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Edited Transcript of AXAS earnings conference call or presentation 8-Aug-19 8:00pm GMT

Q2 2019 Abraxas Petroleum Corp Earnings Call

SAN ANTONIO Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Abraxas Petroleum Corp earnings conference call or presentation Thursday, August 8, 2019 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Robert L. G. Watson

Abraxas Petroleum Corporation - Chairman, CEO & President

* Steven P. Harris

Abraxas Petroleum Corporation - VP & CFO

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Conference Call Participants

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* Duncan Scott McIntosh

Johnson Rice & Company, L.L.C., Research Division - Research Analyst

* Joseph David Allman

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Michael Stephen Scialla

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Noel Augustus Parks

Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q2 2019 Abraxas Petroleum Corporation Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Steve Harris, Chief Financial Officer. Mr. Harris, you may begin.

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Steven P. Harris, Abraxas Petroleum Corporation - VP & CFO [2]

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Thank you, Josh, and welcome to the Abraxas Petroleum Second Quarter 2019 Earnings Conference Call. Bob Watson, President and CEO of Abraxas, joins me today. In addition, we have our Chief Accounting Officer and our VPs of Operations, Land and Engineering available to answer any question you may have after Bob's overview.

As a reminder, the call today is being taped, and a webcast replay will be available immediately after the conclusion of the call.

I would like to remind everyone that any statements made during this call that are not statements of historical fact are considered forward-looking statements and that actual results could vary materially from those contained in these statements. Factors that could cause our actual results to vary are described in our filings with the Securities and Exchange Commission, and we would encourage everyone to review the risk factors contained in these filings and in our press releases.

With that, I'd like to turn the call over to Bob.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [3]

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Thank you, Steve. Good afternoon. Considering all the headwinds, not a great quarter but still a good one. I wanted to let you know in advance of a policy change we are considering. Natural gas and gas liquids represented 29% of our BOE production in the second quarter, yet generated less than 2% of our combined revenue. Due to unpredictable shut-ins and flaring due to third-party processing issues, gas and NGLs caused about 86% of our production variations. So I ask the question why do we even report production in BOEs when BOs are all that really matter. That's our consideration of changing our forward guidance to BOs instead of BOEs and reporting primary production in BOs and still reporting Mcf and barrels of NGLs and leaving it up to the reader to decide if they want to convert to BOEs for somewhat of a meaningless comparison. If gas and NGLs ever regain some relevance in the future, we can always change back.

Operationally, things are running fairly smoothly. In the Bakken, the 4 new Lillibridge wells average approximate working interest of 33%. We're successfully fracked with 244 stages and have been coming online over the last 2 months. The 12 older Lillibridge wells were shut in for frac protect, and the decision was made to do some summer time work overs on some of these older wells to enhance production in the future and, hopefully, avoid winter work overs.

Flaring continues to be an issue, especially in the Bakken, where we flared an average net 752 relatively meaningless BOEs per day during the second quarter. Maybe some relief on the horizon is ONEOK as new infrastructure is scheduled to come online in the fourth quarter.

Raven drilling Rig #1 is slightly ahead of schedule on the 6-well Jore Federal East pad, just starting the third lateral with 3 more remaining. We have successfully drilled and run casing on our first test of the Three Forks second bench on the Jore Federal 14-H. The second bench has shown good success in offsetting spacing, and it's operated by Continental Resources. And success on the second bench will give us additional inventory that is currently unbooked on our existing operated spacing units.

Due to a partner in the Jore Federal unit going nonconsent, we now own on average approximate 90% working interest in the Jore Federal East Extension pad wells. The rig is currently scheduled to move to a 6-well Jore Federal Northwest pad, but since we own the drilling rig, we have tremendous flexibility on timing, which gives us the opportunity to consider oil prices and budget and issues such as gas takeaway.

In the Delaware Basin, we have recently started flowback on the 2-well Woodberry Pad where we own 100% working interest. Initial oil rates and flowing pressures have been quite encouraging. Both of these wells were drilled and completed under ASC.

We are currently starting the second lateral on the Greasewood pad, which is also 100% owned, after successfully setting casing below 17,000 feet in the Wolfcamp B in the first lateral. When this second well is finished, we will release the drilling rig, giving us the opportunity to work on production enhancement for the rest of the year.

We currently have just 3 commitment wells to be drilled in 2020 on our existing Delaware leases to maintain our 100% HBP status, giving us significant flexibility in our program going forward.

