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

Q2 2019 Delphi Energy Corp Earnings Call

Aug 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Delphi Energy Corp 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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* Darwin K. Little

Delphi Energy Corp. - Interim CFO

* David J. Reid

Delphi Energy Corp. - President, CEO & Director

* Karyssa Quansah

Delphi Energy Corp. - Controller

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Delphi Energy Corp.'s 2019 First Quarter Conference Call. (Operator Instructions)

I would like to turn the call -- or the meeting over to Mr. David Reid. Please go ahead, sir.

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David J. Reid, Delphi Energy Corp. - President, CEO & Director [2]

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Thank you, Sadie. Good morning, everyone, and welcome to Delphi Energy's Second Quarter 2019 Conference Call.

As mentioned, I'm David Reid. I'm the President and CEO of Delphi. Pleased to have with me today, Karyssa Quansah, our Controller as well as Darwin Little, our interim CFO, joining us today.

Thanks for choosing us this morning. We do appreciate, given how busy today is with other companies' calls, you've chosen to listen in to ours. So we appreciate that.

As usual, we'll break the conference up into some brief comments by myself on the quarter. And then Karyssa is going to spend some time on the financial highlights of the second quarter. Then we'll talk a little bit of operational and overall outlook for the second half. And then we'll end the conference with any questions, if there are any.

So firstly, please be advised that the statements made in this call, other than statements of historical fact, may contain forward-looking information, and I refer you to the forward-looking statements disclaimer included in the MD&A of Delphi's second quarter results to inform you that this disclaimer applies to any forward-looking information disclosed in today's call by myself or Karyssa.

So in general, we're pleased with the quarter overall. The production volumes were slightly lower than our internal budget, but within the 9,000 to 9,500 range that we had guided to. So overall, we're happy with the way production turned out. We did have some impact of some shut-in production in the second quarter with the 2 offset producing wells to the 4-well pad. So there was a little bit of downtime there. And Chris will probably talk a little bit more about that.

Condensate volumes. We were very impressed with how the condensate performed in the quarter. We're -- with the 2 -- or sorry, the 4-well pad, approximately 20% ahead of our current west type well assumptions. So from a condensate perspective, the new wells were performing very well over the quarter.

The condensates been very predictable as we've been moving west. Gas production, less so kind of decreasing as we move from west or move to the west and into more of an oil -- light oil window.

But we're pleased to see the overall yields holding in, declines moderating out 90 days now.

Keep in mind that as we continue to grow our liquids, we were 44% in the quarter. Condensate has a much lower operating cost than our natural gas, so our bottom line netbacks remained strong, and we do see those growing in time as the yields continue to influence overall production.

I'll spend a little more time on the operations in the 4-well pad a little later on. But we continue to be advantaged by our Alliance service, exposing the company to the higher Chicago prices as well as the excess service that's been providing us with impactful marketing income. The transaction to monetize a portion of the excess service, it closes in September, and provides us with some additional liquidity as we look into the fourth quarter to commence drilling.

We completed our bank redetermination in July and which we all know is -- are influenced mostly by the most conservative bank within the syndicate. In our case, we ended up with a credit facility that initially down to $100 million now and then when the Alliance transaction closes, we'll be at $90 million, and I'll talk a little bit more about that.

When you look at the -- delaying the fourth quarter -- or the capital program to the fourth quarter, that results in, ultimately, a 25% decrease in our net bank debt by year-end 2019, over the course of the year. So significantly underspending cash flow and using the proceeds of the disposition to decrease bank debt.

With that, the 25% drop in bank debt, even on the $90 million line, that increases our liquidity by -- to approximately $25 million from only a less than $10 million at the end of first quarter. So very constructive, and we think it's the right thing to be doing in this environment, given the volatility in commodity prices. And we think the -- we think this will be constructive for our overall business as we look forward into 2020, that both oil and natural gas curves are very backwardated at this point in time. We are protected with a pretty solid hedge book, but we view this strategy as favorable to both our noteholders and our shareholders as we take a little pressure off the bank line and reduce that debt.

