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Edited Transcript of DEE.TO earnings conference call or presentation 7-Nov-19 4:00pm GMT

Q3 2019 Delphi Energy Corp Earnings Call

Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Delphi Energy Corp earnings conference call or presentation Thursday, November 7, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darwin K. Little

Delphi Energy Corp. - Consultant

* 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, and welcome to the Delphi Energy Corp.'s 2019 Third Quarter Conference Call. (Operator Instructions) I would now like to turn 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, Brian. Good morning, everyone, and welcome to Delphi's third quarter conference call. As mentioned, I am David Reid. I'm the President and CEO. I'm pleased to have with me today, Karyssa Quansah, our Controller; as well as Darwin Little, our CFO. So they will be participating in the conference call as well.

Thank you again for choosing to join us this morning. We do appreciate it as we know how busy everybody is with other companies reporting and having their own conference calls. So for those joining us today, we do appreciate it.

And as usual, we'll break the conference up as follows. I'll provide some initial comments on the quarter. Karyssa is going to spend some time on the financial highlights of the third quarter. And Darwin is going to spend some time speaking to the proposed recapitalization transaction that is out in the market. And I'll wrap up with a few comments after that. And then as usual, we'll end the conference with a question-and-answer session, if there is any.

But 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 third quarter 2019 results to inform you that this disclaimer applies to any forward-looking information disclosed in today's call by myself, Darwin or Karyssa.

With that, we'll continue on. In general, we're pleased with the quarter overall. I would say that the quarter results demonstrate our commitment to strengthen our financial position and improve the going-concern nature of our business. We had a substantial 31% reduction in our bank debt over the course of the year. And of course, we've announced the proposed recapitalization transaction. It's not where we want it to be, but that's the reality of what the macro environment and our performance has resulted in.

I mean it was a planned quiet quarter operationally, but we did get some pretty important things done. Of course, we monetized our 16 million a day or a portion of our excess Alliance service to bring in $11.9 million gross proceeds, well-timed as the Chicago-NYMEX basis has narrowed heading into the winter here. So we timed that very well.

Back in August, I mentioned that we had completed our bank redetermination, which we all know is influenced by the most conservative or least supportive bank. In our case, we ended up with some last-minute revisions to the credit facility. And upon closing the Alliance transaction, that was reduced to $90 million. And I think Karyssa is going to talk about the latest redetermination that's just been completed. With a planned minimal capital program in the quarter and then solid cash flow and the proceeds from the Alliance, we were able to reduce the bank debt actually lower than we had initially contemplated in our forecast. So we're pretty pleased with where we are today.

We've advanced several projects that will have a positive impact on our overall cost structure now and into the future. First, being the efficient operation of the pipeline connect that was done in Q2 with the catapult water handling and disposal facility, where we're pipeline connected back to our 7-11 facility, significant cost savings and environmental impact mitigation, getting the trucks off the road and using a pipeline to move that water to disposal.

The second being the pipeline loop line connect from West Bigstone back to East Bigstone, providing pretty significant improvement in well performance to both the new and the legacy wells with lower line pressures as well as we'll see some cost savings as a result of that moving more product back to the east and through the Bigstone plant and whatnot.

Thirdly, an important one, being the planned pipeline connect of our condensate volumes to sales, reducing transportation costs and addressing safety and environmental impacts with the number of trucks that we currently use to haul the condensate to the sales point. So that was just released by the -- by [Secure] early in the week, and we're happy to be partnering up with them. So it should be up and operational in the second quarter of 2020. So that's a pretty big step to be moving all that condensate volume via pipeline.

And the fourth one that -- we signed the agreement to reactivate the Alliance lateral from the Bigstone processing plant to the main lateral. It's been shut-in for a number of years due to an operational issue. So they've agreed to, on their dollar, reactivate that line and then we'll be able to be selling our amine sweetening Montney volumes that are processed through the Bigstone plant on to the Alliance line and down to Chicago. So we will be back up to as high as 90% of our volumes could go to Chicago, if we so choose. You may notice a theme here. Pipelines provide an efficient, safe and environmentally responsible means to move our sales and wastewater products. So that's a message to our friendly politicians that it's an important part of our business.

I think probably most importantly in the quarter, late in the quarter, we announced a comprehensive recapitalization plan to put before our shareholders and noteholders for approval coming up on November 15. It's a plan that began almost a year ago, when we started working on amending the term notes to stay well ahead of the July 2021 maturity date as well as evaluating options to improve the overall financial position of the company, given the weak and uncertain commodity prices and really capital markets at the time.

