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Edited Transcript of LLEX earnings conference call or presentation 8-Mar-19 4:00pm GMT

Q4 2018 Lilis Energy Inc Earnings Call

Rocky Mount Mar 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Lilis Energy Inc earnings conference call or presentation Friday, March 8, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James W. Denny

Lilis Energy, Inc. - EVP of Production and Operations

* Joseph C. Daches

Lilis Energy, Inc. - President, CFO & Treasurer

* Ronald D. Ormand

Lilis Energy, Inc. - Executive Chairman & CEO

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Conference Call Participants

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* David Earl Beard

Coker & Palmer Investment Securities, Inc., Research Division - Director of Research & Senior Analyst of Exploration and Production

* Eli J. Kantor

IFS Securities, Inc., Research Division - MD

* Jeffrey Leon Campbell

Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services

* Jeffrey Scott Grampp

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Jordan Levy

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* 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 earnings conference call for the fiscal year ended December 31, 2018. (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 the call will be available approximately 1 hour after its conclusion through June 8, 2019.

I would like to now turn the conference over to Joe Daches, President and Chief Financial Officer of Lilis Energy.

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

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Thank you. Good morning, everyone, and thank you for joining Lilis Energy's conference call. Today, Lilis' management will discuss financial results for the fourth quarter and fiscal year ended December 31, 2018, and will provide an update on corporate developments along with 2019 outlook and guidance.

After the market closed yesterday, we released our 10-K and our financial and operating results for the fourth quarter and fiscal year ended December 31, 2018. If you have not yet had a chance to review Lilis Energy's earnings release, please visit the Investor Center at the company's website at 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 these reconciliations within the earnings release.

Joining me today is our Chairman and CEO, Ron Ormand; Jim Denny, EVP of Production and Operations; and Wobbe Ploegsma, VP of Capital Markets and Investor Relations. During this call, we will review the results of the fourth quarter and the fiscal year 2019 and then discuss outlook and guidance for 2019. I'll turn the call over now to Ron Ormand.

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

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Thank you, and good morning, everyone. Welcome to our fiscal year-end 2018 earnings call and corporate update. First, I would like to extend a thanks to all of our Lilis employees, the hard work that's gone on during this year as they continue to make excellent strides in growing our asset and production base. I'd also like to thank our investors, many of whom have supported us for quite a long time through a very challenging market.

I'd like to start the call by saying that 2018 was a year of accomplishments and achievements while navigating a very difficult market environment. We made significant progress on our strategic goals despite very difficult market conditions. We exceeded our 2018 target rate of 8,000 Boe per day and most recently completed a transformative balance sheet recapitalization plan. And it's important to note that we [began] this company approximately 2.5 years ago. I've been CEO for a year and we've accomplished a tremendous amount in that time.

In 2018, we unfortunately experienced natural gas curtailments resulting from inefficiencies resulting from our third-party gathering and processing issues. These issues negatively impacted us on a Boe basis. Despite this, we still achieved our 2018 exit rate.

In addition, we have decided to take decisive action to manage our capital by reducing CapEx and moving completions into the first quarter. The combination of these 2 items impacts our Q4 and Q1 production. We're providing guidance for the first time today and our outlook and guidance will primarily focus on liquids and oil mixes, as approximately 90% of our cash flow is derived from these 2 products.

I'd like to now go over the 2018 highlights. I'll discuss the balance sheet recapitalization with a brief look at 2019. Among the highlights for '18, average net daily production increased 215% year-over-year. Fourth quarter average net daily production increased 203% when compared to the fourth quarter, which is a record high for the company. Oil and natural gas sales revenue increased 225%, and 2018 adjusted EBITDAX was $35 million, which is a significant increase from 2017. Our total proved reserves and PV-10 increased 273% and 367%, respectively, since year-end. We successfully completed 15 wells in the Wolfcamp A, B, XY, Second and Third Bone Spring, continuing our strategy of delineating and delineating -- derisking the acreage position, both geographically and geologically.

