Amplify Energy Corp. (AMPY) Q1 2021 Earnings Report, Transcript and Summary

Welcome to Amplify Energy’s First Quarter 2021 Investor Conference Call. Amplify’s operating and financial results were released yesterday after market close on May 5, 2021 and are available on Amplify’s website at www.amplifyenergy.com. [Operator Instructions] Today’s call is being recorded. A replay of the call will be accessible until Thursday, May 20, by dialing (855) 859-2056, and then entering conference ID number 6187289, or by visiting Amplify’s website www.amplifyenergy.com. I would now like to turn the conference call over to Jason McGlynn, Senior Vice President and Chief Financial Officer of Amplify Energy Corp.

Good morning, and welcome to the Amplify Energy conference call to discuss operating and financial results for the first quarter of 2021. Joining me on the call today is Martyn Willsher, Amplify’s President and Chief Executive Officer. Before we get started, we’d like to remind you that some of our remarks may contain forward-looking statements, which reflect management’s current views of future events and are subject to various risks, uncertainties, expectations and assumptions. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it 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. 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 quarterly report on Form 10-Q, that was filed yesterday afternoon. Also, non-GAAP financial measures may be disclosed during this call. Reconciliation of those measures to comparable GAAP measures may be found in our earnings release or on our website at www.amplifyenergy.com. I’ll now turn the call over to Martyn.

Thank you, Jason. During the call, I will start with comments on our first quarter performance, provide an operational update and then run through some company highlights. Jason will provide additional details on our financial performance, balance sheet and hedging program. Following our prepared remarks, we will take questions and I will conclude with closing remarks. Production for the first quarter averaged approximately 24,700 BOE per day, a decrease of 6% from 26,300 BOE per day in the fourth quarter of 2020. Approximately half of the decrease or 800 BOE per day was due to Winter Storm Uri with a remainder attributable to anticipated natural production decline. First quarter adjusted EBITDA of approximately $22.9 million exceeded internal projections and was $1 million more than the previous quarter. This increase was primarily attributable to stronger price realizations during the quarter. Capital spending for the first quarter was approximately $5.8 million focused on completion activity at our non-operated Eagle Ford asset, the enhanced workover program in Oklahoma and rig upgrades and facility preparations for the Beta development program, which will commence in the third quarter. Free cash flow defined as adjusted EBITDA less CapEx and cash interest expense was approximately $13.6 million in the first quarter of 2021. Amplify’s strong free cash flow generation this quarter was supported by the prudent deployment of capital to the highest return projects, relentless attention to operating efficiencies, stronger price realizations and our commitment to controlling costs. Now for an update on our operations. A major milestone this quarter was beginning of the preparations for our previously announced Beta development program. During the first quarter of 2021, we deployed approximately $0.6 million towards rig and facility upgrades to prepare for the first restimulation project scheduled in the third quarter of this year. In addition, Amplify expects to drill two sidetracks in the fourth quarter of 2021, with the majority of production coming online in the first quarter of 2022. All aspects of our development program are currently on schedule, and we are eager to begin the exploitation phase of this asset. Amplify expects the low variable cost structure of our Beta asset, along with special case royalty relief and a rising commodity price environment will lead to incremental cash flow generation from these projects while adding additional reserve to our expansive and prolific Beta Field. Amplify intends to use a portion of the incremental cash flow to accelerate our Oklahoma workover program and convert additional ESPs to rod lift. The additional conversions will help to mitigate the impact of future weather disruptions and reduce operational costs, aligning operations in Oklahoma with our comprehensive strategy for production optimization and free cash flow generation. During the quarter, we also saw 23 DUCs in our non-operated Eagle Ford asset come online. These wells have exceeded our type curves with average gross oil IP rates of 1,200 barrels of oil per day. We are pleased with the initial production rates from these non-operated wells, and our Eagle Ford strategy remains to opportunistically participate in attractive projects with the highest economic viability. Regarding our East Texas and North Louisiana assets, we remain committed to responsibly managing production decline while pursuing high-return workover projects as the area remains one of the company’s highest margin assets. Amplify will continue to monitor potential joint development opportunities in the area and opportunistically participate in projects based on economic feasibility. At Bairoil, we have been actively refining our WAG patterns and CO2 injection rates. The first quarter of 2021 has experienced strong operational reliability in the injection and production facilities and the oil production trend has been increasing since the beginning of March. The favorable results are attributable to technological improvements applied to the overall workflow and analysis of the reservoir and injection patterns. Bairoil’s annual maintenance turnaround is scheduled for approximately 10 days in June 2021, which will reduce production during the second quarter. Following the turnaround, we will continue the implementation of enhanced technological capabilities along with targeted workover activity to drive further operational improvements and efficiencies. I will now turn the call over to Jason.

