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Edited Transcript of LLEX earnings conference call or presentation 9-Aug-19 3:00pm GMT

Q2 2019 Lilis Energy Inc Earnings Call

Rocky Mount Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Lilis Energy Inc earnings conference call or presentation Friday, August 9, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph C. Daches

Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer

* Sarath Devarajan

Lilis Energy, Inc. - Senior VP & CTO

* Wobbe Ploegsma

Lilis Energy, Inc. - VP of Finance, IR & Capital Markets

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Conference Call Participants

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* Guillermo Huerta

Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Richard Merlin Tullis

Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production

* Ronald Eugene Mills

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

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Lilis Energy Earnings Conference Call for the Second Quarter ended June 30, 2019. (Operator Instructions) Participants are advised that the audio of this conference call is being broadcast live over the internet and is being recorded for playback purposes. A replay of this call will be available approximately 1 hour after its conclusion through November 9, 2019.

I would now like to turn the conference call over to Wobbe Ploegsma, VP of Capital Markets and Investor Relations of Lilis Energy. Sir, you may begin.

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Wobbe Ploegsma, Lilis Energy, Inc. - VP of Finance, IR & Capital Markets [2]

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Good morning, and thank you for joining Lilis Energy's conference call. Today, Lilis' management will discuss financial results for the second quarter ended June 30, 2019 and will provide an update on corporate developments, along with third quarter 2019 outlook and guidance. After the market closed yesterday, we released our financial and operating results for the second quarter ended June 30, 2019. If you have not yet reviewed Lilis Energy's earnings release, please visit the Investor Center at the company's website, lilisenergy.com.

Our remarks today may contain forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties, many of which are beyond the control of the company. Participants are cautioned that any such statements are not guarantees of future performance and that actual results or developments may differ materially from those projected in the forward-looking statements. Please see our earnings release for a discussion of these statements and associated risks. We also refer to certain non-GAAP measures, so please see the reconciliations in the earnings release. Joining me today are Joe Daches, interim Chief Executive Officer, President and Chief Financial Officer; and Sarath Devarajan, Chief Technical Officer. During this call, we will review our results for the second quarter of 2019 and then discuss our outlook and guidance for the third quarter of 2019.

I would now like to hand the call over to Joe Daches.

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [3]

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Thank you, Wobbe, and good morning, everyone. Before we start, I encourage everyone to please review our earnings presentation posted to our website for additional detail and other operational updates. First, I'd like to thank and recognize the Lilis team for all their hard work and dedication. Now I'd like to go over our second quarter 2019 highlights and then provide a brief operational update.

During the second quarter, the company increased net sales production volumes by 32% to 6,341 Boe per day, including a 50% increase in crude oil production to 3,925 Boepd as compared to the same period in 2018. We generated an adjusted EBITDAX of $11.4 million for the quarter, which is a 38% increase as compared to the $8.3 million during the second quarter of 2018.

During the quarter, we completed 3 of the 5 remaining 2018 DUCs: the Haley 1H, Haley 2H and the North East Axis 2H. Haley 1H and 2H began flowing to sales in April, and the North East Axis began in the month of June. We realized oil pricing of 93% of WTI versus 84% of WTI in the previous 3 months.

Our commodity volume mix was 73% liquids, which is 62% crude, resulting in a 98% of our revenue attributable to liquid sales during the second quarter. We also significantly reduced crude transportation costs from approximately $5.15 a barrel at 2018 year-end to approximately $0.75 per barrel in June of 2019. We further reduced the recurring LOE per Boe by 24% to $4.99 per Boe compared to $6.59 per Boe for the same period in 2018 through reductions in our saltwater disposal costs program.

At June 30, 2019, we increased our proved reserves by 14% as compared to June of 2018. And our proved reserves were approximately 43 million Boe, with 69% of our proved reserves comprised of liquids, 53% oil and 16% NGLs. Lastly, during the second quarter, we initiated the consolidation of operations to our Fort Worth office. We began the closure of the company's Houston and San Antonio offices, which is a continuation of our focus on overall cost reductions and efficiencies. As a result, the company has reduced overall head count by approximately 15% and expects to recognize significant G&A reductions going forward.

