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Edited Transcript of LLEX earnings conference call or presentation 10-May-19 3:00pm GMT

Q1 2019 Lilis Energy Inc Earnings Call

Rocky Mount May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Lilis Energy Inc earnings conference call or presentation Friday, May 10, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James W. Denny

Lilis Energy, Inc. - EVP of Operations

* Joseph C. Daches

Lilis Energy, Inc. - President, CFO & Treasurer

* Ronald D. Ormand

Lilis Energy, Inc. - Executive Chairman & CEO

* Sarath Devarajan

Lilis Energy, Inc. - Senior VP & CTO

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Conference Call Participants

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* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* 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 morning, and welcome to the Lilis Energy First Quarter 2019 Financial Results and Corporate Update Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Joe Daches, President and CFO. Please go ahead.

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [2]

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Thank you. Good morning, and thank you for joining Lilis Energy's conference call. Today, Lilis' management will discuss financial results for the quarter ended March 31, 2019, and we'll provide an update on corporate developments along with second quarter of 2019 outlook and guidance.

After the market closed yesterday, we released our financial and operating results. If you have not yet reviewed our earnings release, please visit our 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 the actual results or developments may differ materially from those projected in the forward-looking statements. Please see our earnings release for a discussion on these statements and associated risks.

We also refer to certain non-GAAP measures, so please see the reconciliations within the earnings release.

Joining me today is our Chairman and CEO, Ron Ormand; Jim Denny, EVP of Production and Operations; Sarath Devarajan, Chief Technical Officer; and Wobbe Ploegsma, Vice President of Capital Markets and Investor Relations.

During this call, we'll review the results for the first quarter of 2019 and then discuss outlook and guidance for the second quarter of 2019.

I will now turn the call over to our Chairman and CEO, Mr. Ron Ormand.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [3]

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Thanks, Joe, and good morning, everyone. Welcome to our first quarter 2019 earnings call and corporate update. Before we start, I would encourage everyone to please review our earnings presentation posted on our website for additional details and other operational updates.

First, I'd like to thank all the Lilis employees for their hard work as we continue to make strides in growing our asset and production base.

I would like to start this call by stating that despite weather conditions and third-party midstream issues, we still met our stated production guidance for the first quarter. We continue to make significant progress on all of our strategic goals.

During the first quarter of 2019, we unfortunately experienced continued natural gas production efficiencies from our third-party midstream partner, which negatively impacted production. Our outlook and guidance will continue to be focused on oil and liquids mixes as approximately 90% of our cash flow is derived from oil and NGLs.

I would like to now go over our first quarter 2019 highlights and then provide a brief overview of our second quarter 2019 outlook and guidance. First quarter 2019 highlights include the following. The company had 6 DUCs at the year-end 2018. Of those 6, the company has bought on the Oso #1H during the first quarter of 2019 and completed the Haley 1H and the Haley 2H in early April. Our North East Axis well was recently fracked and is currently prepping for flowback. DUC completions during the first and second quarter are expected to significantly benefit future quarters in 2019 as production ramp-up timing coincides with the uplifts and realized pricing with substantial margin enhancements.

In addition, compared to March 31, 2018, we increased our proved reserves by 298% to approximately $44 million BOE, with 68% consisting of liquids, 51% oil and 17% natural gas liquids at March 31, 2019.

As mentioned on our last earnings call, during the first quarter, we improved our capital structures through the exchange of our previously outstanding second lien term loan, which would significantly decrease our indebtedness in any near-term prepayments of debt.

I'd now like to give a quick operational update. During the first quarter of 2019, the company strategically opted to frontload a portion of its 2019 capital expenditure budget. The strategy is designed to maximize associated production and revenues in upcoming quarters as timing coincides with significant uplifts in realized pricing and other margin enhancements including realized LOE costs. Several wells that accounted for significant capital spend during first quarter of '19 have begun flowing to production, including the Oso and the 2 Haley wells. Haley 1H and Haley 2H began flowing sales on 4/6/19, and the North East Axis has finished completion and commencing flowback, with the North West Axis scheduled for later this month.