I think with that, I'll pass it over to Karyssa, and she can spend some time on the second quarter financials.

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Karyssa Quansah, Delphi Energy Corp. - Controller [3]

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Thank you, Dave. Good morning to everyone. It's a pleasure to be here to briefly discuss the financial highlights for the second quarter of 2019.

During the quarter, Delphi wrapped up its capital program, concluding the development of a 4-well pad in West Bigstone.

Capital spending in the quarter amounted to $4.4 million, and was directed on completing frac and tie-in operations of the 4-well pad and the completion of a 14-kilometer dedicated pipeline connecting West Bigstone to a 7-11 compression and dehydration facility in East Bigstone.

Production in the second quarter averaged 9,157 BOE a day, up 5% from the 8,759 BOE a day in the first quarter of 2019. The 4-well pad was brought onstream throughout the second quarter, contributing to a liquid yield of 130 barrels per million cubic feet of gas.

Production in the second quarter was constrained by an average of approximately 260 BOE a day due to the shut-in of offset wells during fracking operations on the 4-well pad.

In the quarter, the production mix was weighted to 30% to field condensate, 14% to NGLs and 56% to natural gas.

Oil and gas revenues in the second quarter were $27 million, up 3% from the first quarter of 2019.

Field condensate revenue increased by $5.8 million from the first quarter of 2019, but we did see an 18% increase in production, along with improved pricing. However, the increase was largely offset by weaker prices for natural gas and NGLs.

Delphi markets its NGLs through annual contracts with prices fixed as a percentage of WTI for plant condensate, pentanes and butane and as a percent of Conway propane for our propane.

The first quarter realized price for NGLs of $35.81 per barrel benefited significantly from last year's contract prices.

Prices in the second quarter of $21.48 are less favorable under the terms of the renewed marketing contract, which commenced on April 1, and does reflect the lower benchmark prices, particularly for propane and butane.

We do carry a strong hedge book with the mark-to-market value of $15 million at the end of the quarter. Almost half of our natural gas is hedged at a Chicago price of $3.44 per MMBtu and 82% of liquids production is protected by WTI hedges at CAD 86.62 per barrel and Conway propane hedges of USD 0.80 per gallon.

We do continue to build the hedge book for 2020, we -- where we currently have about 18% of our gas hedged at a Chicago price of $3.54, and almost half of the liquids production are protected by WTI hedges at CAD 83.23 and Conway propane hedges at USD 0.77 per gallon.

In the second quarter, we did realize hedging gains of $2.1 million, equivalent to $2.50 per BOE. This gain was comprised of a $1.9 million gain on WTI and propane hedges, a $300,000 gain on NYMEX and Chicago basis hedges, offset by $100,000 earlier loss on FX.

Operating cost in the second quarter came in at $7.8 million or $9.41 per BOE. This compares to $7 million or $8.96 per BOE in the first quarter of 2019. The increase in operating expenses is due to higher field activity, as the 4-well pad was placed on production in the quarter, and wet field conditions.

During the quarter, Delphi 7-11 facility was tied into the catapult water disposal facility, allowing the company to transport water from the 7-11 facility via the catapult pipeline and save on trucking costs.

Although we did see cost savings for wastewater handling for produced volume from our 7-11 facility, the 4-well pad creates the majority of the wastewater volumes in the quarter, which are being removed at the 1-3 battery and trucked to the catapult water disposal facility.

Operating costs are down about $1 million from the comparative quarter in 2018 and about $2 million in the first half of 2019 compared to the first half of 2018, which reflects the reduction in third-party processing fees as we are now able to process a portion of mining natural gas volumes at our 25% owned Bigstone fleet natural gas plant.

We do continue to review cost-saving initiatives for shipping condensate by pipeline and various alternatives for further significant reduction in natural gas processing.

Transportation costs in the quarter were $4.67 per BOE compared to $4.03 per BOE in the first quarter of 2019. The increase in transportation costs per BOE is primarily due to higher trucking costs for field condensate due to wet field conditions.

