HOUSTON Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Goodrich Petroleum Corp earnings conference call or presentation Wednesday, November 4, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Joe Leary Goodrich Petroleum Corporation - Interim CFO * Gil Goodrich Goodrich Petroleum Corporation - Chairman & CEO * Rob Turnham Goodrich Petroleum Corporation - President & COO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning and welcome to the Goodrich Petroleum third-quarter 2015 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Joe Leary, Interim Chief Financial Officer. Please go ahead. -------------------------------------------------------------------------------- Joe Leary, Goodrich Petroleum Corporation - Interim CFO [2] -------------------------------------------------------------------------------- Thank you. Good morning, everyone, and welcome to the Company's third-quarter Earnings Conference Call. The Management team on the call is Mr. Gil Goodrich, Chairman and Chief Executive Officer; Mr. Robert Turnham, President and Chief Operating Officer; Mr. Mark Ferchau, Executive Vice President of Engineering and Operations; Mr. Mike Killelea, Senior Vice President and General Counsel; and myself, Joe Leary, Interim Chief Financial Officer. The comments and answers to questions on the call may be considered forward-looking statements, which involve risks and uncertainties, as are detailed in the Company's SEC filings. We have posted an updated slide presentation on our website at www.goodrichpetroleum.com. That is www.goodrichpetroleum.com. We will refer to these slides throughout the call. You can go to the Investor Relations tab, then to Events and Presentation section, then to the third-quarter conference call, click on it, and then click on the slide presentation. We will begin with comments, then answer questions. We will now turn the call over to Mr. Gil Goodrich. -------------------------------------------------------------------------------- Gil Goodrich, Goodrich Petroleum Corporation - Chairman & CEO [3] -------------------------------------------------------------------------------- Good morning, everyone. I would like to start by welcoming Joe to the Goodrich team. Joe brings wide oil and gas financial experience and numerous capacities to the team, and we are delighted to have him on board. At the end of the second quarter, we have been very focused and extremely active in our efforts to improve and strengthen our balance sheet. We have done this with a sharp focus on reducing cash interest expense going forward, capturing maximum discounts to net debt, and extending maturities. For those of you who have access to the website and earnings call presentation, as Joe outlined, please turn to slide 3 with me, and I will give you a brief overview and then some details on our recent transactions. On slide 3, we continue to maintain a large, diversified asset base with oil and natural gas exposure in the Tuscaloosa Marine Shale, Eagle Ford Shale, and Haynesville Shale plays. Our extensive inventory has acreage either held by production or subject to manageable remaining term extensions and renewals. Our recent sale of the Eagle Ford proved reserves and associated acreage has increased our liquidity. The recent debt exchanges and asset sales have reduced total debt by approximately $198 million, reducing interest expense by approximately $9.8 million per year -- excuse me -- $9.5 million per year. We have a strong technical and financial team in place to address market challenges and exploit the assets, once the macro environment improves. Turning to slide 2, our large acreage position is in three concentrated plays; the Haynesville, Eagle Ford, and Tuscaloosa Marine Shale. This gives us balanced natural gas and oil exposure which is largely operated and has modest drilling commitments. The Haynesville and Eagle Ford positions are highly delineated with substantial portion of the acreage in the core of the plays. Our TMS position has been well delineated, with approximately 150,000 net acres in the core. In the TMS we have demonstrated repeatable well results, we've moved the play into develop mode, and achieved significant well cost reductions in 2015. The balanced portfolio provides a number of alternatives in a recovering commodity price environment, with multiple drilling opportunities and inventory of gas and oil weighted opportunities, and several options for asset sales or joint ventures. If you will now turn to slide 5, I will walk you through the recent debt exchanges and improvement to the balance sheet accomplished since the end of the second quarter. During the quarter, we reduced the amount drawn and our senior credit facility from $86 million to $17.5 million, and we expect to further reduce this amount during the fourth quarter. We added $75 million to our second lien secured notes in an exchange, whereby we reduced unsecured 2019 notes from $275 million to $116 million. We also reduced the amount of 5% convertible notes from approximately $172 million to $99 million currently. As part of