And with a strong relationship and support from Luminus, who's our largest shareholder and noteholder even prior to this proposed recap plan, we've explored a number of options and structures. And as we progressed with developing the plan, obviously over the last while, the macro environment has continued to deteriorate. We've pretty much lost most of our going-concern value in our share price. And we really are constructive looking past the success of this plan and getting back into a going-concern mode and see the value return into our share price to reflect that going concern.

Over the course of the last number of months, we faced some pretty significant challenges and headwinds to come up with such a creative and comprehensive plan from the regulatory bodies and dealing with them with respect to having an insider and control person as a shareholder wanting to put capital in. It almost seemed like injecting capital from an existing shareholder was almost as difficult as getting a pipeline to Tidewater. We ended up with some misalignment amongst even some of our team members and certainly ran into some headwinds with the senior lenders.

Certainly, one of our bank syndicate members, I would say without holding back, took a very obstructionist and almost extortionistic position. Maybe that bank wanted to see a different outcome from what our Board and major shareholders were moving forward with. But we persevered and with the assistance of a pretty solid advisory team in Raymond James and AltaCorp and the overall banking syndicate, we've put together a well-thought-out comprehensive plan that improves our financial strength and preserves the opportunity to realize appreciation of the equity value.

Simply put, we have a plan that will continue to reduce the company's bank debt while we're replacing and increasing the producing reserves. We're going to extend the non-revolving debt maturity out into April 2023 from July '21. And most importantly, we're providing some working capital to carry out a sustainable 2,000 winter program -- sorry, winter 2019/'20 program and with the option of pursuing and participating in acquisition and consolidation opportunities, which we view in this environment as probably more opportunistic than and better capital efficiencies than actually being out and drilling in the field, given what's going on. We've already seen a few casualties to date.

So with the vote on November 15 and closing schedule near the end of November, we'll then be in a position to talk more about the planned winter program and our views of what we would call a more aggressive acquisition and transaction strategy, having a much improved and probably a rare liquidity position that we can bring to the table. Darwin is going to spend a little more time speaking to the recap plan after Karyssa is done.

With the closing in late November, this kind of delays the winter program into a December start. So with no new wells onstream until late Q1, we'll see a continued decline in production until then. But we'll also see bank debt continue to decline. So after the transaction is closed, we'll then be able to talk about what 2020 looks like. So we're not going to spend any time on any forecast today because we really need to wait and see the results of the vote.

But I think overall, given the quarter, production is performing well. The new wells that we brought on in the spring, the condensate yields are very strong and stabilizing as we would have expected with condensate yields. Of around 200 barrels a million on average of the dozen wells we've drilled in West Bigstone, the netbacks are about 60% higher than the old legacy wells out in East Bigstone, where they're averaging more like 40 barrels a million. So cash-generating ability out in West BigStone looks very strong. I think the next step for us is continued cost structure improvements, both on the operating and transportation side. Some of the things I talked about earlier, we'll address some of that.

And I must say, having an opportunity to look at some of the reporting out this morning, it's nice to see that our operating netback is within about 3% of Seven Gens', who has recently been crowned the king of condensate. So I think we're being very competitive both at the revenue line through our cost structure down to operating netback. Our greater challenge moving forward is improving the cash netback. And that's really got to come through an interest cost reduction or production growth or G&A cost reductions or improvements. So we'll be continuing to work diligently on that side of things as we move into the spring.

And finally, before I pass it on to Karyssa, I think if we define relevancy in our business as the ability to generate free cash after spending our maintenance capital, I think we're pretty close to being able to do that. But we must create something that's a larger scale to improve both the cash netbacks and ultimately our capital efficiencies through a larger drilling program, where we're taking advantage of pad operations. I think that's pretty obvious, it's such a real challenge in this environment at the size we are at.

With that, I'll pass it on to Karyssa, and she'll go over some of the highlights of the third quarter.

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

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Great. Thank you, Dave. Good morning, everyone. It's a pleasure to be here to briefly discuss the financial highlights for the third quarter of 2019. While it was a relatively quiet quarter and we didn't undertake any development projects, capital expenditures in the quarter amounted to a recovery of $100,000, largely due to cost estimate revision on a 14-kilometer dedicated pipeline connecting West Bigstone to the 7-11 facility compression and dehydration facility, which resulted in an accrual reversal from the second quarter.

Production volumes for the third quarter averaged 8,386 BOE a day, a decrease of 8% from the second quarter average of 9,157 BOE a day as no additional wells have been drilled since the second quarter of 2019. The liquid deals in the third quarter averaged 117 barrels per million, of which 87 of those barrels were the higher-valued condensate and pentane products. The production mix in the quarter was weighed at 26% to field condensate, 15% to NGLs and 59% to natural gas.