The Haley 1H recorded an IP 24-hour rate of 1,422 BOE per day, 1,124 BO per day, which is 90% liquids and 79% oil, with 317 BOE per day per 1,000 lateral feet. The Haley #2H recorded an IP 24-hour of 1,048 BOE per day and 639 BO per day, and this is 81% liquids and 61% oil or 234 BOE per 1,000 lateral feet. We're extremely pleased with the results of these 2 wells, which both exceeded IP rates per 1-mile wells, and Haley 1H exceeded our 1.5-mile target IP 24-hour rate.

We experienced significant margin improvements as we realized pricing from contracts and reduced SWD cost. Second half of 2019 should bring even better pricing realization compared to WTI along with continued benefits from our SWD contracts.

A quarter-over-quarter production was flat to slightly positive on a BOE basis, which we believe speaks to the quality of our existing production base when considering only one well, the Oso, was brought online in the tail end of the first quarter. We're optimistic about the continued growth in production and cash flow in the second quarter and especially in the third quarter, when all our DUCs are online, with increased realized pricing commencing July 1, 2019. Thus, we expect to see very meaningful sequential increases in our EBITDAX in the second and third quarters of 2019.

Capital spending in Q2 2019 will be focused on completing the remaining DUCs, including the 2 Kudu wells, which we've just recently completed drilling. We're encouraged to see the production and revenue continue to improve and the DUCs that have turned to sales. Management continues to evaluate and closely monitor our capital program with the goal of continuing improvement of CapEx returns in the second quarter of '19.

We have made significant technical advancements in the third Bone Spring and choke management, resulting in improved production rates on previous new wells, as we recently demonstrated in the Haley wells.

We continue to target cash flow neutrality in the second half of the year under our one rig program. However, we're seriously evaluating a second rig in the back half of the year as our fundamentals and technology continue to improve. We've also added depth in our technical team with the addition of Sarath Devarajan as our Chief Technical Officer, and promotion of Chris Cantrell to Senior Vice President of Planning and Engineering. We expect to add additional personnel through our operations team, including senior personnel, to position the company to expand our operational program.

I'd now like to turn it over to Sarath to give [additional] review and update.

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

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Thank you, Ron. I would like to go over a few technical updates, starting with 2 of our well results in the Bone Spring which we are very excited about.

First, the Tiger 3H, which is a 1.5-mile third Bone Spring well that started production in October 2018. In about 6 months, the Tiger has produced nearly 95,000 barrels of oil, which is actually not very far behind of our 1.5-mile Wolfcamp type curve performance. With the lower D&C cost and the shorter cycle times factored in, we determined that the Bone Spring development well has an IRR that's similar to our Wolfcamp.

Second, the AG Hill 2H well targeted a shallower second Bone Spring landing zone. This well was drilled in the eastern part of the acreage, so while it had first production in August 2018, this well was shut in for about 3 months post the initial flowback pending midstream takeaway. The AG Hill 2H was put back on production towards end of last year and continues to impress with our -- with its performance. Most recently, for a couple of months, the well stayed very flat at an oil rate of about 400 to 500 BO per day.

It's to be noted that the AG Hill 2H is a short lateral, but performance-wise, it's close to the Tiger 3H, which was a 1.5-mile well. Our current 1.5-mile Bone Spring type curve is based on the Tiger 3H, which means a future AG Hill 2H type well drilled at 1.5-mile length has a potential to be even better than our current Bone Spring type curve. Offset operators have targeted similar intervals in the Bone Spring with success, so this truly has potential to be a regional play and not just a localized target. Hypothetically speaking, we definitely see these zones of interest present with very good reservoir properties across our acreage. While this is a small sample set, we will continue to monitor performance and collect data on the Bone Spring targets that we have identified. So far, we are happy with what we're seeing and believe the Bone Spring will be a significant part of our long-term development plans.