Thank you, Martyn. I’ll first provide details on the company’s first quarter production and expenses. I’ll then give an update on our balance sheet and wrap up with our hedge book. As previously mentioned, production for the first quarter averaged approximately 24,700 BOE per day with the production mix of approximately 41% oil, 16% NGLs and 43% gas. Notably our oil composition in the first quarter represents an increase of approximately 14% from 36% in the first quarter of 2020. This increase is a favorable shift, which we expect will continue moving forward. Lease operating expenses for the first quarter totaled $28.9 million or $13.01 per BOE an increase of $0.4 million compared to $28.5 million or $11.77 per BOE in the fourth quarter of 2020. This increase was primarily attributed to the storm related impacts as we incurred a $0.7 million or $0.30 per BOE increase in workover expenses in the quarter, the prompt actions of our operations team minimize the financial impact of the storm and serve as a prime example of the company’s operational efficiency. Amplify remains dedicated to the disciplined operating expense management and the operational teams will continue to explore additional methods of reducing costs moving forward. GP&T this quarter was $4.6 million or $2.06 per BOE, a decrease from $5.5 million or $2.29 per BOE in the fourth quarter. The reduction is generally attributed to the natural production decline along with production impacts from Winter Storm Uri. Taxes this quarter totaled $4.6 million or $2.08 per BOE compared to $3 million or $1.24 per BOE in the prior quarter. This increase was mainly associated with a positive tax adjustment in the fourth quarter of 2020 and higher commodity pricing, partially offset by natural production decline over the same period. First quarter cash G&A totaled $6.6 million or $2.95 per BOE compared to $5.8 million or $2.38 per BOE in the fourth quarter of 2020. Cash G&A expenses are typically the highest in the first quarter of the year and the quarter-over-quarter increase of $0.8 million was within expectations. Our current projected full year 2021 cash G&A estimate remains approximately $23 million. Capital spending in the first quarter was approximately $5.8 million, an increase of $3.6 million from the fourth quarter of 2020. This increase was largely attributable to the completion activity in the Eagle Ford and expenses incurred to prepare for the Beta development program. Moving onto the balance sheet and our current liquidity position. As of April 30, 2021 Amplify had net debt of approximately $226 million with $240 million outstanding under its revolving credit facility. Our current net debt to last 12 months EBITDA is 2.5x. Amplify’s liquidity position is approximately $34 million consisting of $14 million of cash on hand and $20 million of borrowing capacity. For the remainder of 2021, we will continue allocating the majority of our free cash flow to improving our balance sheet and reducing our total debt outstanding. Our spring borrowing base redetermination process is underway and we do not anticipate any material changes to our existing borrowing base. Now to our hedge book. Since our last earnings call in March, we have added crude oil hedges in 2023. Across commodities, we were approximately 84% hedged in the balance of 2021, 58% hedged in 2022 and 5% hedged in 2023. Specifically, our crude oil production is 90% hedge for the remainder of the year, 65% hedge for 2022 and 12% hedge for 2023. We will continue to monitor the market for opportunities to lock in pricing that supports our strong free cash flow performance. Amplify’s May 2021 hedge presentation contains additional details regarding our current positions and was posted to our website yesterday under Investor Relations section. I’ll now turn the call over to Martyn.

Thank you, Jason. As commodity prices have trended higher since our previous earnings call, our 2020 year-end total approved reserves of 166 million barrels of oil equivalent now have a PV-10 value of $916 million at strip pricing as of April 28, 2021. Our developed reserves of 122 million barrels of equivalent are valued at $689 million using the same strip pricing. Our reserves on a volume in PV-10 valuation basis have materially increased since our previous update in March, and we see this improvement as an important component of our positive outlook for Amplify. Additionally, we are reaffirming our guidance provided in March and have supplemented our initial guidance with full year projections for adjusted EBITDA and free cash flow. Our current guidance projects adjusted EBITDA in the range of $80 million to $100 million and free cash flow in the range of $30 million to $50 million for full year 2021. In addition to the guidance update, we provided greater detail on our operational and financial performance in our earnings release and investor presentation. We are including this additional information in order to better provide our investors with transparency into Amplify’s multiyear financial outlook. Our strategy remains focused on continuously enhancing our free cash flow profile. We have materially improved our profitability and free cash flow generation through transformative reductions to our corporate and operational expenses during 2020, which we expect will carry over through 2021 and beyond. As a result, our internal projections currently forecast more than $140 million in cumulative free cash flow over the next three years at strip pricing as of April 28, 2021. Given our low decline long-lived asset base and a low variable cost nature of our oil assets, this cumulative free cash flow has a potential to increase materially as the forward commodity pricing environment continues to recover. Our dedication to enhancing corporate and operational efficiencies, coupled with our diverse and mature asset base, differentiates Amplify as a leader in generating sustainable free cash flow and creating significant long-term value for shareholders. With our significant reserve value and strong free cash flow outlook, we believe that Amplify remains substantially undervalued in the current market. With that in mind, we are now open for questions.

