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Edited Transcript of BXE.TO earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 Bellatrix Exploration Ltd Earnings Call

CALGARY Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Bellatrix Exploration Ltd earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Andrew Eshleman

Bellatrix Exploration Ltd. - President, CEO & Director

* Garrett K. Ulmer

Bellatrix Exploration Ltd. - COO

* Maxwell Andrew William Lof

Bellatrix Exploration Ltd. - Executive VP & CFO

* Steve G. Toth

Bellatrix Exploration Ltd. - VP of IR & Corporate Development

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Conference Call Participants

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* Josef I. Schachter

Schachter Energy Research Services Inc. - Author & President

* Michael A. Zuk

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to Bellatrix Exploration Second Quarter 2019 Conference Call and Webcast. (Operator Instructions) and the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Mr. Steve Toth, Vice President of Investor Relations. Please go ahead, sir.

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Steve G. Toth, Bellatrix Exploration Ltd. - VP of IR & Corporate Development [2]

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Thank you, Carl. Good morning, everyone, and thank you for joining us today for the Bellatrix Exploration Second Quarter 2019 Operational and Financial Results Conference Call. Thank you also to those who are participating in today's conference call via our live internet webcast, which can be accessed through our website at www.bxe.com.

On the call today is Brent Eshleman, our President and CEO; Max Lof, our CFO; and Garrett Ulmer, our COO. For today's call, management will provide an overview and update of our second quarter 2019 results, which were released yesterday afternoon. Following the prepared remarks, we'll open the call to questions from analysts and investors.

During today's conference call, we will make forward-looking statements within the meaning of the applicable Canadian and U.S. securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Please refer to the forward-looking statements disclosure on our press release and periodic filings for additional information.

Brent Eshleman will now lead off today's call with a summary of our second quarter 2019 operational and financial performance.

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [3]

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Thank you, Steve. As you know, the Canadian oil and gas industry has been challenged and continues to be challenged by pipeline and egress constraints, regulatory uncertainty and general investor apathy. Although we see improvement in many of these factors, the near-term impact to our business is evident by the volatility of Alberta natural gas and oil prices and the differentials.

Bellatrix has taken several steps to mitigate the near-term volatility on our business including market diversification contracts for our commodity sales, hedging and risk management activities, and more recently, the completion of a recapitalization transaction designed to improve and strengthen the company's overall financial position.

All key stakeholders of Bellatrix approved this recapitalization transaction, which was completed on June 4 of this year and resulted in a reduction in total net debt of approximately $110 million, the extension of long-term debt maturities to 2023 and a reduction in cash interest payments by approximately $12 million annually. The recapitalization transaction positions Bellatrix favorably to mitigate the impact of near-term volatility on our business, favorably utilize existing infrastructure and deliver long-term sustainable value for all of our stakeholders.

Natural gas demand growth, expanded pipeline capacity and egress and the forecasted narrowing of the AECO basis differential are representative factors that point to an improved outlook for our industry. Our challenge is to continue to preserve value in today's low-price environment and position ourselves favorably for when the industry conditions improve, which remains our near-term focus. To that end, we continue to optimize our operational and financial resources.

Highlights of our second quarter include: one, production volumes in the second quarter averaged 35,917 BOEs a day. Average production volumes in the first 6 months of 2019 represented 4% outperformance compared with the midpoint of Bellatrix's 2019 full year daily average production guidance range. Production expenses in the quarter were approximately $6.75 per BOE compared with the first quarter production expenses of $8 -- $5.83 per BOE. Second quarter production expenditures of $6.75 per BOE included $2.3 million or 71% -- $0.71 per BOE of turnaround costs at Bellatrix's-operated facilities during the quarter.

Exploration and development capital expenditures were $4.9 million in the second quarter and were $25.5 million for the first half of 2019, which is in line with the budget expectations for a full year range of $40 million to $50 million.

We continue to focus on improving capital efficiencies through the combination of reduced capital costs and improved well performance. All-in drill, complete, equip and tie-in well costs in 2019 for our operated Spirit River program are approximately $3.4 million, consistent with the cost performance achieved in 2018 .

