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

Q2 2019 Rosehill Resources Inc Earnings Call

NEW YORK Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Rosehill Resources 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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* Bryan Freeman

Rosehill Resources Inc. - SVP of Drilling, Completions & Production

* David Lawrence French

Rosehill Resources Inc. - President, CEO & Director

* John Crain

Rosehill Resources Inc. - Senior Manager of Finance & IR

* Robert Craig Owen

Rosehill Resources Inc. - Senior VP & CFO

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Conference Call Participants

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* Jarrod Giroue

Stifel, Nicolaus & Company, Incorporated, Research Division - Equity Research Associate

* Jordan Levy

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

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Rosehill Resources Second Quarter 2019 Conference Call. (Operator Instructions)

It is now my pleasure to introduce Director of Investor Relations, John Crain.

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John Crain, Rosehill Resources Inc. - Senior Manager of Finance & IR [2]

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Thank you, Andrew. Good morning, everyone, and welcome to today's conference call to review Rosehill Resources' second quarter 2019 operational and financial performance. After I cover the forward-looking statements, Dave French, our President and Chief Executive Officer, will provide opening comments and key highlights for the quarter. Following Dave will be Bryan Freeman, Senior Vice President of Operations, who will provide an operational review; and Craig Owen, Chief Financial Officer, who will provide a review of financial results for the quarter. We will then have a question-and-answer session, and Dave will close the call with some brief comments. Also joining us today on the call is Brian Ayers, Senior Vice President of Geology; and David Mora, Vice President of Commercial and Reserves.

I'd like to remind you that today's call includes forward-looking statements and certain non-GAAP financial measures. We believe our expectations are based on reasonable assumptions; however, a number of factors could cause the results to differ materially from what we discussed. We encourage you to read our full disclosures on forward-looking statements in our SEC filings and the GAAP reconciliations included in yesterday's earnings release.

With that, I will now turn the call over to Dave.

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [3]

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Thank you, John, and thank you to everyone for attending Rosehill's second quarter 2019 earnings call today. Since the time of our last earnings call, admittedly early days for me here, I've had a chance to really appreciate the strength of our portfolio, the capabilities of our team and the wide range of opportunities in front of us. I'm convinced we have a bright future. It has been a busy summer catching up with many of our investors, and I look forward to meeting more of you in the near future.

Moving to our update. The second quarter of 2019 was, as expected, very active in both of our operating areas. Bryan will provide greater detail, but in general, we shifted our attention to our northern area drilling and completions after an active closeout of the first quarter in the south. As planned, we shut in some producing wells early in the second quarter in the north to ensure safe operating conditions and minimize well interference. These impacts from simultaneous operations, or SIMOPs, partially dampened the early part of the second quarter. We have 9 3Q '19 completions planned in the north that we expect will drive volumes upward over the back half of the year, and we can reconfirm full year 2019 production guidance.

We're also pleased to announce our most recent results in the Southern Delaware. As we previously released the rationale behind our recent farm-in agreement was twofold. Firstly, increase our acreage position in an area we see potential; and secondly, provide the adequate lease configuration that will enable us to drill 2-mile laterals where applicable. We were very excited last quarter to highlight the operational execution of the State Neal Lethco 1210 2-mile lateral with leading drill times and overall costs and are now equally excited to announce the first production results. We believe the combination of attractive rates, low per foot well costs and high oil cuts further crystallize the potential of our Southern Delaware assets.

Along with optimizing D&C activities, we're also pushing on the equally important work of lowering cost in the Southern Delaware area, especially associated with power and water management. The combined improving well cost and operating expense profile only serve to reinforce the choices of our 2019 balanced capital plan.

Turning to our plans for the remainder of the year, we reinforce previous guidance on a tapered capital program in the second half. Our activity will be laser focused on a couple of key portfolio objectives. First, in the north, we're turning our attention to multi-well drilling at the Wolfcamp B. We've historically drilled several Wolfcamp B wells in the north, but this 2019 follow-up program is a setup for 2020 and designed to tune our well spacing model.