The other item we get asked about is the well spacing, so I wanted to address that next as best we can. We drilled our first spacing test on the 2 Haley, Wolfcamp A wells. The Haley 1H and 2H are spaced about 600 feet laterally. The landing zones are vertically offset by about 150 feet. The wells are zipper fracked in April of this year, and we realized efficiencies on the operations side while not running into any issues. So far, as Ron mentioned, we are very pleased with the flowback from both the wells and continue to monitor the data.

In addition, we also continue to monitor results from spacing tests offsetting us to the South and West in Texas. We've seen several examples of 660-feet spacing tests in the Wolfcamp A and the Wolfcamp B, south of us that are very encouraging. Notably, we've also seen a 330-feet staggered spacing test that has generated compelling oil volumes at the pad level while recognizing it's hard to dig into individual wells with the public data.

Another near-term value driver that we're seeing are some of the recent prolific 1.5- and the 2-mile wells immediately offsetting our acreage in New Mexico. These long laterals significantly exceed our current Wolfcamp type curve, and we're excited for the potential in that area as well going forward.

I also want to talk about our recent data from new choke management and flowback strategies. We have been involved in data swaps with offset operators and have been studying the results of different flowback methodologies from various landing zones. Including our own wells, we have a data set of over 75 wells that we have used to develop a flowback thesis to optimize NPV without sacrificing EUR or future value. As a first test of this thesis, we deployed a more aggressive flowback on the 2 Haley wells that were mentioned earlier. So far, the results have been very encouraging on the Haleys, which has given us the data support to try a similar approach on the upcoming Kudu-Wolfcamp B wells.

While we're cautious to consider individual geology and nature of fluids before applying these learnings across the field, we strongly believe that we're on the right path to maximize NPV in each well without hurting future performance or EUR.

To summarize, we have opened up a transformational new play in the Bone Springs, which we believe is present across our acreage position and has the potential to be a significant part of our development strategy going forward. We are modifying our flowback strategy based on our own learnings on operated wells and supplemented by data from offset operators with the aim of maximizing NPV. This also dovetails with tweaks and optimizations that we're considering currently implementing on the completion side. Lastly, we have built our first Wolfcamp-based spacing test in the Haleys and are very encouraged by the results so far.

Combined with the LOE realizations and pricing uplifts that Ron and Joe have discussed, we believe we are well positioned to execute technically on all the above items and to generate compelling economic returns on future wells.

I'll now turn the call back to Joe.

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [5]

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Thank you, Sarath. I'd like to review our 2019 financial highlights, second quarter and year-end guidance along with providing a brief update on midstream.

Despite adverse weather conditions and midstream inefficiencies, we increased our net sales production volumes by 75% to 6,058 BOE per day, including a 52% increase in crude oil production to 3,530 BO a day for the quarter ended March 31, 2019. We also recognized realized oil pricing equal to 84% of WTI during the quarter, including realized pricing of 93% of WTI during the month of March, resulting in approximately $16.50 per barrel benefit within our realized prices of oil during the month. Our commodity mix was 72% liquids, including 58% crude for the quarter.

Revenue from oil, natural gas and NGLs was $17.7 million versus $14.4 million for the same quarter in 2018, which was a 23% increase. This increase was primarily attributable to increased sale volumes and which was partially offset by a $14 decrease in commodity prices compared to the prior year.

Beginning March 1, Lilis' realized crude prices significantly improved due to a combination of reduction in crude transportation costs and realized Gulf Coast crude pricing through FT contracts. Lilis' realized oil price increased by over 40% compared to January driven by strong Gulf Coast pricing. Realized pricing of 93% of WTI in March resulted in approximately $16.50 per barrel or over 40% improvement from January. And these substantial enhancements in profit margins are expected to increase throughout 2019.