From a capital efficiency perspective, we have added production at an average expected capital efficiency of under $5,000 per flowing BOE in 2019 on an IP365 basis. Our operational results continue to demonstrate the high-quality nature of our asset base combined with the strength and ingenuity of our people.

Garrett will now elaborate on our second quarter operational achievements.

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Garrett K. Ulmer, Bellatrix Exploration Ltd. - COO [4]

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Thank you, Brent. Bellatrix completed the majority of its first half capital program during the first 3 months of the year in advance of the seasonal spring breakup period that curtails activity in the second quarter.

During the first quarter, Bellatrix drilled 5 gross, 5 net operated wells, including 4 Spirit River wells and one Cardium well. No wells were drilled during the second quarter of 2019.

During the second quarter, Bellatrix completed the planned 5-day turnaround project at the Alder Flats Plant, which was completed safely, on time and on budget. Production expenses in the second quarter of 2019 increased to $6.75 a BOE compared to $5.83 a BOE in the first quarter, but included $0.71 a BOE or $2.3 million of turnaround-related expenses at Bellatrix-operated facilities.

As Brent mentioned, the combination of structurally lower capital costs and improved well performance have reduced overall sustaining capital requirements for our business. All-in average Spirit River well costs, drill, complete, equip and tie-in, have been maintained at $3.4 million in 2019, given continued cost-containment efforts by our operations teams. In addition, average well performance from the company's 2019 Spirit River well program to date have outperformed expected results by approximately 15% on an IP150 basis.

Total NGL recoveries at the Bellatrix Alder Flats Plant remained strong, with NGL sales yields of approximately 66 barrels a million in the first half of 2019 compared to first half 2018 total sales yields of approximately 55 barrels per million.

Given continued strong liquids recoveries, Bellatrix's corporate liquids weighting has averaged 29% year-to-date, resulting in a commensurate improvement in our 2019 full year average guidance expectation to 29%, up from 28% previously.

I'll now invite Max to discuss our financial and risk management highlights.

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Maxwell Andrew William Lof, Bellatrix Exploration Ltd. - Executive VP & CFO [5]

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Thanks, Garrett. Adjusted funds flow generated in the 3 months ended June 30, 2019, was $11.2 million or $0.66 per basic and diluted share. That compares to $21.2 million or $3.12 per basic and diluted share in the first quarter of 2019. The decrease in adjusted funds flow between the second and first quarters of 2019 was predominantly driven by a 50% reduction in the realized natural gas price between quarters, partially offset by the settlement of noncash interest and improved oil prices.

Bellatrix maintains strong commodity price risk management and market diversification coverage through 2020, which is expected to reduce the impact of commodity price volatility on our business. In summary, Bellatrix has approximately 65 million cubic feet a day of natural gas volumes hedged from July through December 2019 at an average fixed price of approximately $1.75 per Mcf, representing approximately 50% of 2019 daily average natural gas volumes.

Given weak AECO natural gas prices, it's important to note that Bellatrix has also diversified its natural gas price exposure through sales contracts that give the company access to Dawn, Chicago and Malin natural gas pricing hubs. This long-term diversification strategy reduces Bellatrix's exposure to AECO pricing on approximately 50% of the company's natural gas volumes through October of 2020. In combination, the market diversification sales and fixed price hedges cover approximately 50% to 70% of natural gas volumes through October 2020.

Total net debt at June 30, 2019, of $357.6 million declined by $90.7 million from March 31, 2019, balances, following the completion of the recapitalization transaction. At June 30, 2019, borrowings under the credit facilities were $60.5 million against total commitments of $90 million before deducting outstanding letter of credits of $13.5 million that reduces the amount otherwise available to be drawn on the credit facility.

In connection with the recapitalization transaction, Bellatrix extended the revolving period under its credit facilities by 1 year to May 30, 2020, with the term-out period expiring 1 year after the end of the revolving period. And it's extendable annually thereafter at the option of the company, subject to lender approval. As part of the renewal of the credit facilities, the borrowing base under the credit facilities was reconfirmed at $100 million with total commitments set at $90 million. The next semiannual redetermination is scheduled for November 2019.

