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Edited Transcript of ROSE earnings conference call or presentation 15-May-19 3:00pm GMT

Q1 2019 Rosehill Resources Inc Earnings Call

NEW YORK May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Rosehill Resources Inc earnings conference call or presentation Wednesday, May 15, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian K. Ayers

Rosehill Resources Inc. - SVP of A&D and Geology

* 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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* 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

* Michael Stephen Scialla

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

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

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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 Q1 2019 Conference Call. (Operator Instructions) As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, John Crain, Director of Investor Relations at Rosehill. Please go ahead.

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

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Thank you, Chris. Good morning, everyone, and welcome to today's conference call to review the Rosehill Resources' first quarter 2019 operating 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, our Senior Vice President of Operations, who will provide an operational review; and Craig Owen, our Chief Financial Officer, who will provide a review of financial results for the quarter. We will have a question-and-answer session, and Dave will then close the call with some brief comments. Also, joining us today on the call is Brian Ayers, our Senior Vice President of A&D and Geology; and Colby Williford, our Senior Vice President of Land and Marketing.

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 results to differ materially from what we discuss. 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 First Quarter 2019 Earnings Call. As many of you know, I joined Rosehill as President and Chief Executive Officer in April, taking over day-to-day leadership of the company from Gary Hanna who remains Chairman of the Board. Since that time, I've been heads down on getting to know the teams at Houston and Midland, learning our track record and appraising the opportunities in front of us. We also have strong momentum in one of the most prolific basins in North America. I look forward to building on the good work done before me and continuing to position the company for success.

Moving to our quarter update. 2019 has been decidedly active in both of our operating areas. Although new volumes were unreflected in the quarter since we have not placed any development wells on until late March, production was nearly flat compared to the previous quarter and averaged approximately 21,500 barrels a day, BOE per day. This was accomplished due to a combination of returning some higher GOR wells shut in for production as gas infrastructure came online, which mostly impacted our commodity mix for the quarter and some other operational efforts, which Bryan will review later in greater detail. There will be an even higher level of activity in the second quarter, and this will drive production adds in the second half of 2019.

We're excited to announce our most recent well results in our emerging Southern Delaware area. The installation of electric submersible pumps, or ESPs, on each new well posted quality IP24 rates consistent with the expectations previously provided. These well results compare very favorably with offset wells normalized for lateral length and underpin our confidence in ongoing development of the asset. The trifecta of one, good rates; two, higher liquids content; and three, low well development cost help check a lot of boxes. Bryan will share additional details of each results as well as updates on our Northern Delaware area in the operational review.

As previously guided, our development spend for the full year 2019 will be weighted towards the first half of the year. We are seeing shorter drilling times and an acceleration of completion dates on our operating acreage, and we're working to feather in the drilling requirements associated with our farm-in deal announced last quarter.

Given our strength and liquidity profile, we do not expect additional funds flow -- funding requirements and anticipate our 2019 capital plan to be approximately equal to adjusted EBITDAX.

We have a busy summer ahead, drilling 3 more wells this month and completing a baker's dozen of 13 wells before our drilling operations pick back up in the fall.

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

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

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Thank you, Dave. The first quarter was indeed very busy as we operated 2 rigs, drilled 11 wells and completed 6 wells. We exited the quarter with 13 drilled uncompleted wells, or DUCs. In late March, we began placing 6 wells on to production in our Southern Delaware area targeting the Wolfcamp A and B formations. Soon after initial flowback, we installed ESPs on each well and have obtained IP24 rates ranging from 938 to 1,428 BOE per day, consistent with our expectations for uplift as compared to natural flow. Since these wells have not collectively reached 30 days of production from ESP installation, we provided the IP14 in our press release, and we look forward to providing the IP30 rates for these wells once they are available.

In our Northern Delaware area, we were active during the quarter in drilling a 4-well pad located on the river reef beginning completion operations on these and other wells and our DUC inventory. In late April, we placed onto production Z&T 20 E006 wells, targeting the second Bone Spring Sand formation. The well average net production of 1,457 BOE per day, 73% oil or 331 BOE per day per 1,000 feet after 7 days, which is an encouraging data point for this emerging formation.

As Dave mentioned, our teams worked hard during the first quarter to keep production nearly flat from the fourth quarter despite not bringing on any new wells to production until late March. Along with bringing previously shut-in wells back online, we also installed an ESP on our legacy well in Northern Delaware. With results detailed in our press release, this is our second ESP installation in the Northern Delaware with both projects providing a significant uplift in each well's production profile, representing a superior economic return on our capital. Along with these well results, we've experienced impressive progress on drilling and cost efficiency in both of our operating areas through the beginning of 2019. In the Northern Delaware, we're currently averaging 15.3 days per well compared to 19 days in 2018, a 19% improvement. Our wells in the South are averaging 14 days in 2019 compared to 21.4 days for 2018, an equivalent of 35%.

