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Edited Transcript of AXAS earnings conference call or presentation 18-Nov-19 8:00pm GMT

Q3 2019 Abraxas Petroleum Corp Earnings Call

SAN ANTONIO Nov 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Abraxas Petroleum Corp earnings conference call or presentation Monday, November 18, 2019 at 8:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Peter A. Bommer

Abraxas Petroleum Corporation - VP of Engineering

* 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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* Austin Joseph Aucoin

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

* 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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Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 Abraxas Petroleum Corporation Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Steve Harris, CFO. Thank you. Please go ahead, sir.

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

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Thank you, JJ, and welcome to the Abraxas Petroleum Third Quarter 2019 Earnings Conference Call. With me are Bob Watson, President and CEO. In addition, we have our Chief Accounting Officer and our VPs of Operations and Land available to answer any questions you may have after Bob's overview.

As a reminder, today's call 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 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. I would encourage everyone to review these risk factors contained in the filings and in our press releases.

So 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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Thanks, Steve, and good afternoon. Realizing that our commercial bank's reserve-based loan redeterminations from period to period can be volatile for a number of reasons and at the current time are being very conservative and as part of our strategy to maximize shareholder value, we determined our first step needed to be balance sheet stabilization and increasing liquidity. We needed to term out some of our debt and reduce our reliance on our RBL. After several months of delicate negotiations, we were successful in bringing in a second lien lender who cooperated with our group of commercial banks to develop a second lien loan that fits nicely under our RBL, creates a blended cost of capital of approximately 8.5% and creates approximately $41 million of current liquidity. As we now have no debt maturities until mid-2022, we can move forward with a conservative capital program designed to stay within cash flow or actually generate free cash flow at current commodity prices and keeping oil production flat, if not grow slightly, in the years ahead. This puts the company in a much better position to review and act upon other initiatives to create shareholder value.

As previously mentioned, the company has very few drilling obligations in both of our basins to maintain the asset base in 100% held by production status. Our Board will be meeting in December to review a number of budget scenarios going forward with the intent of maximizing our overall corporate objectives. We will report the conclusion and subsequent 2020 guidance at that time.

Our capital program for all of 2019 was essentially completed slightly ahead of schedule by third quarter having since slightly less than our guided 2019 budget of $86 million, leaving tag-ins and minor capital expenditures for the fourth quarter.

The free cash flow generated during Q4 will be used to pay down debt and grow additional liquidity. Our year-end looks like spending approximately $89 million, we've closed on approximately $23 million in non-core asset sales, and we will have generated approximately $68 million in cash flow. I'll leave you to do the math.

We will have added proved developed producing reserves and production from 4 new wells in the Bakken and 7 new wells in the Delaware, and we'll be carrying over 6 drilled, but uncompleted wells in the Bakken to be completed in 2020. During this period, with no wells drilling or completing, we are concentrating efforts on reducing expenses. For example, but by no means all of our initiatives, electrification in West Texas has been difficult for all operators as the electricity providers don't act as fast as oilfield operators.

We've taken the initiative to do as much of the electrification work as possible ourselves and pushing the electric companies for hookups. More than half of our pads are now electrified at a considerable savings in lease operating expenses. Every pad, where we have to generate electricity, costs about $30,000 per month for generator rental and diesel fuel as our produced gas as H2S in it, which precludes its use as a fuel without a huge cleaning expense. Power supplied by electric companies costs about $3,000 per month. For our 11 current pads, the savings will amount to more than 10% of our company-wide LOE.

We've also included that jet pumps are our preferred method of artificial lift when our wells quit flowing on their own. We are now in a position to buy these pumps instead of running them at an LOE savings of $14,000 per month per well and generating approximately a 16-month payout. This further reduces company-wide LOE by an additional 5% or more. These projects amount to the previously mentioned minor capital projects remaining for 2019.

The Abraxas Board and management, along with our financial advisories -- advisers, Petrie Partners, continue to evaluate numerous options for the company to enhance shareholder value. Due to the quality of our assets and people, we have many. Please do not ask me or any of our team to comment on market rumors or fake news as we have a policy to not comment.

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) And our first question is from Duncan McIntosh from Johnson Rice.

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Austin Joseph Aucoin, Johnson Rice & Company, L.L.C., Research Division - Assistant [2]

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This is actually, Austin, his associate. And I guess I have a few questions. You all highlighted just 3 held by production wells in 2020, will there be any further activity in the Delaware? And how are you all thinking in terms of timing on your remaining 6 Bakken turn-in lines?

