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Edited Transcript of CHHP.PK earnings conference call or presentation 12-Nov-19 3:00pm GMT

Q3 2019 Chaparral Energy Inc Earnings Call

OKLAHOMA CITY Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Chaparral Energy Inc earnings conference call or presentation Tuesday, November 12, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* K. Earl Reynolds

Chaparral Energy, Inc. - CEO, President & Director

* Patrick Graham

Chaparral Energy, Inc. - Senior Director of Corporate Finance

* Scott Clifford Pittman

Chaparral Energy, Inc. - CFO & Senior VP

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Conference Call Participants

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* Austin Joseph Aucoin

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

* Derrick Lee Whitfield

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* John Marshall White

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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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 Chaparral Energy Q3 2019 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to Patrick Graham, Senior Director of Corporate Finance. Please go ahead.

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Patrick Graham, Chaparral Energy, Inc. - Senior Director of Corporate Finance [2]

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Thank you, operator. Good morning, everyone, and welcome to Chaparral Energy's Third Quarter 2019 Conference Call. Participating on the call today are Chaparral's Chief Executive Officer, Earl Reynolds; and Chief Financial Officer, Scott Pittman.

Before we begin, I'd like to encourage you to download our 10-Q and corresponding earnings release as well as our updated company presentation, which are currently available in the Investors section of our website. You can also sign up to automatically receive updates about Chaparral through the e-mail alerts feed on our Investors page.

Please be aware that during the call, we will discuss certain topics that contain forward-looking statements based on our beliefs, assumptions and information currently available to our management team. Although we believe expectations reflected in such forward-looking statements are reasonable, we can give no assurance that they will prove to be correct. There are numerous factors which could cause actual results to differ materially from what is discussed. You can read our full disclosure on forward-looking statements and the risk factors associated with our business in our most recent 10-Q.

In addition, we will also present certain non-GAAP measures, a reconciliation to which can be found in our 10-Q.

With that said, I will now turn the call over to Earl.

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [3]

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Thank you, Patrick, and good morning, everyone, and thank you for joining us today.

2019 has been a challenging year within our -- the industry. We've seen a softening of the macro pricing environment, a tightening of capital markets and less confidence in energy equities. For our area, in particular, there has been an attack on the STACK, with some people actually questioning the quality of the play. Nonetheless, at Chaparral, we continue to deliver and demonstrate the value of our differentiated operational execution with strong year-to-date performance. We continue to deliver operational results within or above our guidance ranges as we've done consistently since becoming a publicly traded company.

We grew adjusted EBITDA by 4% year-over-year or 8% when excluding 2018 divestitures to $35.8 million despite oil and NGL prices decreasing approximately 20% and 50% over that same time period. Also, on a year-over-year basis, STACK and Merge production and total company production for the third quarter increased 37% and 27%, respectively, excluding our 2018 divestitures. We continue to execute at a very high level and focus on things that we can impact.

Now for the third quarter, our STACK and Merge production was 21,500 BOE per day with our total company production at 26,200 BOE per day, both of which were within our guidance range. Overall, the company production mix for the third quarter was 31% oil, 29% NGLs and 40% natural gas. As expected, due to the timing associated with production from our multi-well spacing test, total company and STACK/Merge production decreased on a quarter-over-quarter basis by 7% and 10%, respectively.

In the third quarter, we had 13 new operated wells with first sales, 9 of which were brought online in September with 3 of these wells with first sales in the last 2 days of the quarter. Now this is a significant reduction from the 28 wells with first sale in the second quarter. All these wells brought online in the third quarter were in Kingfisher and Canadian counties.

In addition to the timing of the new wells brought on line, another factor that impacted third quarter production was the ethane rejection. If ethane is rejected for economic reasons, there is our corresponding negative production impact. The impact to the third quarter production for Chaparral was approximately 500 BOE per day due to this ethane rejection. Now we will continue to monitor the economic viability of processing ethane versus rejecting it, but this -- and this may impact our production moving forward.