The drilling time improvements are one driver of the lower well costs we're beginning to realize. So far, in 2019, we are seeing well costs below $7 million in both of our operating areas for 1-mile wells.

Along with operational efficiencies, well costs are also being driven lower by procurement efforts, focused on all categories of spending, including completions, cementing and tubular goods. We plan to stay focused throughout the year on controlling well costs and further improving operational efficiencies.

For operating costs, the first quarter was impacted by higher produced water handling costs associated with issues related to a third-party operated SWD well in our Southern area. Since that time, we brought on over 40,000 barrels of additional capacity from 2 SWD wells and expect our water handling cost to decrease going forward. This caused cash operating cost to increase 23% compared to the fourth quarter, although year-over-year, cost decreased by 23%.

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

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

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Thank you, Bryan, and good morning, everyone. I'm happy to report on our strong financial results for the quarter. Fourth (sic) [first] quarter revenues were $79 million and production totaled 21,478 BOEs per day comprised of 70% crude oil; 15% NGLs; and the balance, natural gas. For the first quarter of 2019, Rosehill reported a net loss of $38 million or $2.75 per share, which included $103.5 million noncash pretax loss on commodity-driven instruments. And we generated adjusted EBITDAX of $46.5 million for the quarter, an increase of 33% compared to first quarter of 2018. Our realized oil price for the first quarter averaged $48.90 per barrel of oil and total equivalent realized price of $37.18 per BOE, both on an unhedged basis.

Turning to cost. Total cash operating expenses were $24.3 million or $12.55 per BOE, which consisted of $10.4 million in direct lease operating expenses or $5.36 per BOE, $8 million in cash G&A expense or $4.16 per BOE, $2.4 million in gathering and transportation expense or $1.22 per BOE and $3.5 million of production taxes or $1.81 per BOE. As Bryan mentioned, our cost in the quarter were impacted by onetime event associated with a third-party SWD well in our Southern Delaware area that resulted in an increased lease operating expense. Since that event, we have brought on additional water disposal capacity in the South. And going forward, we expect cost to trend back to previous levels.

Total liquidity as of March 31, 2019, was $99 million. This amount increased to $121 million shortly after close of the quarter when we received proceeds of $22 million from the previously announced sale of our assets in Lea County, New Mexico. We feel this level of liquidity is strong given our balanced capital plan for 2019, but we continue to look for opportunities to enhance this through asset sales and continued increases in our borrowing base.

Lastly, I'd like to provide a brief update on the potential sale of our water midstream assets in the Northern Delaware area. We continue to work through this process and remain focused on making determination for these assets very soon. We've received strong interest in these assets given the highly strategic location of the water system and want to ensure that we meet our paramount objectives of finding the right partner and at the right valuation.

And with that, Chris, we are ready to take 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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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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My first question, after all the results you put out on the Southern Del, looking at Slide 9, 2 questions around that. Based on what deems to be pretty positive results, I think, on all those wells, looking at both the Trees Estate and the State Blanco, I am just wondering based off of those, now that those are in the books, how do you think about cadence and just sort of thoughts about that area going forward now as far as for the remainder of the year and into 2020?

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Brian K. Ayers, Rosehill Resources Inc. - SVP of A&D and Geology [3]

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Neal, Brian Ayers here. We've got a pretty well-defined drilling program laid out into 2020. Of course, you know we farmed-in roughly 2,000 acres just south of that Trees and State Blanco track and we drilled our first 2-mile well right in the guts of it. That well is going to be completed here in a few weeks.

Our plans are to drill another 4 -- well, it's a spud, at least 4 wells and 5 if the clock works right in the rest of the year, largely south of that State Blanco and Trees blocks. All of those will be 2-mile wells, except for one, and then we will probably keep a rig largely busy in here all of 2020.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [4]

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Okay. And Brian, just to tack onto that, looking at Slide 7 on the spacing. Do you still feel confident in that? I think you've shown the 4 to 6 wells per section. Could you just maybe talk a little bit about that for -- as you target these wells? Will you continue kind of in that spacing pattern?

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Brian K. Ayers, Rosehill Resources Inc. - SVP of A&D and Geology [5]

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Yes. We have built a lot of science into what we've done out here, Neal, and started out with kind of a blank sheet. And so far, all of the science that we've done has told us that this spacing is probably right. If anything, we may have some data that shows us we could maybe down-space a touch. So your 6-well spacing, depending upon some more work to do here, we may wind up being 8. But we'll know here a little bit in a few months.

