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Bonanza Creek Energy Inc  (NYSE:BCEI)
Q3 2018 Earnings Conference Call
Nov. 09, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2018 Bonanza Creek Energy, Inc Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's program is being recorded.

And now, I'd like to introduce your host for today's program, Doug Atkinson, Senior Manager of Investor Relations. Please go ahead, sir.

Doug Atkinson -- Senior Manager of Investor Relations

Thanks, Jonathan. Good morning, everyone, and welcome to Bonanza Creek Third Quarter 2018 Earnings Conference Call and Webcast. On the call this morning, I'm joined by Eric Greager, President and Chief Executive Officer; Dean Tinsley, Senior Vice President of Operations and Engineering; and Scott Fenoglio, Senior Vice President, Finance and Planning and Principal Financial Officer.

Yesterday evening, we issued our earnings press release, posted a new investor presentation and have filed our 10-Q with the SEC. All of which can be accessed on the Investor Relations section of our website. Some of the slides in the November investor presentation will be referenced this morning during our prepared remarks.

Please be aware that our remarks will include forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially. You should read our full disclosures as described in our 10-Q, 10-K and other SEC filings. Also during this call, we will refer to certain non-GAAP financial measures, because we believe they are good metrics to use in evaluating our performance. Reconciliations of these measures to the most directly comparable GAAP measures are contained in our earnings release and investor presentation.

We will start the call with prepared remarks and provide time at the end for Q&A. Now it's my pleasure this morning to introduce Eric Greager, President and CEO. Eric?

Eric Greager -- President and Chief Executive Officer

Thanks, Doug. Good morning, everyone, and thank you for joining us for our third quarter earnings call. I'll start by providing some highlights for the quarter and then turn it over to Dean and Scott for an overview of our operational and financial results.

First, I'd like to acknowledge that we're obviously pleased with the defeat of Proposition 1.12. I'm grateful for the passion and commitment of our employees at Bonanza Creek and the entire industry, working tirelessly until the last ballot was cast. Colorado depends on a healthy and balanced energy industry. It's clear our message resonated with the voting public. I also believe it's important for all sides to engage in a genuine and thoughtful conversation around both the benefits and the impact of our industry. We need to reduce the surface cultural attention that has brought us to this point.

As an industry, we need to work together toward longer term solutions. There are still a great deal to be done by the industry, government and the communities where we operate to ensure workable solutions. Now on to our third quarter.

Wattenberg sales volumes increased 11% sequentially driven by the systematic application of higher intensity completions. Rapidly improving well performance is increasing acreage value acrossed our Wattenberg position. Rocky Mountain infrastructure continues to provide a competitive advantage to our upstream efforts. Dean will touch on this a bit more later. But the delivery point flexibility RMI provides us combined with consistently low gathering system pressures have help to ensure minimal production impacts across our operations in 2018.

We're also pleased to update the PV-10 of our proved reserves to $749 million as of the end of Q3. This represents an increase of 56% compared to our year-end 2017, Wattenberg proved reserves value. We also recently signed a joint development agreement at French Lake. This agreement moves us significantly closer to realizing the full value of the asset. We continue to make progress on the comprehensive development agreement and plan.

Before I turn it over to Dean, I just want to close with how excited I remain about the opportunities ahead of us. With Proposition 1.12 now behind us, our rural Weld County acreage outside of any municipality provides a platform to create value for our shareholders.

Our Rocky Mountain infrastructure provides a competitive advantage and when combined with our Artificial Lift systems, our understanding of the subsurface, fracture stimulation design and reservoir pressure management, we believe, we are uniquely positioned to grow value in the Wattenberg. While we won't be providing formal guidance for 2019 until after the New Year, we are exiting 2018 with plenty of operational momentum, a clean balance sheet and ample liquidity to fund our continuous development program, which will drive greater than 50% growth in 2019 and positive free cash flow in the fourth quarter of 2019.

With that, I'll turn it over to Dean for his operational update.

Dean Tinsley -- Senior Vice President, Operations

Thanks, Eric, and good morning, everyone. We had another successful quarter with drilling, completion and production operations, that continue to yield positive results. Like Eric said, Wattenberg production in the third quarter increased 11% sequentially, driven by strong production from recent completions and consistently low wellhead gathering pressures. Our RMI system continues to keep system pressure lower, which in turn has resulted in flow assurance for both new and old wells.