the exchange we created a new 5% convertible note, with a put date of October of 2018, an amount currently of $29.8 million. In total thus far, we have reduced net debt from approximately $640 million at the end of the second quarter to current pro forma debt as of the end of the third quarter to approximately $441 million, for a total net debt reduction of approximately $198 million. This represents a total reduction of approximately 31%. In addition, a high-yield note exchange of the 2019 notes in October of this year will result in a gain of approximately $62 million in the fourth quarter. We remain actively focused on balance sheet repair and enhancement during these challenging market conditions. As a go forward, we will continue to aggressively structure and pursue additional balance sheet enhancing transactions designed to improve the value of the investment for our common shareholders, as well as all of our stakeholders. And with that, I will turn the call back over to Joe Leary for a review of the third-quarter results. -------------------------------------------------------------------------------- Joe Leary, Goodrich Petroleum Corporation - Interim CFO [4] -------------------------------------------------------------------------------- Thanks, Gil. Good morning again, everyone. I will cover a few items on the financial side. The Company has $540 million of debt at the end of the third quarter, down $100 million from the end of the second quarter. As Gil mention, debt was further reduced in early October by additional debt exchanges as indicated in the earnings release. These material reductions of debt were due to the Eagle Ford property sale and the Company's debt exchange program. The Company's revolving credit facility has been reconfirmed at $75 million. $17.5 million was drawn at the end of the third quarter. Selected covenant relief was also agreed to by the Company's bank group, led by Wells Fargo. As of the end of the third quarter, the Company passed all of its required covenant tests. Adjusted EBITDA was $20.3 million for the third quarter, down 16% from the second quarter. Due primarily to the Eagle Ford sale. EBITDA for the trailing 12 months was $112 million. Discretionary cash flow, that is net cash provided by operating activities before changes in working capital, was $8.8 million for the quarter, down 31% from the second quarter. Capital expenditures totaled $16.4 million in the third quarter, 96% of which was for completion costs and extending leases for future development operations in the TMS. Very little CapEx is planned for the fourth quarter. Total production for the third quarter was 645,000 BOEs at 50% oil, or an average daily production of 7,008 BOEs per day, down 15% from the second quarter. Natural gas production was 2 BCF, down 14%. Oil production was 320,000 barrels, down 16%. Again, as mentioned, production was down primarily due to the decline in Eagle Ford property and its subsequent sale. As to commodity prices, for oil the Company received $45.92 per barrel, down 20% from the second quarter. However, with oil hedges in place, the Company received $88.83 per barrel, up 3%. For gas, the Company received $1.76 per MCF, down 5%. For the fourth quarter, the Company has 3,500 barrels a day hedged at a blended rate of $96.11. We continue to watch the commodity market for attractive hedging opportunities. The Company is reporting a net loss of $17.8 million for the third quarter, compared to a net loss of $31.6 million in the second quarter. This loss is primarily due to; number one, production being down 15%, as mentioned due to the Eagle Ford decline and its subsequent sale; number two, continued low commodity prices. As we mentioned natural gas was down 5%, oil was down 20%; however, hedged oil was up 3%, and a $32.5 million non-cash impairment primarily on the Angelina River Trend acreage. These items are only partially offset by a $42.8 million gain on the sale of the Eagle Ford properties. We plan to file our third-quarter 2015 10-Q later this week. Please see the 10-Q for a more detailed financial review. Thank you. I will turn the call over to Rob Turnham. -------------------------------------------------------------------------------- Rob Turnham, Goodrich Petroleum Corporation - President & COO [5] -------------------------------------------------------------------------------- Thanks, Joe. I would like to pick back up with the earnings slides and focus on our core properties, beginning on slide 6. Our assets are in very good shape and provide substantial upside. We retained 17,000 net acres in the oil window of the Eagle Ford, approximately 25,500 net acres in the core of the Haynesville in North Louisiana and the Angelina River Trend, and over 300,000 net acres in the TMS. We have an extensive inventory of both oil and natural gas resource potential and a team that is capable of supporting those assets. On slide 7, we show our year end 2014 reserves, our midyear 2015 reserves, which takes out the Eagle Ford proved reserves sale, and our 3P resource potential. Slides 8 and 9 deal