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HighPoint Resources Corp. (NYSE:HPR)
Q1 2019 Earnings Call
May. 07, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to the first-quarter 2019 HighPoint Resources 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, this conference call is being recorded.

I would now like to introduce your host for today's call, Mr. Larry Busnardo. Sir, you may begin.

Larry Busnardo -- Vice President, Investor Relations

Thank you. Good morning, and thanks for joining us this morning for the HighPoint Resources first-quarter 2019 earnings conference call. Joining me on the call today are Scot Woodall, our chief executive officer; Paul Geiger, chief operating officer; and Bill Crawford, chief financial officer. Before we begin, I ask that you please review the disclosure statements provided within the forward-looking statements of our earnings, you can find these on our website at hpres.com.

You can also find and review these disclosures as they are referenced in our other filings with the SEC or in our 10-Q, which we filed yesterday afternoon. In addition, we will be referencing non-GAAP financial measures during our call and reconciliation to GAAP financial statements can be found at the end of our press release. We also posted an updated corporate presentation to our website this morning that we will be referencing on today's call. With that, I'll turn the call over to Scot for his comments.

Scot Woodall -- Chief Executive Officer

Good morning and thank you for joining us today to discuss our first quarter 2019 financial and operational results. I'll provide some overview commentary before handing the call over to Paul and Bill for the operational and financial update. We were off to a good start to the year and executing nicely on our operational plan, as demonstrated by our first-quarter results. We delivered year-over-year growth and production sales volumes of 46%, oil volume growth of 51%, strong EBITDAX of that growth of 65% and basin operating margin of $30.31 per Boe.

With the strong first-quarter performance, today we are reiterating full-year guidance. As previously outlined, our capital program and activity is weighted toward the first half of the year as we have maintained a three rig drilling pace and plan to drop to two rigs this quarter. This high-level drilling completion activity resulted in significant number of wells that will return online during the second quarter in both Hereford and Northeast Wattenberg. We anticipate that over 30 wells will be placed on flow-back during the second quarter.

This will drive a significantly higher production profile during the second half of the year along with an associated decline in spending. We were confident that we were on pace to achieve our operational goals and look forward to providing further updates. Operationally, we continue to see strong performance from our high fluid intensity stimulation project in Northeast Wattenberg. In Hereford, our development optimization program is under way which is yielding valuable drilling and completion data that will allow us to deliver optimum value from the Hereford assets.

We look forward to provide you further updates over the summer. The recent signing of Colorado Senate Bill 19-181 into law should bring certainty to the industry and our stakeholders. Just still focus on local control should not affect our highly advantaged and differentiated DJ Basin acreage position that is uniquely located within the rural and un-corporated areas of Weld County. Implementation of this new bill requires changes at the COGCC and multiple rule makings over the period of time, but we expect to be able to continue to execute on our future development plans and fully develop our highly perspective acreage position.

Lastly, we look forward to continuing our established relationship and working in partnership with the stakeholders in our areas as we continue to safely and responsibly develop our asset. I will now turn the call over to Paul for an operational update.

Paul Geiger -- Chief Operating Officer

Thank you, Scot, and good morning everyone. We've had an excellent start to the year with record recent results, as we execute our Hereford development program and we continue to be encouraged with the results of our higher fluid intensity stimulations initiated in Northeast Wattenberg. I'll touch on both of these in more detail in a moment. Production for the first-quarter 2.8 million barrels of oil equivalent grew 46% over the comparable 2018 period and oil volumes of 1.72 million barrels were up 51% over the first-quarter 2018.

First-quarter production was tracking the higher end of our production range before we experienced a significant snow event in March, which we estimate to have deferral of approximately 65,000 barrels of oil equivalent. I would like to thank Weld County for their work to clear roadway and also our company and field and officer personal who work diligently to resume operation safely and quickly. Now, I'll turn to operations. At Hereford, we have seen encouraging results from the recent wells in the DSU 11-63-15.

As highlighted last quarter, we began implementing a buffer zone around active completion activities at Hereford. To minimize interference with production and maximize completion activity or intent to -- for reference, please see the graphic on Slide 12 of our corporate presentation. We placed five wells in eastern half of DSU 11-63-15 on flow-back in February, which were successful demonstration of pressure well concept with these wells ramping production aggressively without significant interference from nature in completions. After 60 days of production, these wells have achieved average cumulative production of approximately 20,000 barrels of oil per well at a high well of 87%.

