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HighPoint Resources Corporation (NYSE:HPR)
Q3 2019 Earnings Call
Nov 5, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q3 2019 HighPoint Resources Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the call over to Larry Busnardo. Please go ahead, sir.

Larry C. Busnardo -- Vice President, Investor Relations

Good morning, and thank you for joining us today for the HighPoint Resources third quarter 2019 earnings call. With me today are Scot Woodall, Chief Executive Officer; Paul Geiger, Chief Operating Officer; and Bill Crawford, Chief Financial Officer.

Before we begin, please review the disclosure statements provided within the forward-looking statements of our earnings release which you can find 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'll be referencing non-GAAP financial measures during our call and a reconciliation to GAAP financial statements can be found at the end of our press release. We've also posted an updated corporate presentation to the Investor Relations portion of our website that we will be referencing on today's call.

With that I'll turn the call over to Scot for prepared comments.

R. Scot Woodall -- Chief Executive Officer and President

Good morning, and thank you for joining us today to discuss our very positive third quarter financial and operational results, which reflects our strong operational execution and has us on track to meet our full-year guidance. I will provide some overview comments before handing the call over to Bill and Paul for the financial and operational update.

As we've discussed previously, our primary objective for the first half of the year was to execute and complete our optimization program in the Hereford Field to demonstrate the quality and economic value of the asset. We have delivered on this goal as recent Hereford well results have shown a substantial and continuous improvement in well productivity and performance compared to early program wells. Today, we provide further Hereford results that show continued improved well performance and builds upon the positive update we provided in early October. We continue to assess further performance opportunities of upspacing and increased completion intensity. This strong performance allowed us to achieve a Company record of Hereford production averaged over 10,000 BOE per day during the third quarter, which is a robust increase of 41% over the second quarter.

Specifically, the continued production performance of the Section 16 East wells, coupled with continued reduction in well cost, provide a strong future outlook for the economic development of the vast Hereford acreage position. For the third quarter, we achieved production that was at the high end of the guidance range and oil volumes exceeded the high end of guidance. When combined with a meaningful improvement in cash cost, we generated EBITDAX of $94 million which was 30% greater than the second quarter and 7% higher than consensus estimates.

We achieved another primary objective by becoming cash flow positive during the quarter. This will continue in the fourth quarter and we will use the proceeds to reduce borrowing on our credit facility. I commend our entire team for an excellent job in helping us reach our economic and operational objectives.

In summary, we continue to meet the financial and operational objectives we set for the year. We have advanced our learnings from Hereford which is delivering sustained improvement in well productivity and performance. We believe HighPoint to be a compelling value proposition based on strong performance of the improved completions at Hereford and Northeast Wattenberg, our vast rule positioning and a solid balance sheet. I will now turn the call over to Bill to discuss our financials.

William M. Crawford -- Chief Financial Officer

Thank you, Scot, and good morning all. Our strong results for the third quarter generally exceeded consensus sell-side estimates and were driven by strong quarter-over-quarter growth in production and a meaningful decrease in cash costs. Production volumes of 3.4 MMBoe were at the high end of our guidance range, despite being negatively impacted by depressed processing yields, primarily related to third-party facilities in the Hereford field as well as basinwide ethane rejection. We estimated that this impacted our quarterly volumes by approximately 100,000 Boe. We expect NGL infrastructure and yields to improve in the fourth quarter in 2020, but expect NGL prices will remain weaker than historical levels.

Our first-half activity drove strong third quarter growth as total production grew 20% sequentially and 24% year-over-year. We also delivered very strong growth in oil volumes that increased 25% over the second quarter and 27% year-over-year.

We remain focused on delivering efficiencies as we had a notable reduction in per unit cash, excuse me, operating costs of 29% and 30% on a sequential and year-over-year basis, respectively. This combination of strong growth in production, particularly oil, and a meaningful reduction in controllable cash costs underpinned an increase in our third quarter EBITDAX to $94 million. Our only minor challenge to our Q3 EBITDAX was NGL pricing that averaged approximately 10% of WTI. This was driven by unprecedented weakness in broader markets that resulted in a 76% decline compared to the third quarter of 2018, as the ethane prices were weak and transportation and fractionation costs were high from the Rockies. For example, our Mont Belvieu basket was down 15% from Q2 with ethane posted at $0.17 and Conway E/P mix posting at $0.07, each of these before taking into account TNFB [Phonetic].

