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Whiting Petroleum Corp (NYSE:WLL)
Q4 2019 Earnings Call
Feb 27, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Rocco and I will be your conference facilitator today. Welcome everyone to the Whiting Petroleum Corporation's Fourth Quarter and Full Year 2019 Financial and Operating Results Conference Call. The call will be limited to 45 minutes including Q&A. [Operator Instructions]

I will now turn the call over to Eric Hagen Whiting's Vice President of Corporate Affairs. Please go ahead.

Eric K. Hagen -- Vice President, Corporate Affairs

Thank you Rocco. Good morning and welcome to Whiting Petroleum Corporation's Fourth Quarter and Full Year 2019 Earnings Conference Call. On the call with me are Brad Holly Chairman President and CEO; Correne Loeffler CFO; Chip Rimer COO; Tim Sulser CSO; and Kevin Kelly our Vice President of Marketing and Midstream. During this call we'll review our results for the fourth quarter and full year 2019. This conference call is being recorded and will also be available on our website at www.whiting.com under the Investor Relations section. We also posted an updated corporate presentation to our website earlier this morning. Please note that our remarks and answers to questions include forward-looking statements that are subject to risks that could cause actual results to differ materially from those in the forward-looking statements. Additional information concerning these risks are set forth on slide number two of our corporate presentation and in our earnings release.

With that I'll turn the call over to our Chairman President and CEO Brad Holly.

Bradley J. Holly -- Chairman, President and Chief Executive Officer

Thank you Eric. Whiting ended the year delivering solid results which reflects the benefit of our midyear reorganization. We kept our oil production flat in second half of the year while significantly reducing cash operating costs. We reduced lease operating expense and G&A by approximately $100 million on an annualized basis from the second quarter levels. In addition we underspent our full year capital budget by $42 million. Our hard work and discipline allowed us to deliver on our core value proposition and generate $86 million of free cash flow in the fourth quarter. To realize the full value of these improvements to Whiting and our cost structure we need to address our balance sheet and asset base. We have retained advisors to assist our effort to explore all alternatives. We are focused on achieving our long-term goals of strengthening our balance sheet and asset base while reducing the absolute levels of our debt. As we explore alternatives we have sufficient liquidity to fund operations.

At quarter end we had $375 million drawn on our $1.75 billion committed revolver giving us ample flexibility. In addition we continue to satisfy all of our covenants. In summary we are taking decisive actions to cut costs improve operating efficiency generate cash flow find solutions for our leverage and maturities while we work to add high-quality inventory. To support these initiatives we have adopted a 2020 plan designed to ensure capital spending maximizes the value of our resource base. Our 2020 plan represents a 23% capital reduction from 2019 a nearly 10% decline in LOE and a 20% reduction in G&A. In 2020 our top priorities include achieving a high rate of return on our drilling program ensuring the capital efficiency of every dollar spent and strengthening our balance sheet. We are prepared to deliver in each of these areas in 2020. Our minimum threshold for drilling a well as a 30% rate of return. As depicted on slide four we beat that in 2019 and believe we can achieve it again in 2020. Underpinning these strong returns is our focus on well cost.

We project 2020 well cost reductions of 10% from 2019 levels on an apples-to-apples basis. Adjusting for additional profit that is expected to enhance productivity the absolute well cost is down 6%. slide nine depicts the continuous improvement the teams have captured in well costs since 2018 through innovative and efficiency improvements. As outlined on slide 13 we are using new drillbit technology to reduce drill times by approximately 20% which saves over $100000 per well. As shown we continue to lead the basin in drilling with four of the top 10 rigs in terms of footage drilled per quarter. We are also continuously improving our cycle times. As shown on slide 14 we have reduced the time from when we begin drilling a well to putting it on production by 11% since 2018. This means we are more efficient with our investment dollars and have less capital tied up and drilled uncompleted wells.

I'd like to finish my review of the 2020 plan and operations by thanking our field teams for their excellent safety record post our midyear 2019 reorganization. Our safety metrics were outstanding in the second half of the year. Our total recordable incident rate declined to a level well below the industry average and our spill metrics were some of the lowest in our peer group. Now I'd like to address our inventory. Before you can add inventory in a value-accretive manner it is critical to maximize the value of existing assets. As you can see from our work at Sanish and Foreman Butte we believe we have a strong and inventive team that can deliver top-tier results. We added over 300 locations at Sanish and Foreman Butte through innovation through innovative new completion approaches and driving down well costs. Sanish field is a good example of finding more locations on existing acreage. We led the industry in Montreal County through our redevelopment of this field.

