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Edited Transcript of HPR.N earnings conference call or presentation 27-Feb-20 2:00pm GMT

Q4 2019 HighPoint Resources Corp Earnings Call

Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of HighPoint Resources Corp earnings conference call or presentation Thursday, February 27, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Larry C. Busnardo

HighPoint Resources Corporation - VP of IR

* Paul W. Geiger

HighPoint Resources Corporation - COO

* R. Scot Woodall

HighPoint Resources Corporation - CEO, President & Director

* William M. Crawford

HighPoint Resources Corporation - CFO

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Conference Call Participants

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* 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

* Welles Westfeldt Fitzpatrick

SunTrust Robinson Humphrey, Inc., Research Division - 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 the HighPoint Resources Fourth Quarter 2019 Earnings Conference Call.

(Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference to your speaker today, Larry Busnardo, Vice President of Investor Relations. Please go ahead, sir.

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Larry C. Busnardo, HighPoint Resources Corporation - VP of IR [2]

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Good morning, and thank you for joining us this morning for the HighPoint Resources Fourth Quarter and Year-End 2019 Earnings call. On the call with me today are Scot Woodall, CEO; Paul Geiger, COO; and Bill Crawford, CFO.

Before we begin, please review the disclosure statements provided within the forward-looking statements of our earnings release, which you can find on our website at hpres.com. You can also find these within our other filings with the SEC or in our 10-K, which we filed yesterday afternoon. We will also be referencing non-GAAP financial measures during our call, and a reconciliation to GAAP financial statements can be found at the end of our press release.

In addition, we have posted an updated corporate presentation to the Investor Relations portion of our website, and we will be referencing several slides within the corporate presentation on today's call.

With that, I'll turn it over to Scot to begin prepared remarks.

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [3]

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Good morning, and thank you for joining us today to discuss our fourth quarter and year-end 2019 financial and operational results. We will also be discussing our 2020 plan.

2019 was not without challenges, but we executed financially and operationally as an organization in our first full year operating as HighPoint Resources. Our returns-focused strategy allowed us to execute our corporate initiatives and deliver solid financial and operational performance.

Our priority for 2019 was a sustained capital program that would generate free cash flow in the second half of the year. This was accomplished during the third quarter. The excess cash was used to strengthen our balance sheet and reduce borrowings under our credit facility.

Our solid operational execution and ability to optimize our cost structure was evident in our financial results as we meaningfully increased EBITDAX by 21% to $339 million. This was underpinned by development activities that drove production sales volumes growth of 23% to 12.5 million barrels and oil volume growth of 21% to 7.7 million barrels.

This was accomplished with capital expenditures that were 29% lower than 2018, underscoring our commitment to maintaining a disciplined approach to capital investment. We maintained a focus on managing costs by reducing operating costs by 16% per BOE compared to 2018, and that includes a 23% reduction in cash G&A. Our profitability was also demonstrated by our peer-leading operating margin of $30.31 per barrel that benefits from our assets having high oil percentage, a low oil price differential and lower operating cost structure.

Operationally, our efforts were highlighted by the successful execution of our large-scale optimization program in the Hereford field, which has realized tangible benefits of increased capital efficiency, enhanced well performance and stronger per well economics. This significantly advanced our geologic and reservoir understanding of the field, and several generations of completion enhancements were accomplished in a single project area instead of over several years. Paul will discuss our results in more detail, including a status update in our development plan going forward.

In our legacy Northeast Wattenberg field, we continue to deliver strong well performance as high fluid intensity completions are performing materially better than earlier program wells. This highlights our ability to continually enhance value from our assets and, as demonstrated by our 2019 drilling program, achieving a 48% rate of return.

For 2020, we will maintain a disciplined approach and plan to prudently allocate capital to our highest-return development opportunities and preserve inventory. We have a flexible development program as the majority of our acreage is held by production, and we have very few drilling commitments.