For you accountants out there, I'm sure you will understand the relevancy of what I'm about to say, but I don't. It looks like from our cash flow statement that we had a significant outspend in capital expenditures so for this year, but in this case, the accounting principles threw up a smokescreen over the actual facts. Capital expenditures from the cash flow statement for the 6 months ended June 30, 2019, of $63.6 million and $33.9 million in the second quarter both include $3.2 million for a decrease in capital expenditures and accounts payable. Net capital expenditures of $60.4 million so far this year and $30.7 million during the second quarter was applicable to our announced 2019 capital expenditure budget. In other words, we used $3.2 million to decrease accounts payable and, thus, increase working capital and liquidity that had to be accounted for as a capital expenditure. We have said all along our budget was front-end loaded due to the most recent -- due to the most economically efficient drilling and completion schedule. And we are right on our schedule with actual CapEx despite picking up the additional average 15% working interest in 6 wells on the currently drilling Jore Federal East pad.

In addition, the higher-than-expected LOEs during the second quarter were due to costs for frac protect and subsequent clean out as well as the summertime work overs on the Lillibridge pads.

All of this is attempted to be explained in our soon-to-be-released 10-Q, but I assume most of you don't read Qs, and I know if didn't have to, I wouldn't.

With a relatively clean and simple balance sheet and 2 good, solid assets, we have a number of options to consider with the ultimate goal of enhancing shareholder value. You can rest assured that management and our Board are very attuned to shareholder value enhancements.

And with that, I'll open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Joe Allman with Baird.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [2]

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My first question is in terms of the Williston Basin asset sale process, Bob, is that concluded? Or is that still ongoing? And just kind of give us an update on that.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [3]

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Yes. It's still ongoing. We're still -- our retained bankers, Petrie Partners, is still discussing the issue with a number of people. We've made it very plain that we're not going to give that asset away at some ridiculous multiple of cash flow, so still ongoing.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [4]

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Okay. That's helpful. And could you also update us -- it's a little bit older, but the Eagle Ford shale asset sale process?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [5]

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That's still ongoing, too. We've kind of taken over from our sales agent and are doing it ourselves, and we've uncovered a number of people that have indicated an interest. So those discussions are ongoing.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [6]

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Okay. That's helpful. And then on that same topic, are there any other asset sales or marketing processes going on at this point?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [7]

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Yes. We're putting together a package of operated non-Bakken assets in the North Dakota and Montana area, which we have. We get no credit for it, but they're worth some money. And also, a package of our override royalty interest that we've accumulated over the years throughout the nation. So we'll be going to market with those fairly soon. And obviously, the objective is to raise cash, but also to clean up the portfolio considerably.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [8]

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Okay. That's helpful. And then last for me. Is there any change in the full year guidance? I didn't see anything in the press release. I didn't see a new presentation out there.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [9]

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No. We haven't changed it yet. Obviously, with all the gas that we have shut in, that's affecting the BOE number, which I've said before is kind of a meaningless number. So pending Board approval at our nearby Board meeting, we'll be changing our guidance at that point and just guide to barrels of oil as opposed to BOEs.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [10]

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Okay. And help me understand, Bob. So can you just run through how are you going to guide going forward?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [11]

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We're just -- if the Board approves, we're just going to guide to barrels of oil production per day. We will also continue to report Mcf and NGLs for anybody that wants to meet what I've called a meaningless comparison. But since oil is generating more than 98% of our revenue, we do think it's kind of ridiculous to give us credit for gas and NGLs that are somewhat meaningless at this point.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [12]

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Got it. So -- okay. So you're just going to report it in a similar way. You're just going to guide to barrels of oil. You're just not going to guide for natural gas and NGLs?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [13]

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Correct.

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Operator [14]

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And our next question comes from the Noel Parks with Coker & Palmer.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [15]

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Just a couple of things. You were talking about the summer workover you did at Lillibridge. About how much CapEx went into those?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [16]

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Well, it's booked as LOE, and there were various projects. We had a couple of wells that had never been cleaned out after being fracked. So we've had successful clean outs on them and are in the process of putting them back on production. But I'm going to say.

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Unidentified Company Representative, [17]

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$700,000.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [18]

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$700,000 in total in all of them.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [19]

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Okay. Great. And -- let's see, I was also thinking about as you talk about looking at a sale in the Bakken and -- or owning your own rig up there. At times, you've talked about the possibility of moving the rig down to the Delaware once you pretty much finish up the inventory up there, though, of course, you said you're getting some more second bench locations in the inventory. Do you -- is that something you still have any -- I mean do you have any time on that? And I guess if you wound up -- moving the rig up there, for instance, you've -- you're slowing down on Delaware activity later in this year. I guess there's about 60 rigs running in the Bakken fairly steady. Would you lease it out to third-parties for use in between?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [20]