Our pilots proved up several concepts to include high-density infill drilling extended lateral lengths and section line wells. I'd like to highlight a few of the projects we recently added in Sanish. We are pleased with our prior results at Sanish but now newer projects are even more productive. On our call last quarter we highlighted our POD nine project. It demonstrated the viability of longer 3-mile laterals and section line wells. Results have remained strong with 120-day cumulative production for the child wells coming in 29% better than the parents. slide 10 shows our progress in Sanish subsequent to Pod 9. The team incorporated completion learnings from Pod nine to further optimize proppant volumes and the installation and sizing of artificial lift. As shown on slide 11 Pod 10 our most recent project is our best performer. These latest results support our confidence in future Sanish development. On the acquisition side our Foreman Butte bolt-on is a strong example of adding value by understanding the rock and unlocking this potential through new completion approaches.

We purchased the asset in the second half of 2018 at an attractive price on the premise that new technology could uplift results. This has been substantiated by performance to date. We have drilled and completed 17 wells that bracket the field. The majority of the wells now have over 90 days of production history. As depicted on slide 12 results remained strong and we continue to improve performance as we optimize artificial lift. We are working with third-party operators to construct infrastructure in the area and have a robust drilling program planned there for the next several years. I'd like to end by emphasizing our dedication to running a disciplined value-driven E&P company. Our fourth quarter and full year capital results show our disciplined approach to capital spending. Our improvements in G&A and LOE demonstrate our progress at our headquarters and in the field. We have remained disciplined on both the acquisition and divestiture fronts and enhance the value of our existing asset base. We delivered on our goals and have adopted an efficient 2020 plan to maximize the long-term value of our asset base.

I'll now hand it over to our CFO Correne Loeffler who will provide further details on the quarter and our outlook for 2020.

Correne S. Loeffler -- Chief Financial Officer

Thank you Brad. Good morning everyone. We are a company focused on generating value with continuous cost improvements strengthening our balance sheet and optimizing our asset base. Last fall we took proactive steps in managing our near-term maturities but more importantly we worked hard to pay down debt through the generation of free cash flow and non-core credit accretive asset sales. During the quarter we generated $86 million of free cash flow which was used to pay down debt. In addition we divested a $25 million non-core non-operated assets at the beginning of this year. These proceeds were used for additional debt reduction. Moving on to the quarter. Our oil production was in line with our second half forecast. capex came in $42 million lower than our full year guidance based on improvements in our cycle times as well as further well cost reductions. In addition LOE and G&A came in at the midpoint. When adjusted sorry came in below the midpoint when adjusted for onetime items.

The LOE beat was driven by the initiatives we outlined last quarter including cost optimization of chemicals decrease of saltwater disposal rates reduced rental equipment in the field and our enhanced work-over program. The G&A beat reflected savings we continue to realize from our midyear reorganization. On oil and gas natural gas differentials also came in at or below the midpoint of our guidance while we also saw seasonal improvements in natural gas prices. The net result was the generation of significant free cash flow for the quarter. After the seasonal decline in production in the first quarter of 2020 we expect production to grow in the second half of the year. Harsher-than-normal weather conditions impacted operations. As a result we lost approximately 5000 BOEs per day. Also our first quarter wells are primarily located in our lower working interest area of Sanish. These factors combined will contribute to our first quarter production run rate. In subsequent quarters we as we plan to bring on significantly more wells with higher working interest we expect to exit 2020 at or slightly above our 2019 exit rate. For the entire year we expect the capital to range between $585 million and $620 million.

The details of the capital plan can be found on slide six. Similar to our 2019 capital plan we will incur higher levels of spend in the first and second quarters which are expected to be approximately $160 million per quarter which will support the planned growth in production in the second half of the year. Moving on to the cost structure for 2020. For the entire year we are targeting $10 million to $20 million decrease in absolute LOE compared to the second half 2019 run rate. As depicted on slide eight the majority of the projected savings are driven by optimization of our work-over program and the renegotiation of our saltwater disposal rates. These are just a couple of examples of the initiatives we have under way that are focused on further reducing our LOE spend. For G&A we expect to continue to realize the savings from our 2019 midyear reorganization. In addition we have implemented multiple nonpayroll cost savings initiatives which are expected to further reduce G&A for the year.

