Welcome to the Battalion Oil Fourth Quarter 2020 Earnings Call. As a reminder, today's conference is being recorded. Now I'll turn it over to Battalion's Manager of Finance, Chris Lang. Mr. Lang, you may begin.

Good morning. I'm joined by a few of my colleagues today that I'd like to introduce: Battalion's Chief Executive Officer, Richard Little; our Chief Financial Officer, Kevin Andrews; and our Chief Operating Officer, Daniel Rohling. This conference call contains forward-looking statements. For a detailed description of our disclaimer, see our earnings release issued yesterday and posted on our website. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings release announcement released yesterday. We have also published an investor presentation, which may be found on our website and will be referenced during this webcast. Now our team will present a few scripted remarks, followed by Q&A. And with that, I'd like to turn it over to Rich to start things off. Rich?

Thank you, Chris. I want to first welcome everyone joining us this morning for Battalion Oil's Fourth Quarter 2020 Earnings Call. We issued our earnings release and presentation last night. We're excited to walk you through those results and describe why we find ourselves very optimistic as we enter 2021 despite the ongoing challenges we face from COVID and the recent operational issues caused by the weather. We'll provide you a more fulsome update on Battalion's response to the recent winter storms a little later. But I did want to begin my comments by commending our team for the outstanding job they did navigating a violent and life-threatening storm. Our field personnel were quick to react to all the challenges they faced. And we are proud of the balance that we're able to strike between keeping our teams safe and providing the critical and essential service in meeting the demands of consumers in the region. We're all well aware of the challenges the industry faced in 2020. The combined impact of the COVID-19 pandemic and the oil price war profited a downturn that has been as severe as anything I've seen in my career. And while that may have stalled our plans to grow, it didn't stop us from having an exceptional year. We kicked off 2020 with a new strategy, a new team and a new name. And we spent much of the year building a new identity. We demonstrated our ability to execute, reducing well costs by 37% and adjusting operating cost per BOE by 12%, the latter of which we did in spite of temporary shut-ins in May and June, disrupting operations. We displayed our commitment to capital discipline, quickly reacting to the downturn by cutting D&C CapEx by 66%. We acted on our belief that ESG…

Thank you, and good morning. I'll start with a recap of our year-end liquidity position and then touch on a few highlights from Q4 2020. As we mentioned in our press release yesterday, we completed the sale of certain of our Northern West Quito assets to Point Energy Partners for cash proceeds of $26.3 million, subject to customary post-closing adjustments. This transaction significantly enhanced our liquidity at year-end and positioned us well as we enter 2021. At December 31, 2020, the company had a liquidity of $31.6 million, consisting of $4.2 million of cash and $27.3 million of availability under our revolving credit facility. [Indiscernible] 2020 was a challenging year and one in which access to liquidity was critical. So in October 2020, we entered into a third amendment to our credit agreement with Bank of Montreal, which, among other things, allowed our borrowing base to remain at $190 million and suspended testing the Current Ratio until December 31, 2021. This amendment helped free up liquidity and added flexibility going into 2021. Our net leverage ratio was 2.2x at year-end, and we continue to assess options to reduce leverage. We also continue to focus on protecting our cash flows by actively managing our hedge book. Our approach to risk management is to hedge a high percentage of PDP, layering in additional hedges as we develop our assets using swaps and 2-way collars. As of December 31, 2020, approximately 90% of our expected oil production in 2021 was hedged at an average price of approximately $45. With our cash flows well protected in 2021 and the strong liquidity position at year-end, we feel confident in our ability to execute our 2021 plan, while remaining free cash flow positive for the year. Now I'll walk through a few financial highlights from our…

Thanks, Kevin. As I've stated, with a disciplined approach, we believe we are well positioned to deliver flat to single-digit production growth, with significantly increasing our free cash flow during the year. There is certainly work to do to get there, but we believe we have the right team and the right balance sheet to make it happen. We also think we're in a unique position to grow through M&A. With the strides we've made in driving costs down and paying down debt, even in a down market, we continue to believe that we can approach M&A from an advantaged position. A lot has been [indiscernible] about a global energy transition and a move away from oil and gas. We believe very strongly that oil and gas has a place in that future, but it has to be done in a smart and responsible way. I hope you walk away from today with the same confidence we have that Battalion has the right team and the right assets to do just that. A lot happened in 2020. And in many ways, it feels like the dust hasn't quite settled. But we view 2021 as an opportunity to come out of the gates running, and it starts to build momentum as we enter into this new future. Thank you for your interest in Battalion, and that's going to conclude our scripted remarks. I'll turn it back over to the operator to facilitate Q&A.

[Operator Instructions]. The first question comes from Noel Parks at Tuohy Brothers.

I just had a few quick ones I wanted to run by you. You mentioned applying your subsurface knowledge, if I understood right, to, I guess, drilling and completion operations. I'm just wondering what sort of changes you might have in mind?