For the quarter ended June 30, 2019, Bellatrix's senior debt-to-EBITDA ratio was 4.34x, below the financial covenant of 5x and Bellatrix's first-lien debt-to-EBITDA ratio was 1.52x, below the financial covenant of 3.0x.

Now back over to you, Brent.

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [6]

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Thanks, Max. First half 2019 average production volumes of 36,450 BOEs a day are in line with the high end of Bellatrix's full year average production -- daily production guidance range and within management expectations, given the front-end-weighted capital program for the year.

As Garrett mentioned, Bellatrix announced yesterday a minor update to its full year 2019 guidance metrics, which relates to higher average corporate liquids weighting realized to date and anticipated through the back half of the year. The average daily production volume and total net capital expenditure guidance ranges for 2019 remain unchanged.

Bellatrix plans to fund its second half 2019 capital budget through adjusted funds flow and will remain flexible and focused on optimizing return on invested capital through development of the company's Spirit River liquids-rich natural gas play. However, management is monitoring available liquidity in light of current strip pricing and may adjust the company's operating and capital budgets in response to liquidity constraints. A strong liquidity position remains a priority for the management.

In closing, I'd like to thank our employees, our stakeholders, our shareholders for their continued support and thank everyone for participating in today's conference call. Thank you.

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Steve G. Toth, Bellatrix Exploration Ltd. - VP of IR & Corporate Development [7]

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Carl, that concludes our prepared remarks this morning. I will now open up the line to questions from analysts and investors.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Josef Schachter of Schachter Energy Research.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [2]

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A few questions from me if you can take the time. You're talking in your budget of $40 million to $50 million, so you spent $29 million or so -- $29.8 million in the first half. Are you in the field yet? Are you looking at drilling 2 to 3 more of the wells? And are they going to be all Spirit River? Can you kind of walk us through what the CapEx plan might be for the second half of 2019?

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [3]

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Yes, yes. Absolutely, Josef. Right now, we spent, yes, a little over $25 million in the first half of the year. For the second half of the year, I mean, it's our anticipation to look at starting to drilling here into the early fall time and to drill predominantly just behind our liquids-rich, high-return Spirit River wells. We continue to monitor the liquidity in this pricing environment. I mean as you know, I mean, as the positive, the actual prices have been exceeding the strip pricing they have in July. August is starting off very strongly. But in our models, we always run the strip pricing, monitor the strip pricing. And so we still expect to be spending by the end of the year between about $40 million to $50 million of CapEx. That will be price-dependent again in that range to get up to the $50 million. So right now, we're looking at, by the end of September, to hopefully start drilling again and be able to drill, I'll say, anywhere from 2 to 5 net wells between now and the end of the year. Does that answer your question, Josef?

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [4]

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Yes. 2 to 5 net wells. And would those potentially be on by year-end in your exit number or they'll come on...

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [5]

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Yes, absolutely. As you know, I mean, the big benefit that we have is we can drill these wells very quickly. They're drilled off of existing pad sites. These wells take us under 10 days from spud to rig release. Completions are immediately afterwards. So our turnaround time is very quick to drill these wells. So hopefully, we continue to see an improved pricing environment and an improved pricing environment into the fall time at the end of Q3 into Q4 and be able to take advantage of that with some drilling activity.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [6]

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So if you were concerned about prices in the near term, would you hold off spending that $10 million or $21 million and then use that just to improve balance sheet items into year-end? If we had, let's take the negative case, a Liberal federal election win and nothing coming out of the government on gas pricing in terms of helping to stabilize it, would you hold off spending and then just use it as a defensive technique for the balance sheet?

