier than we originally thought earlier in the year, so that's good news. Now, along with that, we're not going to have any more completions in 4Q. So you're going to see the volumes come down a bit through 4Q and then even 1Q of next year and then rebounded as going to 2Q and 3Q.

[David Deckelbaum, analyst]

That's helpful, Taylor. And I guess if we're running this 2-rig program in the Williston if this is sort of steady state and we're keeping the Bakken flattish, maybe plus or minus a percent here and there, should we always be thinking about the first half of the year just declining seasonally and then picking back up in the back half of the year.

[Taylor Reid, executive]

Yes, we think that's -- generally, with consistent activity that you're generally going to see that you just get less work done in the winter, we've had this dip and a bit of back loading for a number of years, yes, I think that's a good way to think about it.

[David Deckelbaum, analyst]

Okay. And if I could just ask a quick follow-up. In the press release, you talked about the DD&A rate increasing, I get that, that's an accounting number. Can you give a little bit of color there on just some of the reserve assumptions for the Bakken and the Delaware that resulted in the higher rate?

[Michael Lou, executive]

Yes, David so on the DD&A calc, obviously, some of that's driven around kind of the reserve side and I think we talked about in our August call, the reserve, some of the reserves that we had seen from well spacing test that we had seen previous years back have come down a bit. And so that's affecting the DD&A rate and we do DD&A rates twice a year and so you're seeing the impact in the third quarter.

[Operator]

The next question will come from Gregg Brody with BoA.

[Gregg Brody, analyst]

Just I was wondering -- I'm wondering if you could provide an update on sort of the midstream value creation exercise that you were talking about last quarter and where that stands?

[Michael Lou, executive]

Sure. The short answer is, we don't have an update today. We still -- I think you've heard we were performing at a great level on that midstream assets, they continue to be incredibly strategic as you have heard a number of operators had some weather issues, having strategic midstream like this is super beneficial for us as an operator. So performance has been really strong. We continue to think that the midstream is undervalued and so we're committed to kind of illuminating that value and we'll come out with more when we're able to.

[Gregg Brody, analyst]

Got it. And 2 more for you. The first one, you reduced your commitments on your revolver voluntarily, it looks like. Can you explain the rationale for that?

[Michael Lou, executive]

Borrowing base did come down. I mean, a combination of reserves that we just talked about as well as, like I said previously bank price decks have come down quite a bit both on the oil side and the gas side, a little more conservatism from the banks on that front. So, no surprise, so our borrowing base number came down, we decided to take elected commitments down one because there's less of a need for us to have that high revolver number and we do pay fees on what's unused. And so as you can see our revolver balance came down pretty significantly and we basically took elected commitments down to a level where it was pretty even with where we were at the end of the second quarter in terms of how -- what percentage was drawn. We think that's a good level for us and as we continue to repay debt, we'll be less and less reliant upon our revolver going forward.

[Gregg Brody, analyst]

And that makes sense. And then there is a $20 million charge you took for a litigation accrual. What does that relate to and is there -- how far along is that process?

[Taylor Reid, executive]

Yes, so the, the litigation accrual is associated with, there's a few lawsuits out there and we've got a -- no, with respect to lawsuits, we got a process where we assess the lawsuits. And then what the potential impact of those could be and based on that assessment. We've established a reserve that represents what that impact could be, if you look that we've got really extensive disclosure on those suits. So one of them is lawsuit filed by Mirada and you can look in the disclosure again and read all about that would -- what would it will tell you is that we think the claims really are without merit. But it really is fully laid out in all the disclosures.

[Gregg Brody, analyst]

And that's -- Is there a timing when you expect that to be -- the process to conclude?

[Taylor Reid, executive]

You know, it's hard to predict timing on because of court dates and all those things that move around so hard to give a definitive date at this point.

[Gregg Brody, analyst]

Great, that's helpful. I appreciate the time guys.

[Operator]

The next question comes from Dun McIntosh with Johnson Rice.

[Duncan McIntosh, analyst]

I had a quick question on the fourth quarter, pricing widens out a little bit and I was just wondering if you see improvement kind of getting back more towards your historical realizations next year and what are kind of some of the drivers there widening it out and if it is going to come back in, what is -- where do you see the relief coming from?

[Michael Lou, executive]

Yes, yes. I think this is a bit of a transient thing we have seen early in the fourth quarter, things widen out a bit. Some of it due to kind of Brent TI differentials and some other factors. But what we've seen in as we're starting to look at selling kind of December barrels, now, you're actually starting to see that kind of come back to more historical levels.

[Duncan McIntosh, analyst]

Okay. Great. And then on the M&A front, you commented on -- nothing in the pipeline in terms of further sales from all in the Williston, but you've had some success this year with bolt-ons in the Delaware. I was wondering what that environment looks like? Are there still opportunities there for swaps and continue to kind of core up that position and what you view -- maybe not from a larger standpoint, but bits and pieces here and there, how is that deal flow look?

[Taylor Reid, executive]

Yes, you bet. Good news is we really been able to optimize the position and set it up for from more 2 mile laterals block up more of the acreage doing these, both these smaller deals and trades and we think there's more opportunities to do that. So we will continue to work that front.

[Operator]

Ladies and gentlemen, 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]

Thanks, Chad. In closing, Oasis continues to lower cost and drive efficiency, putting us in a strong position to generate free cash flow E&P free cash flow and reduce debt. Our deep low cost resource base with a strong team behind it puts us in a position to succeed and we look forward to delivering for our shareholders. Again, thanks for joining our call.

[Operator]

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.