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Edited Transcript of RVRA.PK earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 Riviera Resources Inc Earnings Call

Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Riviera Resources Inc earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* C. Gregory Harper

Riviera Resources, Inc. - Director

* Daniel Furbee

Riviera Resources, Inc. - Executive VP & COO

* David B. Rottino

Riviera Resources, Inc. - President, CEO & Director

* James G. Frew

Riviera Resources, Inc. - Executive VP & CFO

* Paula Melancon

Riviera Resources, Inc. - Director of IR

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Conference Call Participants

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* Ronald Eugene Mills

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

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Presentation

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Paula Melancon, Riviera Resources, Inc. - Director of IR [1]

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Good morning, and welcome to Riviera Resources Second Quarter 2019 Earnings Conference Call. Today's call is being recorded. This is Paula Melancon, Director of Investor Relations. And in a moment, I will introduce David Rottino, our President and Chief Executive Officer.

But first, I need to provide you with disclosure regarding forward-looking statements that will be made during this call. The statements describing our beliefs, goals, plans, strategies, expectations, projections, forecasts and assumptions are forward-looking statements. Please note that the company's actual results may differ from those anticipated by such forward-looking statements for a variety of reasons, many of which are beyond our control. Additional information concerning risk factors relating to our business, prospects and results are available in the company's filings with the Securities and Exchange Commission, including the company's Form 10-Q for the quarter ended June 30, 2019, which we plan to file later today and any other public filings and press releases.

Additionally, to the extent we discuss non-GAAP measures such as adjusted EBITDAX and adjusted EBITDA, please see our earnings press release for the calculation of these measures and the GAAP reconciliations. Additional information can be found on Riviera Resources website at www.rivieraresourcesinc.com in the Investors section.

I will now turn the call over to David Rottino, Riviera's President and CEO.

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David B. Rottino, Riviera Resources, Inc. - President, CEO & Director [2]

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Thanks, Paula, and good morning, everyone. We appreciate you taking time today to join us for the review of Riviera's second quarter 2019 results. Joining us today are Greg Harper, President and Chief Executive Officer of Blue Mountain Midstream; Dan Furbee, Riviera's Executive Vice President and Chief Operating Officer; and Jim Frew, Riviera's Executive Vice President and Chief Financial Officer.

On our call today, I will provide an overview of Riviera's strategic initiatives and second quarter results, and then turn the call over to my colleagues to discuss our upstream activity, Blue Mountain Midstream business and financial results.

Riviera continues to deliver on our commitment to drive shareholder value through our strategy of capital discipline, returning capital to shareholders and efficiently managing our assets. Because we continue to believe the company is undervalued, we have been aggressively repurchasing shares. In the last 12 months, we have repurchased more than $270 million of Riviera shares, reducing the company's outstanding share count by over 20%. In 2019 alone, we have repurchased approximately $121 million of shares, including our recent tender offer. The company expects to continue buying back shares and has increased our share repurchase authorization to $150 million.

We continue to opportunistically monetize assets and use the proceeds to fund our share repurchases. Year-to-date, we have closed 4 transactions, generating approximately $216 million in proceeds. The closed transactions include the Arkoma Basin, Michigan, certain non-operated assets in the Hugoton Basin, and our helium VPP. Furthermore, we have 2 smaller sales transactions under contract that we expect to close in the third quarter. The pending transactions include noncore assets in Louisiana as well as our remaining position in Illinois. These transactions align with our overall strategy of opportunistically pursuing asset sales and returning capital to shareholders as long as we believe we are receiving fair value for the assets sold and our stock continues to trade at or below net asset value.

Greg will be covering Blue Mountain in more detail later, but we continue to be excited about its future growth prospects. The business continues to grow within the prolific SCOOP/STACK/Merge play. In addition to gas gathering and processing, Blue Mountain began providing water gathering services in the second quarter, handling nearly 5 million barrels of water in its first quarter of operations. Additionally, the team expanded its offerings to include crude gathering. With a strong anchor tenant, we expect Blue Mountain will have a myriad of opportunities to grow its midstream business and add new producers to its customer list. Blue Mountain plans to grow the midstream business to a position where we can either sell, merge or have it be a stand-alone public company, and we continue to work with Tudor, Pickering, Holt & Co. to assess strategic alternatives to best position Blue Mountain towards a value-enhancing transaction.