We realize the importance of managing our liquidity and have set a planned spending level that is approximately 40% lower than 2019, as we prioritize positive free cash flow generation and no increased debt. We remain focused on creating further cost savings by generating greater operating efficiencies in our drilling program, leading to lower well costs and enhanced returns.

Bill will touch on full guidance in his remarks. I will turn it over to Bill now for his comments.

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William M. Crawford, HighPoint Resources Corporation - CFO [4]

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Thank you, Scot, and good morning to all.

Scot already touched on a lot of our key financial highlights, so I'll provide some additional detail around the financial results and some color around our 2020 outlook. Again, as Scot mentioned, our -- one of our key financial objectives for 2019 was to sustain a capital program that would build momentum throughout the year and allow us to generate free cash flow in the second half. This was accomplished in the third quarter and allowed us to deliver $52 million of second half free cash flow. This excess cash was utilized to reduce borrowings under our credit facility, and we ended the year with $140 million of debt on our credit facility and $350 million of liquidity.

I would like to highlight that with respect to our long-standing $26 million letter of credit, it will reduce ratably on a monthly basis beginning on April 1 until it expires in Q3 2021. This relates to our long-standing GTP commitment, which will end as well then. Reducing debt and maintaining liquidity will remain our top priority for 2020. Our capital budget and nonop divestitures reflect this. Our nearest senior note maturity is over 2.5 years away, and we will be prepared to address them as markets avail themselves.

On the hedging front, we have a great majority of our anticipated 2020 oil volumes hedged at a WTI price of over $58, which is well in excess of current strip prices. We also have a strong base of 2021 hedges at $55 to protect our current activity. This is consistent with our long-standing strategy of being 50% to 70% hedged over the forward 12- to 18-month time frame to protect our capital investments. You can find a full summary of our updated hedge position in the press release.

Now on to our 2020 capital program and guidance. As Scot mentioned, we will maintain a disciplined capital approach for 2020. We've set a spending level of $200 million to $220 million, which allows us to generate free cash flow and not increase overall debt levels. Based on the timing of operations, budget has weighted towards the first half of the year and remains flexible to adjust to any macro-related changes. Paul will discuss the timing and cadence here in a moment.

First quarter capital spending is expected to be approximately $90 million as we focus on completing our inventory of DUCs in both Hereford and Northeast Wattenberg. The drilling in the first half of the year is focused primarily in Northeast Wattenberg before we plan to resume drilling and completion operations in Hereford in the latter part of the year.

2020 production is expected to total 10.5 to 11 MMBoe with an oil proportion of 57% to 58%. I would like to note that this takes into account about 0.6 MMBoe of production associated with the planned divestitures. First quarter production is expected to be 2.7 to 2.8 MMBoe.

The remainder of our cost guidance may be found in our press release.

With that, I'll turn it over to Paul.

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Paul W. Geiger, HighPoint Resources Corporation - COO [5]

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Thank you, Bill, and good morning, everyone.

First, I would like to congratulate and commend our field and office personnel for a great quarter and year, delivering our best combined HSE performance in several years as a result of rigorous root cause analysis and quality corrective actions.

Our fourth quarter production outcome was heavily impacted by midstream availability of Hereford, and the power outage across that region in late November that continued into the beginning of December. However, our strong operational execution allowed us to grow annual production by 23% with the fourth quarter production disruption pulling full year 2019 production to the lower end of our guidance range.

Development activities drove an increase in proved reserves to 127 million barrels of oil equivalent, a 22% increase over our year-end of 2018. This was driven by a meaningful increase in Hereford reserves, recognizing the success of the Section 16 southeast wells. This provided economic baseline and supported the additional PUD bookings audited by our outside reserve engineers.

Hereford wells in Section 16 southeast and southwest continued to perform well, exhibiting shallower declines and supporting our development curves.

I would now refer you to Slide 14 in our updated corporate presentation. As you can see, production from each set of wells is exhibiting strong trajectory. This is highlighted by the average per well cumulative volumes of Section 16 southeast wells, tracking 40% above all earlier wells after 230 days and the Section 16 southwest wells tracking 30% higher after 185 days. The 12-well development DSU in Section 17 initially displayed positive productivity, but did not recover as well as the surrounding wells following the field-wide power outage caused by extreme winter weather. We initiated a workover program to ensure open laterals on each of the wells. These wells were returned to production recently and continue to clean up with postworkover production rates still improving.