The remaining wells that are on western portion of this section replaced on flowback in April. These wells were still in the initial control flowback period, but have a benefit of pressure well and have been producing without significant completion interference. You'll recall from our last earnings call, we are also in the process of an extensive reservoir, geologic and operation technical study within DSU 11-63-16 and DSU 11-63-17, utilizing microseismic and fiber optic technology. This study allows us to increase the granularity of our subsurface picture and gain a real time assessment of our completion and production performance, as we optimize development of the tremendous 30 million to 40 million barrels of oil per section of resource potential in Hereford.

There is more detail regarding this integrated approach on Page 14 of the corporate update. This technical study area consists of 23 XRL wells within two DSUs incorporates fiber-optic monitoring on three wells, well spacing of 10 to 16 XRL wells pre DSU and microseismic monitoring across the area. Today, all of the wells we drilled including of fiber optic and we have begun to gather microseismic data with the first different groups of completion. On this first group of wells, we have increased the base stimulation intensity by 70% to over 30 barrels of fluid per lateral foot from a previous design of approximately 18 barrels a foot.

This design changes made following the strong results of our high-fluid intensity pilot project in Northeast Wattenberg. As we move stimulation activity to the area with fiber optics, we'll be gathering data regarding the impacts of sand loading, fluid loading, cluster fixing, appropriation program and stimulation rates. This process will take place over the second quarter and will involve real-time optimization of completions during the test. Post-testing, we expect to be able to target an optimum well-placement -- well-spacing and completion designs generate the best rig of return from our drilling and completion program.

Supporting our efforts to maximize rate of return, we're seeing continued improvement in our drilling execution. I'd like to highlight that our most recent Hereford well that accompany record of 40.5 hours to drill the XRL lateral section. These successes have driven cost for drilling fortune of our wells under $1 million. We expect these improvements to maximize historical averages to achieve in Northeast Wattenberg as we continue to drive execution efficiencies at Hereford.

Now turning to our legacy Northeast Wattenberg asset. For the first quarter of 2019, 15 gross wells were spud and seven gross wells replaced on flowback. We continue to see improved well performance through high-fluid intensity completions as the initial pilot program wells have reached average cumulative production of approximately 96,000 barrels oil equivalent after 205 days of production. See Slide 17 of our presentation for more detail regarding the continuous improvement from our optimized completions.

These wells are tracking more than 20% above base Northeast Wattenberg type curve, so we remain highly encouraged by the results of the program. And this completion design has been implemented as the new standard for future in Northeast Wattenberg completions. Drilling operations are currently focused on the central portion of Northeast Wattenberg and DSU 5-61-34 and 5-61-35 consisting in 14 XRL wells. The wells are anticipated to be completed during the second quarter of 2019.

In addition, completion activity continues on the western portion of the field in DSU 4-63-3 or 4 that standard reach lateral wells and DSU 4-63-5 with seven XRL wells. The wells are expected to be placed on flowback in the second quarter of 2019. Our Northeast Wattenberg drilling program is continuing to lead the way toward improved well economic outcomes with improved drilling performance. Our most recent wells delivered at time of 5.5 days budget spud which is among the top times delivered during our entire Northeast Wattenberg development.

Similar to our Hereford expectations, we're pleased to see this continuous improvement to our well results. In summary, we are pleased by the operational progress made during first quarter of 2019. At Northeast Wattenberg, we continued with our higher fluid completion design which is led to improve well performance focused on unlocking additional value from our assets. Our Hereford wells have demonstrated high oil cuts, reduced drilling complete cost, and significant productivity to drive rates of return.

Lastly, we are implementing design changes, utilizing advanced technology which we believe will significantly improve the value generation from our coming decade of Hereford development. I'll now turn the call over to Bill.

Bill Crawford -- Chief Financial Officer

Thank you, Paul, and good morning. As Scot and Paul reviewed, our operating results were generally in line or exceeded our quarterly guidance and consensuses estimate. I'd now like to provide on a few specific items financials that impacted the quarter. Our NGL price per barrel averaged approximately 24% WTI.

This is lower than prior quarters as a result of temporary third-party processing inefficiency that resulted in offset NGL due the colder weather experienced during the quarter. An effect of this is that some of the NGLs had to be trucked to a distant market thus lowering the realized price we received. Production tax expense averaged $1.39 per Boe in the first quarter, compared to $2.70 per Boe in the first quarter of last year. Production taxes for first quarter of 2019 were offset by an annual adjustment of 2018 Colorado ad valorem tax and of the related Colorado severance tax-credit adjustments.