Compared to the second half of 2019 G&A is projected to decrease by over $30 million on an annualized basis. I'd like to begin my discussion on differentials by pointing out some of the accounting differences between our peers that make comparisons challenging. Our realized prices tend to be lower than some of our peers that recognize in-basin transportation costs and their gathering and transportation line item. Our G&T per BoE is under $1. When you factor this in our all-in cost structure between price differential and G&T cost you will see that we have a similar cost structure to our peers. We see relatively stable Williston Basin oil differentials as rail continues to set the price on the margin. Whiting's oil differentials are forecasted to improve with the expiration of our Redtail contract in April. In 2021 with the Liberty pipeline and DAPL expansion we could see considerable improvement in the marginal barrel on pipe. In that environment differentials could revert to what the basin experience when DAPL came into service in 2017. Now moving on to natural gas and NGL pricing. We believe with the start-up of the Elk Creek pipeline there should be adequate takeaway capacity and an improvement in NGL prices from the lows that we saw last fall. On the natural gas side the basis processing capacity looks.

Our differentials will vary seasonally relative to Henry Hub but overall should remain similar to 2019 levels. We'd like to thank our team in the field and highlight their excellent work in capturing natural gas as highlighted on slide 16 being a sustainable company and a great corporate citizen is fundamental to Whiting's belief system. Whiting continues to be an industry leader in working for solutions to minimize flaring in the Williston Basin.

Brad with that I'll turn the call back over to you.

Bradley J. Holly -- Chairman, President and Chief Executive Officer

Thanks Correne. I'd like to finish by reiterating our commitment to cost control value maximization and risk management. We intend to build on our cost structure achievements in 2020. We're drilling a productive high rate of return program. We have partially protected this by executing on a proactive hedging program with attractive price floors in a very volatile market. We believe this should help us to achieve our goals moving forward. We look forward to realizing incremental savings maximizing cash flow and further strengthening our balance sheet in 2020.

Operator please open the conference call for Q&A.

Questions and Answers:

Operator

[Operator Instructions] Today's first question comes from Neal Dingmann at SunTrust. Please go ahead.

Neal Dingmann -- SunTrust -- Analysrt

Congrats. My first question guys obviously the mark was wondering on the financing options. I'm just wondering well I realize you could put the remaining 2020 converts in '21 bonds on the current revolver. I'm just wondering your thoughts about what would happen around if the next redetermination changes things? And if so thoughts about the financing options post that point?

Correne S. Loeffler -- Chief Financial Officer

Thanks Neal. Given the kind of current commodity price and the current state of the capital markets we felt it was best to retain advisors to assist and exploring all alternatives. However we feel it is best not to comment on these alternatives at this time. We are early in the redetermination season haven't kicked that process off that will be coming in the coming months.

Neal Dingmann -- SunTrust -- Analysrt

Okay. And then just second question Brad maybe sticking with that read on the alternatives I know you can't speak too much on this but I know could you just Brad give a little more color what you said about I know part of that suggest potentially looking at additional high-quality acreage but you suggested you really have to get our hands around what you have. I'm just wondering could you talk about your inventory now and how that might come into play if you're looking at your potential alternatives?

Bradley J. Holly -- Chairman, President and Chief Executive Officer

Sure Neal and thanks for the question. I think what we've I think what we'd like to highlight is just the track record of Whiting. We've gone into a Sanish field for really a third time in redevelopment. And have been able to successfully redevelop that field that can be very challenging in the unconventional space to go in and to redevelop. But what we've seen is we've been able to drill very economic child wells that have been better than the existing parents. We've also been able to positively stimulate the parent wells. We see more opportunities like that and think that the Whiting team has the capability and skill set to do that kind of work.

We also see opportunities to move out to the west like Foreman Butte where the latest completion technologies haven't been deployed and to be able to take stuff that looked marginally economic and make those very attractive economics moving forward. And so the team has experience doing that kind of work and we feel like that there's more opportunities that exist that to be able to execute on.

Neal Dingmann -- SunTrust -- Analysrt

Thanks.

Operator

And our next question today comes from David Deckelbaum at Cowen. Please go ahead.

David Deckelbaum -- Cowen -- Analyst

Everyone thanks for taking my questions. Just wanted to ask first the decision around using more proppant into 2020. You highlighted incremental well cost there. I guess can you break out that incremental benefit either on a return basis or a productivity basis that is making you go in this direction particularly in light of the fact that obviously trying to be kind of miserly in this environment. You talked about allocating capital and setting up for the most capital-efficient program. Are you noticing a near-term step change between wells that you would have drilled in 2009 with lesser proppant loadings that you'd like to either reverse in '20? Or is this an expansion upon what you were doing?