Oil and gas revenues in the third quarter were $20.6 million, down $6.4 million from the second quarter of 2019, but largely due to the lower field condensate volumes and weaker benchmark prices for field condensate and natural gas. The decrease in oil and gas revenues was largely offset by realized gains of $5.4 million, which is equivalent to $697 per BOE for the quarter.

We do continue to carry a strong hedge book with the mark-to-market value of $15.1 million at the end of the quarter. For the fourth quarter of 2019, about 40% of our natural gas is hedged at the Chicago price of $3.78 per MMBtu and 80% of liquids production are protected by WTI hedges at CAD 87.89 per barrel and Conway propane hedges at USD 0.80 per gallon. We will continue to build a hedge book for 2020, where we currently have 19% of our gas hedged at a Chicago price of CAD 3.33. And about 60% of our liquids production are protected by WTI hedges at $83.21 and Conway propane hedges at USD 0.77 per gallon.

Operating costs in the third quarter came in at $7.3 million or $9.48 per BOE compared to $7.8 million or $9.41 per BOE in the second quarter of 2019. Operating costs in the quarter were negatively impacted by a $0.4 million of third-party equalizations related to prior periods as well as higher costs associated with road and lease maintenance due to wet field conditions.

We do continue to review cost-saving initiatives. As Dave mentioned, we recently entered into an agreement with a midstream company that will build the pipeline from our Montney assets at West and East Bigstone for transportation of our field condensate to a full-service terminal at Fox Creek, where the fluids will then be sold onto the Pembina pipeline system. Transportation costs in the quarter were $4.09 per BOE compared to $4.67 per BOE in the second quarter of 2019. The reduction in transportation cost is largely due to lower field condensate trucking charges as field condensate production from the 4 well pad stabilizes.

The operating netback before hedges in the quarter was $12.89 per BOE compared to the $18.29 per BOE in the second quarter of 2019. And the decrease is largely due to weaker commodity prices. Including hedging gains, the operating netback was $19.87 per BOE in the third quarter compared to $20.79 per BOE in the second quarter of 2019. The company's hedge book continues to support some measure of stability during this volatile commodity price environment.

During the quarter, the company generated free cash flow of $21.4 million as a result of no capital spending and the completion of the sale of excess Alliance service for net proceeds of $11.5 million. Since the first quarter of 2019, the height of the 2019 winter capital program, Delphi has reduced net bank debt by $28.6 million, representing a 31% reduction.

Net debt at the end of the quarter was $165.7 million, consisting of bank debt and working capital surplus of $64.2 million and $101.5 million of senior secured notes. During the quarter, the borrowing base of the senior credit facility was reduced from $100 million to $90 million following the sale of excess Alliance service. On November 1, the senior lenders amended the credit facility and effective on the earlier of the closing date of the recapitalization transaction on November 29, 2019, and conditional upon the completion of the recapitalization transaction, the borrowing base has been renewed at $80 million.

In the revolving period, our maturity date has been extended to May 28, 2020, and May 29, 2021, respectively. If the recapitalization transaction is not completed before December 13, 2019, then the company's next scheduled borrowing base redetermination under the senior credit facility will be on December 13, 2019. Under the credit facility, capital spending until December 13, 2019, is limited to $4 million other, than as funded by the issuance of new equity or senior secured notes.

And that concludes my brief update. And I will turn it over to Darwin to go over some of the highlights of the recapitalization transaction.

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Darwin K. Little, Delphi Energy Corp. - Consultant [4]

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Thanks, Karyssa. Okay. In October, we closed our recapitalization financing by way of private placement for gross proceeds of $46.5 million. These funds are currently held in an escrow account awaiting shareholder approval of the proposed transaction, as Dave mentioned that shareholder approval meeting will be held on November 15.

The recapitalization that we did had 4 important components to it. And that's what I'm going to speak to. The first component was to inject some much-needed liquidity into the company. Second, we extended the maturity date of the existing $105 million of notes from July 2021 to May of 2023. Third, we had a bank line credit redetermination, which if we approve this entire transaction will extend the renewal date out to May of 2020. And the fourth was more of a housekeeping issue. We are going to effect a share consolidation of 15:1.

So just to provide a little more detail on these components. The new debt and equity will be issued as part of the recap transaction. So there will be new equity of $30 million injected into the company. The equity is issued at $0.11 per share, which is significantly above where we are today in the market. We are also issuing some new debt with a face value of $22 million or net $16.5 million. These new notes will have a maturity date of April 2023, which will tie into the extension on the existing $105 million notes. The new notes were offered at a 25% discount to face value. And as I've mentioned, that total transaction brought us $46.5 million gross into the company.