[Operator Instructions] Our first question will come from the line of John White with ROTH Capital. Please go ahead.

Good morning, guys. Congratulations. I thought it was a very strong quarter and as we all know, the focus – one of the main focuses this year is on debt reduction and you are ahead of my estimates on debt reduction for the first quarter. So really good to see that. Looking forward to your work later in the year at Beta, and I’ll start off with kind of a housekeeping question. The Bairoil turnaround that’s obviously included in the guidance that you published.

Yes, John that’s correct. We include the barrel turnaround for approximately 10 days. That’s a complete shutdown, so it takes a little bit of time to recover from that as well. So that’s fully projected into our projections and into our long-term projections that we’ve included into the investor deck as well. So we include that every second quarter over the next few years.

Okay. Thank you. And again, in your comments on Bairoil, you use the capitalized term W-A-G patterns. Can you explain that?

Sure. WAG, or W-A-G, is a water alternating gas. That’s the method that’s used in these tertiary recovery projects to basically where you’re flooding it with CO2 in order to adhere to the oil and then hitting it with water to basically push it towards the producing wells. So it’s obviously a mixture of those two, it’s water, then alternate then over to gas. The concept there is obviously that we are managing pressure throughout the field. There’s a number of different zones and different areas within the field. As you move through the field, sometimes you need to adjust those. And obviously as we’ve had new compressors online over the last year, we’ve made some modifications to our patterns in order to basically manage the pressures throughout the field. And so that’s what I think we’re getting better and better at with this additional throughput through the plant at managing the pressure at wells as well. And so that’s kind of what you’re starting to see matriculate through the results. And obviously we’ll have a little bit of an interruption in June as we do the turnaround, but we feel like we are, like I said, we’ll have better results from Bairoil moving forward as we – after we get the turnaround, especially.

Thank you for that. You had higher realized natural gas liquids prices than I expected. And a couple of other companies have reported similarly higher-than-expected NGL prices. You want to talk about the NGL market a little bit and what’s driving the strength here?

Yes. This is something we’ve talked about previously and the reason we’ve not added any NGL hedges specifically is that we’ve seen a very strong recovery across all the NGL components, especially once you get to C3 propane and plus. We have a broader mix, kind of a heavier mix in Oklahoma than we do in East Texas, but there’s a few higher fixed costs in Oklahoma. So as those costs have – as those prices have gone up, the increase in Oklahoma specifically has been very impressive. I think it’s almost 3x what we were getting at this time last year. And then obviously in East Texas, it’s probably close to double. We see this trend continuing and have – the forward curve is starting to catch up. It hasn’t been there previously where we’ve had very high spot prices, but the forward curve hasn’t been catching up. It is starting to catch up. And like I said, we project there’s a continued need for NGLs. The production at these current levels and the NGL needs and their recovering economy, we feel very good about where the NGLs are. And like that’s kind of where we’ve – that’s why you’ve seen that particular area not be hedged. We see upside to – we wanted to be locked in and obviously we had to hedge some of the oil last year in the low kind of mid-$40s due to RBL requirements. But we’ve been able to kind of keep the NGLs as an upside piece to allow for – as the recovery we’ve seen, like I said, outsized returns on the NGL piece of our East Texas and Oklahoma assets.

Well, thank you for that. It’s a smart read on your part on that market. Those are all the questions I have, but I also wanted to tell you, I appreciate the additional guidance items and the extra information in this quarter’s company presentation. Nice job.

Yes. We wanted to be very transparent. I think – we provided significant additional details by area. We provided a multiyear free cash flow and adjusted EBITDA outlook that really gives investors comfort in kind of what they’re investing in for the long term. And just a little bit of a view of kind of some of the upside that’s present. As we’ve stated, we think we’re highly undervalued at this moment, and our investors should feel assured that we are doing everything we can to continue executing and eventually the market will catch up with some of the numbers that we are capable of producing over the next several quarters. So like I said, we will continue to deliver, and we have a lot of value left to capture.

Well, for a company your size, it’s a very good amount of disclosure and good to see. So again, I appreciate it.

Thank you, John.

Thanks, John.

At this time, I’ll turn the call back over to Martyn Willsher for any closing remarks.

We are strongly encouraged by the overall recovery in market conditions and expect that the transformative steps we took last year will have lasting improvements on our profitability and cash flow profiles. With our strong free cash flow outlook, significant reserve value and margin improvement, we believe that Amplify remains substantially undervalued in the current market. Focusing on executing on our key initiatives for 2021, we can tend to continue delivering for our stakeholders and demonstrating the long-term potential of the company. In closing, I’d like to express my appreciation to the company’s employees for their outstanding efforts and dedication. And I’d also like to thank our stakeholders for their continued support. Thank you for joining us today. And as always, please don’t hesitate to reach out if you have any additional questions.

That does conclude today’s call. Thank you all for joining. You may now disconnect.