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Edited Transcript of SEA.AX earnings conference call or presentation 18-Nov-19 11:00pm GMT

Q3 2019 Sundance Energy Australia Ltd Earnings Call

DENVER Nov 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Sundance Energy Australia Ltd earnings conference call or presentation Monday, November 18, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric P. McCrady

Sundance Energy, Inc. - MD, CEO & Director

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Conference Call Participants

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* Irene Oiyin Haas

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* Welles Westfeldt Fitzpatrick

SunTrust Robinson Humphrey, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and welcome to the Sundance Energy Third Quarter Earnings Call and Webcast. This call is being recorded. At this time, for opening remarks, I will turn the call over to Mr. Eric McCrady, CEO and Managing Director.

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Eric P. McCrady, Sundance Energy, Inc. - MD, CEO & Director [2]

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Thank you, Valerie. And thank you, everyone, for joining us on today's call to discuss Sundance's third quarter 2019 results. I'd like to remind everyone that during this call we'll make certain forward-looking statements that address our expected future business and financial performance and financial conditions and also contains words such as expects, anticipates and similar words or phrases. Forward-looking statements, by their nature, address matters that are uncertain and are subject to certain risks and uncertainties which can cause actual results to differ materially from those projected in the forward-looking statements. I'd also like to caution you not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The company undertakes no obligations to publicly update our forward-looking statements or to publicly release the results of any revisions to forward-looking statements that may be made to reflect events or circumstances after the date hereof or reflect the occurrence of unanticipated events. With the legal portion out of the way, I'll move into discussing our earnings.

In our earnings release, we have provided a reconciliation to non-GAAP measures that we refer to in our public disclosures such as adjusted EBITDA and pro forma free cash flow. I'd like to provide an update regarding Sundance's previously announced scheme of arrangement related to a redomiciliation of the company from Australia to the United States. We're very happy to report that on November 8, our shareholders voted in favor of the redomiciliation, with 95% of the total shares being cast in favor and 68% of the shareholders present and voting by head count in favor. Subsequently, on November 14, Sundance received final legal approval via a court hearing and lodged the court orders with the Australian Securities and Investment Commission rendering the scheme legally effective. The company's ASX shares are currently suspended from trading. However, as previously disclosed, Sundance has been advised by NASDAQ that our ADRs will continue trading through the implementation date on November 26, when our new Holdco shares are expected to begin trading on NASDAQ. We believe this is the right strategic next step for the company and its shareholders and are gratified to have received so much support from shareholders and all the necessary approvals.

We're excited to move the company to NASDAQ. While capital markets for energy companies are currently weak, we believe fundamentals are setting up favorably for oil markets and ultimately equities in the medium term. We believe we can capture this fundamental shift more effectively for our shareholders by trading on NASDAQ. Underinvestment in the space, along with declining Tier 1 inventory and limited productivity improvements from new completion designs, will lead to slower growth and ultimately production declines from onshore U.S. producers. Aside from relatively low levels of OPEC spare capacity, additional new supply has long lead times to fill demand growth, setting up an undersupplied market in the medium term. Sundance's strategy of low growth, cost control, free cash flow generation and inventory preservation should set the company up to create shareholder value as oil markets firm and improve.

Moving on to our third quarter results. Sundance had a strong quarter, which puts us in position to achieve our stated goal of being cash flow breakeven or generate free cash flow during the fourth quarter. This was enabled by 4 key factors, with the results being somewhat constrained, especially on the gas side by Phase 2 of our capacity expansion project at CGP-41, as we shall further discuss. First, the quality of our asset base. Our Live Oak County wells continued to produce outstanding results. Sundance brought online 12 wells during the third quarter, all in Live Oak County. As we've generally seen with our development program over the past year, their initial production is coming in above our expectations and Ryder Scott type curves. These wells represent over half of our development program for the year, and their performance sets us up for a strong fourth quarter production-wise. Significantly, they've helped bring the oil cut of our sales volumes back up to 64% for the third quarter, and we anticipate it to be around 65% for the fourth quarter.

So second, continued success in reducing operating costs. During the third quarter, we reduced our total cash operating costs to $13.83 per BOE. We defined operating costs as LOE, including workover expenses, GP&T expense, production taxes and cash G&A. This figure represents approximately a 40% reduction in operating costs on a per unit basis since the second quarter of 2018, when we closed the Pioneer acquisition and an 8% reduction sequentially compared to the second quarter of this year. This reduction was driven by significant decreases in G&A, LOE and workover expenses per BOE. Our operations and other staff have worked very hard to create a culture of driving cost out of the system, and we do expect to be able to continue doing this. We're still very hungry to achieve more cost reductions. Our goal is to continue to intently focus on lowering these costs further. Being more efficient in our operations is one of our corporate obsessions as it allows us to expand our margins regardless of commodity prices and ultimately achieve our goal of generating true free cash flow for every barrel we lift out of the ground.