We successfully completed multiple acreage swaps and acquisitions throughout the year, increasing the company's net acreage position to over 20,000 acres, our working interest to 76% and our operatorship to 99%. We executed infrastructure agreements in 2018, which will provide significant revenue enhancements and cost savings in 2019, including the access to favorable Gulf Coast oil pricing.

2018 D&C capital budget was in line with our estimate of $100 million. We reduced our F&D costs per Boe to approximately $6.22 in 2018, closed on a new lower-cost RBL with an initial borrowing base of $95 million and have successfully increased our borrowing base since then up to $125 million. We substantially reduced leverage through the conversion of a second-lien, $7 million in all, into common and preferred, and we completed a subsequent balance sheet recapitalization, which I'll now review for you.

As we announced earlier this week, and you can -- if you haven't seen the full presentation, please see the press release and presentation on the balance sheet recapitalization. We completed the exchange of approximately $133 million of second-lien term loan into preferred and common equity. The transaction significantly reduces leverage, improves liquidity and simplifies our capital structure, positioning us for continued future growth and strategic initiatives. The transaction resulted in total debt to annualized EBITDAX for the fourth quarter of less than 2.0x. And currently, with the recapitalization, we've increased our borrowing base to $125 million, which increases our liquidity significantly.

We believe the simplification and deleveraging the balance sheet can make it significantly easier for investors to focus on the true value of our assets as opposed to our balance sheet and other issues. Most importantly, this transformative transaction positions the company to pursue our strategic and financial goals while allowing us for patient and methodical development for the world-class assets.

I'd like to now give a quick operational update. As I mentioned, we took significant measures with the lower price -- commodity prices in late 2018. We began reducing drilling and completion activity, which have impacted Q4 and Q1 of '19. However, we now have a backlog of 6 DUCs, which we intend to complete in the next several months and should provide a significant bump in our production over these next few months.

And we recently completed the East Axis #2H, which is a 1.5-mile Upper Wolfcamp A. This East Axis received an IP 24 rate of 1,733 Boe per day or approximately 223 per 1,000 lateral feet. We have since performed completions on 6 DUCs -- we are performing, I should say -- 6 completions on 6 DUCs with 1 crew and likely to be deploying a second crew here in April. Among our completions, the first is the Oso, which is currently flowing back. It's a 1.5-mile Wolfcamp A. And we're also completing the Haley 1 and 2, both Wolfcamp A 1-mile wells, which are being completed as zipper fracs. We will then turn to the North West Axis 2H, the North East Axis 2H, the Ox 1H and the Kudu 2H, not necessarily in that order. It remains fluid, depending on timing the next -- and the location of our crews. We're currently drilling the Kudu 1 -- A #2H, which is a 1.5-mile Lower Wolfcamp B and expect to have that completed here in the very near future.

I think you'll also see in our presentation that the recent well completions that we've announced have been very -- performing very well, and you can see the extended production data, that they are matching our type curves and performing at or above.

2018 was a very transformative year for our company, and recent actions we have taken I believe position us extremely well for 2019 and beyond. We've taken significant steps to position the company, maximize the value of our assets and with a much stronger balance sheet.

2019 outlook provides a reduced capital expenditure plan, which should realize significant growth in production and reserves with approximately 50% less capital expenditures. And with this recently completed recapitalization plan, we have the ability to increase our activity if prices and strategic reasons warrant.

I want to conclude my remarks by saying I am extremely confident in the value of our assets, the expertise of our management team and the future of the company. I will now turn it over to Joe, and then we will open it up to question-and-answer.

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [4]

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Thank you, Ron. I'm going to talk about 3 things, just a review of financial performance over the quarter and the year, give a brief update on midstream natural gas takeaway, talk about 2019's outlook and then give you just a quick update on a housekeeping item.

Okay. So for the year ended December 31, 2018, our revenue was $70.2 million versus $21.6 million as compared to last year. This increase was primarily attributable to increase in sales volumes as well as higher average realized prices for oil and NGLs, which were partially offset by a decrease in average realized natural gas price. Total net production for 2018 was approximately 5,000 Boe per day, which was a 215% increase over the prior year.