The growth trajectory of our STACK and Merge production will continue to be impacted by timing associated with the number of operated wells brought on line in any given quarter. With that said, we have seen very positive production already in the fourth quarter. We are pleased with the performance of the new wells that were brought on line late in the third quarter. And through early November, our total production for the fourth quarter has averaged above 28,000 BOE per day.

In October, we proactively reduced our rig count from 3 rigs to 2 rigs. And while we are still working our 2020 budget, we currently plan to begin 2020 with 2 rigs. In total, we have lowered our full year 2019 midpoint capital guidance by 6% to $260 million to $280 million driven by lower drilling and completion and lease acquisition expenditures. Now while we've reduced our estimated capital guidance, we are very pleased that we are maintaining our original full year 2019 production guidance of 25,000 to 27,000 BOE per day.

In the fourth quarter of 2019, we expect total company production to be between 27,500 and 29,000 BOE per day and STACK and Merge production to be between 23,000 and 24,500 BOE per day. This forecasted 10% increase in STACK and Merge production at the midpoint of guidance compared with the third quarter is primarily due to the timing of new development wells being placed on line during the quarter.

Now as we look at 2020, our primary goal is to achieve cash flow neutrality as soon as possible due to the volatile commodity environment and the challenging investor cycle our industry currently faces. This goal is top of mind throughout our organization, and you will see that play out next year as we expect to deliver lower cost and optimized spacing tests weighted more toward returns. We are currently working through our budgeting process with the Board. But at this time, we expect to design a 1- to 2-rig program in 2020 that will significantly reduce our capital spend while still growing production on a year-over-year basis by 10% or more. Our drilling and completion activity will remain focused in the areas of Canadian and Kingfisher counties in which we've achieved some of the best economic results.

From an expense perspective, we have made great strides in 2019 to reduce both LOE and G&A and anticipate building on those meaningful reductions as we look toward 2020. We believe if we continue to deliver our highest standards of execution with a focus on capital efficiency and returns, we will achieve cash flow neutrality in 2020.

Now I'd like to now discuss our recent results in more detail and give you some updates on our recent spacing test performance. We are seeing overall strong results from additional spacing tests across both Canadian and Kingfisher counties. Now as we think about optimal spacing design, we must consider, among other things, the geology, parent well communication risk and the commodity prices to ensure we continue to deliver excellent returns on our capital employed. We have completed tests with as many as 2 existing parents in the section and are developing techniques to effectively manage parent-child communication risk. And since we moved to more of a development mode in late 2018, we have taken all steps to make sure we effectively incorporate learnings from each test and continue to improve our results.

Over this time period, we have completed 13 separate spacing tests and have drilled and completed 46 operated Meramec and Osage spacing wells with the average 30-day IP rates of those wells having exceeded our expectations. The 28 Meramec wells within the program's 30-day IP rates averaged 943 BOE per day with 49% oil, 74% liquids. And the 18 Osage wells within the program averaged 621 BOE per day with 61% oil and 80% liquids.

Now looking at Canadian County. Our Merge Miss spacing and development program has been performing extremely well. Results of these tests have significantly outperformed initial oil expectations. These recent results are led by our 9-well Foraker full section development, which through 210 days have outperformed the oil type curve by 120% and our gas type curve by 135%. We are very pleased with the performance of our Foraker project as these results have clearly met our economic expectations and provide confidence for our future full section developments.

Now true to our DNA, our continuous learning and applying these learnings in real time, we are looking to optimize and enhance our Merge full section development design. As you're aware, the Foraker development display and material outperformance in oil production, as expected, experienced high oil declines -- higher oil declines than we saw in our single-well Merge Miss type curve. In the spirit of continuous learning and optimization, we are approaching the development of our Greenback section a bit differently than the Foraker.