Our recurring production costs from -- decreased from $10.08 per BOE in 2018 to $7.26 per BOE in 2019. This decrease in production costs resulted from lower SWD costs as well as lower overhead costs per BOE produced. We expect continued improvement in our BOE metrics with our projected increases in production.

We reduced our total GAAP G&A expense by approximately $1 million or 8% quarter-over-quarter to $9.7 million for the quarter ended March 31, 2019. And on a BOE basis, our recurring G&A per BOE was reduced to $6.58 per BOE in Q1 2019 compared to $14.54 for the same period in the prior year.

Adjusted EBITDAX during the quarter ended March 31, 2019, was $6.5 million compared to $4.5 million during the same period in 2018. This is an increase of 45%. This increase was primarily driven by increased revenue resulting from higher production volumes and realized pricing contracts as well as lower operating expenses per BOE during 2019.

Total CapEx during the first quarter was $33.4 million. D&C capital expenditures during the quarter were $24.5 million, which primarily consisted of DUCs expenditures of $19 million and an additional $5.5 million in 2019 drilling program expenditures. The additional $8.9 million relates to nonrecurring expenditures for workovers, facility expansions, the Panther pilot tests as well as freshwater sourcing wells.

Now to move on to 2019 outlook. Our outlook provides for a flexible development that provides the company optionality with respect to adjusting capital spending based on changing market conditions and our strategic objectives. This plan provides for positive growth in production in 2019 while maintaining low leverage. We are projecting second quarter 2019 oil production to range from 3.6 to 3.8 MBOPD and NGLs to range from 800 to 1,000 barrels a day with our liquid mix accounting for approximately 70% to 75% of our total production. We expect realized crude pricing to be between 90% and 95% of WTI and CapEx to be between $15 million and $20 million. We expect to see recurring lease operating expenses to remain between $7 and $7.50 per BOE for the second quarter of '19 with increasing improvement throughout 2019 in the BOE metrics.

For the full year, we have increased our CapEx budget from $50 million to $60 million to $60 million to $70 million. We've also increased our full year top line oil production from 4.6 MBOPD to 4.8 MBOPD.

Before we open the call for questions, I'd like to take a moment to provide a brief update on third-party midstream operators. We have recently begun to see positive results from our third-party midstream provider resulting in a significant improvement in run time. These improvements are correlated to the completion of many operational and mechanical improvements made to the gathering, treating and processing midstream facilities. We continue to independently evaluate a number of these field-treating options to improve production. And we are cautiously optimistic about our progress, and we will continue working on and observing these solutions, improvements and efficiencies.

I want to conclude by saying that we have taken significant steps to position the company to maximize the value of our assets with a much more favorable balance sheet. I'm confident in the value of the assets and the future of our company.

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 comes from Neal Dingmann with SunTrust.

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

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Maybe, Ron, a question for you or Jim. It sounds like -- or even Sarath. It sounds like -- I'm just wondering, geologically and geographically now, do you all think you've sort of delineated now everything? It sounds to me like you have based on what Sarath and Ron for -- and, Ron, what you were talking about. But just could you comment about the program as how it looks the rest of this year and going into next year? Is it more of just kind of now in development mode, if you would?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [3]

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Yes. I'll let Sarath comment a little bit on our technical side of it. But I would say that in terms of our delineation mode, what we're doing now is really focusing on the most profitable benches. We're really not looking to do further delineation during 2019. Having said that, we've done a substantial amount of that delineation already, so we don't see a need to do substantial delineation in 2019. I think you've got somewhere between 5 and 6 good benches now that we can we look to, including the more recent, very favorable results we're seeing with the Bone Springs, which we will incorporate more into our future development program. And then we also still have the New Mexico acreage, where we haven't moved up to yet with permits, which we believe could be exceeding our current Wolfcamp type curve in Texas based upon the offset results we've seen up there. So we have plenty of good inventory without doing further delineation. However, we have delineated a substantial amount already of our acreage, but it's not to say that we don't have additional potential within other benches in the acreage. Sarath, you want to add anything?