For the quarter, revenue was $18.9 million compared to $2.9 million, and net production in the fourth quarter was approximately 6,000 Boe, which is a 200% increase compared to the same quarter in 2017.

Ron mentioned earlier that our adjusted EBITDAX was $35.1 million, and that's compared to a negative $7 million for 2017. This decrease was principally driven from revenue resulting from higher production volumes and pricing as well as lower operating costs per Boe in 2018.

Production costs decreased from $10.14 per Boe to $7.64 per Boe for the full year. This decrease in production costs per Boe resulted from lower crude and water handling expenses as well as lower overhead costs per Boe. G&A was also reduced significantly by $16.6 million or 33% year-over-year. And despite the 215% increase in daily production, our total operating costs only increased by $5 million -- $4 million or 5%. Our total operating expenses in the fourth quarter decreased to $22.9 million from $30 million for the same quarter in '17.

I'm pleased to report that our current financial position is strong and provides the financial flexibility to fund our planned 2019 capital expenditures. We expect to become cash flow neutral this year, and it is one of the key strategic objectives for the company.

Now I'm going to take a brief moment and talk a little bit about our natural gas takeaway. We continue to execute our development plan. Third-party midstream challenges continue to constrain our natural gas sales. These inefficiencies that have been caused by mechanical and operational challenges have been impairing the efficiencies of third-party treating infrastructure. The issues, in turn, have caused fluctuations in both natural gas production and total Boe production. There has been substantial collaboration and communication between both parties, which has resulted in our third-party natural gas midstream provider establishing a plan to remediate these inefficiencies. They are working closely with our management team, our consultants to resolve this inefficiencies. In fact, we've had daily calls with their management team, the operations teams and the field teams for about -- over the last few months.

The good news is we have seen significant improvement in late December in '18. However, during the month of February, periods of cold weather adversely affected midstream operations. Nevertheless, these issues are actively being addressed, and we should not have the same impact next winter. Based on their commitment to our partnership, we are confident that our midstream provider will provide solutions, which we are collectively collaborating on.

These issues notwithstanding, the company would like to reiterate that the realizable value of its assets is derived substantially from the significant oil and liquids-rich nature of our acreage position. Ron mentioned this earlier, but we have over 90% of our realized cash flow that is being generated from the oil and liquids part of our company.

I'm going to move into the 2019 and give a little overview of this as well. The company has and is responding to the current market environment demands by delivering a recapitalized balance sheet that significantly delevers the company. This provides us a platform to achieve cash flow neutrality and achieve our strategic objectives.

Currently, our 2019 D&C capital budget assumes a 1-rig operator program, and D&C CapEx should be approximately 50% less than it was in 2018. This 1-rig development program provides for growth in production and achieves cash flow neutrality while maintaining a very low leverage. If we elect to add a second rig, it will likely be utilized to drill 2-mile wells in New Mexico, which offset the recently announced 5,000 Boe per day well 1 mile from our northern block in New Mexico.

We are projecting 2019 annual production to range from 4.2 to 4.6 MBOE/d for the first quarter, ranging from 3.4 to 3.6 MBOE/d. We plan to reduce lease operating expenses to $6 to $6.50 per year -- for the year and $7 to $7.50 for the first quarter of '19.

Our CapEx guidance includes the completion of 6 DUCs, 3.9 net; 7 gross development plan wells, 3.8 net; and for a total of 13 gross wells, 7.8 net, for the year. Our CapEx guidance is significantly lower, almost 50%, than the 2018 year. Of these wells, we plan 10 gross, 7.2 net, wells on production during 2019.

Finally, one last housekeeping note. Associated with the recapitalization of our balance sheet, LLEX will be filing a shelf registration statement on Form S-3 to register the shares associated with the transaction. We should get that accomplished sometime in the next 30 days.

I'll turn it back to Ron -- excuse me, we would now like to open 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 of SunTrust.

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Jordan Levy, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [2]

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It's actually Jordan Levy filling in for Neal. I just wanted to get your guys' view on -- in terms of delineation. Do you feel that, on your position, most of the work in terms of delineation is out of the way, and from this point, it's just developing and getting the best wells you can from there on forward?