This is a typical occurrence during the first quarter and we expect production taxes to average about 8% to 9% of pre-hedged revenues. Now touching on the balance sheet. We are currently undergoing our semi-annual borrowing base review and expect that our current borrowing base of $500 million will remain unchanged. We expect that the redetermination will be completed in next week and this will provide us over $400 million of liquidity.

On the hedging front, we continue to take advantage of the recent strength in crude prices to layer support for our capital program. We are well-hedged into 2019 and 2020 which provide added predictability and visibility to our future cash flow. You can find a full summary of our updated hedge position in the press release or the 10-Q. Now an update on our guidance outlook.

We expect total production sales volumes for the second quarter should be 2.8 to 2.9 MMBoe with oil making up about 62% of total volumes. Our guidance incorporates from expected downtime associated with the commissioning of the updated natural gas processing facility in Hereford. As we have previously stated, Summit Midstream is expanding its Hereford gas processing plant from 20 MMcf per day to a 60 MMcf per day plant. The commissioning work is planned for later this quarter during which we expect to experience a production downtime in facility is upgraded.

Capital expenditures for the second quarter are expected to total a $120 million to $130 million based on the activity Paul and Scot repeated. In summary, our 2019 plan is on track and we are reiterating all of our components of operating guidance which can find in our press release.With that, we're ready to take questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question is from Derrick Whitfield with Stifel. Your line is open.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Perhaps for Scot. With the recent signing of the Colorado Senate Bill 19-181, could you speak to the expected changes at COGCC and the additional rules for Clark implemented?

Scot Woodall -- Chief Executive Officer

Sure. But you know one is the makeup of the commission in general is going to change and there will be less industry representation on that deal and a little bit more emphasis on environmental and health and safety. And I think the overall mission of the commission kind of changes more to regulating industry versus fostering industry. And there'll be numerous rulemaking about pipelines and about signing wells and kind of all kinds of things over the course of the next 12 months to 18 months.

Kind of with all that being and said though, the emphasis has really been on local control -- getting local control to municipalities. And we're in an unincorporated portion of well county. So, we really expect to have minimal impact to us as we think about going and executing our drilling plan. In terms of permitting, when I met direct to Robin here a couple of weeks ago, he was pretty proud of the fact that Q1-2019 permit rate was identical to the permit rate of Q1-2018.

So, they plan for it to be kind of business as usual and we continue to have a fully permitted program for 2019. So, I feel very confident that we can put out business plan and go meet them based on our acreage position being in the unincorporated portion and should largely be impacted the least of most people.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Great. That's very helpful. And then, shifting over to Hereford and specifically the Section 16 wells. Would it be fair to say that that's really the first set of wells put on production that fully have your fingerprints on every aspect of design and flowback? And if so, how should we think about the productivity of those wells relative to the Section 15 wells?

Scot Woodall -- Chief Executive Officer

I guess, I'd first answer, yes, 16 and 17 are going to be where we are really trying to implement the latest design, technology. And so, you're going to see, as Paul mentioned, start with fluid design that are 30 barrels per foot, mimicking kind of what the positive results we got in Northeast Wattenberg. And you're going to see various ramp-ups, so that fluid volumes, you're going to see ramps up from the 1,500 pound sand volumes in the testing of different rates. Along with that, we're going to looking at spacing between 10 and 15 wells.

So, there is lot going on in 16 and 17. And I think all of those results will lead us to an optimum design as we think about going and executing the back half of 2019 into 2020. So, when we think about how we typically would go about trying to do evolve our completions and drilling operations, it's kind of can change one thing and then you get production for six or nine months and you evaluate those results and then you change something else. And we're going to be able to do all of that with the latest technology of this fiber optic and microcosmic.

So, we really think that's going to advance the learning curve going forward. So, I'm excited. As Paul mentioned, we're in the middle of that execution right now. We have data flowing out of it right now, and hopefully we have pretty strong results and pretty strong direction about how we're going to go and execute going forward.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Great. That's very helpful. Thanks for your comments.

Operator

[Operator instructions] Our next question comes from Jason Wangler from Imperial Capital. Your line is open.

Jason Wangler -- Imperial Capital -- Analyst

I wanted to ask on the high-fluid completions. I mean just kind of looking at the presentation; it looks like you may well see response a little bit faster maybe as well in terms of the peak rates. Is that something you think maybe a part of that or do you think they're going to kind of continue to be a similar production kind of curve as the other wells, just perhaps at a higher rate.