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

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No, just as Ron said, Neal, we've got 30-plus wells. You've got a lot of data sets. We're doing data swaps with offset operators, so I think we have learned a significant amount in the area. So we're understanding things like oil production, the IPs, the response to flowback and all that. So I think we've got a great handle on what the technical data set looks like.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [5]

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Yes. I would say one other thing we've done is some of the nonrecurring CapEx was related to the Panther pilot well in the East and also some seismic data so that we have data both over in the East and now we're looking at seismic data up in the New Mexico area before we commence drilling there. So there's some front-end-loaded information that we have as we move forward.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [6]

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I good -- at least a good point, Ron, in -- at least in my second question as far as -- some of it's adding a second rig. I agree, it seems like you all have shown you can certainly, if you choose, stay with one rig or live within free cash flow or go ahead and drill. It seems to me -- I don't know, I'm just kind of curious on how you all think about creating the most shareholder values today, potentially adding that second rig given you wouldn't see a huge increase in costs and such around that.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [7]

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Again, that's something we're very carefully evaluating. There are a number of factors involved with that in terms of making sure fundamentals like the oil pricing. We obviously have the benefits in the second half of the pricing. We have sufficient takeaway. We'd like to get to the New Mexico, although that may be later in the year, to be honest, just because of permitting. But we have -- with the delineation of the Bone Spring, that could be an area that we could drill quicker, bring in cash flow on a much faster basis because it's a shorter-term cycle and bring more forward more NPV and IRR. I think we'll be making a decision on that in the very near future. But given some of the technical data, fundamentals, our results and also our -- what we see coming up really in the second and third quarter in terms of our EBITDAX ramp is quite significant. And so that's going to also help support us in terms of what we can do on a go-forward basis.

We're going to see a good benefit of what we've done in the first quarter in the second quarter, but the third quarter is where we're going to really see a production uplift. And I think we'll see at least a doubling of EBITDAX, assuming current prices, as we get to the third quarter and potentially in the second quarter. So with the margins and the production and the cash flow, it positions us to do that. We would like -- we're still sticking with our one rig program, but we're evaluating that on what's the best way to bring the value forward for the company.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [8]

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No, 'makes sense. And would you think about -- when you and Joe think of that hedging side, if you do start ramping that up, would there be associated hedges with that or not necessarily you'd have to do that?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [9]

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We're very well hedged right now, but we would have additional hedges put in place. So we are hedged up to about 60% of our actual oil production. It's 80% of our PDP, okay? So we're very well hedged, mostly collars. But yes, we would look to do that as well. That would probably help move in some more hedges in '20 where we have less hedges because a lot of that production will come on towards the end of the fourth quarter.

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Operator [10]

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Our next question comes from Ronald Mills with Johnson Rice.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [11]

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Quick question and maybe a little follow-up on what Neal was just asking. As you noodle through potentially looking to add a second rig, and you talked a little bit about what that also does not just to grow the second, third quarter or even that would be a longer updated outlook, but what that does in terms of the balance sheet and in kind of leveraged position and how you weigh growth in kind of accelerated deleveraging versus staying pat at a one-rig program.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [12]

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Yes. Well, I think I'm going to let Joe handle that. But if we look at our one-rig program, our leverage is coming down quite substantially. We are mindful of maintaining a very -- a much more conservative leverage position as we move forward. So I think there are liquidity events as well as not just leverage, including cash flow, that can support the expansion of our activities. Joe, you want to talk about that?