So as part of the overall transaction, it was important to extend the maturity date of the existing $105 million notes that we currently have issued. The current maturity date was July of '21. And we are now extending that date to April of 2023. The looming 2021 maturity date causes problems on line of credit availability from our bank syndicate, so extending the maturity date and aligning the maturity date with the new notes eliminates any near-term pressure that we have on our balance sheet with our lending syndicate.

The existing noteholders are to receive 700 consent warrants for each $1,000 of face value that they currently hold. The consent warrants would have an exercise value of $0.149 that's pre-consolidation value. As long as the recapitalization transaction is approved, our bank will provide an $80 million line of credit with a new maturity date of May 28, 2020. If the recap is not approved on November 15, we will have a bank line redetermination, as Karyssa mentioned, on or before December 13. Without the new equity, it's extremely likely that our redetermined loan value would be less than $80 million. So it's important that we get the transaction approved.

The other detail on the recap is related to the funds release. The funds are currently held in an escrow account. If the shareholders do not approve the transaction on November 15, all the funds will be returned to investors. These funds today are contemplated to be released in 3 tranches but may also be released in full if there's a qualifying transaction available for us to complete, which David touched on a bit, that we are looking to try and find a transaction that will make us more relevant in the marketplace and we can use these funds for that transaction. If no acquisition or transaction such as that is available, we will proceed with a winter drilling program, which will run from December of this year to April of 2020. This drilling program will allow us to replace our reserves from the 2019 production and add net new reserves to the company.

The details of the escrow are as follows. 1/3 would be released -- 1/3 of the funds will be released on the effective date of the transaction, which is contemplated to be around November 26. So the Board -- the Shareholders' Meeting is on the 15th. If it's approved, then there's some mechanics we have to go through to have the transaction completed. We think that date should be around November 26, and we would get 1/3 of our proceeds on that date. The second 1/3 would be released 3 months after the effective date of the transaction. So that would be somewhere in late February.

And the final 1/3, which is a little more complicated, is going to be released on the later of several components. One would be we've got to drill our first 3 well pad, tie it in and drill a second well pad. So once we've got those 3 wells drilled on the second pad, we would be eligible for the 1/3 -- the remaining 1/3. There's a later-of clause that says we either have to do all that drilling or it's 4.5 months from the effective date of the transaction. Effectively, that puts us somewhere in April is when we're looking at receiving those funds. If all 6 wells are not completed by 9 months from the effective date, which would be around the end of August of 2020, the final 1/3 of escrow funds would be returned to shareholders.

So that sort of summarizes the transaction. And I'll turn it back to Dave.

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David J. Reid, Delphi Energy Corp. - President, CEO & Director [5]

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Thanks, Darwin. Thanks, Karyssa, for providing your update as well. I think we've given you a pretty good overview of the third quarter and what the transaction details look like. I certainly suggest you read the circular that's been mailed out and is on SEDAR. It's full of a lot of really good information that clarifies a lot of the detail that we've worked through over a number of months to put this rather complex and creative transaction together.

So it's not where we want it to be ultimately as shareholders. But I think this is the best plan that the Board has -- or the Board has deemed this to be the best plan moving forward. And certainly, our advisers and those that provided the fairness opinion believe that as well. So the plans in terms of drilling, I suspect that's going to be in December sometime, assuming that the recap plan is approved. So we'll get started probably before Christmas. The rig has been racked out there since the spring. So it will be ready to go on short notice.

And we -- as Karyssa said, we currently have a very strong hedge position through the remainder of '19 and certainly through the first half of 2020, and we'll be looking to build on that. Certainly, gas has had a nice move in the front months. And we'll see how it does out into next winter as well. So we will continue to build on that. The hedge book for Delphi has been an integral part of our business for a very long time. And we've been very successful at mitigating commodity price risk through that.

So stay tuned with the vote on the 15th. If there are shareholders on the line, I encourage you to do your homework by reading the circular and the voting is very easy. I encourage you to get that done before the 13th. That is the final date, I believe, to vote before the final meeting on the 15th.

So with that, I'd like to open it up for questions for either myself, Karyssa or Darwin.

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Operator [6]

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(Operator Instructions) And I'm showing no questions over the phone line at this time. So I'd now like to hand the conference back over to the management team for any closing comments or remarks.

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David J. Reid, Delphi Energy Corp. - President, CEO & Director [7]

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All right. Well, thank you, Brian. Well, thanks, everybody, for joining us this morning. We appreciate you taking the time. And as always, if anything comes to mind in terms of questions or things you want to discuss, please don't hesitate to drop us an e-mail or give us a call, either myself or Karyssa or Darwin. We're all available as we head in to vote a little over a week from now. So have a great day, and we've got a long weekend coming up, so enjoy that as well. So thank you.

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Operator [8]

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Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.