Yes. Thanks, Noel. So first, it's the understanding of where we drill the well. So if we're going to steer a lateral, we tend to stay away from, call it, high-carbonate concentrated areas because we see higher frac rates, which are going to drive up their completion costs, and they're not as productive. So we'll steer clear of that. It's also good that we know that we are going to be dealing with it that we set up our stages appropriately, where you have light frac gradients for what you're pumping. So tendency, when you're fracking, is for the fracs to go in a -- the lower frac radiate type areas. So what you want to do is have the stages set up to where you would have similar-type price grade, so you're stimulating rock across the entire lateral instead of having it go off to some of your lower frac gradient type zones. That's an example of how we might want to use or do use the subsurface in our frac designs. There's others, but that's probably one of the key ways of driving down costs. It's easy to understand.

Noel, I'd also just jump in. This is Daniel Rohling. As stated, we also have used our subsurface views to really take a look at where water and H2S may be coming from. And the teams have done a great job of beginning to identify that. And our -- a long way down that road is helping us as we move forward in our development to be able to try to mitigate higher water or higher H2S.

Great. And you also mentioned real-time gas monitoring as something that you're going to be doing increasingly. I just wondered, do you have a sense of what the incremental cost of that might be? And I was wondering if there was a plan to go out maybe retrofit legacy wells with a similar equipment?

Yes. Noel, what we have going right now is that we own 4 different clear cameras that we take around the field daily and test the different -- all of our locations. So all of our locations are getting scanned and viewed to make sure that we're not having mistakes [indiscernible] connections and things like that. So every location is getting monitored.

Okay. Great. And a little bit of a housekeeping question. What was the DUC count at the end of the year?

Sure. So as you might have seen in our comments, we -- end of the year, if you're defining it as December 31, we had already started our fracs in December. We saw an opportunity where we felt like we could save on completion capital by getting an early start. We also see -- know the tendency is to -- for supply chain challenges to happen when the first of the year comes around, which we actually did see some of that with some of the other operators. So we started fracking 2 of our 4 DUCs by -- before the end of the year. And then we rolled into the other 2 at the beginning of the year, technically. But I think of it as starting the completion of those 4 DUCs at the end of the year and bringing them online in the first quarter, is how I think about that.

Great. And then just last one from me. You did mention a little bit of some supply chain issues you saw with other operators. Have you basically shipped the bottom of the cycle for service cost, material costs at this point? Do you anticipate any inflation on the horizon? And if so, have you planned for a certain amount?

Yes. No. The majority of our activity, as you saw on our guidance, is happening in the first part of the year. So we haven't built inflation into our numbers for this year on the completion side. But absolutely, I think we ought to count on as we're seeing oil prices trading with a big handle on it that we ought to start seeing some more activity, putting strains on the equipment that's currently being used, and that's going to result in inflation, would be my thought.

[Operator Instructions]. We take the next question from [indiscernible].

I was just wondering if you could comment on how you view hedging in the future for 2021 and inform some of the comments that you talked about related to hedging unrealized gains on positions, obviously, with the moving around with WTI. And just interested to see if you can comment on your outlook for how you hedge production.

Yes. I'll let Kevin answer that.

So in general, we're -- our plan is to -- and we've executed on it, is to hedge a large percentage of our expected production in 2021 and 2022. We are, like we said on the call earlier, we're 90% hedged on oil for '21. We have some room in '22 to add hedges, and we have been doing that, and we will continue, likely to do that during this year. And depending on the outlook, the '23 and prices in '23, eventually, we'll start adding probably some hedges in early '23. But we do believe in hedging, especially as we increase our activity. And we have planned activity. We have certain obligation wells that we plan to drill. We may decide to do more in the future depending on pricing. And we'll consistently try to match up our hedging program with our activity in the field.

And is it at all -- 90% hedged. Is that kind of a -- is there a goal that you guys trying to stay at?

Well, I think what we typically show is that we like to protect our cash flows, and we've been anywhere from 75% to 90% of our production. Just -- the way we approach hedging is that we like the hedges to protect our cash flow. We've made the investment, and we want to protect those cash flows. And then when you see in an environment like what we're in right now, we create the flexibility to be able to invest into that market as prices increase. And when we do that, we'll hedge those volumes as we make those investment decisions. But I think we've been anywhere from 75% to 90% hedged historically.

It appears there are no further questions at this time. Mr. Little, I would like to turn the call back to you for any additional or closing remarks.

Okay. Great. Thanks. And again, I just want to thank everybody for their interest in Battalion. There's no doubt that 2020 was a difficult period in our industry, but we do feel like the accomplishments that we were able to achieve only manage a stronger organization. And we do feel like that our disciplined approach to development has positioned us well and will position us well in a recovering market. So we look forward to sharing some of those accomplishments with you as we get into 2021. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.