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Well, I guess, you would say that's an option, it's not one that we've discussed. What we have discussed is some time in the future, maybe moving that rig down to Delaware. It has certainly proven itself as a very efficient piece of equipment and has allowed us to become one of the lowest-cost, if not the lowest-cost, developer in the Bakken. And we would hope to be able to use that rig maybe to be able to say the same thing in the Delaware. It's an extremely efficient walking rig that in a multi-well pad or cube development program would be very, very efficient in drilling Delaware wells.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [21]

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Okay. Great. And I'm just wondering, anything new as far as what you've observed or heard from offset operators to your neck of the woods in the Delaware? I realize that there are some probably single ounce private companies that we wouldn't otherwise hear about.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [22]

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As you may remember, we have confidentiality agreement signed with a number of offset operators. So we do get their information and we are able to incorporate that information into our thought process. But under the confidentiality agreements, we're not able to divulge what we're -- what the knowledge we're gaining from them to outsiders. So I really can't answer that. I wish I could, but I can't.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [23]

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No problem. Could you maybe just kind of characterize just maybe where you're seeing or hearing about progress being made, whether it's more clarity on the spacing or different Wolfcamp benches looking a little bit better? Or whether it's more on the engineering side, progress being made?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [24]

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I think all of the above. Certainly, we've incorporated what we've learned from them in our current thinking on spacing, which is in our current corporate presentation of 880 feet between wells horizontally and 200 feet between wells vertically, which gives us a new net location count. Certainly the prime driver on that was the information we gain from our own downspacing test, which now has been on production for close to a year or a little more than a year?

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Unidentified Company Representative, [25]

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Yes.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [26]

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Yes. So every day, we're gaining more and more knowledge on that. And certainly, the more knowledge we have, the better we can make those decisions. But we're pretty comfortable now that we're not the only one thinking that 880 feet or 900 feet between wells is -- it seems to be the optimum to minimize, if not avoid, the parent-child issues and fracking into the neighbors when you're doing your frac jobs.

We've made some considerable progress on the frac side of business. Obviously, we're very proud of our Woodberry fracs. They came in under budget, and so far, the wells are outperforming. So we continue to incorporate what we learned from our own work and what we learned from offset operators in our frac design. So that should continue to improve going forward, just as it has very dramatically in the Bakken. If you look at our corporate presentation, you can see the progression of frac protocols and what it has done to production and decline curves. And you'll see that it's the same rocks because all our DSUs are joining each other, so the difference in production has to be attributed to the frac protocol. So we learned considerably up there, but we have about a 8- or 9-year head start in the Bakken than what we have in the Delaware and what basically everybody has in the Delaware. It's just that much of a newer play, and people are still learning to the advantage of the whole industry.

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Operator [27]

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And our next question comes from Dun McIntosh with Johnson Rice.

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Duncan Scott McIntosh, Johnson Rice & Company, L.L.C., Research Division - Research Analyst [28]

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With the -- it sounds like after the Jore East, you had the Raven or you've got some optionality. I think it's Jore Northwest or maybe it's Northeast. What are some of the drivers that would go into deciding to pursue drilling on next Jore pad or not?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [29]

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I guess you would say that capital budget. We've made the statement that we want to be in a free cash flow position this year, and at current oil prices, we're not. So oil prices would impact that as well. And gas takeaway, we're pretty tired of flaring a bunch of gas and we want to see the impact of the new ONEOK infrastructure that's going on line, supposedly, during the fourth quarter. If that greatly eliminates or at least greatly reduces our gas flaring, then that would be a positive. If oil prices recover from where they are right now, that would be a positive. But I guess the overall driver would be CapEx budget.

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Duncan Scott McIntosh, Johnson Rice & Company, L.L.C., Research Division - Research Analyst [30]

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Okay. Great. And then -- so assuming the rig lays down, what's the -- what you all's corporate decline rate since -- without any drilling after this to just kind of look at production at the end of the year and then heading into 2020?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [31]

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Yes. It's -- we state that in our K and Q. I know it's in this month's Q, and I'm trying to -- I know the first year is 35%, second year is 22%, 19% or 18%, and it goes down to 11% in year 5 and 8% thereafter, I think. And that's a PDP decline, so that's not influenced by drilling wells or not drilling wells.

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Operator [32]

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And our next question comes from Michael Scialla with Stifel.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [33]

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On your LOE, you mentioned that you had the workovers for the second quarter. I want to get your sense of where a good run rate is for LOE. Should we look at the first quarter as a guide there? Or do you see some inflation going on, on the LOE side?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [34]

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No. We definitely don't see any inflation. And I would say we're getting better at what we do. And certainly, as we generate mass in our operations, we have more wells to spread fixed costs over. So I know, internally, we look at about $2 million a month, maybe $1.9 million, as our day-to-day operating expenses, excluding what we would book as nonrecurring. We don't anticipate any shut-ins for frac protect for the rest of the year, and consequently, we don't expect to see those costs.