As you can see on Page 11 of our presentation, the Greenback is in close proximity to our successful Foraker and Denali sections and has a full section spacing test with no parent wells and will include 6 Merge Miss wells. We plan to spud the first well toward the end of this month. The Greenback is a good example of how we are attempting to optimize our full section development in the current challenging commodity environment. While we always seek to identify the best balance between rate of return and NPV in each spacing development, we will place a higher emphasis on rate of return in the Greenback and test the lower end of our spacing design with less wells per section. Chaparral has been a leader in the Merge in terms of spacing development and the recent results from 4 different spacing tests, which includes 16 Merge Miss wells in Canadian County have on average exceeded our type curve by 111% through the first 150 days.

Now in Kingfisher County, recent results from 7 different spacing tests, which include 15 wells in the Lower Osage target, have achieved 96% of the Lower Osage type curve through the first 150 days. All 7 of these spacing developments contain existing parent wells. And we are pleased that on average, these Osage developments are performing in line with our expectations. Including in these tests was our Northern Kingfisher County 6-well commingle test that has not met our expectations. The commingle was a 6-well full section development that include 3 Meramec and 3 Osage wells were brought on line with 4 wells initially for a short period of time, and their return to drill will complete the final 2 wells. This development design was an effort to reduce the cycle times of a full section cube development and mitigate the impact of time in a parent-child relationship. Now we're still in the process of analyzing the early results of this project. But as we always do, we will take these learnings and apply them to future developments.

Now as it relates to Garfield County, while results in '17 and throughout much of '18 were quite strong, more recently, the performance up there has been less consistent than our development in other areas. And therefore, at this time, we don't plan to allocate any of our 2020 operated D&C capital in the Garfield. We will continue to analyze these results in the area and better understand the geology to provide us more confidence when we will -- when we reintegrate this into our future development plans.

As a reminder, all these tests I discuss are geologically designed based upon our 3D seismic subsurface earth model. With this material experience, we have had some significant successes and some learnings along the way. But as a whole, these projects are exceeding our expectations. As you move from delineation to development, you have to incorporate all aspects of subsurface, including the geology, the parent-child and frac design to ensure you can deliver on all your financial expectations.

At Chaparral, our technical teams' understanding this -- understanding of this, and we approach this, each development, independently based upon the unique characteristics. Each development is a fit for purpose, and the Greenback is a great example of this as we compare it to our Foraker and Denali developments.

As illustrated on Slide 9 of our presentation and our development strategy, we attempt to solve for the optimum balance of returns and NPV on a section-by-section basis. In the current commodity and investment cycle, we are applying more of a premium to rate of return for a maximum capital efficiency, which ultimately is used to drilling fewer wells per section with faster cycle times and an acceleration of cash flow. The Greenback full section development is a good example of this approach and philosophy.

Another key aspect of delivering strong returns is our ability to drive down costs, and I continue to be very pleased with our drilling and completion teams' success in capturing and incorporating operational efficiencies to lower costs and increase cycle time. By capturing these efficiencies, we have seen our recent average Osage and Merge Miss well cost decline by approximately 15% to 20% compared to the 2018 average, and we are currently in the range of $3.5 million to $4 million. Through continued operational execution and efficiencies, coupled with our laser-focused procurement process, we anticipate in 2020 our average well costs will continue to trend lower and be in the range of $3.4 million to $3.8 million, which will obviously positively impact our well-level economics.

As we look to the future, achieving cash flow neutrality is an absolute priority for our company, and we believe we're on the path to achieve this in 2020. While we have done a great job in cutting costs throughout '19 and we're having a very strong year operationally, you can expect us to continue to proactively take measures to reduce costs across all aspects of the cost structure, including CapEx, LOE and G&A. We plan to continue to deliver on our guidance as we've consistently done since becoming public, and we'll remain focused on execution and delivering strong returns that will create long-term value for our shareholders.

With that, I'll turn the call over to Scott to discuss our third quarter financial results. Scott?

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Scott Clifford Pittman, Chaparral Energy, Inc. - CFO & Senior VP [4]

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Thank you, Earl, and good morning, everyone.

