Battalion Oil Corporation (BATL) Q3 2015 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for standing by. And welcome to Halcón Resources Third Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded. And now I would like to turn the call to the Executive Vice President, CFO and Treasurer, Mark Mize. Please begin. Mark J. Mize - Chief Financial Officer, Treasurer & Executive VP: Okay. Good morning. Thank you. This conference call contains forward-looking statements. For a detailed description of our disclaimer, you can see our earnings release that we issued yesterday and we posted on our website. Production for the third quarter was in line with our guidance and averaged about 40,739 barrels of oil equivalent per day. We published production guidance for the fourth quarter in our earnings release yesterday, which indicates we expect to be in line with our full year 2015 guidance range despite the previously disclosed negative impacts associated with non-operated production in the Williston Basin that was either shut in or deferred. On the cost side, LOE plus workover expense was just over $7 per BOE in the third quarter, which was below our guidance range for the year and represents about a 6% improvement compared to the second quarter of this year. After adjusting for selected items, cash G&A was $4.58 per BOE in the third quarter, which was toward the low end of our guidance range for the year and slightly lower than the second quarter. Taxes other than income came in at $3.23 per BOE for the quarter, which was also below our guidance range for the year. And gathering, transportation and other, after adjusting for some selected items, was just over $2 per BOE, which is in line with guidance. An overall look at operating cost per BOE, we decreased about 3% compared to the second quarter and, more importantly, about 27% when you compare to the third quarter of 2014. The cost reductions that we are experiencing are reflective of the continuing efforts to drive costs down, both operationally as well as administratively. With respect to drilling and completion CapEx, we spent $84 million during the third quarter, which is in line with expectations. We continue to be extremely focused on both capital discipline and capital efficiency, and we currently expect drilling and completion CapEx in the fourth quarter to be below watermark for the year, with our full year D&C CapEx being within the previously disclosed guidance range. With regards to hedging – I think I may have mentioned this on the last earnings call – we do not designate any positions of cash flow hedges for accounting purposes and, therefore, we record any change in the value of those positions in the mark-to-market value of the derivative contracts on the income statement. We did realize a net gain on settled derivative contracts of about $115 million during third quarter. And I'm making a comment about the accounting that we apply because I think there's a lot of analysts that include the realized hedge gains and losses in the revenue estimates, and we do not. As of the close of the market yesterday, our hedge portfolio had a mark-to-market value of right around $350 million. Today, we have about 30,500 barrels per day of oil hedged for the remainder of 2015 at an average price of just over $90 a barrel. For 2016, we currently have about 25,500 barrels of oil hedged at an average price of just over $80 a barrel, and then there's a small amount hedged in 2017. We ended quarter with $827 million of liquidity. It consisted of cash on hand plus our undrawn capacity on our revolver. And as we disclosed here a few days back, our bank group did recently reaffirm our $850 million borrowing base and our next redetermination will be the regularly scheduled redetermination in the spring of 2016. Since the beginning of the year, we've executed on several initiatives to strengthen our balance sheet and improve our leverage profile. During the third quarter, we were able to exchange right at $1.57 billion of unsecured debt for about a $1 billion of third-lien secured notes, which reduced our leverage by about – our debt load by about the $550 million. This exchange transaction resulted in an almost full-turn improvement in our leverage profile with no dilution to our shareholders, and it also reduced our annual interest expense by about $12 million. When you combine this with the exchanges that we did earlier this year, we've reduced our overall debt by more than $800 million. This is a strong step in the right direction, but we're going to remain focused on further improvement to our leverage profile as we move forward. And with that, I'll turn the call over to Floyd. Floyd C. Wilson - Chairman & Chief Executive Officer: Thanks, Mark. So, as Mark indicated, the environment that we're in demands efficiency. Halcón's operating staff has been very successful in driving efficiency gains without negatively impacting production rates; this will continue. We're operating three rigs today. We will likely keep three rigs running next year as well. Our three-rig program in 2016 should run about 25% less in CapEx than this year and allow us to keep production relatively flat. Those are comments – not perfect guidance at this time. In the Williston Basin, the wells that we put on line this year are all outperforming our published type curves; continued to set new drilling records during the third quarter in the Fort Berthold area. Our average time for Middle Bakken and Three Forks wells was 14 days; that's part of surface-to-rig release on completions. Frac-to-first-production times are one-third faster than they were at this time last year, and all of our completions are coming in under AFE. Lease operating costs are also down about a third since this time last year. Completed well costs on our property in the Williston Basin have been running at about $7.2 million this quarter, while new AFEs are projecting $6.8 million, so presenting the continued cost declines that we are experiencing. About a third of the reduction – this is kind of a good point – about a third of the reduction in total completed well costs since last year for us is related to design modifications. These efficiencies will stick even in a higher commodity price environment. We have also made significant progress in gas capture in the Williston Basin. We're currently selling approximately 95% of our gas. At El Halcón in East Texas, the story's similar. Our average spud-to-TD was 11.4 days, for a three-string well during the third quarter. That's about one-third less time than last year. Our shortest time for a three-string well this year was just under 10 days. On the completion side, we put away an average of four stages per day on wells completed in the third quarter. This is a 40% improvement year-over-year, with one of those wells setting a record of five stages per day. We're in development mode at El Halcón and expect to drill two, three or four well pads from now through the end of next year. The current completed well cost is estimated at $6.8 million for a three-string well at El Halcón. This includes expensive design changes; a 500-foot increase in average lateral length to approximately 7,500 feet and a 33% increase in the amount of proppant used up to now about 2,000 pounds per lateral foot. So, $6.8 million – if we were following our older design would be a lot less, but this is a much more efficient way to spend the money. In summary, we'll continue to make what capital we spend as efficient as possible. We'll preserve our wonderful assets for an eventual improvement in crude prices. We'll continue to work on reducing leverage and maintaining our strong liquidity position. Maybe as important as all else that we do, we are flexible. We can cut spending quickly if conditions persist. We can maintain our current plans if conditions improve as we gauge if future changes are directional or blips. Carmen, we can take a few questions now if there are any?