Touching on the balance sheet liquidity, we completed our semi-annual borrowing base review during the third quarter and our borrowing base of $500 million remained unchanged. This was achieved despite lower-price decks -- bank price decks being used by the lenders, highlighting the underlying value of our reserves. We appreciate our long-term relationship with our lenders and their support.

On the hedging front, we continue to execute on our strategy and are 50% to 70% hedged on oil volumes for next year, as we protect anticipated cash flow at greater than $59 per barrel WTI. You can find our current hedge position in the press release or 10-Q.

Now on to fourth quarter guidance. We anticipate total production to be 3.6 MMBoe to 3.7 MMBoe and oil volumes to be approximately 2.3 million barrels. This represents an oil weighting of about 63%. We remain capital disciplined and capital expenditures will be in the range of $30 million to $40 million for the fourth quarter. By executing on our business plan and achieving our fourth quarter guidance, we will hit all of our full-year guidance metrics that we laid out at the start of the year.

With that, I'll turn the call over to Paul.

Paul Geiger -- Chief Operating Officer

Thank you, Bill, and good morning, everyone. First, I would like to congratulate and commend our field and office personnel for a great quarter, delivering on our operating objectives in a safe manner and driving performance improvement throughout our operations.

We are very pleased with our operational execution and performance in the third quarter, which have us on track to meet our full-year objectives. Hereford well results in Section 16 and 17 DSUs are showing dramatic improvement. Our Hereford development optimization project is highlighting performance improvement opportunities and the high-volume completion tests in Northeast Wattenberg continue to outperform their offsets.

We have driven our EHS incident rates down significantly versus 2018 rates. Our LOE is down materially on an absolute and liquid cost basis [Phonetic]. And our 2019 Gen 2 completion design demonstrated reduced well cost and increased EURs.

Now moving on to operations. At Hereford, total production sales volumes in the third quarter set a field record averaging over 10,000 barrels a day -- barrels equivalent a day at a high oil cut of 80%. During the third quarter, we spud six gross wells and placed 16 gross wells on controlled flowback. We're operating a drilling rig in what we refer to as the Fox Creek Area, immediately north of our initial row of development in Hereford. We will resume completions in January with designs developed based on the Hereford performance base.

Our Hereford optimization program execution concluded in the third quarter. Since our October 7 update, we continue to see substantial and sustained increases in well productivity, which are both exceeding all previous Hereford DSU performance and exhibiting significantly shallower decline profiles.

For specifics, I would now point you to our November Corporate Presentation, which we posted to our website this morning. Turning to Slide 14, you can see a snapshot of the dramatic improvement in well performance we were seeing on a comparative basis for the two sets of wells in Section 16. The green line is the seven wells located on the East side of Section 16. It is important to note that these wells are drilled in a density of 16 wells per DSU and completed with our Gen 2 completion.

The wells are exhibiting a daily production rate of approximately 120% greater than the previously completed wells as shown by the separation of the green line of the Section 16 Gen 2 completions over the blue line of all previous Gen 1 completions. This outperformance continues to increase as Section 16 wells are displaying a shallowing decline trajectory as compared to previous wells. Recall from our October update, these wells were producing 75% higher barrel oil equivalent per day, per well than the early program wells.

Now moving on to the Western side of Section 16. This includes four wells, which were drilled at a density of eight wells per DSU and completed with our Gen 3 completion design. As shown by the orange line in Section 14 [Phonetic], the wells have begun to show strong performance after initial curtailment associated with the start-up of new processing plant. After 85 days of production, the average well barrel oil equivalent per day is essentially 55% greater than the previously completed wells and continues to increase as water cuts decline. This is a very positive indication of performance.