On Slide 7 of our deck, you'll see a plot of system pressures for RMI and prevailing basin gathering pressures. Pressure outside of the RMI system have been volatile over the last year and have averaged over 350 psi. Meanwhile, RMI pressures have remained consistently around 75 psi. We have accomplished this by strategically placing compression as well as increasing the number of delivery points to other processors. Like we did with Sterling Energy in late 2017, as well as our contracts with Cureton to provide additional gas gathering and processing for our legacy and northern blocks. This flow assurance has been especially important as we ramped up to two drilling rigs and two frac crews. Said another way, we have not had a single new well constrained or delayed due to curtailments from third-party gathering or processing.

Moving onto operations. Our teams have done a tremendous job in driving further efficiencies into our drilling and completion processes. We operated two drilling rigs during the quarter and continue to be very efficient with these rigs. Drilling on SRL to a total measured depth of 11,600 feet and 2.5 days and XRL to 17,000 feet in under 4 days. In fact, our daily average drilling rate has improved 28% from 2017 levels. We also operated two stimulation fleets and completed nearly 1,100 frac stages during the quarter.

Our scaled operations, which typically involves concurrent stimulation on adjacent pads and producing into existing RMI facilities enables tremendous speed production and cost efficiencies. Regarding LOE, we are now beginning to see the fruits of our cost reduction efforts from earlier in the year, as LOE has decreased 26% year-over-year and 29%, sequentially. Our non-recurring compression fleet replacement and air emissions compliance costs rolled off in the third quarter and our go-forward compression rental rates have been reduced. So going forward, we foresee a lower baseline operating costs. Combining this with increasing production volumes, we anticipate our go-forward unit cost to trend downward.

Moving onto some of our recent well results. We have provided several production plots in our November Investor Presentation. On Slide 11, we are providing updated data for our recent five-well K-22 pad on the legacy west acreage. The production performance from these wells further validates our continually evolving enhanced completion designs and the value of our Western acreage. Also, these wells were drilled on 40-acre spacing compared to 60-acre spacing on most of our pads completed year-to-date. This spacing scheme equates the 16 wells per section and is an example of how we're continually investigating and implementing ways to maximize the value of our leasehold.

On Slide 12, we updated well performance in our French Lake acreage, six of the eight wells continue to outperform their respective type curves. We are very encouraged with the well performance and resource potential in French Lake and are looking forward to development of this greenfield area. Although not shown in our investor presentation, in the third quarter we brought online our four well B-28 pad on the eastern portion of our legacy position. We utilized an enhanced completion design on this group of XRLs and are very encouraged by the initial production results.

In summary, we continue to see solid results from all segments of our operation. Our new wells utilized an enhanced completion designs are exhibiting significantly improved performance over previous type curves. Additionally, our base and new production streams continue to benefit from the flow assurance provided by RMI. Consistent and reliable production growth combined with reduced operating cost structures provides a favorable platform for EBITDAX and margin growth. I am very proud of the operations and technical teams, as we continue to deliver solid results, while also maintaining a safe and environmentally responsible culture.

I will now turn the call over to Scott for his financial remarks. Scott?

Scott Fenoglio -- Senior Vice President, Finance and Planning, Principal Financial Officer

Thank you, Dean, and good morning, everyone. Third quarter volumes were at the midpoint of guidance where cost came in significantly below our guided range. Specifically, Wattenberg LOE for the third quarter of 2018 on a unit basis decreased 29% to $4.26 per Boe from approximately $6 per Boe in the second quarter of 2018. Additionally, RMI operating expenses for the quarter decreased 37% to $1 per Boe from $1.59 per Boe in the previous quarter.

As you heard from Dean, unit operating costs in the quarter were favorably impacted by lower regulatory and compliance costs and the completion of the compressor replacement program. With the compressor swaps complete, the one-time installation costs are behind us and we have more favorable rental rates going forward. We are very pleased with the progress we've made in improving our cost structure and believe that with a continued focus on costs and increasing volumes, per unit operating costs will continue to trend lower.