Paul Geiger -- Chief Operating Officer

Hey, Jason. This is Paul. I mean, for those higher fluid intensity completions, as you know, we drilled these wells back on controlled flowback. And so, you might have a peak of our production ramp anywhere from second to fourth month as we go.

As you see in the Northeast Wattenberg completions, those have continued to ramp on out into the third and fourth months. I think, as you look at it in terms of throughput, understanding controlled flowback is important as well. I mean, as compared to typical wells, you got highest cume in the first month, whichever month following that is significantly less than the first month, whereas for controlled flowback well, our second, third and fourth months are continuing to ramp and generating a higher per month cume. So, we do see those run all the way across.

I don't know that we see anything more quickly, to your question specifically, but we do see significantly enhanced overall production from the start and just factoring up there across the curve. And so, as you saw on those Northeast Wattenberg specifically, 20 plus percent increase performance overall. And Scot mentioned, we are very excited to see that Section 16 in Hereford, which is our first opportunity to see what those higher intensity fluid stimulation look like at Hereford.

Jason Wangler -- Imperial Capital -- Analyst

Great. Thanks. And may be Scot for you just, obviously, focused on free cash flow in the second half of the year. Can you just talk to where you're kind of focused on those proceeds? I'd assume obviously with the draw on credit facility that'd be an area that you'd focus on, but just any color around that?

Scot Woodall -- Chief Executive Officer

Yes. I think, exactly right, would be -- payoff the credit facility would first, and then I think we can look at all kinds of other ways of returning value to the shareholders kind of once we get to that point.

Jason Wangler -- Imperial Capital -- Analyst

OK. And if I could sneak one more, and just obviously the front end loaded capex and kind of backend loaded production, I think that was kind of what happened last year as well. Do you think that that's kind of just the way that the years will look going forward? Do you think is there a size or a scale that you guys get to work , maybe smoothes out further, just curious how you kind of think about that as you guys plan for the longer term.

Scot Woodall -- Chief Executive Officer

You would think eventually that it moves out going forward. But if you recall, kind of in the first quarter is where we built that pressure well in the Hereford field. And so we intentionally completed some wells and left them without putting them on flowback just to kind of build that pressure barrier from our existing production operations. So, that kind of delayed some of the onlines in Q1.

But as I referenced, in my opening comments, I think we put on 12 wells in Q1 and we expect to put on more than 30 in Q2. And I think we've already exceeded putting on more than 12 wells just in the first month, Q2. So, clearly, we have great line of sight of getting all those wells online; that is how we speak to such a high degree of confidence about the second half of this year's production profile.

Operator

I show no further questions at this time. I'd like to turn the call back over to Larry Busnardo for closing remarks.

Larry Busnardo -- Vice President, Investor Relations

I think we have one more question that just popped into the queue. We'll take that.

Operator

We do have a question from Mike Kelly from Seaport Global. Your line is open.

Mike Kelly -- Seaport Global -- Analyst

Hey, guys. Good morning. Thanks for getting me in. I apologize, I missed part of Scot's opening comments.

So, maybe you detailed this. But, just wanted to dive into the capex a little bit more. We know where you were obviously for Q1 and now what are you expecting for Q2? How does that trajectory look, Q3 and Q4, if you wouldn't mind getting maybe a little bit granular than you would like to on that?

Scot Woodall -- Chief Executive Officer

Sure. So, I guess two things. So one, we ran three rigs into the second quarter, which we plan on laying down one of those rig in the quarter, so a slower drilling pace in the second half of the year. And then also, obviously, we had a lot of things going on completion-wise.

And what I kind of just said, as we put on 12 wells in Q1, we expect to put on more than 70 wells in Q2. We have the opportunity to bring in some additional equipment and kind of accelerate the data gathering in the Hereford area. So, we have additional simulation crews in the field trying to gather that data as quickly as possible. And so that kind of leads to the spending levels that you see due to which also then should diminish as you move into Q3 and Q4.

So, really kind of everything, kind of going -- is going to plan. We are accelerating a little bit in Hereford in Q2, but I think that we're on track for both meeting the capex and the production targets that we laid out.

Mike Kelly -- Seaport Global -- Analyst

OK, great. And should Q3 and Q4 look pretty similar in terms of that spend or would there be -- expect maybe a larger drop-off in Q4 in the capex?

Scot Woodall -- Chief Executive Officer

I think it's pretty similar, but I don't have those numbers in front of me, I guess.