Okay. Thank you. And our first question comes from the line of Neal Dingmann from SunTrust. Your line is now open.

Good morning, guys. Say, well, just a couple of details, first just in the Bakken, you mentioned currently about well cost now even down as low as $6.8 million. I mean, is that something you think can trend forward or is that $7.2 million more a likely rate for early in the year? Floyd C. Wilson - Chairman & Chief Executive Officer: If things stay as they are, the definite trend is beneath $7 million.

Got it. All right. And then just my follow up, over in the El Halcón, you mentioned about two new records – pretty amazing – the three-string in 9.7 days as well as the record on the five stages per single well. Again, is that, either one of those – do you consider those potential repeatable or are those sort of one-offs for now? Floyd C. Wilson - Chairman & Chief Executive Officer: I don't know about the less than 10 days, but the 14 days is a very achievable number, and as you know, that brings additional issues in terms of spend because you drill more wells with the same rig days in a year. So it puts pressure on your budget unless you start delaying things. But really, I pointed this out that the really interesting part about all that's been going on is that for Halcón about a third of our cost reductions have been in design changes and efficiency gains, rather than just negotiating with suppliers. And those cost reduction ideas will continue even in a higher price environment.

So, your thought of – great point, Floyd. If things do run ahead like that, when you look at the budget, would you let rigs go occasionally? I mean, how do you think about it? I mean, obviously, the benefit of it that is, as you said, you'd be spending more money, how do you think about that for the plan next year? Floyd C. Wilson - Chairman & Chief Executive Officer: Well, we don't intend to spend more. And as I said, we're projecting about $325 million for this year; we may beat that. It'll be at least 25% less next year with the same rigs with a fairly flat production profile. If the conditions persist as they are or deteriorate, we'll certainly, as I said, we'll will be flexible to slow down the spend and contain that. And if things improve – and this is probably an important thing to understand about us – if things improve, we're not going to increase our spend. We're going to give it enough time to make sure it's a real new direction, as opposed to just a temporary move driven by speculation and whatnot.

Thanks, Floyd. Appreciate the comments.

