AMPY (2020 - Q2)

Welcome to the Amplify Energy's Second Quarter 2020 Investor Conference Call. Amplify’s operating and financial results were released earlier today and are available on Amplify's website at www.amplifyenergy.com. During this conference call, all participants will be placed in a listen-only mode. Today's call is being recorded. A replay of the call will be accessible until Thursday, August 19, by dialing 855-859-2056 and then entering conference ID number 4185547, or by visiting Amplify's website, www.amplifyenergy.com. I would now like to turn the conference over to Eric Willis, Senior Vice President and General Counsel of Amplify Energy Corporation. Eric Wil

Good morning. And welcome to the Amplify Energy conference call to discuss operating and financial results, the second quarter of 2020. We appreciate you joining us today. Martyn Willsher, Amplify's Interim Chief Executive Officer and Chief Financial Officer will lead the call with comments on our second quarter results and liquidity enhancement initiatives before concluding with comments about our liquidity, hedge positions and outlook for the second half of 2020. We would like to remind you that some of our remarks may contain forward-looking statements and are based on certain assumptions and expectations of Amplify’s management team. These remarks reflect management’s current views with regard to future events and are subject to various risks, uncertainties and assumptions. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this earnings call. Please refer to our press release and SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books, records, and reports. For additional detailed disclosure, we encourage you to read our quarterly report on Form 10-Q, which we expect to file later today. Also, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our press release or on our website at www.amplifyenergy.com. With this in mind, I will now turn the call over to Martyn Willsher. Martyn?