We'll also return to the south and drill another 2-mile lateral and a delineation well in the eastern block of the acreage, setting up for 29 plants there as well.

Given our balance 2019 plan and expected increase in our liquidity profile going forward, we do not expect additional funding needs for the remainder of the year. It should be a busy fall, and I look forward to sharing the results.

With that, I'll now turn the call over to Bryan Freeman for a review of our operational performance in the second quarter.

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Bryan Freeman, Rosehill Resources Inc. - SVP of Drilling, Completions & Production [4]

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Thank you, Dave. The second quarter was indeed very busy as we operated 2 rigs for a good portion of the quarter, drilled 8 wells and completed 9 wells. We exited the quarter with 12 drilled uncompleted wells, or DUCs, as was our plan entering the year. We released both rigs late in the quarter as we took a pause to catch up on our DUC inventory, and now anticipate resuming drilling in the weeks ahead, which I'll talk more about in a few minutes.

As Dave mentioned, most of our drilling and completion work in the second quarter occurred in our Northern Delaware area, where we were active on both our Z&T 20 and Weber leases. We've provided results in our press release for the Z&T 20 E006 while targeting the second Bone Spring's formation. Demonstrating the strong economics of this interval, we also provided extended production results for the Z&T 32 3-well pad brought on late last year, which continues to produce at an average rate of over 250 barrels of oil equivalent per 1,000 foot lateral. After more than 6 months on production, we maintained our exceptional operational performance averaging 15 days per well drilling and just under 5 stages per day on the completions for the northern wells in the quarter.

Our Weber lease in the Northern Delaware, we made a prudent decision to shut in 10 wells during the quarter to avoid potential safety issues and adverse impacts to the wells during pressure pumping operations.

As Dave mentioned, this caused a negative impact to second quarter production. We estimate production for the quarter would have been over 1,200 BOE per day higher had we not taken these preventative measures. Prior to the end of the quarter, we brought on some wells back online and this helped contribute to a total company average net production level over 20,000 BOE per day for the full month of July, which is a field estimate on 2-stream basis.

Turning to the activity. In our Southern Delaware area, we brought on our first 2-mile lateral, the well -- the State Neal Lethco 1210, and we're very pleased with the initial production we're seeing, which is detailed in our press release. We are encouraged with both the production level and the total well cost achieved, $8.5 million or approximately $850 per completed lateral foot. We plan to take the learnings from this well including completion design, pump rates, fluid loading and artificial lift approach to apply to additional 2-mile well we plan to drill in this area during the fourth quarter.

We placed other wells onto production recently as well including the Silow 14, which is also detailed in our press release, and we look forward to providing additional results once sufficient flowback information is available.

All together, the operations and land teams are making tremendous progress around our Southern Delaware infrastructure, including ensuring adequate grid power, flowback support, water supply and produced water disposal capacity. Craig will touch on how this translated into total cash operating cost for the quarter.

Moving to current operations. We're hard at work completing 6 wells in the north by simultaneously pumping 2 3-well pads on the Kyle 26 lease. After these wells are completed, the crew is staying in the north and moving to a 3-well pad on the Z&T 32 lease as we work through this DUC inventory. We also plan to resume drilling operations, initially targeting the Wolfcamp B formation in the north. Overall, we're excited about the potential of the Wolfcamp B given the thickness of the reservoir, pressure environment and the low decline profile that these wells previously drilled in the interval.

In summary, you can see we've had quite a bit of activity and progress that should drive the increase in production for the second half of the year Dave mentioned.

With that now, I'll turn the call over to Craig for a financial review of the second quarter.

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [5]

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Thank you, Bryan. I'm pleased to report on our strong financial results for the quarter. Second quarter revenues were $69.4 million and production totaled 18,934 barrels of oil equivalent per day comprised of 70% crude oil, 15% NGLs, and the balance, natural gas.