I think in the Bakken, we're going to wrap up all our, what would be considered pretty normal maintenance workovers during the summer time, so we don't have to fight the cost inflation doing work up there in the winter. I just think that was the prudent thing to do even though it cost us a few barrels in the second quarter. We're more inclined to look at cash flow rather than barrels anyway. So anything we can do to enhance return and enhance cash flow is our prime driver. So yes, this quarter's LOEs are a little high because of all those extenuating circumstances, and I don't see them existing going forward.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [35]

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Okay. And it sounds like you are leaning -- I don't want to put words in your mouth, but leaning toward completing the 6 wells on the Jore Federal extension maybe in the spring. If that were the case, could you give us a sense of what's the swing in CapEx there and maybe in terms of the trajectory of production if you make that decision to complete those wells this year versus next?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [36]

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Yes. I would say that there's a pretty good chance that we'll go on and complete those wells next year, unless we have a nice spike in crude oil prices. I can't see bringing on really good flush production in today's environment. And then we haven't made the decision yet whether we continue to drill the next pad or not. So that would have a bigger impact on our current budget because those wells are in the current budget, and it certainly gets us down closer to free cash flow. We won't do exactly that at -- in the current oil price environment, and certainly, we're getting 0 help in the gas and NGL environment. So I think we're right on line for our $86 million, and that assumes that we continue to drill. So if we don't -- if we decide not to drill, then we back that number down. And I don't know exactly what that would be, but it's probably going to be in the $80 million range, something like that?

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Unidentified Company Representative, [37]

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Yes. It'll be in the (inaudible) through '19, so yes, basically.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [38]

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Okay. Our ops guys are in agreement with that.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [39]

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Okay. So if, say, you delay the completions, I guess, the -- whether you drill the additional wells that were in the budget, it's not going to really affect production for this year either way. But if you push off the completions till next year, do you see any potential for additional growth in production this year? Or would you expect production to roll over heading into first quarter of 2020?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [40]

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No. I think it's going to be flat at worse. Because keep in mind, we've got the 2 Greasewood wells to frac. They're scheduled to be fracked in September. Those are 100% wells. And we do have a commitment on that lease to go on and complete those wells, so we will go forward with that. So that means flush production coming on probably 1st of November and continuing on in December. So that actually gives us a nice little kick in the fourth quarter going into the first of next year. Next year would be -- the first quarter would be down a bit. We'd probably be fracking in the second quarter. But in the third quarter, you're looking at 6 very high working interest wells coming online, which gives us a really nice boost for year-over-year growth '20 over '19.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [41]

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Okay. Got it. And then I understand your intent to forecast just on -- or guide just on oil makes perfect sense. I'm just curious on NGL price. I mean everybody has been experiencing weak NGL prices here recently. Was there anything particular to Abraxas? It looked like yours were extraordinarily low this quarter.

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [42]

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Yes. I guess we're in the 2 worst NGL basins there is. We had a negative $0.02 of -- is that gallon or barrel? It doesn't matter, but it's $0.02 per unit negative on our NGL pricing. It's just -- that's just the way life is in the Delaware and in the Bakken currently.

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Operator [43]

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(Operator Instructions) Our next question comes from Joe Allman with Baird.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [44]

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Bob, what's the schedule for that Board meeting? And is that a regular Board meeting? Or is that to address kind of the issues brought up by the activists?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [45]

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Well, we always -- we're always -- it's a regular scheduled Board meeting. And we always discuss opportunities that we see to enhance shareholder value. And so certainly, that's on the agenda for this meeting, and hopefully, there'll be some results coming from it.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [46]

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And when is that meeting, Bob?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [47]

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Monday and Tuesday.

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Joseph David Allman, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [48]

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Okay. Got you. And then in terms of the activists, the activists put out another letter today to the Board and made that public. Any additional comments? And just even if you don't want to address that specifically, just any comments overall?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [49]

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No. I think I've made all the comments we're going to make that our Board is very attuned to enhancing shareholder values. So we're going to look at all the opportunities out there and see what makes sense.

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Operator [50]

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And I'm not showing any further questions at this time. I would now like to turn the call over to Steve Harris for any further remarks.

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Steven P. Harris, Abraxas Petroleum Corporation - VP & CFO [51]

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Thanks, Josh, and we appreciate your participation in today's earnings conference call. As I mentioned at the start, a webcast replay will be available on our website, and a transcript will be posted in approximately 24 hours. So thanks, everybody, and have a good day.

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Operator [52]

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Thank you, ladies and gentlemen. Thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Every one, have a wonderful day.