At Northeast Wattenberg, we're delivering strong well performance as high-fluid intensity completions are performing materially better than earlier program wells. This highlights our ability to continually enhance value from our assets and, as demonstrated by our 2019 drilling program, achieving a 48% rate of return. Our more recent operations are highlighted by 7 wells located in DSU 5-61-35 completed with high-fluid intensity completions and placed on flowback late in the third quarter. The wells have exhibited strong production performance as per well average cumulative oil production is tracking 50% above analog offsets after 125 days versus wells with the previous standard completion design.

Slides 17 and 18 at the corporate presentation highlight the impact that higher-fluid completions have had on production performance of our wells and demonstrate our success in enhancing value from all areas of our legacy assets.

We are very focused on tuning our cost structure in response to low commodity prices. Lease operating expenses trended down across the year, achieving $2.10 per BOE average for the fourth quarter, the lowest of 2018 and 2019.

Now moving on to 2020 operations. At Hereford, we resumed completion activity in the first quarter with completions on the carry-in 2019 DUCs. This program incorporates the design optimizations from our HERDOP program and our 2019 development program. Significantly among those are larger volume completions of 50 barrels a foot, medium sand loadings at 2,000 pounds a foot, high rate per cluster methodology and simultaneous stimulation of wells. These 7 wells located in the Fox Creek Area of DSU 12-63-34 will be turned online during the late first and early second quarter. We will evaluate the relative performance of these wells during the second quarter, make any indicated design changes, and we expect to initiate continuous drill and complete operations at Hereford beginning in the third quarter.

At Northeast Wattenberg, we're in the process of completing the 24 carry-in DUCs. We are currently operating 1 drilling rig, and we plan to spud up to 13 new wells in the first half of the year. Early 2020 Northeast Wattenberg activity resulted in a lower overall corporate oil percentage as these higher GOR wells come online. We expect this trend to reverse as we begin continuous development at the Hereford field in the second half of 2020.

The company is committed to producing energy in an environmentally responsible manner. Both Hereford and Northeast Wattenberg completion programs utilize natural gas as fuel, reuse produced water for completions and employ ventless completions and flowback techniques. We incorporated sustainability and innovation focus in all of our efforts.

Finally, we're in the process of divesting our nonoperated assets in Wyoming, Colorado and New Mexico, all of which constitute a small portion of our overall acreage position. We have received acceptable bids from multiple parties and expect these transactions to close separately during the second quarter. In aggregate, we expect these accretive sales to bring in $27 million, which is approximately 7x the 3-year average cash flow. The proceeds will be used to repay borrowings on revolver, and our 2020 guidance is net of the approximately 600 MBoe expected production loss from these sales.

To summarize, in our first full year of HighPoint Resources, we increased production 23% versus 2018, demonstrated economic DSU development at Hereford with the 16 southeast wells. We expanded our proved reserve base 23%. We successfully developed high-volume completions across the Northeast Wattenberg, leading to our best program rate of return, and we drove our EHS incident rates to multiple year lows.

For 2020, we are focused on conservative capital management on rate of return performance within the drilling program and on generating positive free cash flow. We look forward to providing future updates and delivering on our full year 2020 guidance.

Operator, we're now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Derrick Whitfield from Stifel.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [2]

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Perhaps for Scot or Paul. With respect to your 2020 guide, could you speak to the production impact associated with Section 17 wells? And with that question, I'm trying to separate Section 17 impacts from activity impacts.

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Paul W. Geiger, HighPoint Resources Corporation - COO [3]

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Sure. This is Paul. We look at those versus our previous curve and their net contribution to our 2020 budget. I think that reduction is about 250 MBoe.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [4]

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Okay. And then with respect to the 5 DUCs at Fox Creek, could you speak to the well design and spacing for those wells?