For the second quarter of 2019, Rosehill reported net income of $11.2 million or $0.54 per diluted share, which included a $33.7 million noncash pretax gain on commodity derivative instruments and an $11.1 million pretax gain on the sale of our northern -- New Mexico assets.

We generated adjusted EBITDAX of $43.8 million for the second quarter, a decrease of 11% compared to the second quarter of 2018, driven primarily by lower commodity prices.

Our average realized oil price for the second quarter was $55.06 per barrel and a total equivalent realized price of $40.27 per BOE, both on an unhedged basis.

For natural gas, the current transportation constraints experienced in the Permian Basin in the second quarter resulted in a realized natural gas price of negative $0.44 per Mcf. This price was significantly impacted by Waha and EP Permian pricing points and is inclusive of processing costs and certain gathering costs.

NGL pricing was also challenged in the quarter due to sharp increases domestically in liquid supply, most notably ethane and propane as export capacity constraints have caused domestic stockpiles to build.

Our average realized NGL price for the quarter was $12.05 per barrel, a 45% decrease as compared to the second quarter of 2018.

We have a very strong hedge book, protecting our downside commodity risk while also providing exposure to upside price movements. We have the vast majority of the remaining 2019 expected oil production hedged at $56.47, approximately 13,000 barrels of oil per day hedged on average in 2020 and '21 at $59.83 along with over 5,000 barrels of oil per day hedged in 2022 at $59.35. All of these aggregate positions provide us with exposure to upside price movements as well.

Turning to cost. Total cash operating expenses were $24.3 million or $11.72 per BOE, which consisted of direct lease operating expense of $4.90 per BOE, cash G&A expense of $4.31 per BOE, gathering and transportation expense of $0.77 per BOE and production taxes of $1.74 per BOE.

As Bryan alluded to, our costs in the quarter improved sequentially due to bringing on additional company-owned and operated SWD well capacity in our Southern Delaware area that resulted in less reliance on third-party SWD well operators. We continue to have adequate SWD disposal capacity in both of our operating areas, including a number of approved permits on our southern area to support our future development plan.

The net result of our operations for the quarter again was seen at the corporate level with a strong cash return on capital invested of 23%.

Total liquidity as of June 30, 2019, was $65 million made up of cash on hand and availability under our revolving credit facility. We expect our liquidity to improve in the second half of the year as we experience the benefits of the expected production increases, lower capital investment and our scheduled fall borrowing base redetermination.

Lastly, I'd like to provide a brief update on the potential sale of our water midstream assets in the Northern Delaware area. We have made extensive progress on this front. This is a complex process involving multiple parties with a number of aspects out of our control, but we continue to be optimistic that a value-added transaction could occur this year.

And with that, Andrew, we are ready to take some questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Neal Dingmann with SunTrust.

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

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This is actually Jordan Levy, Neal's associate. I just wanted to ask how you guys view balancing kind of internal growth with external growth or kind of maintaining spending within cash flow? And how you kind of see that progressing going forward into 2020?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [3]

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Jordan, this is Dave. I think, my take on internal, external growth, or at least certainly, how we try and pour the portfolio. The first couple of years, the company -- since inception, we grew very quickly from sort of 5,000 to 20,000 barrels a day. We focus this year really on balancing capital and cash. So we don't think the market is really going to pay for growth. It's going to require a lot of tapping up -- topping up on our capital from external sources. And so when you think of internal, external, for us, it's going to be about trying to find the right balance within our portfolio. We set in, by any league table, an exceptional resource in the Northern Delaware, and we think people are going to be very excited and really -- when we truly understand and unpack the Southern Delaware potential, we think it's going to bring people to the story. We don't think doing that in a way that's going to outspend our cash makes a lot of sense. So we certainly focused on moderating growth this year to put a balanced portfolio, but we think we'll still put together a focus on both 2019 and 2020. They're going to provide very interesting rates of return, self-funded, if that answers your question.