The operating netback before hedges in the quarter was $18.29 per BOE compared to $20.19 per BOE in the first quarter of 2019.

Although weak commodity prices have placed downward pressure on the operating netback, the composition of our production and efforts to reduce operating and transportation costs continue to support a healthy operating netback in this depressed commodity price environment.

In accordance with International Financial Reporting Standards, also known as IFRS, an entity is required to make an assessment of whether or not indicators of impairment exist at the end of each reporting period. If indicators are present, then you must perform an impairment test.

At the end of the quarter, Delphi identified indicators of impairment primarily relating to the further declines in forecasted commodity prices, particularly for natural gas and NGLs and the market capitalization deficiency relative to the book value of the company's shareholders' equity.

As a result, we performed an impairment test and recognized a $61.7 million noncash charge against the book of the company's property, plant and equipment.

As a result of the impairment charge, we did record a net loss for the quarter of $53.6 million.

Net debt at the end of the quarter was $189.1 million, with bank debt and working capital deficiency of $85.7 million, a $7.1 million reduction from the first quarter of 2019.

During the quarter, Delphi entered into a binding agreement to sell and permanently assign 35% of its firm path Alliance service for $11.9 million. This marketing transaction is expected to close on or about September 3, 2019, and the net proceeds and reduction to Delphi's outstanding letter of credit associated with the Alliance service is expected to increase liquidity by approximately $13.3 million.

As Dave mentioned, during the quarter, the revolving period of the senior credit facility was extended from May 28, 2019, to July 12, 2019, in order to complete the annual borrowing base redetermination.

In July, the annual borrowing base redetermination of the credit facility was finalized and the credit facility was amended. The borrowing base of the amended credit facility was reduced from $105 million to $100 million, and will be reduced further to $90 million upon the earlier of September 30 and the completion of the marketing transactions.

The credit facility is available on a revolving basis until November 28, 2019, with a maturity date of November 29, 2020.

Under the amended credit facility, capital spending is limited to $4 million until November 30, 2019, other than that is funded by the issuance of new equity or senior secured notes.

In addition, the July 2019 amendment to the credit facility does exclude lease obligations as defined under the new lease standard under IFRS from the definition of debt, and will not be part of adjusted bank debt or adjusted debt for the purpose of covenant calculations.

And that pretty much concludes my brief update, and I will turn it back to Dave.

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David J. Reid, Delphi Energy Corp. - President, CEO & Director [4]

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Great. Thanks, Karyssa. So we look at operations in the second quarter, I mean it was probably one of our quietest quarters we've had in a very long time. And really, other than bringing the 4 wells on, doing a little bit of facility work and some maintenance, that's really all we did. And we've been eye -- all eyes on the performance of the 4 wells and how they're relating to not just the original 16-10 and 15-10 wells on that same 2-section block, but some of the liquids-rich wells in the immediate area that we've drilled over the past 6 to 9 months. So 'been important to sit back and watch the performance of these wells.

I think as we've been developing westward into the higher condensate yields, we've been utilizing increased frac intensity. We've gone from 40 to 50 stages to 65. As we continue to move westward and starting to see more of a light oil environment, we've attempted an 80 stage and we did -- the furthest west wells were done with the extreme limited entry with a theoretical 200 entry points. So really, it's trying to use the increased frac intensity to improve recovery primarily of the condensate.

We recognize that as you move west and things get thicker, but a little tighter rock, we need better fracs to open up that tight rock to get the condensate out, but that seems to be working.

I think some of the observations -- and now that we're 90 days into that production, it's very encouraging to see that over the 90-day average for the 4 wells, we were 63% liquids. So we're -- compared corporately to 44 this quarter.

The first 2 wells over that same 90 days was 53%, and that's really a result of higher gas production, not lower condensate production.

But in all cases, I think from the table, you can see that the gas -- natural gas rates have tended to be flat to increasing over the first 90 days, indicating that it takes longer for the -- as we get the frac water back for the gas production to come in, clean up and we see the condensate tending to have an immediate gain, but having a decline profile that starts really on day 1, but -- and even on the decline profiles over the 6 wells now, we see quite a difference on the condensate.