While Chaparral reported a net loss of $130.9 million or $2.86 per share for the third quarter, we reported an adjusted net income for the quarter of $1.2 million or $0.03 per share. The quarterly net loss included $147.7 million noncash ceiling test impairment charge primarily due to a decrease in prices used to estimate reserves and impairments of unevaluated nonproducing leasehold, which was partially offset by an $18.7 million noncash gain in the fair value of our hedges. Of the $147.7 million impairment charge, $55.9 million was associated with nonproducing leasehold, of which substantially all was related to Garfield County and our decision to pause our development there, pending further technical analysis of recent results.

Our adjusted EBITDA grew 4% year-over-year to $35.8 million. Excluding 2018 divestitures, it grew by 8% year-over-year. This increase was driven primarily by higher production and lower operating costs partially offset by lower realized pricing. The price impact on a year-over-year basis has been dramatic, with WTI prices and NGL realizations decreasing 19% and 52%, respectively.

Revenues for the third quarter were $58 million, which included $40.5 million from oil, $8.8 million from NGLs and $8.7 million from natural gas. Revenues decreased 20% in the third quarter compared to the previous quarter driven primarily by lower realized commodity pricing. For the third quarter, excluding derivative settlements, we realized $54.82 per barrel for oil, $12.57 per barrel for NGLs and $1.50 per Mcf. On a quarter-over-quarter basis, realized pricing was down 6% for oil, 15% for NGLs and 18% for natural gas.

We had significant decreases in our operating costs for the quarter. Both our total company LOE and STACK LOE were down on an absolute basis as compared to the previous quarter. The total company LOE for the third quarter was down $1 million from the prior quarter to $12.4 million, and the STACK LOE was down $600,000 from the prior quarter to 8 -- or to $7.9 million. For the third quarter, our per BOE numbers were virtually flat with our prior quarter as the lower absolute costs were offset with lower production due primarily to the timing of new development wells coming on line. Our total company LOE was $5.14 per BOE, and our STACK LOE was $3.99 per BOE. As we move into 2020, we plan to build on our cost initiatives and drive down LOE costs even further.

For the third quarter, after adjusting for severance charges and noncash compensation, Chaparral's cash G&A expenses for the quarter were $6.1 million or $2.52 per BOE as compared to $6.5 million or $2.52 per BOE in the second quarter of 2019. To better align our G&A and overhead expenses with current industry conditions, we completed a workforce reduction this summer. Since the beginning of 2019, Chaparral has reduced its corporate workforce by 23% and implemented cost-reduction initiatives that will result in estimated annualized G&A savings of 20% to 25%. We will see initial savings from these reductions flowing through the second half of 2019 and with the full impact of these reductions realized in 2020.

Shifting to CapEx. We invested $66.3 million in oil and gas capital expenditures in the third quarter. Of that, we invested $55.9 million on STACK drilling and completion activities, $1.9 million in acquisitions, $2.4 million in capital workovers. And an additional $6.1 million of capital was incurred outside of the STACK with $1.2 million in capital workovers and $4.9 million in corporate allocations consisting of cap G&A, cap interest and asset retirement obligations. Of the $55.9 million of STACK D&C, $1.6 million was nonoperated and $500,000 was joint venture CapEx.

We expect CapEx in the fourth quarter of 2019 to be significantly lower than the first 9 months of 2019 due to a reduction to 2 operated rigs, increased drilling and completion efficiencies per well, a lower-than-expected nonoperated activity and lower acquisition capital. We have reduced our full year 2019 CapEx guidance to $260 million to $280 million, which is a reduction from the midpoint of the original '19 guidance of approximately 6% while maintaining our original production guidance.

During the third quarter, we took meaningful steps in reducing a portion of our secured debt. On August 29, we closed on the sale of our headquarters for $11.5 million. Proceeds from this sale were used to pay off the outstanding balance of the real estate note of $8.2 million, and we estimate annualized savings of approximately $1 million will be achieved through this sale.