Turning now to our second quarter performance. Riviera delivered strong operational results. The upstream business outperformed adjusted EBITDAX guidance due to higher production and lower operating cost. In fact, second quarter adjusted EBITDAX was 25% higher than our original guidance. This is the fourth straight quarter that Riviera has beat guidance on adjusted EBITDAX.

With respect to our drilling inventory, we continue to be excited about our high rate of return investment opportunities and believe this inventory is not valued in our current share price. So far this year, we have turned to sell 6 wells in our Northwest STACK position and 2 wells in our prolific Ruston field in North Louisiana with strong results. In a few minutes, Dan will give you more details on both programs.

In the second quarter, Blue Mountain's operational performance was strong. The Cryo plant continues to operate as designed, and uptime was greater than 99%. The team is hitting key milestones in completing its water handling infrastructure and has found ways to lower the capital intensity of the water business. Furthermore, the team has initiated its oil gathering infrastructure buildout, which we believe will be a win for Blue Mountain, its customers and the community.

Though we are proud of what we achieved during the second quarter, we're even more encouraged about the prospects moving forward given the strength of our unique asset base. Riviera upstream is well positioned with a combination of mature, low-decline assets, generating significant free cash flow in addition to tremendous growth assets, including positions in the Northwest STACK, East Texas and North Louisiana. Blue Mountain has an excellent existing footprint and also has attractive growth prospects.

Finally, our extremely strong balance sheet gives us tremendous flexibility. Taking all these factors together, Riviera remains well positioned in the current market. Before handing it over to Dan, I wanted to take a moment to thank the Riviera employees. As we reach our first anniversary as a company, I look back on what we have accomplished together with pride. Employees have been working extremely hard to optimize the value of our assets, and I am extremely appreciative of their efforts. I think we have a first class organization, and I'm fortunate to work with this team each and every day.

I will now turn the call over to Dan to discuss the upstream operations in more detail.

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Daniel Furbee, Riviera Resources, Inc. - Executive VP & COO [3]

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Thanks, Dave. We had another strong quarter in which production averaged 286 million cubic feet equivalent per day, up 8% from the first quarter, even with the closing of the non-operated Hugoton Basin sale at the end of May. Production was above the high end of our prior guidance and was driven by strong results from our 2019 operated drilling program and lower-than-expected downtime within our mature asset base. Operating cost were in line with expectations, while capital came in slightly below guidance as well.

During the second quarter, we completed our operated drilling program in both the Northwest STACK and North Louisiana. The company has turned to production 6 wells in Northwest STACK and 2 wells in North Louisiana. As discussed on prior calls, we are currently evaluating the results and have no current plans to drill additional wells in 2019.

In the Northwest STACK, all 6 wells have at least 30 days of production, and the early results are positive, with an average IP30 rate of approximately 670 barrels of oil equivalent per day with 55% oil and 72% liquids. All 6 wells are single-mile laterals, consisting of 4 wells producing from the Meramec formation and 2 producing from the Upper Osage. This demonstrates the potential of at least 2 viable formations in this part of our asset. Our estimated capital cost in this Western Major County area is $4.9 million to $5.2 million per well, which is expected to generate a 30% to 40% IRR.

As I mentioned earlier, in the Northwest STACK, we plan to suspend drilling operations to evaluate results, continue to refine our geologic models through additional mapping and 3D seismic acquisition, and continue our participation in the non-operated activity in the area. We will determine the details of our next phase of operated drilling later this year, which will be designed to best realize the value of our significant leasehold in our core Northwest STACK position. As a reminder, we have approximately 70,000 net acres of our core position as well as over 100,000 net acres in our broader Anadarko Basin position, and we are working closely with the Blue Mountain team on securing downstream solutions for our production.

In North Louisiana, we continue to monitor the results of the 2 wells we completed this year. As a reminder, these horizontal wells are drilled in the Cotton Valley Upper Red formation for an average capital cost of approximately $6.2 million per well. The average choke-restricted IP30 of these wells is approximately 20 million cubic feet equivalent per day, consisting of 99% natural gas; and the 2 wells have a current combined cumulative production of approximately 4.5 Bcfe in less than 4 months. These wells are expected to generate greater than 100% IRR and payback in less than 12 months. Also, the production from this asset receives very favorable natural gas pricing relative to other basins due to its proximity to growth demand centers on the Gulf Coast. We are currently evaluating the potential for future development in this North Louisiana asset.

With that, I will hand it off to Greg to discuss Blue Mountain.