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Paul W. Geiger, HighPoint Resources Corporation - COO [5]

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Sure. They are Codell and Niobrara north and south DSUs, and those are -- Codell's at equivalent 4-well spacing, and Niobrara's at equivalent 6- to 8-well spacing across that area. As far as design goes, those are larger completions at the 50-plus barrels a foot, 2,000-plus pounds of sand a foot based on our HERDOP findings and our 2019 results.

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Derrick Lee Whitfield, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of E&P and Senior Analyst [6]

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Great. And just one last build on that last question. Assuming success with Fox Creek, could you speak to how you're thinking about second half plans for Hereford?

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Paul W. Geiger, HighPoint Resources Corporation - COO [7]

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Absolutely. As we bring those wells on in the first quarter and the beginning of the second quarter, we will be monitoring those across the first -- the second quarter with that higher rate flowback that we've been talking about in the last quarterly call to bring those wells on more aggressively. In that way, we'll be able to watch those wells over Q2 for -- reflective of any design changes, any modifications before we go into continuous development in the third and fourth quarters of the year.

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Operator [8]

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And our next question will come from the line of Welles Fitzpatrick from SunTrust.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [9]

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On the -- could you talk to the GOR of the asset sales just so I can kind of better understand the kind of cadence of how that GOR's shifting with the new 2020 guide?

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Paul W. Geiger, HighPoint Resources Corporation - COO [10]

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Sure. As we look at the total piece of those assets, sales may fall within the range of our operated production very similarly. And then you've got the, of course, the Permian component and the Wyoming DJ component. And so altogether, those are 60% to 80% -- or 60% to 70% oil.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [11]

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Okay, perfect. And then on the blizzard, is the -- is it right to assume that the only real impact in 2020 is that kind of 63-17 Section, the 250 Mboe you talked about? Or were there other impacts that might have negatively affected that guidance?

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Paul W. Geiger, HighPoint Resources Corporation - COO [12]

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No. Welles, we didn't see other negative impacts from that field-wide shut-in. It was really limited to that Section 17 area.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [13]

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Okay, perfect. And then just one last one for me. What are you guys seeing with current NGL pricing? Obviously, there's been a little bit of a pleasant uptick with the new pipes coming on. Are you seeing that continuing into February actuals?

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William M. Crawford, HighPoint Resources Corporation - CFO [14]

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Yes, Welles. We're up from our, obviously, the lows of Q3 and kind of seeing that $10 to $12 per barrel with our mix now that we're getting more to DCP, which is now off curtailment. We get onto those long-haul pipes down to Bellevue. Obviously, the ethane is still just $0.15 down there. So it's not great, but it's better than it was in Q3.

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Operator [15]

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And our next question will come from the line of Jason Wangler from Imperial Capital.

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

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Curious on the CapEx spend. Obviously, you spent a pretty good chunk of it first quarter. Is that second quarter also going to have a pretty good piece as you can complete those DUCs? Or how should we kind of think about it as you think about the optionality for second half of the year?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [17]

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Yes. I'd probably say, yes, Jason. It won't be as much as what -- Q1, but it will have some of those DUCs still being done in the early part of Q2, which will lead to a little bit higher spending.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [18]

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Okay. And then just looking at the guidance from the operating expense and G&A and things. Is -- are those levels just a little bit higher than last year basically just because of the lower production level? Or is there anything else we should be thinking about on those numbers?

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R. Scot Woodall, HighPoint Resources Corporation - CEO, President & Director [19]

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I don't think there's anything else that you should be thinking about in those numbers. We did them all on a per BOE basis. And so it's just the denominator there.

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Operator [20]

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And I'm not showing any further questions at this time. I'd like to turn the call back over to Larry Busnardo for any closing remarks.

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Larry C. Busnardo, HighPoint Resources Corporation - VP of IR [21]

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That's it. Thank you again for participating in our call today. Please feel free to reach out if you have any additional questions. Thank you.

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Operator [22]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.