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Edited Transcript of ECR earnings conference call or presentation 1-Nov-18 2:00pm GMT

Q3 2018 Eclipse Resources Corp Earnings Call

State College Nov 20, 2018 (Thomson StreetEvents) -- Edited Transcript of Eclipse Resources Corp earnings conference call or presentation Thursday, November 1, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Benjamin W. Hulburt

Eclipse Resources Corporation - Co-Founder, Chairman, President & CEO

* Douglas A. Kris

Eclipse Resources Corporation - VP of IR

* Matt Denezza

Eclipse Resources Corporation - Executive VP & CFO

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Presentation

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Operator [1]

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Greetings, and welcome to the Eclipse Resources Third Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Douglas Kris, Head of Investor Relations for Eclipse Resources. Please go ahead, sir.

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Douglas A. Kris, Eclipse Resources Corporation - VP of IR [2]

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Good morning, and thank you for joining us for the Eclipse Resources Third Quarter 2018 Earnings Conference Call.

With me today are Benjamin Hulburt, Chairman, President and Chief Executive Officer; Oleg Tolmachev, Chief Operating Officer; and Matthew Denezza, Chief Financial Officer. If you have not received a copy of last night's press release regarding our third quarter 2018 financial and operating results, you can find a copy on our website at www.eclipseresources.com.

Today we will spend a few minutes going through our operational and financial highlights of the quarter.

Before we start our comments, I would like to point out our disclosures regarding cautionary statements in our press release and remind you that during this call, Eclipse management will make forward-looking statements. Such statements are based on our current judgments regarding factors that will impact the future performance of Eclipse Resources and are subject to a number of risks and uncertainties, many of which are beyond Eclipse Resources' control. Actual outcomes and results can materially differ from what is expressed, implied or forecast in such statements. Information concerning these risk factors can also be found in the company's filings with the SEC.

In addition, during this call, we do make reference to certain non-GAAP financial measures. Reconciliation to applicable GAAP measures can be found in our earnings release.

In connection with our pending merger with Blue Ridge Mountain Resources, we note that on October 12, 2018, Eclipse Resources filed with the Securities and Exchange Commission a registration statement on Form S-4 and a joint proxy statement. These and other documents filed by Eclipse Resources with the SEC may be obtained through the SEC's EDGAR system. You should review such materials filed with the SEC carefully as they include important information regarding the proposed transaction.

This communication does not constitute an offer to sell or an offer of a solicitation of an offer to buy any securities or solicitation of any vote, approval. We will file our 10-Q shortly and which will be accessible through our website or the SEC's EDGAR system.

I will now turn the call over to Benjamin Hulburt, our Chairman, President and CEO.

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Benjamin W. Hulburt, Eclipse Resources Corporation - Co-Founder, Chairman, President & CEO [3]

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Thank you, Doug, and thank you to everyone for listening to our call today.

Before discussing this quarter's results, I would like to provide a brief update on our merger with Blue Ridge Mountain Resources. As I hope you can understand, given the pending merger, we will be keeping our comments brief and to the point, and restrictions around our ability to comment on the deal and the process means that we will not be taking any questions on this call.

Both companies are continuing to make significant progress on a number of items related to the transaction, and the process is proceeding as planned.

Additionally, we are pleased to announce that the proposed increase in the revolving credit facility to $375 million from $225 million has received nonbinding commitments supporting the increase and extending the maturity of the credit facility to 5 years from the closing date, subject to documentation and merger closing.

Eclipse Resources has filed its Form S-4 registration statement to register the offer and sale of company common stock as consideration in the transaction with the Securities and Exchange Commission and continues to anticipate the closing of the transaction during the fourth quarter of 2018.

Earlier this week, Blue Ridge Mountain Resources provided updated guidance for the full year 2018. For the fourth quarter of 2018, Blue Ridge is expecting to produce approximately 187 million to 212 million cubic feet equivalent per day and achieve an EBITDAX of approximately $30 million to $40 million. Assuming they're able to achieve these forecasts and utilizing our implied fourth quarter guidance, the pro forma merged company would be expected to have combined production of approximately 560 million to 600 million cubic feet equivalent per day and EBITDAX of approximately $100 million to $115 million in the fourth quarter of this year, excluding any potential cost benefits from synergies post-merger.

Switching back to the Eclipse stand-alone company results. For the third quarter, I am pleased to announce that we have again exceeded our internal and consensus expectations. I'm extremely proud of the team that has remained highly focused on lowering cost to enhance returns while operating within our capital budget and maintaining a strong liquidity position.

During the third quarter of 2018, our average daily production was approximately 346 million cubic feet equivalent per day. More importantly, our revenue was a company record at $130.1 million, a 42% increase over 2017. And our adjusted EBITDAX grew to over $66.8 million for the quarter, a 46% increase over 2017. These records again reflect our strategic decision to focus activity on the liquids portion of our acreage, which now accounts for approximately 48% of our overall revenue mix.

Additionally, on the expense side, our per-unit cash production costs, including firm transportation expense, was $1.46 per Mcfe, which showed incremental improvement over the second quarter of 2018. I am pleased to report that all of these financial metrics were better than analyst consensus expectations.

During the third quarter of 2018, the company drilled 6 wells with an average lateral length of approximately 14,500 feet. On the completion side, we completed 14 wells, which include 6 condensate and 8 dry gas wells with completion costs running at to slightly below our AFEs while averaging approximately 5.1 stages per day.

While we continue to focus on innovation and enhancing our rates of return on our wells, we have not seen any meaningful service cost inflation in the Appalachian Basin today. In fact, as we look forward, we see substantial future reductions in completion costs, which could lower our AFEs on the order of approximately 5% to 10% through the remainder of this year and into 2019.