And our next question comes from the line of Don Crist from Johnson Rice. You're line is now open. Ronald E. Mills - Johnson Rice & Co. LLC: Hey, guys, it's Ron Mills. Question just - Floyd C. Wilson - Chairman & Chief Executive Officer: No, no, speak to Don Crist. Ronald E. Mills - Johnson Rice & Co. LLC: Okay. Well, then, Don, can ask. Hey, but can you just give us an update on acquisition market, kind of I appetite on your side? I know you in the last call talked about continuing to look at opportunities and that in addition to what you've done on the debt side, there's also ways where there are some opportunities can be de-leveraging. Just curious what that market looks like, bid-ask spread and whether or not you think that frees up a little bit. I think people were expecting with this redetermination period that maybe does that slip into the early part of 2016 depending on how the redetermination period looks then? Floyd C. Wilson - Chairman & Chief Executive Officer: Well, our entire history, Ron, has been full of continuing to look for ways to improve and add to the quality of whatever properties that we've owned. It's no different now. We're highly selective. We're very covetous of our liquidity, so we're very conservative in how we might use it but we're, as always, willing to use it. Again, though, we're highly selective. In terms of what slips into next year in the spring, Mark could make some comments about that, but we've had extensive conversations about what might happen with us in the spring. I can't speak for the industry. And we have a very strong asset base and a good – great group of banks. So, we're not expecting any kind of giant, sort of, draconian situation in terms of as it relates to Halcón. Ronald E. Mills - Johnson Rice & Co. LLC: Okay. And then, on the – on Neal's questions when – could you just clarify, when you talked about the $325 million, that's this year's budget? Floyd C. Wilson - Chairman & Chief Executive Officer: That's what we've estimated for this year. Ronald E. Mills - Johnson Rice & Co. LLC: Okay. Floyd C. Wilson - Chairman & Chief Executive Officer: We may or may not beat that, I'm not sure. But we're estimating right now to keep the same number of rigs running, we'll spend about 25% less. Ronald E. Mills - Johnson Rice & Co. LLC: Great. And - Floyd C. Wilson - Chairman & Chief Executive Officer: Keep in mind that the first quarter, four months, maybe five months of this year had some sort of older costs involved. Ronald E. Mills - Johnson Rice & Co. LLC: Right, right. And in terms of given the same number of rigs from a well count standpoint, given the continued improvement in drilling days is that something more from an activity level even though you spend 20% or 25% less from an overall activity level, it's going to be more similar to this year? Floyd C. Wilson - Chairman & Chief Executive Officer: No. We're going to try to spend about 25% less next year and keep a relatively flat profile. The reason we can do that is that, like many others in the industry but certainly at Halcón, we're getting a lot more out of each well. Ronald E. Mills - Johnson Rice & Co. LLC: And you're getting more out of each rig as well because of drilling efficiencies? Floyd C. Wilson - Chairman & Chief Executive Officer: We're getting more out of each rig, which is the double-edged blade, and that - Ronald E. Mills - Johnson Rice & Co. LLC: Right. Floyd C. Wilson - Chairman & Chief Executive Officer: ...tends to drive you spend up. So, we'll moderate wherever we need to, to maintain a sensible approach to watching the crude price and see what's really going to happen. We have no idea right now. We're hedged, but we didn't really count that in our planning. We're planning on the strip happening. If it doesn't happen, whether it's up or down, we'll make some adjustments. But in other words, we're going to try to spend a significant amount less next year than this - Ronald E. Mills - Johnson Rice & Co. LLC: Okay. Floyd C. Wilson - Chairman & Chief Executive Officer: ...and keep production relatively flat. Ronald E. Mills - Johnson Rice & Co. LLC: And then lastly, just operationally, it seems like both Bakken and El Halcón relative to curves you continue to outperform. In particular at El Halcón, when did you shift to pad drilling and how quickly do you think you can realize the incremental cost savings you mention in the release? Floyd C. Wilson - Chairman & Chief Executive Officer: Yeah. We're on pad drilling now. We're only running one rig there. So, if we were running five or six rigs on pad drilling, you'd see some immediate numbers and things, but when you're running on one rig, you're completing two or three or four wells in a quarter. We fully expect that the increases in cost due to our design, longer laterals and more proppant, have been more than offset by other types of gains, i.e. fewer rig days on a well and less horsepower used on completions or less time, I should say, on completions with frac jobs and actually on an efficiency, quicker to market times, in both areas. So you mix all that together, again, we think we can spend less money and keep production about where it is as we watch crude prices. Ronald E. Mills - Johnson Rice & Co. LLC: Great. Thanks, Floyd.