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

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Okay. And then lastly, David, for you. Now that you've been there, analyzed some things, I know the plan is set to sort of spend within cash flow. Do you still feel pretty good about that plan as far as, I guess -- the question would be is production and sort of ultimately free cash flow still on line from as far as you see everything?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [7]

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Yes. That's the plan, Neal. I think when we looked at it, obviously, we'll have -- as I said in my opening, the lion's share of the capital will be spent in the first half of the year. As Brian talked about, we've got the 5 wells planned for the second half of the year and really are going to look at what that rolls into 2020, but don't expect really to be outspending EBITDAX for the year. We should be in line. With that general forecast with volume, I would say the volume wedge associated with the development in the first half of the year with summer really coming on in third quarter.

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Operator [8]

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And our next question comes from the line of Jeffrey Campbell with Tuohy Brothers.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [9]

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David, welcome aboard. It sounded -- I just want to clarify this. It sounded like based on the update that Craig gave in the remarks that you intend to retain some ownership on the water assets as opposed to a full sale of the asset, is that correct?

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [10]

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Yes. This is Craig. Yes. Well, that's correct from the standpoint of our areas. We intend -- if we do sell, we intend to sell our Northern position. That's what we're marketing right now. But we intend to hold onto our Southern water assets at this point.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [11]

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Okay. I was wondering when I look at your work in Loving, I see type curves for the upper and lower Wolfcamp A and the second and third Bone Spring Sands. I'm just wondering, are these the 4 go-to zones for the next couple of years? And I was also wondering if you're doing any multi-bench development currently or will perhaps over the next 12 or 18 months?

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Brian K. Ayers, Rosehill Resources Inc. - SVP of A&D and Geology [12]

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Yes. In fact, we are developing -- if you flip to Page 12, those 3 type curves are often drilled in the same pad, the same time. There's no break. There's no barrier between the top of the third Bone sand and the base of that lower A shale. So we drill and frac those in 3- and 4-well clusters as one tank. Those are the best rocks out here. That, along with the second Bone Spring Sand, will be the focus of wells going into 2020, although we're also going to start growing some Wolfcamp B wells. We see a substantial amount of -- I mean some serious upside in the Wolf B.

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Jeffrey Leon Campbell, Tuohy Brothers Investment Research, Inc. - Senior Analyst of Exploration & Production and Oil Services [13]

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Right. And the Wolfcamp B is a good chunk of your inventory there, too, so some good results that are important. If I could ask just one last one. We're seeing some pretty dramatic reductions in drilling days down in Southern Delaware. Just wondering if you could add a little color on what's behind the improvement. And what I'm really wondering is, is this just primarily better logistics? Or are things like the 3D seismic or maybe optimizing fluids is contributing to faster drilling?

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Bryan Freeman, Rosehill Resources Inc. - SVP of Drilling, Completions & Production [14]

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Yes. Thanks. This is Bryan Freeman here. A lot of it we've moved from doing science wells to sort of to do development wells. Also, as we progressed over the last year or 2, you break the wells down by sections, the surface, intermediate, curve and lateral. We've somewhat struggled over the last year or 2 with improving in the lateral until here recently this year, 2019, we've worked with a bit -- vendor to develop a little different bit and also another power section, a 7-inch power section in the lateral. That, in itself, has greatly reduced our drilling times. We're able to single trip the laterals versus we were struggling with 3 trips.

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Operator [15]

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And our next question comes from the line of Jeff Grampp with Northland Capital.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [16]

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Question on the oil mix front. I think you guys touched on in the prepared remarks a bit, the oil mix (inaudible) well seems maybe a little bit better than some of the prior type curves that you guys had put out. So I guess, first, wanted to see if that's a fair conclusion or if maybe you guys expect some GOR change over time on those wells. And more broadly, how you guys are expecting oil mix to trend over the remaining of the year given that it seemed like first quarter had a little drop in oil mix.

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [17]

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This is Dave French. Obviously, the wells are sitting on that 90% range. I think we're not seeing lift or no lift or material change in that. So the guys are really liking the liquids evolution. I think we -- I mentioned in my opening remarks very briefly that we had a little bit of an uptick in the gas side of the business just because we've moved -- we've been able to reduce significantly our flare, so we added some flare volumes back in the portfolio. But as we add new wells on and they're coming in at kind of the 90% liquid side, we're going to see that GOR -- that sort of overall gas content trend itself down to more of what you would have expected coming into the year.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [18]

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Okay. Great. And my follow-up on kind of the to-do list, if you will, or objectives that you guys laid out in the slide deck. I know Craig touched on the water side, but was wondering if you guys could have any broad commentary or just drill down more on the simplify and strengthen balance sheet objective that we're looking for a check box on. Is there any kind of commentary you guys could provide on the particulars of things you could be looking to achieve here?