In addition, we successfully eliminated $9.8 million of lease financing obligations for compressors associated with the sale of our legacy EOR properties in late 2017. These compressors were being subleased to the buyer, and therefore, Chaparral did not utilize any cash to eliminate this debt obligation. In total, we were able to reduce $18.1 million of debt through these 2 transactions.

Through the third quarter of 2019, Chaparral has realized $14.3 million in proceeds from noncore asset sales. This is significantly above our 2019 guidance range of $5 million to $10 million. In September, the company's $325 million borrowing base was held flat during our semiannual fall redetermination. As of the end of the third quarter, we had approximately $21.5 million in cash and cash equivalents and $110 million drawn on our revolver. As a reminder, we have no significant debt maturities until 2022.

We continue to focus on being an efficient and disciplined operator in maximizing the value of our STACK and Merge acreage. We are moving closer to our goal of achieving cash flow neutrality and are well positioned to profitably grow and lock -- and unlock the potential of our assets as we strive to deliver value to our shareholders now and to the future.

And with that, I will turn the call back over to Earl.

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [5]

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Yes. Thanks, Scott. And in closing, we remain confident in our operations team and the strong culture of learning, science and technology, which has resulted in significant cost savings and further sets our drilling, completion and operations apart from our peers. We believe that we have clearly differentiated ourselves and our assets as we continue to deliver operationally, which has enabled us to consistently meet or beat our guidance. We remain as focused as ever on achieving excellent capital efficiency through strong execution, cost management and capital discipline.

In October, we proactively reduced our rig count to 2. This is a meaningful step as we accelerate our path toward cash flow neutrality, which is our highest priority as we plan for 2020 and beyond. We are optimizing a 1- to 2-rig program in '20 that will significantly reduce capital spend year-over-year while still continuing to grow production by 10% or more. We're excited about our future and believe with continued operational and technical excellence, we will further demonstrate Chaparral's tremendous value potential.

I guess we can get ready for some questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Duncan McIntosh with 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. Just wanted to say good quarter. And the first question I have is, you all pointed to that 1 or 2 program aiming to be cash flow neutral for 2020. I just was wondering if you could provide some additional color around potential turn-in-lines/the timing and what kind of growth that program could deliver?

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [3]

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Well, I think the -- you said some TILs. You said turn-in-lines. Is that what you're ask -- the question?

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

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Yes. Correct.

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [5]

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Yes. So look, here's what I would say to that. We are -- we just -- we had our Board meeting last week, and we kind of looked at several scenarios. The primary goal, and our Board was crystal clear, and it was the management team's expectation as well, is to be cash flow neutral in 2020. We're going to deliver that. So we're going to start the year with 2 rigs, and that's our plan. And then we'll -- throughout the year, we'll assess what we do with rig activity. Right now, the plan is like one -- well, between 1 and 2 rigs.

As to TILs, I think we had -- for the lower 2-rig program this year, we had, how many TILs, guys? It was...

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Unidentified Company Representative, [6]

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50.

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Scott Clifford Pittman, Chaparral Energy, Inc. - CFO & Senior VP [7]

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Roughly 55.

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [8]

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Yes, 55 this year was over 2 rigs. So you can kind of ratio that back. But look, I think in terms of growth, I think I said in my remarks a couple of times that we're targeting in excess of 10% growth. Feel really confident with that. And when you run through the numbers at current strip, we believe we can be cash flow neutral next year. So -- and that's our goal. I mean at the end of the day, the capital markets are very challenging, as you're fully aware of. And we have plenty of liquidity, and we really have no maturities. But the idea would be to make sure this company is cash flow neutral in 2020. And with our focus on execution and our great returns we've achieved through our development programs, we have high confidence we can deliver that.

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Austin Joseph Aucoin, Johnson Rice & Company, L.L.C., Research Division - Assistant [9]

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And then I guess my follow-up would be, quarter-to-date, you all say you all are producing over 28 MBOE per day. Is that activity focused exclusively on drilling your Greenback 6-well pad in Canadian County for the remainder of the year? And then when do you expect to bring that pad on?