Thank you, Eric. Before discussing our quarterly results, I would like to again express my appreciation for the Amplify team. Despite market disruptions related to the ongoing COVID-19 pandemic, we delivered in an outstanding quarter and exceeded our expectation regarding the liquidity enhancement initiatives that were previously discussed during our first quarter earnings call. I'm extremely grateful for the dedication and professionalism demonstrated by our employees across the organization and reaffirm Amplify's commitment to operate in an efficient and safety focused company. During this call, I will provide comments on our second quarter performance as well as updates regarding our previously announced liquidity enhancement initiatives and hedging program. Production for the second quarter average personally only 27,700 Boe per day, despite anticipated reductions attributed to the schedule annual Bairoil turnaround, the previously announced temporary curtailment on are non-operated Eagle Ford assets and incremental offline wells in the Oklahoma due to workover economic. At Bairoil, we're please that the annual plant turnaround in June was completed on schedule and within budget and our plan quickly returned to pre-turnaround production levels in the first half of July. The non-operated Eagle Ford curtailment discussed during our first quarter earnings call concluded in April and production levels have since returned as expected. Finally, production in Oklahoma experienced minor reductions in the second quarter, as a result of the increase backlog of wells staying offline as commodity prices remained depressed. We expect to bring many of these wells back online in future periods as prices rebound and workover economics improve. Lease operating expenses in the second quarter were $27.8 million or $11.03 per Boe. These results reflect quarter-over-quarter savings of $7.9 million that significantly exceeded our savings estimates of $4 million to $5 million for the quarter and demonstrated the outstanding execution by our operations team. Capital spending for the second quarter was approximately $7 million, which was in-line with our internal expectations. A significant portion of second quarter capital spend were $2 million, or 29% was attributed to the non operated drilling and completion activity in Eagle Ford, which occurred in April as operators finalized previously initiated development plan. The remaining capital activity was primarily related to the Bairoil turnarounds, high return type of workover projects and facility maintenance across our operated assets. Second quarter cash GNA was $6.2 million or $2.45 per Boe, which was in line with our expectations. We expect that cash G&A expense will continue to trend down to approximately $5.5 million in the third quarter and remained relatively flat thereafter. Moving onto adjusted EBITDA and free cash flow for the quarter, second quarter adjusted EBITDA was approximately $21 million, which significantly exceed the consensus estimates and validated the exceptional execution of our cost reduction initiatives and hedging program. I think it is also important to note that the $18 million of monetized 2021 hedges is not included as part of the second quarter adjusted EBITDA. For purposes of calculating adjusted EBITDA and covenant compliance under our enrollment credit facility, the hedge fund position will be allocated across 2021 to reflect the timing of the hedges that were in wound. Free cash flow defined as adjusted EBITDA, less CapEx and cash interest expense was $11 million in the second quarter, and primarily driven by our significant cost reduction efforts. We anticipate a strong free cash flow profile for the remainder of the year due in parts due to the reduced capital budget for the second half of 2020. Now I would like to update our stakeholders on liquidity enhancing initiatives, we’re proactively implemented in light of the current commodity market volatility. As discussed during the last quarter’s earnings call, Amplify inactive several initiatives to mitigate the effects of market disruptions related to the ongoing COVID-19 pandemic and commodity price volatility. While we completed some of these initiatives prior to the last call to completion and realization of the remaining projects were critical to our success and I'm pleased to announce that these remaining initiatives were executed without standing results. First, operating costs and corporate overhead reductions, our lease operating expenses are reduced from $35.7 million in the first quarter to $27.8 million in the second quarter. The quarter over quarter savings approximately $7.9 million exceeded the internal expectations of $4 million to $5 million for the quarter. While we expect that operating costs will increase modestly in future periods, we remain committed to executing additional cost saving opportunities and exceeding our target estimates. In addition, as previously stated, the team materially reduced recurring SG&A which declined from $8.7 million in the first quarter to $6.2 million in the second quarter, this reduction was in line with expectation and we expect G&A spending to trend down approximately 5.5 million in the third quarter and remain flat thereafter. Second, capital reductions, Amplify capital spending was $7 million during the second quarter, which was in line with our expectations and representative an $8 million reduction from the first quarter. Amplify's remaining capital expenditure budget for the second half of 2020 is approximately $6 million. We intend to stay prudent capital allocation and now our activity is focused principally on maintenance projects, which are essential, or equipment integrity and operational efficiency and high rate of return workover projects. Finally, Beta Field royalty relief, effective July 1st, 2020, Amplify qualified for special case royalty relief at its Beta Field. This program decreased the royalty rate of Beta by 60%, which is expected to result in approximately 500 barrels per day of additional net production and associated revenue are approximately $7 million per year assuming you $40 per barrel WTI price. I would like to emphasize that this royalty relief program provides relief for both existing production and incremental production in future periods when economic conditions allow for additional developments. Moving on to a discussion of our recent credit facility redeterminations and our current liquidity position, on June 15, 2020, we announced the successful completion of the spring borrowing redetermination process. The spring redetermination was particularly challenging with depressed bank price decks and a negative economic backdrop driven by the COVID-19 pandemic. But we were pleased to be able to work with our bank group and deliver a supportive foreign based solution that provides sufficient liquidity while we work to delever our balance sheet. We expect the next borrowing base redetermination will take place in November 2020. As of July 31, Amplify had total net debt of $259 million under its revolving credit facility and liquidity of approximately $21 million. Moving onto our latest hedge position, since our last earnings call in May, Amplify has added to its hedge positions in natural gas for the second half of 2020 and 2022 as well as NGL swaps for the second half of 2020. Inclusive of the new hedges, the Company has over 80% hedge for the second half of 2020 based on Amplify 2019 year end reserve report forecasts, with approximately 83% of those hedges being swapped and the remainder being collars. Our hedge positions allow us to protect future cash flows, while also providing the opportunity to benefit from commodity market improvements. As of July 31, our hedge mark-to-market value was a net asset position of $25 million. Amplify's second quarter 2020 hedge presentation contains additional details in our current positions and was posted on our website earlier today under the investor relations section. This formerly concludes our prepared remarks this morning. We would now like to invite analysts to ask any questions they have for the management team. Operator, please open the line for any questions.

[Operator instructions] And our first question comes from Jeff Grampp with Northland Capital. You may proceed.