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C. Gregory Harper, Riviera Resources, Inc. - Director [4]

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Thank you, Dan. Blue Mountain had a very eventful second quarter as we launched our water management business and immediately began executing on our full services contract for Roan Resources beginning April 1, providing both truck hauling and water disposal via third-party disposal wells. During the quarter, we hauled approximately 5.1 million barrels of water, averaging nearly 56,100 barrels per day for Roan and another customer. I'll discuss this business in a bit more detail in a minute, but first, let's cover the gas and processing business.

In the second quarter, Blue Mountain averaged 120 million cubic feet per day of gathering throughput volumes, producing approximately 10,590 barrels per day of NGLs. During the quarter, we connected 2 wells, and 5 wells turned to sales on our system. However, throughput volumes were slightly impacted as our primary customer temporarily shut in 5 wells due to hydrofracturing of neighboring wells. Looking at the second half of this year, we still expect throughput volumes in our Cryo plant to increase based on the current well attachment schedule provided by our customers.

In addition, we expect to add approximately 5 million cubic feet per day of new third-party volumes through our Cryo as early as the fourth quarter of this year through an acquisition of a natural gas gathering system in close proximity to our Merge system. On August 5, 2019, we acquired 100% interest in Lumen Midstream Partnership LLC, including approximately 55 miles of natural gas gathering pipelines and an 18.5 million cubic feet per day processing plant. The acquisition secures us over 15 new customer relationships, 3 of which are operating rigs in the area. As important, the current production volumes will be rerouted to our highly efficient Cryo plant, increasing our fee-based revenues and recoveries for our new customers. The Lumen system and an interconnection to the Blue Mountain system will come at a total investment of less than $5 million. I'm excited about the addition of this system as it extends our reach into the Merge toward the SCOOP, providing additional opportunities for our 3 gathering service options for gas, water and crude oil.

Also looking at other opportunities to increase throughput volumes at our Cryo, we have entered into 2 new interconnect agreements with regional processors to receive offloads and/or exchange volumes not tied directly to our system.

Okay. More on the water business, which as I said before, is off to a great start, providing us new steady cash flow stream contributing over $800,000 of adjusted EBITDA in the second quarter. As I mentioned on our last call, our goal is to rapidly transition water volumes to pipe and Blue Mountain-owned disposal wells as these are the greatest margin contributors. We are working diligently and have made significant progress on transitioning our water services from truck hauling with third-party disposal, to pipe gathering with Blue Mountain-owned and operated disposal wells, or SWDs, for short. We installed 38 miles of water gathering lines and have connected to 10 pads thus far with our first pipeline segments flowing water last month. In addition, we acquired the land and permits for 2 SWDs, and expect at least 1 to be operational as early as September.

Regarding treatment and recycling, we have identified a more capital-efficient technology which has reduced our estimated CapEx for the initial water bill by about 20% while still providing Roan ample recycling capacity. We're now estimating $47 million of capital expenditures for the initial pipe and SWD build, with $43 million expected to be incurred in 2019. Having said that, we're still projecting $18 million to $20 million of adjusted EBITDA attributable to the water business once the initial facilities are fully commissioned in early 2020.

Moving to crude oil. I'm very pleased to have announced last month the extension of our midstream services into crude oil gathering and our ability to now offer our anchor customer, Roan, and future producer customers with a 3 stream service offering for gas, water and crude oil. A definitive agreement with Roan Resources will provide crude oil gathering services consisting of an 89,000 net acreage dedication in 9 townships in Central Oklahoma. The initial build will consist of 51 miles of gathering pipeline capable of transporting up to 60,000 barrels per day with 2 downstream interconnections with direct access to the Cushing markets. We have commenced construction on the crude oil system and expect commercial in-service for the initial facilities beginning by year-end.

From a growth perspective, our water and crude oil gathering systems, we have launched an open season, offering prospective third-party producers the opportunity to secure pipe gathering for the remaining initial build capacities with ability to extend and expand our systems based on the outcome of the open season and future producer commitments. I'm excited to see the ultimate results later in Q3 of the open season as we continue to expand our existing Merge asset footprint and grow our fee-based business while diversifying our customer base.

Now a little color on our second quarter financial results for the Blue Mountain business segment. During the second quarter, we delivered approximately $6 million in adjusted EBITDA. We were impacted by this quarter's overall lower commodity prices, including a 20% reduction in the weighted average barrel NGL price from Q1. Despite this major challenge, Blue Mountain's Q2 adjusted EBITDA decreased less than $1 million from the first quarter results benefited primarily due to the new fee-based water margins and steady gas throughput volumes. In the second quarter, this business did continue to be impacted by the NGL pricing differentials at Conway and Mont Belvieu. The elimination of the basis exposure would have added over $700,000 to Blue Mountain's margin.

