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Extraction Oil & Gas Inc (NASDAQ:XOG)
Q4 2019 Earnings Call
Mar 05, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good afternoon. I am Sherry and I will be your conference facilitator today. I would like to welcome everyone to the Extraction Oil & Gas fourth-quarter 2019 financial and operating results conference call. [Operator instructions] Please be advised that the remarks today including answers to your questions, include statements that the company believes to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. Those risks include, among others, matters that the company described in its financial and operating results news release issued this afternoon and in its filings with the Securities and Exchange Commission. Extraction disclaims any obligation to update these forward-looking statements. While the company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, general economic conditions, competition, technology and environmental and regulatory compliance, the company's drilling schedules, capital plans and other factors that may cause its results to differ materially.

I would now like to turn the call over to Louis Baltimore, Extraction's director of investor relations.

Louis Baltimore -- Director of Investor Relations

Thank you. And good afternoon to everyone. We're glad you could join us today for our fourth-quarter earnings call. With us today on the call, we have Matt Owens, our president and CEO; Marianella Foschi, our VP of finance; and Tom Brock, our chief accounting officer.

I'd like to remind you that today's call, in addition to the aforementioned forward-looking statements, also includes a discussion of certain non-GAAP financial measures. Please be sure to read our full disclosure on the forward-looking statements and GAAP reconciliations in our earnings release and in our filing on Form 10-K which we plan to file before the SEC deadline of March 16. I'll now turn over the call to Matt Owens, our president and CEO, to go through some of the highlights from this quarter, along with the leadership changes we just announced.

Matt Owens -- President and Chief Executive Officer

Thanks Louis. Good afternoon everyone. Welcome to our fourth-quarter earnings call. First, on behalf of Extraction and its board of directors, I'd like to thank Mark Erickson for his service since founding the company with me back in late 2012.

Mark played an integral role in helping Extraction assemble the asset base we have today and led us through our previous phase of rapid growth. We wish Mark and his family the very best in the future. We are proud to announce that Tom Tyree has joined the Extraction team as our executive chairman. Tom brings with him decades of oil and gas corporate finance experience.

Before joining Extraction, Tom served in executive capacities at Northwoods Energy, Vantage Energy and Bill Barrett Corporation. He also has served as a member of the board of directors of Antero Resources and Bonanza Creek Energy. Before becoming the CFO of Bill Barrett, Tom was an investment banker at Goldman Sachs for many years. Please join me in welcoming Tom to Extraction.

I'd like to quickly touch on our fourth-quarter results which came out quite nicely relative to the guidance we updated last November, then I'll turn it over to Marianella Foschi, our VP of finance, to touch on some of our financial details. We turned in strong full-year results with respect to our updated guidance. At roughly 42,300 barrels of oil per day, we exceeded our midpoint on oil production, and at over 88,700 boe per day, we surpassed the high end of the range on total production. We also exceeded our asset sale targets, generating $56 million of divestiture proceeds.

Putting this all together, our second half free cash flow topped $120 million, also exceeding the high end of our guidance range which in turn allowed us to pay down more RBL than we initially forecasted. Our focus on improving capital efficiency can really be seen in our full-year results as D&C capex came in almost 15% less than what we originally guided to while we were still inside the ranges of our initial production guidance after adjusting for asset sales. During the fourth quarter, our upstream drilling and completion operations were executed as planned as we turned on 50 high-quality wells in Greeley and Broomfield which included our first three mile laterals. These extended-reach wells were drilled and completed in line with our expectations and we are excited about the potential to develop additional reserves with longer laterals while minimizing our surface footprint.

They've been online for roughly 30 days and have been producing at an average rate of approximately 1,600 boe per day and a 77% oil cut. I'd also like to highlight that our company has now gone over two million employee hours without a single OSHA recordable incident. This is a testament to the safety first culture we have created here at Extraction. We will be publishing our inaugural ESG report next week and there you will be able to see a lot more about our focus on safety, protecting the environment and improving the communities where we operate.

On the midstream side, we've talked a lot about the bottleneck relief we expect to see from the various DJ Basin expansion projects, along with our diversified processing and takeaway portfolio. The strong fourth-quarter production numbers demonstrate the value of our midstream positioning. Despite cold weather with plenty of snow, we did not see any material production downtime and continue to produce our wells without any significant production constraints. On the organizational front, we made the difficult choice to reduce our headcount to further improve our cost structure as we shift our focus toward free cash flow generation rather than growth.

We reduced our staff by approximately 70 employees in February which represents just over 20% of our workforce. As a result of this reduction, we have reduced our G&A expense guidance by $10 million for 2020. Again, this was not a decision we made lightly. However, we felt it was necessary given the headwinds we continue to face in the macro commodity environment.

Commodity prices are down significantly year to date, and notwithstanding our strong hedging position in 2020, we believe it is prudent to brace the company for a lower for longer pricing scenario. Before I turn it over to Marianella, I'd like to quickly touch on our ongoing asset divestiture program and its modest impact to our 2020 production guidance. During the fourth quarter, we signed and closed a deal to divest a portion of our non-operated production for $10 million which brought our divestiture total to $56 million for the year. In 2019, we had targeted leasehold expenditures being offset with asset sales, and we were successful in achieving this goal.