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [13]

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Yes. Thanks, Ron. I think the one-rig scenario in the cash mentality that's expected in the second half of the year puts us in a scenario that were less than 2x leveraged for sure, and it progressively gets better, like an inverted wedge, in each of the progressive quarters throughout the year, we're very mindful of leverage and indebtedness and making sure we're doing the right things. And what we have right in front of us is our re-determination of our borrowing base is scheduled to happen in the month of June. We feel pretty good about what's going on and all things that would support advancing up all to another set. And as Ron mentioned, we've got a handful of liquidity enhancement items in front of us. Some are significant. Some are less than, right? But the reality of it is we're -- if we bring in a second rig, we want to make darn sure that we don't start pushing the needle the wrong way on leverage. We will continue our disciplined approach to making sure that our leverage does not get out of whack. I mean I don't know how else to say it other than just to be straight up honest on that one. We -- if we bring a second rig in, we would be very careful as to how much CapEx we spend in the current year and what our production and what the resulting cash flows are, that I think we all would recognize that bringing a second rig on in the second half of the year, that 2020 would be the big benefactor. It would really benefit from that second rig program. And that's very interesting to us as well.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [14]

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And I think also as you look at the growth of the company and with the cash flow, you're not -- with the growth coming in, you're not looking about any elevated leverage from that because you're going to have benefits coming back. It may be in the short term, but in the long term, that may actually bring your leverage down.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [15]

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Okay. And just one quick follow-up on that. In terms of the liquidity enhancing -- enhancement opportunities, I saw in the Q, you mentioned potential sale of some royalties. You also have some noncore asset sales. I mean you're getting a better handle on the various zones and across your acreage position. What kind of -- I guess how much or what are you looking to accomplish or how much liquidity can you bring in? And what are the primary assets that you're talking about in those royalties in noncore sales?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [16]

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I think it's -- I'd be -- I don't think it's something we can comment on in terms of specifics. I'll say this. We're not looking to -- we want to make sure that what we sell leaves us with a very meaningful position, certainly not impacting the working interest that we've worked hard to get ourselves back up to, okay? So it would be obviously in areas where we have drilled, where we have higher working interests, so we're not impacting the overall economics. So it wouldn't be a huge number, but it's certainly a meaningful number for us if we chose to go that direction, okay? So we have to look at that. We have a water asset that we've talked a lot about, water -- freshwater sourcing. We're putting data together on that. We've got close to 100,000 barrels -- well, 50,000 barrels today, and we can ramp up to about 100,000 barrels of freshwater. And this was part of the nonrecurring costs we had in the first quarter, drilling those freshwater wells. But that also is a business that can be monetized. And we didn't start out that way, but it really -- because of the need for freshwater and some cost advantages that we have, we're going to look to either monetize or JV that business. I wouldn't -- I don't know if that will all be a near-term event, but certainly, I wouldn't start it within the next 6 months. It gives us -- we have some strategic advantages, and it's become a valuable asset. It's not really recognized in the company right now, but obviously, once you monetize it, it will be.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [17]

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Right. And then when I -- given the type curve data and the relative returns in which -- in terms of EUR is pretty similar. The IRR is pretty similar as well with the Wolfcamp. When you think about it longer term, how do you think about potential allocation between the Wolfcamp and the Bone Springs? Or do you potentially think you move to a co-development on both zones? And how much of that would be driven by kind of infrastructure needs or capacity situations?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [18]

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I think we look at each independently, but we do look at it, I would say, as a build program, where it will be more incorporated from what we have today. It may not be 50-50, okay, but I'd certainly say it's a larger portion of what we will be doing. And what we'd be doing is drilling primarily pad wells, okay? So we can have a rig drilling 2 rig -- sorry, 2 wells in the Bone Spring, 2 wells in the Wolfcamp, okay? We just did that. And that's a way that we can more efficiently develop the asset and focus on 2 different zones and then frac them simultaneously. So that's something we've looked at pretty closely. And as we look at a longer-term plan, we will move more towards that certainly as we get into probably second half of this year and certainly into 2020 where most all of our drilling would be on at least 2 well pads. And it could be focused in the Bone Springs or the Wolfcamp, or it could be New Mexico, which would be New Mexico has Bone Springs and Wolfcamp. Initial target there is probably Wolfcamp A.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [19]