I think I haven't put out anything too firm it in terms of for guidance or anything. So, I'm not trying to pin you down, but if we just kind of thinking about 2021 and kind of current strip prices. Can you just talk maybe broad level what kind of capital program would you look to, to employ in that environment? And maybe talk about what kind of minimum spending that you guys would have to put in, for any environments? And then, what kind of projects maybe pencil out and, on the workover front or any facilities, cost enhancement type projects that you guys may look to deploy in that type of scenario?

Sure, Jeff. As we've discussed before, there's a certain level of capital spending required under with Beta and Bairoil and some of the facilities projects in Oklahoma, and so probably $5 million to $10 million in kind of base capital spending, depending on the calendar year. And then you'd layer on whatever level of activity was going to be on the Eagle Ford, obviously, those well is still, economically make sense, in a kind of a mid-30s environment, which is where we're talking about in one year. I think once you get beyond that, it's going to be -- we're going to look very closely, capital workover projects. And if certain projects in California and the Beta Field makes sense that work is ongoing and obviously, it's a very dynamic commodity market. Three months ago, the prices in the mid 30s, you probably weren't looking at a lot of projects with prices moving into the mid 40s, and maybe a little higher, there may be a slightly higher level of activity. But it's unless we get in to the mid to high 50s, then I think it's certainly a little subdued relative to prior years. And so, I think like I said, that's still to come, but for the rest of this year, I think we're going to have a very -- we've noted will have a very minimal capital budget. We will work closely on workover economics, with a focus on cash flow returns, payback periods, et cetera and we'll see what makes sense. So there may be slightly higher level workover activity with prices being a little higher, but and still in line with what we've discussed previously.

Appreciate that. So my follow-up, you touched on the Eagle Ford little bit here. Do you guys have any line of sight on second half activity? Is that embedded in the second half budget that you guys talked about? And then more broadly, I know that was potentially a divestiture candidate, pre-COVID. Does the stabilization in the commodity market maybe make that something you've kind of revisit? Or is that still kind of on the back burner to the extent oils kind of hanging around these levels?

No, I think right now, we're not projecting a lot of activity in the Eagle Ford for the remainder of the year. Obviously, we don't operate and there's some ducks, there is some wells that we're proposed and not completed. And so, there could be additional activity beyond what we're projecting. But we've deferred most of that into 2021 and our expectations like I said that's something that what prices kind of moving up more recently, maybe there is some level of activity and sneaks back into the latter half of 2020 from some operators. In regards to it as a divestiture candidate, I think we've put that on hold for the time being obviously, we can't stop inbounds and to the extent that those become attractive, or we'll consider anything, but I don't think that's likely for the remainder of this year. But obviously, from our long term perspective, that asset still doesn't fit our strategy as well as the operated assets and so certainly we revisit in 2021.

And our next question comes from Noel Parks with Coker & Palmer. You may proceed.

I just have a few questions. Could you talk a little bit more about the hedge monetization and you mentioned that we're not included in adjusted EBITDA, even though I guess they're kind of a onetime cash event, but you're actually going to be recognized over time? Could you just go into more detail in that?

Absolutely. Thank you, Noel. So, what the hedge monetization is, obviously, these are 2021 hedges our unwound, the way that we look at this from an accounting perspective, from a non-GAAP perspective. From a GAAP perspective, they were included in earnings and cash flow from operations in this quarter. That's how as they realized hedge gain. From a non-GAAP perspective, obviously, we want to make sure that those gains are reflected in the periods in which they were actually unwind from and so. From both a credit facility perspective, and an adjusted EBITDA perspective, and the free cash flow perspective that will all take place in 2021 and we do not take any credit for that for there's $18 million of proceeds in our adjusted EBITDA free cash flow in the second quarter. We were online -- that was 18 million spread across the full calendar year 2021. And so call it $4.5 million per quarter, essentially be put into 2021 adjusted EBITDA and free cash flow. And it works the same way in our credit facility. So that value is not lost from a credit facility perspective, that will be adjusted EBITDA in the credit facility calculations as well, 2021. And that matches the hedges with the actual periods in which those hedges were essentially locked in.