As I mentioned before, we expect throughput volumes at our Cryo plant to increase over the second half of the year as we're projecting up to 22 wells turned to sales on the Blue Mountain system between Q3 and Q4. With that said, we're still evaluating how Roan's shut-in schedule and preloading of existing wells will impact the timing of the volume ramp for the balance of the year and into Q1 2020. However, with gas volumes growing and our water and crude oil services going into full effect in 2020, we clearly have a solid foundation of contracted EBITDA growth, which will further improve with any new business development that we secure.

Lastly, I want to mention our process with Tudor, Pickering, Holt & Co. is well underway as we explore the various alternatives that can truly eliminate the value of the Blue Mountain enterprise as we continue to execute our strategy to become a multiservice, growth-oriented midstream company.

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James G. Frew, Riviera Resources, Inc. - Executive VP & CFO [5]

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Thanks, Greg. Before opening the call up for Q&A, I'd like to discuss the following items: One, second quarter financial performance; two, balance sheet and liquidity; three, share repurchases; and four, 2019 upstream guidance.

For the second quarter of 2019, daily production averaged approximately 286 million cubic feet equivalent per day, exceeding the high end of our initial quarterly guidance. Total oil, natural gas and NGL revenues were approximately $67 million. Of that, approximately 70% of the revenue was from natural gas sales, 15% was from oil sales and the remaining 15% was from the sale of NGLs.

With respect to costs, operating expenses for the second quarter were approximately $44 million, which was below the low end of our previous guidance. While lease operating expenses and transportation costs were in line with guidance, the company benefited from a onetime Texas sales and use tax refund. General and administrative costs, excluding share-based compensation and severance costs, were approximately $10 million in the second quarter. Of that, approximately $7 million was incurred by the upstream business and the remaining $3 million was attributed to Blue Mountain. The upstream general and administrative costs, excluding share-based compensation and severance costs, was at the low end of second quarter guidance.

In the second quarter, Riviera invested approximately $41 million of capital. Riviera upstream capital was approximately $17 million while Blue Mountain invested approximately $24 million. Riviera's oil and natural gas capital investment during the second quarter was slightly below guidance due to timing.

With respect to the balance sheet and liquidity, Riviera and Blue Mountain have established separate credit facilities. As of June 30, 2019, there were no borrowings outstanding under Riviera's revolving credit facility and approximately $211 million of available borrowing capacity inclusive of outstanding letters of credit. In July 2019, Riviera's borrowing base was reduced from $245 million to $230 million in connection with the closing of the Michigan asset sales.

Blue Mountain has established a separate credit facility with total borrowing commitments of up to $200 million. As of June 30, 2019, Blue Mountain had approximately $33.5 million drawn on its credit facility and approximately $155 million of available borrowing capacity inclusive of outstanding letters of credit, subject to covenant restrictions in the Blue Mountain credit facility. As of June 30, 2019, Riviera's ending consolidated cash balance was approximately $80 million. Including the $33.5 million drawn on Blue Mountain's credit facility, the company had approximately $47 million in net cash.

The company successfully executed a tender offer to repurchase approximately 2.67 million shares for a purchase price of $15 per share on July 16, 2019. As a result of the successful tender offer, the company returned $40 million to shareholders. Through the last 12 months, the company has been buying shares under a previously established $100 million repurchase authorization. Since inception through July 31, 2019, Riviera has repurchased approximately 6.9 million shares, for a total cost of $99 million. On July 18, 2019, the company increased its share repurchase program by $50 million, bringing the total repurchase authorization to $150 million. As of July 31, 2019, Riviera had approximately 60.6 million shares outstanding.

Looking ahead, we have provided upstream-only guidance for 2019. In our supplemental presentation posted to our website today, we highlight the full year 2019 upstream guidance, taking into consideration the noncore North Louisiana and Illinois divestitures expected to close in the third quarter. Our pro forma full year adjusted EBITDAX forecast for our upstream assets is $91 million. With respect to capital, the upstream business expects to invest $68 million in 2019. Approximately 80% of the upstream capital will be devoted to drilling, with the balance dedicated to leasing, seismic and other needs. Blue Mountain expects to invest $120 million in 2019. Approximately 36% of the Blue Mountain capital is to construct a water gathering system in the Merge, and approximately 15% will be used to build a crude gathering system. The remaining capital is allocated to natural gas gathering.