When we look at the decline profiles of the 4 wells on condensate at day 90, which -- you guys don't have the data; you've got the IP90 and the IP30 -- but at day 90, so production rates out at after 3 months. The 4 pad wells are almost exactly the same. In one case, 14-10 is actually higher than 15-10 condensate rates.

So we're seeing a little lower initial rate on day 1, but lower declines. And the question will be, in time, do the wells -- the pad wells actually cross over on a condensate and with lower declines, produce at higher rates and greater ultimate recoveries than the first two wells.

One of the things that we have done with the infrastructure -- the 14-kilometer pipeline is -- has been very important in providing flexibility and processing options and bringing that West Bigstone volumes all the way to the 7-11 East Bigstone and access our aiming system.

Over in the west, we have installed gas lift. We have 2 wells on the pad on gas lift. The furthest 2 wells with the highest CGRs when you're looking at condensate ratios up approaching 300 barrels a million with the lower gas rates that we're seeing. The gas lift has been very instrumental in getting these wells cleaned up and flowing steady, much more efficient than pump jacks on some of the other wells that we've had.

We continue to see the benefits of the amine sweetening plant on our overall operating costs. We're aggressively evaluating our options in terms of processing gas in the area, whether it's a second amine plant or whether it's currently with SemCAMS or actually potentially heading down to Edson with our partner, Repsol. So we have a number of options to continue to pursue a reduction in operating costs.

We're also pursuing getting the condensate pipeline connected and getting the trucks off the road. That'll be a material cost savings for us that -- so stay tuned for that. We're working very aggressively to get something done on that as we head into late fall. It'd be a 2020 start-up, of course, but we hope to have something in place over the next several months.

The infield water disposal project with catapult that connected our 7-11 facility to their disposal facility is up and running and doing an excellent job, and we're now in discussions to try and expand that to actually get some of the West Bigstone water volumes into pipeline and down to that same facility.

So continued efforts to drive costs down.

When we look at what we did in the pad drilling in West Bigstone, we see opportunity to reduce the capital costs on both the drilling and completions. But the most important thing for us will be to evaluate the production performance over the next several months to decide exactly what the right recipe is going to be on the follow-up drilling.

We -- in our observations, we continue to see as the industry does at parent-child well relationships, and the impacts to productivity remain paramount in managing frac size and hits to either existing wells or wells next to each other.

We have many cases in the field where our first delineation well is being the best well compared to the follow-up development drilling that we've done. 16-10 in the table is no exception. You can see that it, by far, is better on a gas rate and condensate rate out at the IP90.

That was the first well drilled, larger frac, 65 stages. Then, of course, offset by 15-10 as a single well. So that 15-10 was a child well and then the 02/15-10 was another child well. 14-10 and 13-10 are really the only 2 wells on that pad that you could consider as parent wells and not being impacted.

So we're managing and evaluating how best to deal with the parent-child relationships, that's frac size and more frac -- number of fracs. So we think we've got some of that figured out.

I think one of the other observations, at least in the early time, is that on our hybrid of ball drop perf-and-plug, the 65 stages versus 80, certainly in early time, hasn't provided any material difference in performance out 90 days. So we do need to just kind of be patient and watch.

We would expect that the increased stages may have a lower decline profile out into the 6 to 9 months. And we've always said that we really need outwards of 6 months before we really understand what we have. So I think when we talk about delaying the capital program into the fourth quarter, that gives us the time to fully understand these wells and design the next completions.

When we think of the outlook in the press release. We did talk about commencing the drilling of the next pad. It'll, in all likelihood, be a 3-well pad later in the fourth quarter on production late in the first quarter. So yes, production will decline between now and then but given our netbacks, strong hedge book, debt is going to come down, like I said, 25% and create that much-needed liquidity as we look out into 2020 and 2021, with currently strip pricing in a very backwardated position and much weaker than we're enjoying even today. So we're trying to be cautious and create a sustainable and durable model here. But the equity market is somewhat broken now. So we're really more focused on our business, and the market will follow, given our success over time.