Bradley J. Holly -- Chairman, President and Chief Executive Officer

Yes David. Thanks for the question. It's primarily in Foreman Butte. And what we saw with the 17 wells they blanketed across that area. We pump different proppant loads and our team is always innovating. And so we had cases where we pumped significantly more proppant. And the incremental return on that is very very attractive. And so because that area maybe was largely undeveloped and hadn't been developed in at least the last five to eight years the larger jobs in that area of the field have performed significantly better. And so it's simply just better well economics.

And so we're adding about $300000 per well which brings it down 6% over 2019. But that extra $300000 is we're seeing we have 90 days of cume production on most of the wells the ones that we pumped the larger jobs we've seen substantially better performance. And that justified the change that we made on the completion side.

David Deckelbaum -- Cowen -- Analyst

Understood. And I know you all didn't have a chance to release your reserve report yet but I was curious if you could give us some high-level color at all just directionally where things shook out? And if you guys were if you should expect any performance improvements or if you got credit for bookings in Sanish from some of the infill activity and the benefits that you're seeing to those parent wells?

Correne S. Loeffler -- Chief Financial Officer

Yes our year-end reserves totaled 485 million BOE which is approximately call it a 75-ish prove developed. We produced roughly 46 million BOEs and we added about 34 million BOEs through extensions and discoveries. We had a small amount that we sold which was about 5. So the net revision at the end of the day was about 18 million and this is really driven more by pricing changes at the end of the year.

David Deckelbaum -- Cowen -- Analyst

Thanks for that.

Operator

Our next question today comes from Kashy Harrison at Simmons Energy. Please go ahead.

Kashy Harrison -- Simmons Energy -- Analyst

Good morning, and thank you for taking my questions. So apologies if I missed this in the prepared remarks but how much free cash flow does the program generate in 2020 at $50 oil? And then can you help us think through what it would take for you to revisit the capital program? What you would need to see on the forward strip just given how just given how challenging it is today?

Correne S. Loeffler -- Chief Financial Officer

Yes we don't typically put out kind of a free cash flow forecast. But to kind of look at it slightly different. We do think $55 is about our breakeven but this is also reflecting kind of the deficiency payments that we have to cover with Redtail. As those payments decrease and as we get the additional savings through just the cost structure we're working that number down.

Kashy Harrison -- Simmons Energy -- Analyst

Got it. And then I guess my follow-up question is actually following up on the earlier questions surrounding reserves. What's the PV-10 associated with the numbers you quoted? And what would be the PDP PV-10 as well?

Correne S. Loeffler -- Chief Financial Officer

So the PDP PV-10 is just over $3 billion on all-in total it's closer to $3.8 billion.

Kashy Harrison -- Simmons Energy -- Analyst

Got it. That's it for me. Thank you

Operator

Our next question today comes from Michael Scialla with Stifel. Please go ahead.

Ian mustafine -- Stifel -- Analyst

Morning. Thank you for taking my question. This is actually Ian mustafine [Phonetic] for Mike. I was wondering if you could comment on the infrastructure constraints for 2020 in the back end a little bit more?

Kevin A. Kelly -- Vice President, Marketing

This is Kevin Kelly. We feel good about the infrastructure relative to 2019. As you've probably seen gas processing additions have been pretty adequate 2019 over a Bcf a day. We also see headlines of additional processing additions coming through in 2020 and 2021 that gives us good running room as an overall basin. We've also selectively shifted our program to the Sanish and Foreman Butte where we have better control over our gas gathering oil infrastructure networks which gives us high confidence in our ability to capture on pipeline. Oil takeaway and gas takeaway from the basin are also sufficient and with NGL pipeline Elk Creek now in service we also feel good about that takeaway avenue.

Ian mustafine -- Stifel -- Analyst

And my follow-up would be would you consider our core asset sales to reduce your absolute level of debt at any point?

Correne S. Loeffler -- Chief Financial Officer

Yes As we mentioned before we actually have done some non-core credit accretive asset sales. We will continue to evaluate that. But they must be at least they have to at least be credit neutral to credit accretive for us to consider.

Ian mustafine -- Stifel -- Analyst

And is the to spread to Whiting for that to happen?