with our Eagle Ford asset. We are projecting 150 gross, 102 net locations remaining on our 17,000 net acre position. Our economics, on slide 9, are predicated off of a CapEx estimate of $5.6 million, but we have noted offset operators disclosure about lower well costs and our bias is to take them lower as well. Moving on to the Haynesville, beginning with slide 10, as we have said on our previous call, we are very encouraged by early results from offset operators, like our friends at Comstock in the Haynesville, who are using a new completion design with a significantly higher profit concentration. We have drilled or participated in 93 wells in the Haynesville with a typical EUR of approximately 6 BCF per well from approximately 4600-foot laterals, using the old completion design, which is less than half of the proppant currently being pumped. By increasing the proppant from 1,100 pounds per foot to 2,500 or even 3,000 pounds per foot, we are seeing approximately 50% improvement in short laterals EURs, as shown on slide 11, where we are projecting 9 BCF from 4600-foot laterals, that generate a 25% rate of return at $3 gas. However, the wells improve as you drill longer laterals, as we show on slide 12, where we are projecting 15 BCF per well from 7,500-foot laterals; and a rate of return of approximately 40% at $3 gas. From our analysis, which is consistent with what we are seeing from many of the offset operators, we see 1.8 BCF to 2.0 BCF per thousand feet, and ultimately expect to drill up to 10,000 laterals, which at 2 BCF per thousand foot would equate to 20 BCF wells. With the longer laterals you will see better rates of return as we believe EUR per foot is linear, and drill and complete costs decrease per foot for extended reach laterals. Slide 13, shows our Haynesville acreage based on short laterals only, which equates to probable resource potential of 960 BCF at 9 BCF per well location. We are in the process of quantifying long lateral versus short lateral locations, which will cause the resource potential to go up with better economics. We believe there's upside potential also in the Angelina River Trend or Shelby Trough, as well, but haven't seen enough data points from longer laterals drilled in the area to quantify at this point. Focusing on the TMS, beginning on slide 14, we continue to be enthused and convinced of the play and look forward to restarting development once oil prices recover to a sufficient price. We, and our peers, have established a core area where wells are very consistent, and I'll talk more about that shortly. On slide 15, we show the top 15 IP wells to date, with the top well peaking at 1,900 BOE per day, and the average for the 15 wells at approximately 1,500 BOE per day. Obviously, what matters more is how the wells perform overtime, but it certainly shows how prolific the wells can be, especially considering the oil cut is higher at 92% to 99% than in other shale basins. Our royalty burdens are lower, at an average of 17.4%. We have severance tax abatement for a minimum of two years, and we receive LLS pricing less $2 at the well head, a premium to WTI. We have 33 optimized wells spotted on slide 16, which we have broken out into four areas that we can show curves for each of the areas. Our 150,000 net core acreage position is shown within the red halo, as areas 1, 2, and 3. We show area 4, but don't call it core, as the wells aren't quite as good as the other three areas. The current identified core area isn't necessarily the only area that could be core in the future, as we are just mapping currently the best wells drilled to date that were adequately stimulated. The green circles on this map are the wells where we have deferred completion. Through data sharing agreements and experience, we've identified certain optimized criteria that we believe creates better well results, as shown on slide 17. Our optimized criteria is landing in the better quality rock in the lower section of the TMS, sufficient lateral links with hybrid frac designs, and proppant concentrations of at least 1,500 pounds per foot. Many of the recent wells that have outperformed have had longer laterals and proppant concentrations in excess of 2,000 pounds per foot, which we expect to use once the development reconvenes. As I just mentioned, regarding the Haynesville results, proppant per foot and lateral links have a very good correlation to EUR projections and returns, and we would expect to see even better wells in the future in the TMS with higher proppant concentrations, once we and others get active again, once oil prices improve. Slide 18 shows an area 1 composite curve comprised of 10 wells versus our 600,000 BOE, 700,000 BOE, and 800,000 BOE type curves. Our Crosby well is in this area, which has produced over 200,000 BOE in its first 24 months. In addition, several wells have come online over the last 11 months, including our CMR Foster Creek 31, which had tracked well above our Crosby well and the 800,000 BOE type curve. Slide 19 shows area 2, which has several of the top producing wells drilled to