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Great. And then lastly, New Mexico, you talk about you think of it as a little bit further down the road because of permitting. When do you think you'll kind of get a little bit more active up there given some of the exciting offset results that you have? I guess I don't -- I'm not as clear on the New Mexico regulatory process versus Texas, so 'curious when you'd kind of fold in more wells there to complement what you're doing in Texas. And that's it.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [20]

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Sure. Well, it's a BLM, right? So it's a federal lease as opposed to a private lease. So when are we going to drill on a BLM lease? You have -- the advantages is you have a good royalty rate, and in the long term, you have to have the drilling permits. We do think we will hear something about that by the third quarter, so it's just a matter of how quickly we can get up there. But that's -- we got set back, obviously with the government shutdown because that's part of the federal government, the BLM, but they do prioritize drilling. And when you have time commitments, time -- on your drilling leases, and obviously, they hinted to get revenue from it at the state level. So it is a process, but we're well down the road. We have something like 13 to 15 permits in process, including, I would say, 5 or 6 in that [Marlon] block right now. So we can -- we're on a continuing process of permitting so that we'll have an inventory of permits. Not that we're going to drill all of those wells, but it can be for us or someone else in the future. But it's -- with the primary focus on our Marlon area and the Hog area down below, where we can drill long laterals. That's the process that happens.

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Operator [21]

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Our next question comes from [Gerard Jarreau] with Stifel.

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Unidentified Analyst, [22]

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I just had a question about some of the nonrecurring expenses from the quarter. Specifically, could you go in a little more detail about the Panther pilot well as well as the SCADA system production monitoring that you guys are using?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [23]

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Jim, do you want to tell him about the Panther?

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James W. Denny, Lilis Energy, Inc. - EVP of Operations [24]

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The Panther is our most easternmost test. It's a B -- all the way through the Wolfcamp B -- test. We've logged it, full log suites. We've taken rotary cores in a number of the formations. And we're using that to tie into our seismic and also to better evaluate the east side. So it was an expensive project that really wasn't intended to generate revenues, and it represents a very large portion of the nonrecurring test spend in the first quarter. We also have some facility and infrastructure upgrades. And then we drilled some freshwater wells, as Ron had mentioned. So that's the bulk of it right there.

The SCADA system is an electronic system whereby the gaugers don't have to go up on the tanks. We got tank levels, we got alarms, we can see pressures, so we can better monitor our production on a day-by-day basis like a well-by-well basis. And it also ties in to our Salt Creek-Lilis automatic custody transfer system that should be coming online in the next few months.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [25]

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Yes. Quite a lot of that is infrastructure related with the water and oil and gathering and then the Panther well and seismic.

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [26]

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[Gerry,] we spend about $2.5 million on a (inaudible) basis on the pilot, call it, $0.5 million, $600,000 or so on the SCADA. There is sort of de minimis amount that are kind of rolled in there. I don't have all the exact details. Happy to be follow back up with you again. But for those 2 amounts, it's about $2.5 million and about another $0.5 million for SCADA on the northernmost.

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Operator [27]

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This concludes the question-and-answer session. I would like to turn the conference back over to Ron Ormand, Chairman and CEO, for any closing remarks.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [28]

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Well, thank you, everyone, for attending this morning. I think I want you to stress the acceleration of our D&C CapEx is going to really impact second quarter but really more the third quarter. And that -- some of the notes I've seen have not necessarily been looked at in terms of what that may do. But again, significant bump in our production from where we are today, significant bump in our EBITDAX because of the contracts that we have. And we are currently tracking our guidance well in the second quarter, and we want to make sure that we're putting out numbers that we're well within and above. So we're very pleased with where our operations are today, and we look for a very good second quarter and an excellent third quarter.

So with that, I'd like to end up and say thank you very much, and I'll be available for any questions or follow-up if anybody needs it. Thank you.

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Operator [29]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.