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

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I think there's 2 answers to that question. I think that we have done a significant amount of delineation. And with some of the work we're doing in our pilot drilling as well as seismic work, that we should have done here in the first half of the year, we have a tremendous amount of data now with our properties. Having said that, our 2019 program is going to be really focused on areas and zones that we have already proven results and delineation results in those zones and will likely not be much more delineation, with the exception of -- we're going to move into northern New Mexico, which is not -- a new area where we have not previously drilled. We're looking forward to doing that in the second half of the year. We have not drilled yet wells in that block.

But as I think a lot of you know, there's a well just 1 mile off our block. That was a 5,000 barrel a day well. We share data with that company on that well. And so we look forward to the opportunity when we can get up there and drill that. That's subject, obviously, to BLM approval. BLM was shut for a while, so that delayed it. But we're hoping that we can do that in the second half of the year. Assuming we move to a 2-rig program, that would likely be what we would do.

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Jordan Levy, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [4]

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Great, great. And then just one more if I could. Just in terms of the East Axis well, I just wanted to see how you guys feel about that well in terms of how it's performing versus your expectations in offset wells?

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

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Yes. I'm going to let Jim Denny, our EVP of Operations, answer that.

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James W. Denny, Lilis Energy, Inc. - EVP of Production and Operations [6]

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Good morning, everyone. So the East Axis is an Upper Wolfcamp A, and it is our most easterly Upper Wolfcamp A. So as we move up, I think part of our delineation has been proving 2 benches within the Wolfcamp A, and we're seeing slightly higher gas-oil ratios as we move east and also as we go higher in the Wolfcamp A formation. However, the higher gas-oil ratios yielded much higher pressures, and it looks like the well is going to be flowing on its own for an extended period of time. As you know, we've been kind of blessed with that. We've had flow -- just natural flow rates as long as over a year. And it's similar to the XY as you move up. So maybe we're fracking into the XY, but we don't know that at this point in time. So still really strong liquids and a very good well. Very happy with it.

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Operator [7]

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Our next question comes from Ron Mills of Johnson Rice.

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

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The question, maybe, Joe, for you or Ron. At the end of December and early January, what were some of the changes that Lucid implemented to kind of free up the gathering capacity? And do you feel like their, in light of your 8,000-barrel a day production over that period, that it shows they have the capacity, but they're getting close to getting all the problems remediated?

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

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I'll take a crack at this, but some of this is proprietary information on their side as to what they're doing and accomplishing on the gathering in the AGI. But it's never been a capacity issue, just keep that in mind. The processing has 310 million a day, and the AGI plant has over 60 million a day, right? So we're -- there has never been a capacity limit issue. It's just getting the operations to run more smoothly, which, as I mentioned, they're working on. It's a long laundry list of items, and it's on their side of the table to really navigate through that.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [10]

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I would say that the thing that set us back, though, however, once we've received -- achieved that, was the cold weather and some things that occurred with that cold weather, so some pigging on the line and liquids freezing up in the line. So those are things that are being remediated now. There'll be a new automated pigging equipment for them for next winter, which should alleviate some heater-treaters that are being put in, several things. So we're hoping we can get back to high efficiency with that. With the weather warming up, it should be improving.

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

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Great. And then on the recap from earlier this week, clearly, you've restructured or rebuilt the balance sheet with some more on the equity side. Joe, can you provide a little bit background in terms of how the process came about with Varde now kind of swapping out of their secured position into just equity position, kind of how that negotiation and the process occurred?

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [12]

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Yes, I'd be happy to, Ron. And I'll keep it brief, and we can talk more if you want about it. But Varde is a very good partner for Lilis shareholders in its entirety and with management. And there really wasn't a mechanism for them to do any sort of conversion that we went through in the fourth quarter to convert the initial $68 million into the pref and to common back then. They worked through it with us. We thought it was the right answer to begin delevering the company. They are good equity partners. They are good capital partners. They are good debt partners. And when they looked at the company, they certainly liked the idea of helping it grow and move in the right direction. And we all recognize that having a capital structure that's much more simple, that has regular bank, RBL at the top of the stack and then has -- get that second lien out of there and prep below it accordingly, they were just as encouraged as we were to significantly delever, the ability to help the company be very nimble and patient going forward. And that was really the key part of the discussions.