For the fourth quarter, we are guiding lease operating expenses of $3.90 to $4.30 per Boe. Current commodity prices are allowing us to undertake economic, well servicing and maintenance projects, that will continue to benefit our base production volumes. Given our strong operational performance, adjusted EBITDAX increased 10% sequentially to $38.4 million in the quarter. During the first 9 months of 2018, we have invested approximately $175 million of CapEx. As Dean mentioned previously, we are now running two rigs and two frac crews, which will result in an increase in CapEx deployment during the fourth quarter and meaningful production growth as we move into 2019. We are maintaining our full year capital expenditure guidance of $275 million to $295 million for 2018.

Our balance sheet remains exceptionally strong. Liquidity at the end of the third quarter was approximately $216 million with $24 million in cash and nothing drawn on our RBL. Based on current pricing and our preliminary 2019 capital program, we continue to forecast our debt-to-EBITDAX metric to remain below one term throughout 2019, with the Company becoming cash flow positive in the fourth quarter of 2019.

Lastly, our hedging philosophy revolves around providing predictability to our future cash flows. To that end, we continue to layer on hedges for both oil and natural gas, and recently placed hedges at attractive WTI and CIG prices. Details of our current hedge position are included in our Form 10-Q and in the appendix of our November Investor Presentation.

With that, I will turn the call to the operator for Q&A.

Questions and Answers:

Operator

(Operator Instructions) Our first question comes from the line of Irene Haas from Imperial Capital. Your question please.

Irene Haas -- Imperial Capital -- Analyst

Yes. So I would like to explore a little bit granted that you are not going to provide formal guidance for 2019. How you would kind of proceed logistically now without really having to worry about rolling the western part of legacy project, first, I mean, how would your projects stack up? And then French Lake, a little feeling as to when the infrastructure work will start?

Eric Greager -- President and Chief Executive Officer

Yes, thanks, Irene. Best way to think about 2019 again considering that, we're still in the process of building our 2019 budget is that we've guided to a 50% production growth in 2019 and that would imply something little bit bigger than what we've done this year in terms of let's say well count. And the way to think about that on an acreage -- on a mix of acreage in the development plan would be to think about our continued development of our legacy acreage West, Central and East. And we've drilled one delineation well. called White Tail up in the south and west corner of our northern acreage. You might recall that we also have -- that we announced during our last quarter earnings call, our accrued and gas gathering agreement for the northern acreage. So we believe we've got that northern block teed up for continued pilot and delineation work. We do have to wait and see how White Tail continues to come in. It's too soon to discuss the results. But we are encouraged at this point in time and will discuss more when the data matures. The other way to think about this is considering we've got the joint development agreement now in place on French Lake, because this is a greenfield area, we're going to spend a large part of 2019 building out the gathering infrastructure and then you can expect that to be in the drilling and completions development plan kind of late 2019 and then onward in the 2020 and beyond.

Irene Haas -- Imperial Capital -- Analyst

Okay, that's great. Thank you.

Eric Greager -- President and Chief Executive Officer

Thank you, Irene.

Operator

(Operator Instructions) Our next question comes from the line of Welles Fitzpatrick from SunTrust. Your question please.

Welles Fitzpatrick -- SunTrust -- Analyst

Hey, good morning.

Eric Greager -- President and Chief Executive Officer

Good morning, Welles.

Welles Fitzpatrick -- SunTrust -- Analyst

It's good to see those results at a French Lake and the JDA, as your partner there continues to concentrate on their contiguous core area. Is there an opportunity or I guess more importantly a desire for you guys to take them out of that interest and end up owning the whole thing?

Eric Greager -- President and Chief Executive Officer

I think -- we've had a number of conversations around that basic concept, Welles. And I think the way it looks right now, because we had 1.12 come up to just hear this week and the uncertainty that was creating. All the conversations up to this point have been, I would say kind of hypothetical. The operating partner, they'll make their own decisions on where they concentrate. For us, we really like the acreage, we really like what it represents. And we really like the fact that, in the joint development agreement, we've gotten minimum and maximum pace of development, restrictions or side boards, if you like. And as a result of that, there will be continued opportunities to develop over time. Specifically around whether or not we we want to acquire up, we definitely like the acreage. And I think there are certain advantages to scale and efficiency we recognize that and we'll continue looking for ways to grow our scale and grow the economies of scale in our operations and gain efficiencies across the board. And if that means taking opportunities in French Lake if they present themselves, we'll certainly look at that open mindedly.