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

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The -- we've announced that we only have 3 commitment wells in the Delaware. We have not set our capital program yet for 2020. But those 3 are the only ones that we have planned. And we don't frac in the winter time up in the Bakken. So those 6 will be fracked as soon as weather permits this spring.

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Austin Joseph Aucoin, Johnson Rice & Company, L.L.C., Research Division - Assistant [4]

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And then the follow-up question is, are you all -- is there any activity you're all seeing in regards to the M&A market? And is there any continued interest around your Bakken properties?

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

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As I've said that our Board and management and our financial advisers are continuing to evaluate numerous options for the company. We'll continue to do that. Certainly, we're in a much, much better position to negotiate now with the balance sheet that we have and liquidity that we have. So those talks continue.

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Operator [6]

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(Operator Instructions) Our next question is from Noel Parks from Coker & Palmer.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [7]

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Just a couple of questions. I was wondering about what you think of hedging at this point? We had some commodity spikes over the last few months, but otherwise, crude has been in these pretty tight trading ranges. And -- but -- 2020 strip, I guess, has risen maybe about $3 over the last couple of weeks. So do you have any thoughts on hedging going forward? And does the new second lien have any requirements or restrictions on hedging?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [8]

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The requirements are the same as our first lien and we are limited under that loan agreement to hedge no more than 80% of our PDP production projection from the last reserve report we've supplied the bank or the bank group. So we are currently hedged at the max for the time being until we supply another reserve report, which will be effective at the end of this year. And then we will look at locking in additional barrels going forward. We -- because of the tremendous discount in the Bakken and in West Texas on natural gas, very difficult to consider hedges on those right now just because the basis differentials are almost impossible to predict.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [9]

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Sure. And if my calculations are right, it looks like your LOE already had a good downtrend in the third quarter. Is -- does that incorporates on what you're already talking about electrification and being able to buy your own pumps? Or is that -- will both of those be items we'll see more of the impact in the future?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [10]

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Well, most of the impact will be in the future, but some started in the third quarter. We also had minimal frac protect cost. We did have 4 wells shut in during September while we were fracking our Greasewood pad. But we've devised a little bit cheaper frac protect protocol. So we don't have the big frac protect costs going forward. We'll continue to use the cheaper one because it seems to work.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [11]

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Okay. Actually, what's involved in that protocol that's different from what you were doing before?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [12]

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Well, we're just pressuring up on the wells periodically instead of monitoring with sophisticated gauges, any pressure spikes. Pete, you want to add in to that?

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Peter A. Bommer, Abraxas Petroleum Corporation - VP of Engineering [13]

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No, that's about it. Yes, we have been more active in the past and actually measuring and then pumping in against pressure events. But yes, we think that, especially going forward, pulling and plugging with temporary bridge plug would be effective. And -- so that's kind of our plan going forward now.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [14]

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Great. And -- I'm sorry, go ahead if there's something else?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [15]

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No.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [16]

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Okay. And wanted to just ask you what you're thinking about service cost. I think from things you said in the past that the service companies were pretty hungry. And your -- you, for example, of course, won't be completing in the Bakken in the near term. But I guess, I was wondering, in this environment, maybe where do you stand on materials inventory of sand and pipe? Is this a good time to maybe buy a bit for the future land of supply for next year, assuming this is as cheap as it's going to get? Or do you think it makes just as much sense to wait and see?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [17]

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Well, we're not a big company, and we can't afford to have a big inventory of pipe. We do buy our pipe ahead of time, which we've already done for an estimated drilling program for next year. Sand is getting cheaper by the day. So there's no sense in buying and stockpiling sand. But we're not factoring in any additional savings into LOE or into capital expenditures for service costs next year. We think they've gotten pretty much close to the bottom and don't anticipate much more reduction in cost.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [18]

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Okay, great. And just one last thing, could you just remind me about sort of the difference in the royalty terms on your legacy acreage in the Delaware versus the acreage you more recently acquired?

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Robert L. G. Watson, Abraxas Petroleum Corporation - Chairman, CEO & President [19]

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Yes. The -- some of the legacy acreage we have is -- calls for a 1/8 royalty. So our NRIs are in the high 80s, even one is right at 90%. All of the stuff that we have bought in the last 3 years is at 75%. So our average throughout our 11,000-plus net acres is right at 80% NRI.

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Operator [20]

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Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Steve Harris for closing remarks.

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Steven P. Harris, Abraxas Petroleum Corporation - VP & CFO [21]

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

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Operator [22]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.