Ron and I were looking at the market, the environment. Commodity prices are coming down. We're looking at what was plaguing us as a company. And one of the biggest initiatives that we started on the fourth quarter of '18 was how do we delever the company, what is the best path. And so we went to our capital partner. They were completely open. They had lots of ideas, and we worked through them with them, and we were able to, at the end -- the end result was completely equitize the entire $134 million of second-lien debt into a combination of 2 pref, a non-convertible and a convertible instrument, as well as some common stock. We believe that this platform, that we've removed that second-lien debt, will significantly benefit the company to be very patient and very careful as we go through our development plan and try to achieve all of our strategic goals in 2019 and beyond.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [13]

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Great. And then one last one. Especially in a constrained capital environment, is it -- do you continue to look to pick up incremental interest in some of your position or -- given your inventory spread across the different zones and your acreage that you're pretty content with where you are right now?

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

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I think we feel very confident and content with the position that we have. We're always looking at ways to improve it. I would say that there are ways we can do that, and we are looking at those. They're not significant in terms of any D&C capital because we're not really projecting any capital expenditures related to acreage acquisitions. So more than likely, they would be swaps, or we could do, say, where we sold a piece and bought a piece, but it would be net neutral in our position and accretive to the entire position. The things that we've done in the last year have all been really working interest within our block. We still have some opportunities like that, where we may have less core things we can split off, where we have a lower working interest. So we still have active discussions in those areas, but more than likely, that's probably the direction that we'll be going.

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Operator [15]

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Our next question comes from Jeffrey Campbell of Tuohy Brothers.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [16]

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My first question. Slide 12 illustrates that in 2018, and I think you mentioned this, this was a year of significant delineation of zones other than the Wolfcamp B. And Slide 11 also shows that there's a lot of Wolfcamp A wells that are flowing back or in completion. I was wondering, which zones are going to be the primary ones that are going to attract investment in 2019 to the extent that you can foresee it into 2020?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [17]

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We have a fairly balanced program between the Wolfcamp B and the Wolfcamp A, and we also have a couple of Bone Springs with each one of those zones. So I would say those are the primary ones. Jim, do you want to make any particular comments on that?

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James W. Denny, Lilis Energy, Inc. - EVP of Production and Operations [18]

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Yes. We're drilling our first Lower Wolfcamp B on our westerly -- on Kudu A 2H, which will be our most westerly Wolfcamp B period, but it also will be a Lower Wolfcamp B. All of our Wolfcamp Bs, to this point, have been Upper Wolfcamp Bs, and they've been very profitable to the company. So we're looking at establishing 2 benches within the B like we have within the A. And that's where we'll be concentrating our efforts and more in the field proper, I think, at least, to start the year, as Ron has mentioned, and then maybe New Mexico and/or moving to other areas.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [19]

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Mexico would likely be in the Wolfcamp A. It's a little different geology up there. So it's primarily A and B and a couple of Bone Springs.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [20]

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So let me follow-up on that last thing you said because it's pretty interesting. If the Lower Wolfcamp B test is successful, I assume that's going to beget another one. But just thinking more broadly, do you see the majority of your Wolfcamp B acreage potentially exposed to landing 2 benches if this effort is successful?

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James W. Denny, Lilis Energy, Inc. - EVP of Production and Operations [21]

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Yes, that's correct. It does thin slightly, but we have the pilot well that we drilled on our eastern edge of our acreage indicates that it is present and it is prospective. So we're waiting for core and other data to make that statement more definitive. But yes, it carries throughout the field.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [22]

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That's really good color. My other question is a little bit broader one, but I think it's germane this year as we're talking about development maybe over a 1- or 2-year horizon. We've been getting a lot of talk about parent-child relationships back in the news again lately. I was just wondering what your thoughts are on this issue relative to your own experience and if this, in any way, colors your future development efforts in '19 and '20.