date, including the 1,900 BOE per day well mentioned earlier. Many of the 14 wells in this area are materially outperforming our 800,000 BOE type curve in their initial 12-month period, and are positively affected by longer laterals and higher proppant concentrations per foot. Our results in area 3, as shown on slide 14, are outstanding from shorter laterals. Our five wells in area 3 have had lower gas rates than the other two core areas and are responding very well to artificial lift. Our Blades well is in this area and is our best well per foot drilled to date. Area 4, on slide 21, although not currently identified as core, continues to provide upside potential, but needs higher oil prices or improved completion results and technique to compete with our three core areas. As shown on slide 22, well costs in the TMS have come down dramatically, from approximately $10 million on our latest wells drilled, even though we drill it in a higher cost environment, to a current estimate using recent bids of $9.3 million per single well, $8.7 million for two well pads, and $8.3 million for four well pads. Our plan, once development begins again, is to retain acreage where needed through renewals, extensions, and develop the acreage on two and four well pads, as economics are meaningfully improved with the cost savings and efficiencies. When you average the 33 optimized wells into a composite curve, as shown on slide 23, we are producing above our 700,000 BOE curve. We would expect this curve to increase over time, as the newer outperforming wells continue to flow through the curve. Factor all of this in with our recent well costs on slide 24, and we generate attractive rates of return at reasonable oil prices, which will compare well with many of the more active oil basins in the US. Slide 25 also accentuates the need to keep your well costs lower as four well pads generate an additional 9% to 25% incremental internal rate of return at $55 to $75 oil using or 800,000 BOE curve. We have included our drilling inventory, on slide 25, to show you the effect of the Eagle Ford Shale proved reserves and associated acreage sale, which has very little impact on our inventory. In summary, we're excited about the optionality that Haynesville provides where our acreage to sell by production and we can significantly grow gas volumes and generate sufficient rates of return at a minimum $2.75 gas. Our acreage position in the Eagle Ford has approximately four years of term left, and we can maintain our core TMS acreage through 2016, with very little capital. As to our balance sheet, as Gil pointed out, we're very pleased with the debt reduction to date of almost $200 million or roughly $3.50 a share; and remain laser focused on further improvements. We have amended our covenants with our bank group, which gives us flexibility into 2017 without improvement in commodity prices. We believe it prudent to continue to play defense and conserve capital, as it provides for an extension of our runway to an ultimate recovery in oil prices. Predicting when that recovery will occur, which certainly is impossible and; therefore, we will continue to manage the business conservatively, yet maintain our core acreage positions in each of the basins for exploitation at the appropriate time and commodity cycle. We will release a preliminary capital expenditure budget for 2016 in December and give guidance at that point. Our capital allocation to the Haynesville Shale or TMS Eagle Ford for 2016 will be based on expected returns from 2016 strip natural gas and oil prices at that time. With that, I will turn it back over to Gil for closing remarks. -------------------------------------------------------------------------------- Gil Goodrich, Goodrich Petroleum Corporation - Chairman & CEO [6] -------------------------------------------------------------------------------- Thanks, Rob. While we've made significant progress with our recent debt exchanges, more work needs to be done and we will continue to actively seek to strengthen the Company and which makes sense for all of our stakeholders. At the same time, as Rob mentioned, we are closely following the current enhanced completion designs and longer laterals with very strong results in the core of the Haynesville Shale play, and the potential to allocate capital to our Caddo and DeSoto Parish acreage in 2016. With that, we'll turn it back over to the operator for Q&A. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) -------------------------------------------------------------------------------- Rob Turnham, Goodrich Petroleum Corporation - President & COO [2] -------------------------------------------------------------------------------- With no questions in the queue, we appreciate everyone's attention and dialing in for the call. Thank you. -------------------------------------------------------------------------------- Operator [3] -------------------------------------------------------------------------------- The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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