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Edited Transcript of AREX earnings conference call or presentation 9-Aug-19 2:00pm GMT

Q2 2019 Approach Resources Inc Earnings Call

FORT WORTH Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Approach Resources Inc earnings conference call or presentation Friday, August 9, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ian M. Shaw

Approach Resources, Inc. - CAO

* Sergei Krylov

Approach Resources, Inc. - CEO & CFO

* Troy A. Hoefer

Approach Resources, Inc. - SVP of Engineering

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Second Quarter 2019 Approach Resources Inc. Earnings Conference Call. As a reminder, this conference is being recorded. (Operator Instructions)

The company's earning release and presentation slides that management will refer to during prepared remarks can be downloaded from the Investor Relations section of the company's website at www.approachresources.com.

Please note that management's remarks include forward-looking statements that are subject to risks that could cause actual results to differ materially from those in the forward-looking statements. Additional information concerning these risks is set forth on Slide 2 and in the company's earnings release.

Reconciliations of non-GAAP measures management refers to and the applicable GAAP measures can be found in the company's earnings release on the Non-GAAP Financial Information page of the company's website and at the end of the company's earnings presentation.

Now I will now turn the call over to the Chief Executive Officer of Approach Resources, Sergei Krylov.

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Sergei Krylov, Approach Resources, Inc. - CEO & CFO [2]

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Good morning, everyone, and thanks for being on the call today. Joining me on the call today are Troy Hoefer, who leads our operations; Josh Dazey, who leads our legal, regulatory, land and administrative functions; and Ian Shaw, who leads our accounting and information technology functions.

Before we get into operations and our second quarter financial results, I will address our ongoing balance sheet restructuring activities. While we want to provide a comprehensive update on the company's position and plan, please bear in mind that our current fluid circumstances limit what we can share at this time.

As we have previously disclosed, due to current market conditions, including the significant Waha discount, our financial metrics, as measured in our credit facility, exceed required thresholds, which has resulted in an event of default under our credit facility. To address our leverage and financial metrics, we continue to believe we will need to significantly restructure our balance sheet in the short term. As previously disclosed, we have been engaged and continue to engage in constructive discussions with our largest stockholder and noteholder regarding, amongst other things, a potential debt for equity exchange and additional capital infusion into the company.

In addition, we will continue to engage in constructive discussions with our lenders regarding amendments to and extension of our credit facility. The consummation of an extension and amendment under a credit facility would be contingent in part on the successful completion of a transaction with our largest stockholder and noteholder, as further disclosed in our second quarter 2019 earnings release. The banks have continued to be supportive by entering into a forbearance agreement to provide us with additional time needed to find a workable solution. All of these discussions remain ongoing, and we cannot guarantee a particular result. In the event these negotiations are unsuccessful in the near term, we anticipate that we'll pursue a restructuring of our balance sheet through an in-court Chapter 11 proceedings. As we continue these discussions and work to improve our leverage and liquidity positions, we are conserving capital and have temporarily suspended our drilling and completion activity and have worked to reduce our corporate overhead expense.

I will now turn the call over to Troy to discuss our second quarter operational highlights.

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Troy A. Hoefer, Approach Resources, Inc. - SVP of Engineering [3]

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Thanks, Sergei, and good morning, everyone. As you can see from Slide 5 of our investor presentation, the Waha gas differential significantly widened, has remained high into the third quarter and is still not expected to improve until later this year. As a result of this and our ongoing deleveraging initiatives, we continued to defer drilling and completion activities in the second quarter of 2019.

Our capital expenditures on oil and gas properties in the quarter were $1.5 million, primarily related to cost-effective, short payback cycle workovers to manage our natural production decline. Production for the second quarter was 875 MBoe or 9,600 BOEs per day.

As Sergei discussed on the last quarter's call, from an operations perspective, we continue to review all of our operating practices in an effort to manage natural production decline through surface facility optimization and operating efficiencies. We have also focused our limited capital on our most efficient projects and those with near-term returns.

Operationally, we remain committed to safe and environmentally responsible operations and our extensive infrastructure network of centralized production facilities, water transportation, handling and recycling system, gas lift lines and saltwater disposal wells continue to provide us operational efficiencies. As a result of our efforts, we reduced our LOE by $0.7 million quarter-over-quarter, resulting in an LOE per BOE of $4.78 in the second quarter.

Now I will turn the call over to Ian to go over the financial results.

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Ian M. Shaw, Approach Resources, Inc. - CAO [4]

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Thanks, Troy. As of June 30, 2019, we have liquidity of $7.2 million, which represents our cash balance at the end of the quarter. However, as we are in an event of default under our credit facility, our liquidity remains subject to the lenders under our credit facility continuing to refrain from exercising their rights and remedies under our credit agreement due to our noncompliance with the financial covenants discussed earlier. We continue to focus on reducing our cash operating expenses and conserving capital. Our cost initiatives have reduced our cash operating costs by 29% or $5.9 million year-to-date. Net loss for the quarter was $13.6 million or $0.15 per share. Excluding the decrease in fair value of our commodity derivatives of $0.3 million and restructuring expenses of $0.1 million, adjusted net loss was $13.2 million or $0.14 per diluted share. Lease operating expense for the second quarter was $4.78 per BOE. Production and ad valorem taxes were $1.76 per BOE. Cash general administrative expense was $4.61 per BOE, and DD&A was $14.94 per BOE.

Now I'll turn the call back to Sergei.

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Sergei Krylov, Approach Resources, Inc. - CEO & CFO [5]

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As we have in the past, we intend to continue to operate efficiently and focus on maintaining our low-cost operations. The special committee of our Board, as we have previously disclosed, has been formed to explore additional strategic and deleveraging alternatives and continues to work with advisers and management to identify the best path forward for our stakeholders. Thank you for your interest in Approach. We will not be taking questions today.

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Operator [6]

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This concludes today's teleconference. You may now disconnect.