Mike Kelly -- Seaport Global -- Analyst

OK. And then, Scot, when do you think you will really be able to tell, and we're looking to the Hereford wells, kind of the really best-in-class completions with the frac barriers, the higher intensity fluids levels, when do we think we really get a good sense of what those results, each for potential resource?

Scot Woodall -- Chief Executive Officer

All the work will be done in Q2. And so, you'd probably would like to one, analyze the real time data that we captured in Q2 and probably see at least a little bit of production history. So, probably we could speak to it without the higher degree of confidence maybe in Q3, will probably be my guess.

Operator

Our next question comes from Welles Fitzpatrick from SunTrust. Your line is open.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

On the five wells in Section 15, can you talk to where were those Nios and Coddles fairly similar, are those performing about in line with each other?

Paul Geiger -- Chief Operating Officer

This is Paul. Yes, they are. You got that split between Nio and Coddle on those wells, and we do see those performing relatively similarly. They've got the similar lower intensity completions.

They were protected by the walls, so we haven't seen frac gets on flowback. But, yes, we've not differentiated in the way we're stimulating seeing Nios or Coddles.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

OK. And then, just one last one, obviously you talked to controlled flowback. Is there any way to quantify that, either can you put pressures or maybe how those rates have been relatively flat or even not quite peaked yet?

Paul Geiger -- Chief Operating Officer

Absolutely, I can talk a little bit about that. As we look at the controlled flowback, you've got -- our peak at Hereford, we're talking about a two to three-month ramp there from what we've seen from the wells to date. We're managing that on maximizing liquids recovery through kind of management of flowing bottom pressure there. So, as we target that, in that first month, cume is not the highest month; you're talking about the second or third month which will be the highest monthly rate with the second and third likely to being very similar.

And so, as we've seen those things ramp through their second and then third months, that's how we're taking look at those from a controlled flowback standpoint.

Scot Woodall -- Chief Executive Officer

Yes. And Welles, just remember, kind of went through same exercise when we first started development in the Northeast Wattenberg. And so you remember, maybe first handful of wells, we flowed them back pretty hard and we didn't think that taking all that gap and solution was the right way of producing those wells. And once the controlled flowback methodology gets the gap and solution longer, and it led to higher oil recoveries and higher EURs.

And obviously we largely check that looking at net present values and cume production through time. And so, we're going that same exercise here in Hereford. And we just think that there is a strong application to do it this way when you are in the lower GUR area. So, you remember, Wattenberg position is plus or minus 50% on the oil cut and the Hereford is plus or minus 80% oil cut.

And so, we think it's the right application of the technology and that's why we are going through this process and doing the controlled flowback for these early times couple of months.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

OK. That's wonderful. That's really helpful details. It sounds like those wells are still on the way.

I appreciate it.

Operator

The final question is from David Beard from Coker Palmer. Your line is open.

David Beard -- Coker and Palmer -- Analyst

Hey. Good morning, gentlemen. I had two questions. The first was on that Section 16; you've answered that.

So, good to see the progress on those wells. Bigger picture, you talked about use of free cash flow to pay down the credit line. What's your priority after that in terms of absolute debt levels, maybe building some cash on balance sheet or buying back stock and how do you think about use of proceeds after the credit line is cleaned up?

Bill Crawford -- Chief Financial Officer

Hey, David. This is Bill. Obviously, when we get to that situation, we'll assess all of those opportunities. It feels good to be in that position, to be cash flow positive and look at that.

Obviously, we like the rates of the returns of the wells, but we're going to be very capital disciplined with that good hedge program. And so, we'll just assess that as we get into later this year and start planning out our 2020.

David Beard -- Coker and Palmer -- Analyst

Fair enough. I appreciate it, guys. Congratulations on the quarter.

Bill Crawford -- Chief Financial Officer

Thanks, David.

Operator

I'm showing no further questions at this time. I'll now turn the call back over to Larry Busnardo for closing remarks.

Larry Busnardo -- Vice President, Investor Relations

Thanks again for joining us today and feel free to reach out if you have any additional questions over the next several days. Have a good day.

Operator

[Operator signoff]

Duration: 31 minutes

Call participants:

Larry Busnardo -- Vice President, Investor Relations

Scot Woodall -- Chief Executive Officer

Paul Geiger -- Chief Operating Officer

Bill Crawford -- Chief Financial Officer

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Jason Wangler -- Imperial Capital -- Analyst

Mike Kelly -- Seaport Global -- Analyst

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

David Beard -- Coker and Palmer -- Analyst

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