Additionally, during the third quarter, we turned to sales 13 gross, 6.8 net wells to sales, which consisted of 40 Utica Dry Gas wells and 8 Utica condensate wells and our first operated Flat Castle well, the Painter 2H, in Northern Pennsylvania.

Moving to the Flat Castle project in Pennsylvania. We continue to be excited for the potential of this area and are pleased with the strong initial production results that have been achieved. After initial cleanup, the well's production quickly achieved our target rate of approximately 32 million cubic feet per day, which was expected to continue for an initial flat period of approximately 30 days. The well's production continued at this level after reaching the 30-day period, which is encouraging to us, and we'll be continuing to monitor this well performance closely.

In our Southeast Ohio Utica Shale dry gas project area, our 4-well Yellow Rose pad began flowing to sales during the third quarter and reached a combined target rate of approximately 170 million cubic feet per day, with 2 of these wells producing slightly over 50 million cubic feet per day each.

We continue to remain pleased with the performance of the Marcellus wells in our stacked pay area in Eastern Monroe County, Ohio. Since coming online in January of this year, the 2 Marcellus wells drilled on the David Stalder pad have continued to significantly outperform expectations and are on track to exceed our previously issued type curve EUR for this area, further derisking the acreage.

In addition, our recent round of Guernsey County condensate Utica wells have turned sales at or above expectations from initial gas rates, and more importantly, condensate yields, allowing Eclipse to remain one of the highest liquid concentrated producers in the basin, with approximately 48% of our revenue derived from liquids production.

Overall, I remain fairly pleased with this team and their push to innovate in order to enhance the value of our asset base and our company. We've shown our ability to continue to outperform the goals we set for ourselves and anticipate that this will continue as we move forward through the remainder of the year.

With that, I'll turn the call over to Matt.

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Matt Denezza, Eclipse Resources Corporation - Executive VP & CFO [4]

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Thanks, Ben. Over the last quarter, we continue to achieve strong results in almost every area of our business. Revenue for the third quarter was over $130 million, and our adjusted EBITDAX was approximately $67 million, both of which were records for the company.

During the third quarter, our all-in realized price was $3.99 per Mcfe before the impact of cash-settled derivatives and firm transportation. Our natural gas price differential before transportation expense was negative $0.04 per Mcf. This strong differential was driven by better in-basin pricing dynamics as well as due to our ability to sell gas into underutilized firm transportation assets owned by others at prices which were at a substantial premium to in-basin benchmarks. This capacity was available on numerous pipes, including on the REX and Rover pipelines as well as on Leach XPress.

Our Rover capacity began in June, and we've been able to fill this capacity since day 1. As we've moved through the second half of the year and brought wells online, we have quickly grown through this capacity and are selling incremental production in-basin and to those with excess firm, where we continue to see strong netbacks.

During the quarter, we achieved a decrease in third quarter operating expenses versus our second quarter numbers while at the same time, experiencing the benefits of better pricing at the Gulf and Dawn hubs, where our Rover production is flowing.

Our per-unit cash production cost for the third quarter were $1.46 per Mcfe, which included $0.48 per Mcfe in firm transportation expense. These attractive cost levels were achieved with fewer-than-anticipated workover cost and a continued focus on managing well level lease operating expenses.

As we move through the fourth quarter and beyond, our transportation expense will begin to decline as our incremental production will continue to flow to in-basin markets or to others' unutilized firm capacity.

Our realized oil price during the third quarter was $63.24 per barrel, which implies a negative $6.45 differential to WTI and is inclusive of all transportation expenses. This differential is consistent with prior quarters, and we expect it to continue over the remainder of the year. As we look at our NGL sales during the third quarter, we realized a $27.66 per barrel NGL price, equating to 40% of WTI. This was in line with our expectations and strong relative to recent years for in-basin summer pricing. We look forward to continued strength in NGL prices as seasonal demand is anticipated to improve during the coming winter months.

For the third quarter, our $63.2 million of capital expenditures consisted predominantly of $56.9 million in drilling and completion capital, $2.6 million of midstream expenditures and $3.8 million in land-related capital. These figures also include capital reimbursement that relate to our drilling joint venture with Sequel.

Turning to the balance sheet. Our strong operating performance and EBITDAX allowed us to end the quarter at a debt to LTM EBITDAX of 2.6x and with $99 million of liquidity. As we consider our current and anticipated liquidity position and our capital plans, we're comfortable that Eclipse remains well positioned to fund its drilling program with cash flow from operations and our revolver and generate an attractive level of production and cash flow growth.

As Ben mentioned, we are pleased with the significant interest in our pro forma company revolver process and the overall increase in borrowing capacity and strengthening in terms achieved during this process. This revolver will provide the base funding for the combined company's growth in 2019 as it works to become cash flow positive by the end of the year.

On that note, Ben will wrap up our prepared remarks.

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Benjamin W. Hulburt, Eclipse Resources Corporation - Co-Founder, Chairman, President & CEO [5]

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Thank you, Matt. We continue to believe we are well positioned with a superior asset base. But perhaps even more importantly, we have built an operating platform that has the ability to deploy cutting-edge techniques and leverages our culture of innovation to exploit opportunities that might be otherwise overlooked. The high degree of focus we have embraced on full-cycle corporate-level returns aligns our interest with shareholders as we have remained prudent with our spend and thoughtful stewards of capital. I'm extremely proud of this team and the many accomplishments they have achieved.

We thank everyone for joining us today. This concludes our call.

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Operator [6]

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Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.