Third, as of the time of this call, we have completed our 2019 development program early and within capital guidance due to continued improvement on the development side. As an example of our focus on cost reductions and operational efficiencies bearing fruit, we completed our 2019 drilling program roughly 2 months early as a direct result of reducing our average cycle time per well. We averaged 11.7 days cycle time per well, inclusive of nonproductive time. This is a significant improvement, and the net result is great capital savings and efficiencies. As of this call, Sundance has placed 20 wells online in 2019, not including the 2 Dimmit County wells we brought online at the beginning of the year and which were included as part of the Dimmit sale. 16 of those wells were in Live Oak County, 2 of the wells are Bracken pad, which came online in early Q2 are in McMullen County. That is about our expected cadence for McMullen development moving forward. 2 to 4 wells annually driven by lease obligations if the wells and lease economics meet our economic thresholds. And finally, 2 wells are in Atascosa County, on acreage acquired from Pioneer.

During the third quarter, Sundance finalized drilling the 2 extended reach lateral Justin Tom's wells in Atascosa. Both wells on that pad, the Justin Tom's 08H and 09H, had laterals of over 12,500 feet, which we believe put them in some of the longest wells ever drilled in the county. Those wells began flowing back in early November. Sundance also spud the 2-well Washburn Ranch pad in La Salle County during the third quarter. We finalized drilling operations on those wells in the early fourth quarter and have laid down our rig through early next year when we will pick it back up to commence our 2020 plan. These Washburn wells will be held as DUCs at the end of the year and represent our first development activity on our La Salle County assets. We're very excited to demonstrate the potential of the rock in that area as Pioneer had not been active in developing the area since approximately 2012. So we are confident that the application of modern completion designs will produce some greatly improved results. We see it as potentially our second best rock after Live Oak County.

Overall, our drilling and completion AFEs have been at or slightly under our AFEs year-to-date, by somewhere in the neighborhood of 3.5%. And with the fourth quarter being a comparatively light quarter from a capital perspective, with virtually all the development activity finalized for the year, we're confident in hitting our capital guidance.

Finally, Sundance also closed on the sale of its Dimmit County assets in the fourth quarter. Immediately subsequent to the quarter's end, on October 1, we received $17.8 million in cash proceeds, leaving the remaining transaction proceeds at the end of 20-day post-closing period, which puts it in the middle of the first quarter of 2020. While Sundance drew incremental debt during the quarter, pro forma for receipt of the Dimmit proceeds, which were expected to be received during the quarter, the company was successful in decreasing its net debt position. Sundance has used the initial proceeds to pay down outstanding accounts payable. On the midstream front, during the third quarter, the company and its midstream partner continued expansion of CGP-41 to increase gas processing capacity from 18 million cubic feet per day to 28 million cubic feet per day. The company anticipates that this expansion, which is expected to be completed in the fourth quarter, will accommodate foreseeable future planned production growth from the Live Oak and Atascosa County assets. Similar to the initial expansion, the company's midstream partner will fund this and future capital projects up to $10 million in cumulative capital costs. In the short term, during the quarter, the capacity constraints and high back pressure resulted in short-term gas flaring and some oil production curtailment. This resulted in Sundance being slightly below our total sales volume guidance, while being at the top end of our oil guidance. In reflection of this dynamic, Sundance has adjusted its full year guidance slightly downward to 13,300 to 13,500 BOE a day.

From a financial perspective, we are now at what anticipates being our peak net debt. As discussed, our fourth quarter is relatively light from a capital spending perspective with guidance of approximately $20 million in development capital. And we have completed the vast majority of the work represented by that figure. We have laid down the rig for the remainder of the year. We have released our frac crew for the remainder of the year. As mentioned, we'll largely utilize the proceeds from Dimmit received to date to pay down our accounts payable. We retained significant liquidity with approximately $41 million in cash and undrawn revolver capacity at year-end, in addition to our organic cash flow that we'll generate during the quarter. We are in the process of finalizing our fall borrowing base redetermination and expect our borrowing base to either stay flat or increase compared to the last redetermination. We'll have those results out to you as soon as possible.

Again, this figure exists mainly as a buffer going forward as we anticipate generating free cash flow in the fourth quarter, and as a result, do not anticipate needing to touch the liquidity. We have significant asset and cash flow coverage from a 1P, PDP and EBITDA perspective, and all of our covenants are in very good shape from a credit profile perspective. The RBL does not mature until the fourth quarter of '22, and the term loan does not mature until the second quarter of '23. So while we are always thinking of how to optimize our balance sheet, we're very comfortable with where those sit today from a tender perspective. Our goal remains to reduce our leverage over time through debt paydown and EBITDA growth.