In closing, our assets performed well in the second quarter, and our balance sheet allows us great flexibility. Moving forward, we continue to look for opportunities to maximize shareholder value, and we are committed to finding ways to return capital to shareholders.

With that, I will hand it over to the operator to open this call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question on the line from Ron Mills with Johnson Rice.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [2]

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Quick question. Just on the drilling, as you continue to evaluate both Northwest STACK and North Louisiana, when you look forward, those are really kind of the 2 potential growth-y areas. Any preference in terms of capital allocation between Northwest STACK and North Louisiana? And maybe as a help to answer that question, what kind of running room do you have in each area?

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Daniel Furbee, Riviera Resources, Inc. - Executive VP & COO [3]

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Ron, this is Dan. In terms of running room, I mean, Northwest STACK in our greater Anadarko position is where we have a lot more running room. We have 100,000 acres throughout the Anadarko Basin, 70,000 acres in our core area in kind of Northern STACK Major County, Northern Blaine. And the results we've seen there so far, we're very encouraged by. We drilled 6 wells; 4 were in the Meramec, 2 in the Upper Osage. The returns we're seeing right now, even at current pricing, is an attractive return. And we think we're getting better from what we're learning in our -- from our initial program. We're really nearing down on our targeting, and our completion design is getting, I think, more efficient. So we're encouraged there.

North Louisiana is just an amazing reservoir. The 2 wells we brought online, as we talked about, worth 20 million a day, IP30 each. URs and returns on those wells will generate 100% rate of return even at the current gas strip. I guess the one negative there is we do not have the same inventory there as we do in Northwest STACK. We have probably 15 remaining locations within that North Louisiana position, talking about Terryville-ish type results of the downturn side of that Terryville fault. North of that fault, there's some other potential that we're currently looking at. May test a well there at some point, that would expand the inventory. But right now, most of the float would be Northwest STACK.

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Ronald Eugene Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [4]

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Okay, great. And David, maybe for you. On your slide deck, you and I have talked about this sum of the part slide quite a bit, and the stub piece continues to get smaller and smaller. Beyond the Blue Mountain process that's going on, and clearly, the stock buyback has been a big focus of yours. How do you view going forward kind of free cash flow the allocation of that to buybacks? Do you consider a dividend at some point? Just -- or what else can you do to highlight this value on this slide?

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David B. Rottino, Riviera Resources, Inc. - President, CEO & Director [5]

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Yes. Thanks, Ron. Yes, as we continue to produce that slide every quarter, as you pointed out, the number gets smaller and smaller, which becomes an increasingly frustrating point, I think, to all of us here, and I know, a lot of our shareholders. But I do think it presents an opportunity. I think, as you mentioned, with the free cash flow that we generate from just the underlying assets as well as the potential to sell assets, I think a combination of buying back shares and returning capital to all shareholders is what we're focused on. But obviously, the smaller that number becomes, the more attractive the share repurchase program becomes, and that's why we've focused a lot of our free cash flow on that. So yes, thanks for pointing that out.

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

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And then lastly, maybe for Greg. You talked about this Lumen transaction. It's $5 million. It clearly opens you up to additional customer relationships. What does the market look like for similar deals? Are there opportunities for kind of additional acquisitions like that, that are in and around your existing area that can -- that you can really leverage? Or is this more of a one-off situation?

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C. Gregory Harper, Riviera Resources, Inc. - Director [7]

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I think there may be a few more, but I'd look at this as a one-off right now as far as things that we've been heading for those to evaluate. We like the transaction. As far as the cost, the net cost of, even after interconnect, is well in line with our cost per Mcf and what we connect to [loan low] in that area for. We get to 18,000 a cryo that will be there that you can't replace that or put a new one in for less than $5 million. So in itself, just the whole deal was a pretty good deal on a value proposition. And we like where the assets and the extension into that SCOOP-ish area. There's saltwater disposal opportunities with some of these old wells, so it sets us up pretty well for the water as well.

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Operator [8]

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Thank you. And I'm not showing any further questions. So I'll now turn the call back over to David Rottino for closing remarks.

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David B. Rottino, Riviera Resources, Inc. - President, CEO & Director [9]

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Okay. I'd like to thank everyone for their continued support, and that concludes our call. Thank you.

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Operator [10]

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Ladies and gentlemen, this does conclude the program. You may now disconnect. Everyone, have a great day.