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [10]

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Yes. Great question. So yes, right now, we know we had some -- the whole reason we kind of talked about our Q3 in some detail but we -- our TILs were kind of latter part of the -- most of our -- a lot of our TILs were kind of the latter part of the quarter. And so we had a nice increase going into Q4. So we've been in excess of 28,000 barrels a day in Q4. We haven't spud our first Greenback. Well, I think that's kind of the end of the month, roughly. And so -- and then we're talking about that being put on line, turned in line sometime in probably latter part of Q1.

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Operator [11]

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Your next question comes from Jason Wangler with Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [12]

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Was curious as you talk about the 1- to 2-rig program next year and, obviously, you talked about Greenback and some of the other spacing tests. How do you think about the program in terms of, will we be kind of in that lumpy multiple well pads throughout? Or will there be kind of a different type of program as we look at next year?

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [13]

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Jason, I would tell you that, obviously, we're still -- it's kind of working through that. But clearly, we'll go into Q1 with the Greenback coming on line. That's what we'll be drilling there in Q1. If you remember Q1 of this year, we had a similar type thing with our Foraker. So a little similar, you'll see some lumpiness from kind of Q1 into Q2. And then from there, what we're trying to do is achieve the efficiencies of multi-pad development. So you will continue to see this lumpiness up and down. But to be fair, we are -- we're still optimizing it with our Board. And so give us a few more weeks to kind of work through that, those alternatives. But because of our size, give or take 28,000, 27,000 BOE a day, and the fact that we are drilling these multi-well pads, you will see lumpiness until we get scale to obviously take some of that lumpiness out.

But right now, as we -- our current plan would be to spud our Greenback the back half of this month. And then, of course, we'll have really no TILs until we got some time in Q1 later -- latter part of Q1 because of the Greenback. So that will -- you can appreciate the impact of that.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [14]

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Sure. And you mentioned in your prepared remarks the well cost reductions you're seeing. Is there anything that you guys are doing specifically changing on the wells? Or is it simply just drilling and completing faster? And obviously, I would assume that service costs are helping. Or is there something else that we should be thinking about?

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [15]

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Yes. So look, we work it really, really hard. My ops team is laser-focused on this issue, and we're very proud of our execution and our results that really demonstrated Chaparral's separation between our peers in terms of execution. And our goal in 2020 is to continue with that effort. So we're going to get there through -- our expectation is continue the efficiencies we're seeing on both drilling and completion time as well as continued service sector deflation. So I think we're dialing in a 3% to 5% reduction from where we are right now, and that's just on the D&C side. But combination of all those, I don't see a material shift in designs, right? We're continuing to optimize those every single day across all spectrums of our spend, and you'll see that continue to play out in 2020. But the terms of trying to frame that, I don't see a major step-down in the design change to get us to the numbers. It's more about operational efficiency as well as a service sector deflation.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [16]

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Great. If I could sneak one more in, Scott, for you. Just on the borrowing base, obviously, you got it reaffirmed. Could you just give us the availability as it's at, I guess, at the end of the quarter from the second quarter?

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Scott Clifford Pittman, Chaparral Energy, Inc. - CFO & Senior VP [17]

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Yes. So it's actually -- it will be in our Q as a portion of the liquidity, but the availability that we have for September -- the end of September is $180 million. It is important to note through the debt reduction process that we've done, we started the year with availability of $208 million on that revolver. And so despite the outspend that we've worked through and the ability to kind of grow production, we've actually only deteriorated our liquidity on our borrowing base by approximately $28 million. So it's been fairly positive. We were very happy that we were able to kind of maintain the borrowing base kind of where we were at given commodity prices and movement, but we were generally extraordinarily happy with what -- where we're at and feel fairly positive around our liquidity availability.