And our next question comes from the line of Sean Sneeden from Oppenheimer. Your line is now open. Sean M. Sneeden - Oppenheimer & Co., Inc. (Broker): Good morning. Thank you for taking the questions. Mark, you mentioned in your prepared remarks that you're looking at further ways to deleverage the balance sheet. I guess with the third-lien exchange being done, is there an ability for you guys to do more unsecured for third-lien or are you looking at other mechanisms like unsecured for converts or maybe talk about how you're thinking about that process? Mark J. Mize - Chief Financial Officer, Treasurer & Executive VP: There is not additional third-lien capacity, so I can just address that one straight up. Obviously, any other plans or discussions that we're having internally that aren't public, we're not talking about, but we do feel like we have some options available to us and we're giving them consideration internally right now. Sean M. Sneeden - Oppenheimer & Co., Inc. (Broker): Okay. And would you describe those options as more kind of capital market based or is there is something we should be thinking about in terms of like an asset sale or anything on those lines? Floyd C. Wilson - Chairman & Chief Executive Officer: No. Mark J. Mize - Chief Financial Officer, Treasurer & Executive VP: There you go. Floyd C. Wilson - Chairman & Chief Executive Officer: We have several levers we can pull. We're evaluating all of them constantly. We're in good shape at this moment. We're not in good shape forever, but we're in good shape at this moment. So we understand what's going on the market, and we're evaluating lots of different ideas and when one comes to the forefront, you'll hear about it after we did it. Sean M. Sneeden - Oppenheimer & Co., Inc. (Broker): That's fair enough. Maybe just thinking about the indications for next year, I guess, number one, what do you think you need to spend on infrastructure or capitalized G&A and interest on top of your, call it, $250 million-ish type of number on D&C? Floyd C. Wilson - Chairman & Chief Executive Officer: That's a question for Mark. On infrastructure, we're not spending much – of course, have some things going on, but it's not very much. It's included in our other number, so it's a nominal number. Mark, what about the rest of that? Mark J. Mize - Chief Financial Officer, Treasurer & Executive VP: I'm sorry. Was that question about capitalized interest, is that correct? Sean M. Sneeden - Oppenheimer & Co., Inc. (Broker): Yes, that's right. Mark J. Mize - Chief Financial Officer, Treasurer & Executive VP: Yeah, about 30%. Sean M. Sneeden - Oppenheimer & Co., Inc. (Broker): Okay. And then just housekeeping on keeping production flat, are we talking just on a year-over-year basis or are we thinking about that on an exit-to-exit basis? Floyd C. Wilson - Chairman & Chief Executive Officer: We're thinking about looking at a whole year's worth of work. And since you do have a sort of a natural decline built into your PDP base, you can't have a fourth quarter that's dramatically less than your other fourth quarter than your prior fourth quarter or you – it's mathematically impossible. So, our feeling right now is that we need the EBITDA, we're hedged, we're going to keep it relatively flat and watch how things unfold as – in the markets and whatnot. Sean M. Sneeden - Oppenheimer & Co., Inc. (Broker): Okay. I think that make sense. I appreciate it. Thank you.

And our next question comes from the line of Dan Guffey from Stifel. Your line is now open. Dan Guffey, your line is now open. Daniel Guffey - Stifel, Nicolaus & Co., Inc.: Sorry about that. Hi guys, wondering if you can, I guess, give any guidance in terms of how many wells in El Halcón have been drilled with the upsized frac and then kind of talk about, if you have any data, if that supports an increase to your type curve? Floyd C. Wilson - Chairman & Chief Executive Officer: Charles should talk about how many wells. It's early days in this – we tend to not make any changes in type curves until we have plenty of hard evidence in our hands. We can tell you that we will for sure outperform our existing published type curves. Charles, anything to add to that? Charles E. Cusack - Chief Operating Officer & Executive Vice President: Yeah. We have three that are flowing. They're in early stages right now flowing back and then two more we're currently completing. And then three more we're currently drilling that'll all be with the same design. So, we'll have a lot of data here in a few months. Daniel Guffey - Stifel, Nicolaus & Co., Inc.: Okay. Great. And then you mentioned $6.8 million well cost on a three-string, is everything you're drilling now three-string up in Brazos? Is that where you're focusing? Charles E. Cusack - Chief Operating Officer & Executive Vice President: Yes - Floyd C. Wilson - Chairman & Chief Executive Officer: Go ahead and answer but on Brazos – but go ahead. Charles E. Cusack - Chief Operating Officer & Executive Vice President: It's mostly – it's in Burleson and it's all three-string. Daniel Guffey - Stifel, Nicolaus & Co., Inc.: It is. Okay. All right. Great. And then I guess moving up to the Bakken, can you remind us of undrilled locations on the Indian Reservation? And then I guess what spacing assumptions are you assuming in both the Bakken and Three Forks to get to that location number? Floyd C. Wilson - Chairman & Chief Executive Officer: You know we're so far away from being developed up there. Charles, please correct me, but I believe all of our indications are that the Middle Bakken in most areas is responding pretty well to 660 acre – 660 feet between wells; and then, if you're in an area where the Three Forks is good, you have to temper that spacing pattern with the knowledge that there's some cost drainage. So, you don't ever want to stack laterals; you want to have alternate – sort of an alternate pattern. So, when we're drilling a pad, we're solving for the overall capital efficiency based on reservoir characteristics of all the locations we might drill and we try to drill them all at once. Charles, what would you say about all that? Charles E. Cusack - Chief Operating Officer & Executive Vice President: No, that's right. We're drilling everything on 660s right now – at pretty much Three Forks and Middle Bakken unless there's pre-existing wells that kind of complicate that pattern, then you got to work around those. But there's a couple hundred locations up there. Daniel Guffey - Stifel, Nicolaus & Co., Inc.: Okay. All right. Well, I appreciate the info. Thank you, guys.

And this concludes the Q&A session. I will turn the call back to our Chairman and CEO, Floyd Wilson, for final remarks. Floyd C. Wilson - Chairman & Chief Executive Officer: Well, that's it everybody. Thanks for calling in. Feel free to contact us if we didn't cover something that you wanted to have covered. Thanks.

Thank you for participating in today's conference. This concludes the program and you may all disconnect. Have a wonderful day everyone.