Our Section 17 DSU includes 12 wells placed on flowback in July, drilled at a density of 12 wells per DSU and completed with even greater fluid of up to 15 -- 52 barrels per lateral foot. These wells are ramping up more slowly, given the high volumes of fluid used in the completion and our controlled flowback methodology. We are highly encouraged by the early production profile of this DSU based on well spacing and early performance. We will provide further updates on these wells as we gain more production insights.

Slide 15 in the presentation is a good example of our controlled flowback methodology. As you can see, the wells performed very similarly for the initial two months to three months before you begin to see separation in performance. The Section 16 wells continue to outperform early program wells and have achieved average cumulative production of approximately 40,000 barrels of oil per well, which is over 30% greater than the previously completed wells.

Overall, these very strong results from our initial optimization program at Hereford bolster our excitement about the future development program. We also continue to see improvements in our drilling execution as we drive to maximize well rates of return. This includes tangible efficiencies, which driven expectations of future well cost to $4.9 million for a Gen 2 XRL well with a high-fluid intensity completion, down from $5.1 million for wells drilled in the first half of the year. We continue to develop opportunities to drive costs lower.

Now turning to our legacy Northeast Wattenberg asset. For the third quarter of 2019, we produced an average of 26,845 barrels of oil equivalent per day. We spud nine gross wells and placed five gross XRL and four gross SRL wells on flowback. Recent activity is highlighted by seven wells in DSU 5-61-35, which began controlled flowback in September and October. All of these wells continue to ramp to peak production.

Our Northeast Wattenberg drilling program is continuing to lead the way in terms of innovation by recently executing our two longest laterals in the Company's history. The drilling team executed the wells in under 7.5 days spud-to-spud, with laterals averaging 12,975 feet in length and delivered at $84 per lateral foot, which is among the strongest cost performance realized in 2019. The success of these wells will allow the Company to continue to expand our well designs, increase the return of individual wells and expand the profitability of development throughout the assets.

To summarize, during the third quarter, we met all key operational objectives, which in turn drove our financial performance. Continued Section 16 Southeast performance, coupled with ramping production from Section 16 Southwest and Section 17, reinforce and refine our plans for future economic development performance of Hereford. We look forward to providing future updates and delivering on our full-year 2019 guidance.

Operator, we are now ready for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Welles Fitzpatrick of SunTrust. Your line is open.

Welles Fitzpatrick -- SunTrust -- Analyst

Hey, good morning.

R. Scot Woodall -- Chief Executive Officer and President

Good morning, Welles.

Welles Fitzpatrick -- SunTrust -- Analyst

I know -- I know the NGL and gas pricing is a basinwide issue. I mean, as we look toward relief on that, are we really waiting on fracs in White Cliff? And are those still supposed to be in service by year-end? And then I guess shying in the first half of next year?

William M. Crawford -- Chief Financial Officer

Yeah, that's the way we're seeing it. Welles, this is Bill. Yeah. I think the tight infrastructure just caused walk-up prices to be so weak on the TNF and having to go to Conway just impacted pricing. Yields are starting to improve in Q4, and we expect it to be better in 2020. Obviously, ethane is pricing at $0.20, and I think then the processors will be able to go through their normal rejection map.

Welles Fitzpatrick -- SunTrust -- Analyst

Okay. Okay, perfect. That makes sense. And then as you guys think the kind of 2020 plans, I see in the presentation you have, you note that you have 1.5 rigs worth of permits. Is that -- should we look at that as sort of a gentle guide? Or are you guys just trying to illustrate the margin of safety you have in the basin?

William M. Crawford -- Chief Financial Officer

I think that's just kind of directionally that we probably think that next year is something like a one or two rig program. But you have to marry well, here we got all the flexibility in the world when you think about everything being HBP and really minimum commitments of any other fashion. So we're still early in the planning process and we'll keep kind of working through it. So we kind of chose 1.5 as an illustrative example just to talk about the permits in the regulatory environment.