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Operator [18]

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Your next question comes from Derrick Whitfield with Stifel.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [19]

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Building on the previous 2020 questions, I wanted to specifically focus on your oil production for 2020. Based on our preliminary modeling efforts, it appears that you can generate modest oil growth while spending less than cash flow. Is that a reasonable read?

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [20]

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I think so. I think that's right. I mean what you'll see is a continued emphasis on our Merge Miss in 2020 because our results have been so, so strong there. And if you look at our expectations of that type curve versus our stuff in Kingfisher County, it's a little bit -- it tends to be a little less oily. But because of the great results we're seeing with our full section development and seeing high oil rates initially, we do believe we can get some increase in oil year-over-year through this rig activity that we just outlined.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [21]

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Great. And as my follow-up, as you guys are well aware, your stock is currently pricing something in the vicinity of PDP value largely based on fears that Chaparral could become the next AMR. In a general sense, could you speak to how you've been able to deliver consistent results and do more with less while others around you have consistently experienced difficulty?

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [22]

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Yes. Happy to do that. And I appreciate the call -- the question because it's something that we think a lot about here and frame it. I can start with a couple of comments, and then I'm going to dig into a lot more detail to your question.

Just a few months ago, I'd say the basin -- well, this basin was considered a top-tier basin. I think everybody is fully aware of that. And I really -- I don't think anything that drove the basin to be considered top-tier has changed. Effectively, if you think about the technical attributes, and my operations team are very strong, technical-focused, great things that made it -- that basin is still there, I mean, all the way from source rock to deliverability of the wells.

In addition, infrastructure across the whole spectrum is still there. And I'll remind everyone that, really, we really had Chaparral's -- other companies had very outstanding parent well economics, and parent wells were producing very strong.

So what's changed? Well, I think the development approach is the key, and some of the companies that you mentioned, this went -- in my mind, went into it with a different approach, effectively just throw rigs at the issue and then assume you understand it. And that's just not the way we've approached it here. We've taken a very systematic, focused approach that allowed us to incorporate learnings, while at the same time, we were delineating and derisking some of our acreage. When we saw an issue that we didn't like, that did not meet our expectations, we tried to incorporate that and shift accordingly. And when we saw something we did like, we tried to build on it.

So ultimately, where we came down is we feel like it does take a development approach that I'll call unique, and we've kind of framed the words fit for purpose. I mean the geology here is really, really good, but you can't just assume it's going to be consistent across the whole play. STACK/Merge and SCOOP, you have to be very smart about it. So our earth model is a key piece of that. I think others just threw rigs and stuff. And unfortunately, that caused some serious problems that you mentioned.

So we just haven't approached it that way. We believe this basin is -- it's still a very strong return basin, and I think our results are, in my mind, the leading indicator of that, that every quarter we can set out and we can tell you what we think we can deliver and the capital efficiency we can deliver, and we're continuing to do that. Our focus in this company is about execution and capital efficiency. We recognize that, that the only way you're going to deliver value in an E&P company is to ensure you get strong returns and strong capital efficiency. And the attention to detail around our development is a key piece of that for us to be able to deliver strong results.

I think that's what separated us, and then you'll see us -- why you see us continuing to do what we're doing. And that's why we have high confidence about the future. And I'm really excited about what 2020 could bring as we push this company to a new level of production as well as cash flow neutrality.

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Operator [23]

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Your final question comes from John White with Roth Capital.

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John Marshall White, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [24]

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My question's been answered, but congratulations on the borrowing base and the quarter.

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Operator [25]

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Okay. And I'd now like to turn the call back over to Earl Reynolds for closing remarks.

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K. Earl Reynolds, Chaparral Energy, Inc. - CEO, President & Director [26]

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Okay. Thank you, everyone, for joining us on the call today.

We believe we have a very, very strong team with these differentiated assets, and we plan to continue to deliver strong results on our path to cash flow neutrality. Scott and I look forward to speaking with you all in the near future. Thank you so much.

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Operator [27]

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This concludes today's conference call. You may now disconnect.