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

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Yes, absolutely. And then if I could just ask one more. Kind of thinking about the Wolfcamp B in the North Delaware, could you just give us a little more color, Bryan, maybe on kind of the geologic properties? And how you guys are going to approach for that interval when you start testing it and having the strong technical team you do? How you kind of think about that interval in terms of the overall inventory in the north?

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Bryan Freeman, Rosehill Resources Inc. - SVP of Drilling, Completions & Production [5]

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Yes. We have drilled 3 wells in the B back in 2017, watched those wells over the last 2 full years, and while we've been doing that, actually our peers have also been very active in starting to derisk that play. If you've been following me at all, when I've talked to folks about this for the last 3-plus years, I've been saying and still feel strongly that ultimately the Wolf B interval will rival the Wolf A when it comes just to flow rate sticks and just the size of the resource. The Wolf B in the core where we're at is 700-plus feet thick. We see at least 3 sub-bench plays there, a B1, a B3 and a BB4 target. From a stick count standpoint, I wouldn't be surprised if we don't ultimately significantly increase our well count that we have in the B now. It's thick, it's porous, it's rich, it's a silty shale that -- again, that I think, really has legs to it.

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Operator [6]

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(Operator Instructions) Our next question comes from the line of Mike Scialla with Stifel.

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Jarrod Giroue, Stifel, Nicolaus & Company, Incorporated, Research Division - Equity Research Associate [7]

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This is Jarrod for Mike. Thanks for the quick update on the water assets in the north. I was just curious, what kind of synergies you guys were looking for, for a potential buyer? So I'm assuming that you guys would still want to utilize that infrastructure for your water disposal?

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [8]

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Sure, Jarrod. This is Craig. And yes, as we've talked through the year, we're looking for a partner that -- this is not their first rodeo. They've done it before. We've got to be comfortable with a partner that knows what they're doing operationally. So they've been out in the field, they've -- if we can't move our water, we can't move our production. So it's very important, that relationship will be important. Obviously, that fits like a glove ideally with the overall deal, but certainly looking for someone who's got a track record in the business of water movement, water management.

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [9]

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Jarrod, I might ask a quick -- I might add -- this is Dave. The one thing that's important for us and we talked about in the last earnings call as well is that it's important for us to build and put our own volumes through there. We don't think we want to be in a business though of marketing that capacity. So part of the synergy there is where we're providing what we think is sort of a baseload for that SWD disposable, but we're offering the ability for folks to hook in the infrastructure who might want to use other operators' volume as well, which just isn't a good role of an E&P company to spend your time to market that yourselves. So we think that natural blend will provide our volumes as baseload and somebody else to do the work of also thinking about bringing in volumes that they can enhance their returns on. We think it's a good business model.

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Jarrod Giroue, Stifel, Nicolaus & Company, Incorporated, Research Division - Equity Research Associate [10]

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Perfect. And then one more quick question. With the wells that were shut in, in this quarter for -- due to SIMOPs, do you -- for your guidance going forward, is that incorporated? If there is going to be any other shut-ins this year? Or is that something we have to keep in mind?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [11]

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That's correct, certainly for the rest of the year, I reconfirm guidance for the rest of the year. So we have summer operations where there is going to be some volume taken off-line, but in general, the focus of the second half of the year will be pretty minimal SIMOPs effect, and certainly, for 2020, we'll roll it into expectations for the year.

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Operator [12]

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And I'm showing no further questions. So with that, I'll turn the call back over to CEO, Dave French, for closing remarks.

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [13]

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Thank you, Andrew. I'd like to thank everyone for joining the call today. I hope we gave everyone a good sense of the spring and early summer Rosehill activities and a preview for the fall. For us, there really is no substitute for good execution on picking the right targets and drilling solid wells. Rosehill will create shareholder value through relentless and disciplined delivery on the potential of our acreage. Expect nothing less from us as a company. Take care, and enjoy these last fading days of summer.

This concludes our second quarter earnings call. Thank you for your interest in Rosehill, and have a great day, everyone.

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Operator [14]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a wonderful day.