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [19]

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Sure. Jeff, you hit on it. Water -- any asset sale -- we sold the New Mexico assets we had. That helped. If we sell water, certainly, that will help. We'll intend to use those proceeds to pay down our positions on debt and possibly some of our higher-cost financing.

But beyond that, certainly, borrowing base should continue to move up, give us more liquidity and flexibility. But we are looking and we've talked about this over the last 6 months or so, we'd love to simplify our balance sheet from a complexity standpoint, and we like to get into the high-yield market should it -- obviously, it's opened up a little bit. It's not great. We're well positioned opportunistically to hit the market if and when it's available. If it is, we would like to issue potentially there and pay down our second lien -- or refinance our second lien debt and refinance our Series B preferred. Anything on top that, we'll pay down our revolver.

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Operator [20]

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(Operator Instructions) And our next question comes from the line of Michael Scialla with Stifel.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [21]

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Brian, you mentioned you're developing the third Bone Spring and the Wolfcamp XY simultaneously. I am just wondering, do you have any sections yet where you've developed the majority -- I'm looking at Page 7, the majority of those Bone Spring and Wolfcamp zones to get a sense of what kind of vertical or horizontal communication you might be looking at? Or are there any plans to fully develop a section, near term?

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Brian K. Ayers, Rosehill Resources Inc. - SVP of A&D and Geology [22]

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The only section that we have that we've developed fully across those 3 zones is that little half section we call Kyle 24. It's the block in the Northeast. And when we completed them all at the same time, we drilled a 5-well pad there in kind of May or June of 2017, it's producing like it's one tank. We haven't fully developed anything else yet. We are very cautious about timing. Mike, it's a 4D problem. It isn't just a spatial one. And so we're very conscious of that whole parent-child concept and how we work through that. But the plans are within probably the next year, we will have fully developed in those 3 benches at least one more track.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [23]

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Okay. And just want to confirm, you mentioned drilling and completing faster than the original plan had anticipated with most of the spending in the first half. Just want to get an idea on the full CapEx and production guidance for the year, if there were potentially any changes coming there.

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [24]

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Mike, it's Craig. As Dave mentioned, we still expect to be balanced. We've got a lot -- we're very excited about the South. The 6 wells just turned on. We want to get a little more history there before we do anything different on the production guidance and so forth, but we're confident that we can land it. Our CapEx with that EBITDA -- we'll update as we go more through the year, but that's kind of where we sit in.

We'll soon -- we're running one rig right now. We're about to send that rig off in a couple of weeks and pick it back up in the fall and complete what we have. So we'll be active this quarter. We'll be active all quarters, but take a pause in the third quarter and hit the accelerator again kind of late third quarter, early fourth. That gives you an idea of pace.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [25]

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That helps. Does that one rig bounce between the North and the South? Or does it stay in one area? Is it staying in the South? Or...

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Robert Craig Owen, Rosehill Resources Inc. - Senior VP & CFO [26]

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Well, right now, it's in the North. It will come back in the South and that works.

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Michael Stephen Scialla, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [27]

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Great. Okay. Just one last one for me. Dave, any thoughts at this point on any changes you might make at a high level for the company and where you see the company going over the next couple -- 2, 3 years?

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [28]

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I think we're going to really think about the pace and scale of the development of the South. I think the early results are quite good, but that's going to be driven by, as Brian puts that crew back in the field in the fall, we're going to spend some time this summer looking at the development. We've got -- as I described in my opening, we feather in also the commitments associated with the farm-in. So you'd be seeing us predominantly develop in the fall in the South and into next year. But as other Bryan talked about, I have 2 very high-quality Brian leaders on my team. We're going to be coming to the North and thinking a lot about the Wolfcamp B and that development. So those combination within the Delaware Basin are going to drive our attention certainly in the near future. I think that combination looks quite good.

I don't see a material change in direction. I think it's really thinking about how to stay balanced as we do that. So focus on capital discipline, thinking about when that development occurs. And then Craig and I are thinking about the extent that we can do some balance sheet work opportunistically, that will be the focus for the fall.

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Operator [29]

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Thank you. And that does conclude today's question-and-answer session. I would now like to turn the call back to David French, CEO, for any further remarks.

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David Lawrence French, Rosehill Resources Inc. - President, CEO & Director [30]

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Thank you, Chris. I'd like to thank everyone for joining the call today. As you can tell, the team is excited about the continued strength of the Delaware Basin. We got a solid anchor business in the North, a commercial validation of our Southern acreage potential and the additional portfolio muscle unlocked with our recent farm-in.

These coming months will be busy, and I look forward to continue to meet and to hear from our investors. It's a great time to tell our story and an important and pivotal time to join as a leader and as a shareholder.

This continues -- or this concludes our first quarter earnings call. Thank you for interest in Rosehill. And everyone, have a great day. Take care.

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Operator [31]

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