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

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Well, I'm going to let Jim Denny answer, but I'll first say we're fortunate in that we have such a large amount of inventory. We don't have anything that's very close to test the parent-child. We are going to be doing some testing on that particular issue with some equipment and technology that we have. But as far as we have, because we have such a large inventory and small amount of wells at this point in time, we've seen none of that. But Jim, why don't you...

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

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Other than the odd frac hit, which was just a -- would shut in a well, we haven't seen any broad communication due to frac hits or even -- and we haven't drilled wells, really, that would be parent-child type of situation. In our Haleys, where we're doing a zipper frac, we are doing a -- we're performing pressure transient work now to do frac mapping, looking at the effectiveness of diverters and looking at some effectiveness of our -- we changed our clusters a little bit. So we're doing -- making our first attempt to look at spacing, looking at a little bit of wine-racking type of thing. And we're going to continue that where we have the ability of either 2 nearby wells or even another zipper frac possibly at the Kudu. So we're looking at it. The history has -- for us, it's just been a matter of shutting in for -- to be prudent, but we have not seen any huge effect due to parent-child. And longer term, I think we'd be looking at doing -- pressuring up in the parent well or refracting the parent well, holding pressure for drilled children.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [25]

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Okay, great. That's really -- and let me just follow up one real quick one. You're talking about the wine racking that you're going to start to experiment with. Is that within a zone, some kind of Chevron thing, like maybe within the Wolfcamp A or something like that? Or are you talking about any kind of a multi-zone wine rack test?

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James W. Denny, Lilis Energy, Inc. - EVP of Production and Operations [26]

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The 2 Haley wells are both in the Wolfcamp A, but they are slightly different targets within the A. I won't call it wine racking at this point.

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Operator [27]

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Our next question comes from Eli Kantor of IFS Securities.

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Eli J. Kantor, IFS Securities, Inc., Research Division - MD [28]

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Can you talk about what level of borrowing base growth you'd expect this year, assuming no change in commodity prices and assuming you're on run rate throughout the year?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [29]

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I'll let Joe deal with that, but you also have to assume what's the commodity price, your assumption on it. So we're not looking at exhausting what we have today, so we're operating a plan within our $125 million, okay? We do expect borrowing base increases, but that assumes a stable commodity market that we have. So we'll just have to see. We will have proved reserve growth that will definitely support that, but it's tough to say where we expect to see that go to. Without understanding the commodity price, I wouldn't feel comfortable giving you a number on that.

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [30]

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Here's what I would add to that, is we -- we've obviously got 6 DUCs. We're drilling them in the first quarter. Our next redetermination date is in July. We expect an increase in production, in volumes and values, for sure. But really, the focus point really should be where are we going to be on the other side of, I guess, June 30. And we're going to be in a cash flow neutral position going forward, living within our own means. So we feel good that we're not going to be tapping into the top end of our borrowing base, but we'll be growing it and creating the ability to tap in if we need, right? So I don't know how else to answer that question. I don't want to give you a specific number. The commodity price is really the limiting factor in speculating to a number.

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Eli J. Kantor, IFS Securities, Inc., Research Division - MD [31]

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Makes sense. That's great color.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [32]

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Certainly, our leverage ratios and our proved reserve growth should, in a stable price environment, support a healthy growth in that. But again, by going cash flow neutral, we're not really relying or looking to that as a basis to grow the company.

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Eli J. Kantor, IFS Securities, Inc., Research Division - MD [33]

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Understood. As my follow-up, can you give us a sense of what considerations will go into the decision on whether or not you'd flex back up to a 2-rig program? Is it simply dependent upon commodity prices? Or are there other factors that play a role? And if oil prices are the predominant factor, what price would drive that rig activity increase?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [34]

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Look, I don't think there's any one data point that's really -- would drive that. I think it's a collective decision that we would discuss with our board. But commodity-driven, it's the ability to -- ability, like if we have something, for example, in New Mexico, also looking at the market outlook on sentiment, so we would have to review that and maintaining our leverage and cash flow position. So there are a number of factors. I mean, we do have ideas and plans, but right now, we don't have anything that we would put on the table and implement absent a variety of factors that go into that decision.