Welles Fitzpatrick -- SunTrust -- Analyst

Okay. Perfect. Makes set of sense. Thanks a lot guys.

Operator

Our next question comes from Jason Wangler of Imperial Capital. Your line is open. If your telephone is muted, please unmute.

Jason Wangler -- Imperial Capital -- Analyst

Thanks. Sorry about that. Good morning.

R. Scot Woodall -- Chief Executive Officer and President

Good morning, Jay.

Jason Wangler -- Imperial Capital -- Analyst

As far as the 2020 program, I was just curious, you're just mentioning with wells, one or two rig program, how do you kind of see that breaking down between Hereford and the legacy position as you connected [Indecipherable]?

William M. Crawford -- Chief Financial Officer

It's going to be more heavily weighted toward what Hereford with the well results that we're getting out of Hereford. So the way we see the EURs and the cost in the oil cut would make you want to spend more money in Hereford then in the legacy position. So probably a stronger weighting up there.

Jason Wangler -- Imperial Capital -- Analyst

Okay. And I think you'd mentioned this to me before, but where you guys have kind of started drilling? The idea was you kind of stay close to the infrastructure in that area, would that be correct? Or would you guys be looking to step out any further in Hereford as you look at next year?

William M. Crawford -- Chief Financial Officer

No, we're going to stay in close to the infrastructure. So, we did that East to West row of the wells that we've been talking about in '16 and '17. And the way we kind of looked at '20 is just going just North of there and drilling two-mile laterals kind of on top of '17 and going from West to Wast. So, pretty simple plan.

Jason Wangler -- Imperial Capital -- Analyst

Okay. Great. I appreciate. I'll turn it back.

Operator

[Operator Instructions] Our next question comes from Derrick Whitfield of Stifel. Your line is open.

Derrick Whitfield -- Stifel -- Analyst

Thanks. Good morning, all. And congrats on a strong ops update.

William M. Crawford -- Chief Financial Officer

Well, thanks Derrick.

Derrick Whitfield -- Stifel -- Analyst

Perhaps for Scot or Paul, as a build on Welles' earlier question, do you have a view on what your maintenance capital would be to hold Q4 '19 production flat assuming current Q3 capital efficiency levels?

William M. Crawford -- Chief Financial Officer

We've been talking something, Derrick, in the range of $250 million to $300 million.

Derrick Whitfield -- Stifel -- Analyst

Great. And then, perhaps as my follow-up, could you comment on how the Section 17 well is performing? In your October presentation, the cumulative total fluid volume was trending about 30% above the Section 16 East wells. Is that still the case today? And are you seeing evidence of oil breakout?

Paul Geiger -- Chief Operating Officer

Derrick, this is Paul. As we look at 17 relative to 16, we put considerably bigger completions on those things. We've talked about that 52 barrels -- up to 52 barrels a foot. And so they have more water coming back under that controlled flowback methodology. So as those wells continue to clean up, oil cut continues to improve, and we're seeing solid performance in productivity out of those wells and continuing to ramp even at the current time frame.

Derrick Whitfield -- Stifel -- Analyst

Very helpful. Thanks for your time, guys.

Operator

There are no further questions. I'd like to turn the call back over to Larry Busnardo for any closing remarks.

Larry C. Busnardo -- Vice President, Investor Relations

Great. Thank you again for joining us today. In closing, I would like to reiterate our message that the strong execution we have delivered this year has firmly positioned us on track to meet our operational and financial objectives we set out earlier this year. We look forward to providing further operational updates to the investment community and please feel free to contact us if you have any additional questions with respect to the quarter. Thanks.

Operator

[Operator Closing Remarks].

Duration: 22 minutes

Call participants:

Larry C. Busnardo -- Vice President, Investor Relations

R. Scot Woodall -- Chief Executive Officer and President

William M. Crawford -- Chief Financial Officer

Paul Geiger -- Chief Operating Officer

Welles Fitzpatrick -- SunTrust -- Analyst

Jason Wangler -- Imperial Capital -- Analyst

Derrick Whitfield -- Stifel -- Analyst

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