Welles Fitzpatrick -- SunTrust -- Analyst

Okay. Now, that makes total sense. And then on the 40-acre test. Is that something that you think you can apply a little bit more broadly or do you think that's because it's on that legacy west acreage that's kind of unique because of the thickness over there?

Eric Greager -- President and Chief Executive Officer

Yes, that's a good question. We've been systematic in our testing various completion design, artificial lift, flowback and also spacing, stacking and density tests. This is the density test we put into place on the Western acreage and we're very pleased with the performance. I do believe there are continued opportunities across the legacy acreage. Legacy West. Legacy Central and we'll continue to test these spacing, stacking and stimulation design inter-dependencies on all parts of our acreage. So we'll continue exploring that, whether it's 17 wells per section in one area or 14 wells per section in another area, will look thoughtfully at resource and the way the reservoir responds to the designs in the spacing and stacking arrangements and we'll work to optimize that in every place. But you can rest assured, we'll be testing all across our acreage position to maximize the resource recovery.

Welles Fitzpatrick -- SunTrust -- Analyst

That sounds wonderful. Thanks. That's all I have.

Eric Greager -- President and Chief Executive Officer

Thank you, Welles.

Operator

Thank you. This does conclude the question-and-answer session, as well as the program for today. Actually, we just got another question in the queue. Our next question comes from the line of Phillips Johnston from Capital One. Your question please.

Phillips Johnston -- Capital One -- Analyst

Hey, guys, thanks. There's not many E&P companies out there whose enterprise value is trading below PV-10 value. And I guess in your's case, it's a pretty big discount and close to 20%. My question is what kind of steps can you take to help close that gap beyond just sort of executing on your planned program that's in front of you?

Eric Greager -- President and Chief Executive Officer

Yes, thanks, Philip. That's a great question, and we ask ourselves the same question. From my perspective, we have to continue executing quarter-over-quarter, pad-over-pad, drilling and completing it just as effectively and efficiently as we can. That's fundamental. We also need to continue getting the word out and that means conversations with you, conversations like this during earnings releases in quarters. And I'll spend more time out on the road, having as many conversations as necessary to try to get the word out. Because I really do believe, we have a unique opportunity to grow shareholder value with the oily nature of our asset with the rate at which our well performance is improving and the degree to which we have opened runway. All of these things point in the same direction, underpinned by the scaffolding of Rocky Mountain infrastructure, 11 interconnects and access to four gas processors with ample takeaway, I think this is a mix for some upside. And I really think one of the things that we need to do as continue to have this conversation with as many folks in industry that are added with us. And over the last couple of months, I met with you and I've met with others to have this conversation. I think this earnings call in this quarter will help reinforce the performance of the team and the asset. We have to keep doing that.

Phillips Johnston -- Capital One -- Analyst

Yes, I completely agree. Just -- maybe just as a housekeeping follow up. With that 1P reserve report, you just put out. What's the 12-month PDP decline registered on the oil side, it's embedded in that reserve report?

Eric Greager -- President and Chief Executive Officer

Phillips, I'm not sure I have that number right here, right now in front of me. I'll have to look that up and then we'll get back with you and others and make sure that information is available.

Phillips Johnston -- Capital One -- Analyst

Okay, sounds good. Thank you, guys.

Eric Greager -- President and Chief Executive Officer

Thank you, Phillips.

Operator

(Operator Instructions) All right. And this does conclude the question-and-answer session, as well as today's program. We thank you, ladies and gentlemen for your participation. You may have a great day. Thank you.

Duration: 23 minutes

Call participants:

Doug Atkinson -- Senior Manager of Investor Relations

Eric Greager -- President and Chief Executive Officer

Dean Tinsley -- Senior Vice President, Operations

Scott Fenoglio -- Senior Vice President, Finance and Planning, Principal Financial Officer

Irene Haas -- Imperial Capital -- Analyst

Welles Fitzpatrick -- SunTrust -- Analyst

Phillips Johnston -- Capital One -- Analyst

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