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Operator [35]

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Our next question comes from Jeff Grampp of Northland Capital Markets.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [36]

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Was curious -- I guess just trying to get a sense of -- I appreciate the guidance you guys put out. So I know we have first quarter and full year, but can you guys disclose, maybe more recently, what sales production volumes you guys have been able to get out? And maybe if you're comfortable taking a stab at year-end exit rate and, I guess, just more generically, trying to get a sense of how we should think about production trajectory for 2019.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [37]

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I think we honestly want to stick with what we have in terms of our outlook and guidance. We have stayed away from an exit rate. Obviously, if you look at the production that we have over the year, you can probably extrapolate something from that. So we're not providing that, I'm sorry to say. We may later in the year, depending upon where we see production and our Boe number is going, but our -- we'd prefer to stick with the guidance that we have.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [38]

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Okay, fair enough. And I guess just trying to maybe quantify what kind of impact that these midstream issues have had on production. I know in the past, you guys have quoted kind of a productive capacity number. Do you have a sense of, if we look at the 1Q oil guide specifically, how much that may be curtailed for some of those midstream issues? Or is that really more just a completion timing function more than anything as we look at that number and kind of compare it to some of the (multiple speakers) you talked about?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [39]

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Again, the oil is more a function of 2 things: one, slowing down in completions that we did; and two, there is some impact from weather when we have an event in the wintertime, which would impact not only the gas capacity but could impact some of the deliverability. So it's -- that's normal kind of winter issues we deal with from time to time, the transient, and we'll see that moving back forward. So it's really nothing as much related on the midstream as normal operations. We had the slowdown in our production completions. We're going to see that now coming back pretty actively. We're flowing back the Oso, which looks very good. We're very happy with the initial results that we've seen on that.

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Joseph C. Daches, Lilis Energy, Inc. - President, CFO & Treasurer [40]

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I would add one thing. As you look at the 2019 year, production is going to be as we've laid out here in the guidance. The EBITDA for the company -- so 75% sort of production is related to liquids, right, and same thing goes on the revenue side. But on EBITDA, it's like the 90-plus percent is driving the value of this business is coming from the combination of oil and liquids, right? So the natural gas constraints that we've had, while they're getting worked on and they're going to get fixed, they don't really impact the value of our reserves or anything else. So keep that in mind as you're thinking about what the primary drivers are, and it is the liquids and it is the oil.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [41]

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And we'll see a very nice growth in our EBITDA for the year, and that's why we're really giving guidance on the liquids portion of the business. And I think that once you do the math on what we've put out there, you'll be able to see that.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [42]

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Yes, understood. I appreciate the comments, guys.

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [43]

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Yes. I think one other thing I'd just add is a good portion of that is attributable to the very favorable contracts we have on oil that come into play, really, in the second half of the year. So that's something that -- when you do the math on.

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Operator [44]

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Our next question comes from David Beard of Coker Palmer.

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David Earl Beard, Coker & Palmer Investment Securities, Inc., Research Division - Director of Research & Senior Analyst of Exploration and Production [45]

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Just a follow-up to some of the other questions relative to potentially adding a second rig but also looking to be cash flow neutral by midyear. So my question is, how much outspend might you tolerate if you were going to add a second rig?

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [46]

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We're not really looking to outspend. And based upon our numbers, that's something we would factor into timing of completions as well as the rig drilling. So we do show our ability to get into cash flow neutrality and cash flow positive by the second half of the year, so we can absorb some capital expenditures additionally. And that would also impact us positively in the fourth quarter, let's say. So we're going to look carefully at that and manage within cash flows.

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Operator [47]

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(Operator Instructions)

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [48]

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Okay. Go ahead, operator.

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Operator [49]

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

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Ronald D. Ormand, Lilis Energy, Inc. - Executive Chairman & CEO [50]

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I'd just like to thank everyone for spending their time today. We look forward to an exciting 2019, obviously dealing with a more difficult market environment. We're very excited about where we are and the value of our assets and the future of the company. Thank you very much.

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Operator [51]

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Lilis Energy's conference call has now concluded.