So, on a Gaap basis through do those show up as a current liability, then?

No, it's a realized gain in the cash. And so, we just -- from a non-GAAP adjusted EBITDA perspective, we just back it out. So it isn't cash flow from operations. It isn't statement and obviously there's the cash, it is cash on the balance sheet, but it does not reflected in our adjusted EBITDA or published free cash flow number.

Great. Thanks. Next, I just, maybe, could you talk a little bit about, I guess, how you categorize sort of recurring versus nonrecurring LOE expenses?

Yes. Obviously, we -- I think from an operating team perspective, they did an outstanding job of finding and executing on longer term recurring expenses, which was $4 million to $5 million estimate. We've far exceeded but they also found some short term one time type items that, we were significant value drivers, but at the same time we're not trying to claim that will be forever. And that's probably in the range of called a $1 million to $1.5 million of operating expense. Now, there is a couple of other moving pieces with some of those cost savings initiatives didn't come in until May, but we'll also look at a little bit more potentially on the workover side. So, from $1 million to $1.5 million of operating expense that I would call non-recurring, that were just opportunities identified and executed by the team during the quarter that saved a substantial amount of money.

Okay, great. And one thing I was curious, we did see one of the relatively rare asset sales a few days ago, and that was a range of sale. I believe it was Terryville, in North Louisiana. And I was just curious, what you thought of the valuation for that transaction? Do you see that as applicable to your position and just examples of how it should be valued?

Obviously, we have a personal long history knowing that that Terryville asset from the old MRD days. It is a little different asset. It's probably got more upside at higher gas prices and it's got a higher NGL content than our Cotton Valley, which is obviously on the East Texas side, this is in Louisiana. And so, it's a little bit more risk and a little bit more and I think there's a little bit paid for that. So I thought it was a pretty decent valuation under the circumstances, but you've also seen gas prices rallying and NGL prices starting to firm up. So I said, I thought it was a very reasonable transaction. And I think, if gas prices continue to trend in that direction then they'll do well with the acquisition.

Okay. Just the last one for me, I was wondering, I have been hearing about, continued suffering going on around private equity held assets. And as some companies get into sort of a distressed state, probably with their, their bank lenders, I was running in, in some of your basins that are relatively mature. Do you see are you going to push for any opportunities to do like a contract operator type role? I'm aware I heard of something similar where a bank got some properties that you didn't really want to operate them that you didn't to sell in this environment. So, they look for this the third party to come in.

I think with our platform, we're obviously set up to take on those kind of opportunities as they present themselves. I think, right now, I wouldn't say anything is imminent on that front or that something that we're actively pursuing. But as you say, there could be more activity of as banks getting more involved and don't want to set up operating teams for specific massive areas. Obviously, we have a very strong operations team and I think these quarterly results to that. And like I said, if those opportunities present themselves, we'd kind of look at it as a kind of on an individual basis, but it's not a business model idea that we're going to go out in full force and look to contract operate for a lot of different groups, but it could make sense under the right circumstances. And so certainly, something we would consider as given the platform would allow for the right to do that with minimal incremental costs.

[Operator instructions] Ladies and gentlemen, this concludes today's conference call. I would like to turn the call back over to Martyn Willsher for any closing remarks.

Thank you. As an organization, the second quarter began with a lot of uncertainty, but due to the outstanding efforts of the Amplify team, we're now moving forward with renewed optimism for the remainder of the year. While COVID-19 related issues are still dampening demand and prices are slow to recover, the organization has demonstrated its resiliency and ability to adapt to the current environment. With strong free cash flow expected for the remainder of 2020, we look forward to continuing to execute for our stakeholders and preparing for future opportunities. Thank you, as always for joining us today, and if you have any questions, please do not hesitate to reach out to us. Thank you.

Ladies and gentlemen, this concludes today's conference. Thank you participants and you may now disconnect. Everyone have a good day.