I'd now like to shift to operations and provide a quick update. Currently, we are operating 42 wells, which correlates to the 24 horizontal and 14 vertical wells that are flowing through to sales, plus 4 horizontal wells that are currently and temporarily shut-in.

During the second quarter, we temporarily suspended drilling and completion operations to focus on our cost reduction program, office consolidations and an improvement of overall operational efficiencies. Despite temporarily suspending the D&C operations, production during the second quarter increased by 5% on a Boe per day metric and 11% on a BO per day metric as compared to the first quarter of 2019.

Additionally, in the month of July, the company temporarily shut-in 4 wells to remain within regulatory flaring compliance. These wells were being flared due to the presence of hydrogen sulfide in the natural gas stream, resulting in a quality specification that could not be currently treated and processed by our midstream operator.

We are currently producing 28 MMcf per day and are flaring 36% of that. We have an additional 14.6 MMcf per day shut-in, accounting for approximately 58% of our natural gas not flowing through to sales. However, natural gas only accounts for approximately 2% of our total revenue. This is not a capacity issue on our midstream provider's part. Rather, the natural gas isolated to these specific wells does not meet the quality specifications. We continue to evaluate a number of field treating options that target a reduction or elimination of the H2S from our 4 shut-in wells, and we expect to improve production and meet the quality specifications to bring these wells back on quickly.

The combined production associated with these 4 shut-in wells affecting the third quarter production is estimated to be 567 net BO per day. And in addition to treating solutions, the company is currently applying for extended flaring permits with the Texas Railroad Commission, which we expect to minimize the impact on future third quarter production volumes. Management expects these wells to be placed back into service during the third quarter. However, if we're required to keep these wells shut-in for an extended period of time, it could have an adverse impact on total production.

As a part of the company's asset and operational improvement initiatives, artificial lift has also been installed on select current productive wells to enhance performance and increase our production. To date, 9 wells have been placed on artificial lift, 6 on jet pumps and 3 on gas lifts, with 2 additional wells targeted for artificial lift by the end of the third quarter.

Our most recent well that was brought online is the North East Axis 2H, which recorded an IP 24-hour rate of 2,455 Boe per day or 712 BO per day, 49% liquids, 29% oil, or 327 Boe per day per 1,000 lateral foot. We also experienced significant margin improvements with realized pricing from contracts and reduced SWD costs during the quarter. Additionally, in May of 2018, the company engaged a third-party midstream provider to implement the midstream system to transport all of our crude oil production. The initial system is not yet fully in service. However, we anticipate flowing majority of our crude oil through the gathering system by the end of the third quarter.

And with that, I'd like to turn the call over to Sarath to give a brief technical overview.

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Sarath Devarajan, Lilis Energy, Inc. - Senior VP & CTO [4]

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Thank you, Joe. As Joe mentioned, we had a temporary suspension in drilling and completions in the second quarter. Firstly, we used the operational downtime to further expand our geologic and engineering understanding of the asset. We also coordinated closely with our land team on acreage valuation and swaps, addressing near-term expiries and pursuing other critical A&D opportunities.

Regarding well results, we reported on 2 of our Bone Spring wells, the Tiger #3H and the AG Hill #2H in the last quarter. The Tiger #3H has continued strong and has produced 120,000 barrels of oil in 9 months. The AG Hill #2H was also outperforming the Bone Spring type curve. That was one of the wells shut-in due to flaring compliance that Joe had mentioned earlier.

We continue to monitor offset operations, both using public data and through our data swaps with offset operators. We are consolidating that knowledge to develop a best practices approach that we can implement once we resume operations. This playbook includes drilling, completion, choke management and geologic targeting.

With that brief update, I'll turn it back to Wobbe.

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Wobbe Ploegsma, Lilis Energy, Inc. - VP of Finance, IR & Capital Markets [5]

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Thank you, Sarath. I would now like to review our second quarter 2019 financial highlights, along with our third quarter and year-end guidance. During the second quarter, we increased our net sales production volume by 32% compared to the same period in 2018 and recognized realized oil pricing equal to 93% of WTI versus 84% in the first quarter.