Correne S. Loeffler -- Chief Financial Officer

I'm sorry. Can you repeat?

Bradley J. Holly -- Chairman, President and Chief Executive Officer

Repeat.

Ian mustafine -- Stifel -- Analyst

Sorry I said that the bid-ask spread between what a possible buyer might be willing to pay versus what might be accretive on a leverage basis for you? Is that too wide as of today?

Correne S. Loeffler -- Chief Financial Officer

I would just say right now in general we've seen that the A&D market has been extremely challenged. We will continue to look at alternatives as they come available.

Ian mustafine -- Stifel -- Analyst

Okay, that's it for me.

Operator

And our next question today comes from Karl Blunden at Goldman Sachs. Please go ahead.

Karl Blunden -- Goldman Sachs -- Analyst

Thanks for taking my question. Just on the refinancing options you have with the 2020 and the 2021 bonds is a different size different type of bonds. I understand that maybe you need to be conservative with regard to the borrowing base getting pinched a bit. But with they're still probably being sufficient room for the 2020s would you take a different approach to the '20s versus the '21s? Were you suggesting that you're looking for a more fulsome solution here our wholesale solution?

Correne S. Loeffler -- Chief Financial Officer

I really appreciate the question. However this is a near-term upcoming maturity. We don't believe it's proven to provide any specific commentary on the call at this time regarding the 2020.

Karl Blunden -- Goldman Sachs -- Analyst

Okay got you. And then just with regard to those 2021 bonds not being that far out now. And then there's some spring and maturity language on the revolver tied to the '21. Is there a specific time at which you need to address those to avoid putting adverse language in your filings like we saw from one of the peers where that kind of drove some concern in the market? Just trying to figure out how much time you have to act in this pretty tough macro tape.

Correne S. Loeffler -- Chief Financial Officer

We're considering all factors. But as we said we're working with advisors to explore all of our alternatives. However we really just cannot comment at this time.

Karl Blunden -- Goldman Sachs -- Analyst

Gotcha. Thanks very much.

Operator

And our next question today comes from Tarek Hamid at JP Morgan. Please go ahead.

Tarek Hamid -- JP Morgan -- Analyst

Morning. So try to get a different tack. Can you maybe just talk a little bit about kind of how you think about long-term balance sheet targets for the business sort of what do you think the right leverage level or right quantum of debt to sort of target on the back end of this process is?

Correne S. Loeffler -- Chief Financial Officer

We are continuously evaluating to answer those specific questions. But given the conversations and the inviters that we have at this time. We don't feel it's prudent for us to comment.

Tarek Hamid -- JP Morgan -- Analyst

I appreciate that. And then just on the business itself as you think about the slight increase in the gas mix in '20 versus 2019? Sort of have an idea of what portion of that is just due to lower flaring versus any sort of shift in the actual gas mix on the wells you're drilling?

Bradley J. Holly -- Chairman, President and Chief Executive Officer

No thanks for the question. And it really is more gas capture. And so we are working hard to have the infrastructure in place to capture our gas. And so the increase in gas volumes we're seeing as a direct reflect of the wells we're drilling are very similar to our prior program. We're just able to capture more of the gas.

Tarek Hamid -- JP Morgan -- Analyst

Got it. That's helpful. I'll get back in the queue. Thank you.

Operator

And ladies and gentlemen this concludes the question-and-answer session. I'd like to turn the call back over to Brad Holly for any closing remarks.

Bradley J. Holly -- Chairman, President and Chief Executive Officer

Thank you Rocco. I want to thank our dedicated employees and committed shareholders. In the second half of 2019 Whiting delivered on its goals of expanding margins generating free cash flow and paying down debt. We have remained disciplined in our capital spending. Our 2020 program maximizes the value of our asset base and positions us to address our balance sheet. We look forward to seeing you at upcoming events.

Operator

[Operator Closing Remarks]

Duration: 29 minutes

Call participants:

Eric K. Hagen -- Vice President, Corporate Affairs

Bradley J. Holly -- Chairman, President and Chief Executive Officer

Correne S. Loeffler -- Chief Financial Officer

Kevin A. Kelly -- Vice President, Marketing

Neal Dingmann -- SunTrust -- Analysrt

David Deckelbaum -- Cowen -- Analyst

Kashy Harrison -- Simmons Energy -- Analyst

Ian mustafine -- Stifel -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

Tarek Hamid -- JP Morgan -- Analyst

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