So when we think of the growing condensate production that we've achieved in Q2 and what we see out west, we're very excited with the potential to continue to improve well results out there and drive growth as we head into 2020.

The Alliance Gas marketing advantage remains a key asset to us, mark-to-market. On that, what we view as a significant asset is probably more than our current market cap right now.

So -- and then with the increased liquidity from that Alliance sale and the deferred spending in third quarter, we'll be in a really good position to weather what looks like a very uncertain commodity price environment looking out into 2020.

I think the other important thing that we're working on is our view of the senior secured notes. They mature in July of 2021. So we're working with some of our larger noteholders, evaluating options to develop an extension to that. And I think that'll be very important to both the noteholders and the equity holders as we achieve that heading into year-end.

So before I end, I'd like to introduce Darwin Little, our Interim CFO, who joined us yesterday. I just thought I'd offer up him an opportunity to just introduce himself to our shareholders and analysts who are on the call today and just share a little bit of his background. And I'll turn it over to you, Darwin.

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Darwin K. Little, Delphi Energy Corp. - Interim CFO [5]

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Thanks, Dave. So I thought I'd maybe just give a 3-minute synopsis of my history. As Dave said, I joined him yesterday or -- and I am a CPA. And over the last 5 years, I worked for -- as a CFO for a company called NEP Canada. We sold the company in August of 2018, to Aspenleaf. We had grown that company from 2,000 barrels up to 12,000 barrels a day. I actually joined the company in 2013. During that period of time, we sold $60 million worth of assets, we raised $90 million worth of equity, we increased our syndicated line from $60 million to $175 million, and we've raised $40 million of second lien debt and repaid it.

We made money for our shareholders, which was a tough thing to do in the -- in that time frame, that environment.

Prior to that, I was a CFO with 2 different public juniors, where I was a founder. The first one, Glamis Resources, started with 0 barrels and we ended up selling that to Legacy Oil + Gas. The second one, Torquay, again, started with 0, and we ended up selling that to a private company called CanEra.

Prior to that, I worked for 6 years at Precision Drilling. I was a Controller with one of their international service divisions, a well testing under balanced drilling, and also worked on some project they had for rolling out international software to tie their accounting systems together.

And then prior to that, 1991 to 2000, I worked for a company called Inuvialuit Petroleum. They were a private company owned by the Inuit out of Northwest Territories. Again, I was the CFO there.

And prior to that, I was in industries not related to oil and gas, but now I'm starting to show how old I'm at and so it's probably not relevant.

So basically, that's my synopsis. I've worked private, public. I've done all sorts of equity raises in both market, debt, sold assets, bought assets. So I've kind of been around the block a little bit.

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David J. Reid, Delphi Energy Corp. - President, CEO & Director [6]

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Yes. Good. Thanks, Darwin. Again, I think we're certainly just having come in yesterday, myself, I'm very excited to have Darwin here. The Board is very happy to see Darwin come in, and we look forward to kind of meeting some of the challenges head-on here. Certainly, one of the big ones is the bank as we head into November and solidify that syndicate into a little stronger position than maybe it is right now.

But -- so very pleased to have Darwin with us.

So with that, I'll kind of open it up for questions, if there are any. And for any of us, whether it's Karyssa or Darwin or myself. So Sadie, we'll open up now for -- yes.

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Operator [7]

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(Operator Instructions) We don't have any questions at the moment. You may continue.

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David J. Reid, Delphi Energy Corp. - President, CEO & Director [8]

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All right. Thanks, Sadie. Al right, well, if there's no questions, certainly, as always, feel free to give myself a call or drop me an e-mail. And if you've got any questions or want to talk on a one-on-one basis, happy to do that.

And again, thank you for joining us today, and enjoy the rest of your summer. Thank you.

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Karyssa Quansah, Delphi Energy Corp. - Controller [9]

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Thank you.

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Darwin K. Little, Delphi Energy Corp. - Interim CFO [10]

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Thanks.

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Operator [11]

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You may now disconnect your lines and, presenters, please stay online for your post conference.