Our commodity mix was 73% liquids or 62% crude oil for the quarter, resulting in 98% of our revenue attributable to liquid sales. Revenue from oil, natural gas and NGLs was $21.6 million versus $17.5 million for the same quarter in 2018, a 23% increase. The increase was primarily attributable to increased sales volumes, but partially offset by a $3 decrease in commodity prices compared to the prior quarter.

At the start of the second quarter, our realized crude pricing as a percentage of WTI significantly improved due to a combination of a reduction in crude transportation costs and an increase in realized Gulf Coast pricing through FT contracts. We reduced recurring LOE per Boe by 24% to $4.99 per Boe compared to $6.59 per Boe for the same period in 2018 through reductions in saltwater disposal costs. This decrease in production costs resulted from lower SWD costs as well as lower overhead costs per Boe produced.

We increased total GAAP G&A expense by $2 million or 27% quarter-over-quarter to $9.4 million for the quarter. However, on a Boe basis, our recurring cash G&A per Boe was reduced to $5.88 per Boe compared to $8.55 per Boe in the same quarter 2018. Adjusted EBITDAX for the quarter was $11.4 million compared to $8.3 million during the same quarter in 2018, an increase of 38%. This was driven by increased revenue from higher production volumes and improved realized pricing contracts as well as lower operating expenses per Boe.

The total capital expenditure in the second quarter was $14.7 million, primarily comprised of $5.1 million to bring 3 DUCs online, $5 million related to the 2019 D&C program, $2.9 million related to the completion operations and $1.7 million related to facility construction, infrastructure, artificial lifts, the Panther 1H Pilot well and our freshwater asset.

I would now like to review our third quarter and year-end guidance. Capital spending in the third quarter will focus on drilling the Grizzly A #2H and completing the 2 Kudu wells, which are currently scheduled for completion and expected to be turned to sales in the fourth quarter. In projecting the company's third quarter guidance, we are assuming the 4 shut-in wells are not brought back online during the third quarter. In the event these wells are brought back online before September 30, the company will adjust third quarter and full year guidance metrics.

For the third quarter, we are projecting oil production to range from 2,000 to 2,300 barrels per day and NGLs to range from 600 to 700 barrels per day, with our liquids mix accounting for approximately 65% to 75% of our total production. We are reducing our full year oil production guidance to range from 3,000 to 3,200 barrels per day in light of recent shut-in wells and the temporary suspension of our drilling and completions program in the second quarter.

We expect realized crude pricing to be 90% to 95% of WTI and CapEx to range from $13 million to $17 million in the third quarter. We expect to see recurring LOE to range from $6.50 to $7 per Boe for the third quarter with future improvement expected. We are reaffirming our CapEx budget of $60 million to $70 million for the full year.

I would now like to turn the call back over to Joe.

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [6]

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Thank you, Wobbe. I want to conclude by saying that we have taken significant steps to better position the company to further enhance the value of our current assets.

And with that, I'd like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Neal Dingmann from SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Joe, could you talk about what you see for upside for artificial lifts going forward without kind of what you're putting on now?

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [3]

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Yes. So the AL stuff for us was really to stabilize the production flows throughout the next couple of quarters. There's been a little bit of a decline in some of our wells. And maybe Sarath, you may want to talk about this in a minute. We can talk about the decline. The plan is to go from 9 to 11 and continue with the artificial lift program.

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Sarath Devarajan, Lilis Energy, Inc. - Senior VP & CTO [4]

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Sure. Neal, this is Sarath. Again, part of this is just regular maintenance of the pressure on some these older wells. But even some of the newer wells, we -- like the Haleys, we saw that we got initial production. We got good rates, but we also did see the pressure -- the decline as a result of that increased choke management or the choke size. So those wells are getting ready for jet pump right now, for example.

So it's -- like Joe said, there's 9 wells currently on lift, and there could be a couple more coming up. But I think it's just part of the regular pressure maintenance in the field.

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Operator [5]

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Our next question comes from Ronald Mills from Johnson Rice & Company.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [6]

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Joe, a question for you. Just I think you referenced it in here, in addition to production optimization, adding lift that you mentioned something about contract driller. Can you talk about differences of the guys that you are coming in, when you plan on bringing in the rig and how their performance compares to Lilis' performance for a go-forward look?