Our hedge book remains robust and provides us with some price certainty, covering roughly 90% of our remaining forecasted 2019 oil sale volumes at an average $60 per barrel floor price. For 2020, we have about 4,600 barrels a day hedged at a $56 floor, and we'll be looking to add to that amount as we move forward and have firmed up our capital planning for next year. As a reminder, our hedging strategy is to put hedges in place when we make the capital decision to drill a well. If the economics behind the investment decision work at that time, we certainly want to lock current strip pricing in to protect return of capital. All of this combines to uniquely position Sundance at this point in time. We're on the verge of being relisted as a U.S. company on NASDAQ. We anticipate having reached the inflection point of being free cash flow positive in the fourth quarter. We have many years of remaining inventory, especially in our Live Oak and Atascosa County acreage, and we hope to soon demonstrate in our La Salle County acreage as well that generate highly economic returns in a variety of price environments. We are fixated on unlocking increased cost savings in our operations and efficiencies in our development program.

So what does that mean for Sundance moving forward and for our 2020 development plan? As laid out on our second quarter call, while Sundance has not finalized our capital planning cycle for next year, we are contemplating 2 bookend scenarios. In the first, and most aggressive, we will run a program that looks a lot like this year from a development perspective. We can proceed for several years to develop within cash flow while delivering approximately 15% growth. In the maintenance case scenario, Sundance would drill 15 to 16 wells to keep production flat for 2020 and instead focus on retaining inventory and producing free cash flow over the course of the year, which we could then use to pay down debt. The strength of our asset base and health of our balance sheet allow us the flexibility to select wherever on the spectrum between those 2 plans we believe will deliver the best results for our shareholders as prices in the overall economy fluctuate over time.

At this point, I'm happy to open up the line for any 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 Welles Fitzpatrick of SunTrust.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [2]

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On the 4Q guide -- just for my own clarity, on the 4Q guide, when does that assume completion of the 28 million a day facility addition?

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Eric P. McCrady, Sundance Energy, Inc. - MD, CEO & Director [3]

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It assumes it will come on by the end of the quarter. And so we've included gas flaring really into early December on the Live Oak and Atascosa assets.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [4]

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Okay. Okay. That makes sense. And then you gave your thoughts, obviously, you kind of bookended where 2020 could be. Any preliminary thoughts where completed well costs and where the commodity sits now? Which side of that growth versus free cash flow you guys might be more biased towards?

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Eric P. McCrady, Sundance Energy, Inc. - MD, CEO & Director [5]

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Yes. I think because of some of the efficiencies that we've seen on both the drilling and completion side, I think we'll see a year-over-year reduction in well costs. So this year, I think we'll end up at approximately $950 or $960 per lateral foot for well costs. And I think we can drop that by somewhere between 7% and 10% is the target for next year. And so I think we can improve our capital efficiency through some of the efficiencies that we're generating on the operations side. In terms of the actual cadence in between the 2 bookends. I would expect that we'll target somewhere between -- or somewhere around maybe 10% growth and look to generate a little bit of free cash flow on top of that, that initially, at least, would be just used to pay down our revolver.

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Welles Westfeldt Fitzpatrick, SunTrust Robinson Humphrey, Inc., Research Division - Analyst [6]

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Okay. Okay, that makes sense. And then those well cost drops that you mentioned. Is that -- I mean, obviously, it's going to be a little bit of a mix of OFS pricing and efficiencies. But is there anything you guys are doing internally that has made any sort of step change on those costs?

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Eric P. McCrady, Sundance Energy, Inc. - MD, CEO & Director [7]

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Yes. I think we've done a handful of things. On the drilling side, I think it's having the assets for 18 months and our drilling engineers just very focused on the details of drilling a well efficiently. So we've had a consistent rig and crew running with her, and she's really been able to just drive down the small things that make drilling go faster, like connection times on drill pipe.

On the completion side, we've shifted to extreme limited entry on our perf designs, which we think is improving cost but also likely getting us better fracs. We've tweaked the design a little bit. And then for next year, we're likely to begin testing, on 4 well pads, dual fracking, where we'll frac 2 wells at a time. So we'll pump a stage in 2 wells simultaneously while we're perfing the 2 adjacent wells, and then we'll pump 1 stage simultaneously in the 2 offset wells. And we believe that, that can drive down our completion costs over time. And it doesn't have quite as much value in a lower service cost environment. But longer term, as service cost comes -- come back, we think that's a more meaningful impact to completion costs down the road.

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Operator [8]

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(Operator Instructions) Our next question comes from Irene Haas with Imperial Capital.

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Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [9]

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So very, very encouraged to see that you were able to decline your cash costs by about 8% sequentially. And just kind of looking forward to next year, similar to the questions asked earlier, how much room do you think you can compress the cost structure in terms of cash costs?

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Eric P. McCrady, Sundance Energy, Inc. - MD, CEO & Director [10]

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Yes. Again, I think it's probably similar to the capital side and we're targeting somewhere between an 8% and 10% reduction next year in cash costs. I think longer term, we can carve more cash costs out of the system than that, but that's what we're targeting for next year.

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Operator [11]

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I'm showing no further questions at this time. I'd like to turn the call back over to Mr. McCrady.

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Eric P. McCrady, Sundance Energy, Inc. - MD, CEO & Director [12]

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Thank you, Valerie, and thanks, everybody, for participating in and joining the call. We look forward to following up with you with any additional questions. Thank you.

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Operator [13]

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Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation, and you may all disconnect.