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [7]

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We might hold that. We're holding off right now, Josef, because our production has been hanging in quite steady with the great wells that we drilled in the first half of the year. We're monitoring pricing. Like you are, we're very encouraged to see the AECO pricing over the last couple of weeks stabilizing at some very constructive values. If that continues, we'll see how the fall unfolds and then consider on the timing that we want to get out there and drill. Right now, we're targeting more at the end of, I'll call it, middle to the end of September, beginning of October, but that will be dependent upon the market. We're very encouraged with what we're seeing right now and recognize -- and we all recognize that drilling the wells adds very good value and especially at the spot prices we're seeing here today. So yes, I mean, we are monitoring that. We are being patient, and we want to ensure that we have the liquidity and the balance sheet to support the activity.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [8]

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One last question from me. The government is sitting down, talking to the industry and trying to get input to come up with some plan to work to stabilize natural gas prices, especially during the summer. Are the smaller companies like Bellatrix involved in that? Or is it more of CAPP and then the EPAC and the bigger players? When I got on the Tourmaline call, Mike said that he was involved and that there are things moving forward. But I was wondering if it's -- if they brought on members to this discussion group from the smaller-sized companies.

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [9]

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Yes. Really good question, Josef. And the answer is, yes, they have. I have been involved also talking to various members from ministers to deputy ministers. They are doing a fantastic job. I must say they recognize the situation and the concern. They're coming up with very viable options to move forward. And so I fully support what the UCP government is doing. They're doing a great job. Mike is in there heavily involved, as he should be, as the, I believe, the largest gas producer in Canada. And so everybody is working very hard on it, and the government is including smaller companies and companies like Bellatrix. They want a very fulsome solution that benefits all.

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Josef I. Schachter, Schachter Energy Research Services Inc. - Author & President [10]

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And lastly, is TransCanada involved in this? And how are they -- how's the discussions going there? Do you see them coming with plans that help the industry instead of hurt it over the last 5 years?

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [11]

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They're absolutely involved, and they're extremely supportive of a viable solution to make this work for everybody. I can say that from the knowledge that I have, everybody is heavily engaged, doing a great job, coming up with a very positive plan forward. And so it's good to see that widespread industry participation, not just the large companies, but also looping in midsized companies like us into the discussion. So that's proceeding very well. I'm very optimistic and positive that a good solution can be put forward and worked out.

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Operator [12]

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(Operator Instructions) Our next question comes from Michael Zuk of Athena Capital Markets.

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Michael A. Zuk, [13]

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Just a couple of questions. As you look down at AECO's strip of $2 a strip, do you manage your business differently? And I apologize if you already answered this. I got cut out there. But do you, I guess, get more aggressive towards the tail end of the year? And secondly, 2 of your closest conventional gas peers are down between 10% and 14% year-over-year. You guys have managed to stay within 2% year-over-year. Are you doing anything different year-over-year in terms of the actual technical downhole engineering?

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Brent Andrew Eshleman, Bellatrix Exploration Ltd. - President, CEO & Director [14]

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Thanks, Mike. I think -- sorry, you're cutting out a little bit, and so it might have been a little unclear on the AECO strip. But as we all know, the AECO strip, the forward strip has been very challenged, and it is still -- the forward strip prices is very challenged. However, we do know and we can all see on a daily spot basis, one, the July actual pricing was much higher than that strip pricing at the end of June. And here for August, we know that to date, I think over the last several days, the numbers that I see, the AECO -- actual AECO pricing has been averaging about $1.50, whereas the strip 2 weeks ago was only about $1.10 to $1.15. So it is continuing to perform much better than the strip pricing. Hopefully, that continues here for the rest of this year, and some viable options come forth from all the discussions with industry and the government that are ongoing. Everybody wants to see a solution, a viable solution to this problem.

The downhole, we're always fine-tuning our downhole techniques, utilizing the available technology to drill quicker and also on the completion. So that's one of the positives and why our wells to date throughout not only 2018 but into 2019 continue to perform above our expectations. And we have a very broad inventory. And again, what we can turn around very quickly, drill the necessary wells, majority of them are on existing leases that have very quick tie-in. So it puts us in a very good position into this hopefully stabilized and improving price environment into the winter time to be able to take advantage of that. So hopefully that answers your question, Mike.

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Operator [15]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Steve Toth for any closing remarks.

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Steve G. Toth, Bellatrix Exploration Ltd. - VP of IR & Corporate Development [16]

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Thank you, Carl, and thank you again, everyone, for participating in today's call. We look forward to providing further updates when available. Have a great day.

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Operator [17]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.