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [7]

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Yes. I'd be happy to, Ron. So I think we're probably going to start and just rewind a little bit. This quarter is an effective reset of company, company management. And we've taken a lot of effort. We set -- we laid the rig back in early April. We stopped completing the DUC wells to make sure that we knew what we're doing.

As we marched through Q2 and started just evaluating the cost structure, the operational effectiveness and precision and performance of the drilling and the completion processes, we've all known that the drilling days associated with our program are a little bit longer than we would have liked. And we were under a few different impressions from previous management.

But with the reset, we've taken a lot of time, and we found a group of guys who have drilled well over 200 wells in the northern Delaware, not necessarily in the Permian. They're damn good at their jobs. We like what they're doing. We've engaged these guys, and we're going to spud the Grizzly A #2H in about -- I think it's in about 2 weeks, right? So that will be the first well that we bring back into our 1-rig scenario.

We're going to reduce our drilling days, Ron, by about 50%. We're hopeful it's even better than that. That will be a significant cost savings as we go forward throughout our 1 rig program.

Look, this company is not meant to be a 1-rig scenario company, but we're going to be careful. We're going through a next couple of wells, drilling, monitoring daily, doing all the right things. And we're going to report back up into our Board and, hopefully, have some good stuff to report to you as we go forward. But eventually, we're going to get back into a rig -- a 2-rig scenario, with the focus of that rig, hopefully, being up in New Mexico where we can drill much longer lateral wells. And honestly, that's how we're going to build this business, by getting back into a 2-rig scenario. I think that might answer most of your question there.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [8]

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Just one quick follow-up. If you cut your drilling days in half in terms of when you think about impact on economics, is that -- are you in kind of $40,000 or $50,000 spread rate? So that's kind of almost $800,000 to $1 million of potential savings just if you get your time down without any of that bit of staying in target, et cetera?

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [9]

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Yes. Honestly, Ron, I think it's probably a little better than that, right? We're looking -- we're really looking forward to getting this thing kicked off. This is a long-term view of where we're going with the company.

The guidance -- and you didn't ask this question, but I'm sure it's on everybody's mind. The guidance in Q3 is exactly what it is. I mean it's the result of laying the rig down. It's a result of the shut-in wells and the Grizzly A #2H well that we'll spud here and complete here sometime during the fourth quarter is going to have a big, big benefit to 2020.

So we're -- our view is long term. Our view is not short term. We're giving the guidance that we expect to have in the second quarter. We've reset everything across the board, and we brought everything out in front of everyone so they will understand that this is a long-term vision of this company. We want to be a production growth company.

We will become a production growth company moving into a second rig. And we will maintain and implement a cash pool with discipline that we haven't had before. And we're going to focus very carefully on maximizing the costs associated with drilling and completion. And to your point, it is a big savings on our future development program.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [10]

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Right. And then one -- just on -- to touch on the H2S, I know you shut those wells in. Where were those located across your footprint? And have you -- if you had the chance between yourself and other industry players, when you think about your footprint, is it towards the eastern portion of it? Is it is spread across? Or what's your initial view on the H2S footprint?

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [11]

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Yes. Another good question, Ron. So here's the deal. We have some degree of H2S across our entire field, and it varies, right? And no, I don't want to get into the specifics because this completely varies across the position. We, as well as our third-party midstream provider Lucid, have been working on solutions. They are optimizing their system to take much, much, much higher volumes of H2S than we are. And we are very focused on field treating solutions. And I hope to be able to report back to you guys here in the near future, and I don't want to give you time because you'll all hold me to it.

But the answer is we have a dual-pronged process here, where our midstream provider, whereas other offset operators are dealing with the same things, they're increasing not necessarily their capacity because they have the capacity to handle this, but their ability to process the higher H2S. We zeroed in on how to treat it at a field level, and we're going to continue doing so.

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Operator [12]

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Our next question comes from Richard Tullis from Capital One Securities.

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Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [13]

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On G&A, you talked about this a little bit, Joe, in the prepared comments. What do you think the run rate could be down to, say, by the first quarter of 2020?

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [14]

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Yes. That's a good question. Current run rate now on a recurring basis is $3.5 million cash per quarter. When you back that out, the share-based comp, which is you all know what that is, and you can pick it off the face of the cash flow statement for the quarter. And I think it's around $6 million and about $2.4 million for the quarter. But for year, it's $6 million. So there's a lot of nonrecurring cash in the current quarter due to severance charges and a few other things that are just generally nature will not reoccur for the company. My guess, without giving you guidance in this, is it's going to be a lot better than that as we go forward into Q3 and Q4 as well as '20.

Our optimizing, Richard, on G&A is a very big focus. That's why we're consolidating the offices. We've reduced headcount by 50%. That's on a net basis. We've hired some A players, some very, very good guys, to help us run this business. And we feel like we got the right team. We are headquartered in 1 location here in Fort Worth, Texas. And all the guys here are -- communicate at a very high level, and we're going to reduce from across the board a wide variety of things. Not just office space, not just headcount, but just a number of other things. I don't want to give you an exact number, but I can tell you I think each quarter is going to get progressively better.

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Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [15]

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That's helpful, Joe. And just lastly, when you look at 2020 from an operations standpoint, say, it is 1 rig for -- as you start the year, how do you think production sets up in 2020, say, compared to your third quarter '19 guidance?

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [16]

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Yes. It's really intriguing. What we've done in Q2 by laying the rig down, by shutting in these 4 wells as an adverse impact to production, we do not want to be viewed as a quarter-over-quarter company. And I know that the analysts want to talk about that at times, but we want to be viewed as a long-term company who's going to develop our assets as a production growth company by having multiple rigs running.

We haven't provided any guidance on 2020, and I don't want to do this on this call. But I can say the same thing about production that I'm going to say -- that I said about G&A. Q3 is going to be our low point. Q4 will be, obviously, better than Q3. And with the activities there are going to occur in 2019 in both drilling operations, completion operations, we expect to see a whole different production profile in 2020. It's primarily driven from the 1 rig moving to a 2-rig scenario and looking very hard at the assets that exist up in New Mexico.

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Operator [17]

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(Operator Instructions) Our next question comes from Guillermo Huerta from Stifel.

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Guillermo Huerta, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [18]

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I was wondering if you could comment on the long-term capital structure of the company.

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Wobbe Ploegsma, Lilis Energy, Inc. - VP of Finance, IR & Capital Markets [19]

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Sorry, could you repeat that?

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Guillermo Huerta, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [20]

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Yes. I apologize. I was wondering if you could comment on the long-term capital structure of Lilis.

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Wobbe Ploegsma, Lilis Energy, Inc. - VP of Finance, IR & Capital Markets [21]

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Long term, I mean, we're going to continue to better our balance sheet, have liquidity measures in hand to where we do not have to continue to rely on Varde Partners going forward.

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Joseph C. Daches, Lilis Energy, Inc. - Interim CEO, President, CFO & Treasurer [22]

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Guys, I would say to add on to that just a little bit, we are very appreciative of the relationship we have with Varde. They've been a very supportive capital partner. From a liquidity perspective and a 1-rig scenario, we're in a pretty darn good spot. We have some other options available to us as we move into a 2-rig scenario, but we're not going to go crazy here and just start drilling and drilling and drilling.

We're going to be very careful and very disciplined with the balance sheet constantly in mind about how we develop things. We have an RBL. We have a very, very good relationship with our entire bank group. They've been supportive of us. We continue to develop our assets with those guys in concert as we do everything. And for now, I mean, I think liquidity is decent. I think liquidity is going to continue to get enhanced through a series of potential transactions. And we're going to be in a really good spot.

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Operator [23]

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And ladies and gentlemen, at this time, we've reached the end of the question-and-answer session. I'd like to turn the conference call back over to management for any closing remarks.

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Wobbe Ploegsma, Lilis Energy, Inc. - VP of Finance, IR & Capital Markets [24]

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I'd like to thank everybody for taking the time to listen to our conference call, and we look forward to providing more information going forward. Thank you all for your support.

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Operator [25]

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Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.