While the undeveloped acreage market in the DJ Basin is not all that strong right now, we continue to find ways to monetize our various nonstrategic assets. Our divestiture program in 2020 has started strong as we signed and closed on another deal last month for $14.7 million to sell additional non-operated production. After taking into account the production impact from the December 2019 asset sale and the asset sale we closed in February, we have reduced the midpoint of our 2020 production guidance by 2,000 boe per day and 1,000 barrels of oil per day. I'll now turn it over to Marianella to discuss our financial position.

Marianella Foschi -- Vice President of Finance

Thank you Matt. During the second half of 2019, we generated $122 million of upstream free cash flow, above the high end of our $100 million to $120 million guidance range, and we're able to reduce the balance on our revolving credit facility by $80 million. The $80 million of revolver paydown exceeded the $75 million guidance we provided previously. Consolidated free cash flow for the second half of 2019 was $36 million.

We ended the fourth quarter with $470 million drawn on our revolving credit facility which represents 49% of the $950 million elected commitment. Also during the fourth quarter, we took a $1.3 billion impairment charge related to the carrying value of our portfolio of oil and gas properties as a result of lower NYMEX pricing and our more measured pace of development to focus on free cash flow generation. We believe the strategic shift was and continues to be the right path as we prioritize leverage reduction in liquidity enhancement. With that, I'd like to open it up for Q&A.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Welles Fitzpatrick from SunTrust.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

Hey. Good afternoon.

Matt Owens -- President and Chief Executive Officer

Good afternoon.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

The three milers that you talked about in the prepared comments, obviously those sound pretty stout. To be clear, are those included in the light blue on Slide 8 labeled XOG New?

Matt Owens -- President and Chief Executive Officer

No. They are not included in there. The wells fairly had 30 days of production as of today. So we usually don't put them on that slide until we get about 90 days of production.

But yes, those three mile wells, we did get the first two of those online from our interchange pad drilling south and they look very strong to date.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

OK, perfect. And then it looks like also that the well cost went down a little bit for the longer wells, I think two and a half miles is the only one you could compare kind of presentation-over-presentation, but can you talk to what that and the EUR bump might do on the two and a half milers and the three milers and what having a good three miler pad under your belt might do to unlocking more locations?

Matt Owens -- President and Chief Executive Officer

Yeah. As far as the capex goes, we're doing everything we can internally right now to continue to push down our cost, especially given the macro commodity environment. We were pretty successful, and really, in the fourth quarter negotiating new prices with our vendors, and that's where I'd say the cost reduction has come from. As far as the three mile laterals and future inventory, we were able to drill and complete those in just a couple of days.

So I think our fastest three mile lateral well we drilled in about three or three and a half days. So we didn't have any issues on the drilling or completion side which was very good news for us because we do have a lot of locations in the future that we could possibly extend two and a half to three mile laterals and possibly test even further in the future. So this will allow us to -- like what we said in the prepared remarks, hopefully, we'll be able to access a lot more reserves and get better economics from the same amount of surface locations.

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

OK. Perfect. That's all I have. I'll hop back in queue.

Thanks.

Matt Owens -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Jeffrey Campbell with Tuohy Brothers.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Good morning. And Matt, congratulations on becoming the new permanent CEO. My first question was, it looked like you tied in line approximately 50% of your wells in the fourth quarter of '19. I was just wondering, what sort of a tie-in line cadence you're planning for 2020?

Matt Owens -- President and Chief Executive Officer

As far as production goes, we're going to have obviously a decrease from Q1 versus Q4, just given the fact that we turned on so many wells in the fourth quarter of last year. But then we expect oil to stay relatively flat as we move out -- move on throughout the year. So oil will be, like I said, relatively flat from first quarter through the end of the year, and then we'll see a slight increase in boes, and that just really has to do with the areas of where we're turning on the wells in the second half versus the first half.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

OK. And I want to go back to the three mile laterals, again just ask kind of a different sort of question. I was just wondering if you kind of drilling such long laterals, and particularly you cited how quickly you drill them. Does this require any specifically enhanced rigs or services or tools to stand zone and drill so fast? And was also wondering if there's anything special on the completion side required to finish such long wellbores.

Matt Owens -- President and Chief Executive Officer

We actually -- we did that with all the same equipment that we normally use. So there's nothing changed on the drilling side. The rock out here in this basin drills fairly easily. So we haven't really gotten close yet with our lateral lengths on something that begins to slow down the drill bit.

So we're excited about that for potentially drilling longer in the future. On the completion side, just to be safe, on the first two wells, we did run some dissolvable plugs in the last mile of the lateral, just to be safe. And we ended up running all those plugs just fine. So after that, we switched to normal plugs and just our normal status quo operations, and we haven't run into any issues yet.

So we're very excited with how smoothly everything has gone in our first attempts with laterals that long.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

And just to follow that up, is that shift from dissolvables to normal plugs, does that provide any kind of cost saving?

Matt Owens -- President and Chief Executive Officer

It does. So there's probably about a $3,000 difference or so in those plugs. So it wasn't much just to be safe on the first two, but we're right back down not using those on our three mile laterals now and just our standard plugs.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

OK. Great. Thanks for the color. I appreciate it.

Operator

Thank you. Our next question comes from Brad Heffern with RBC Capital Markets.

Brad Heffern -- RBC Capital Markets -- Analyst

Hey everyone. Just going back to an earlier question, I just want to make sure I understand the new guide and the capex properly. Is the reduction in the guide exclusively due to these non-op sales or is there some component of it that's due to slightly lower capex?

Matt Owens -- President and Chief Executive Officer

It is due to the non-op sales. The lower capex is just those initiatives I said we've been working on in trying to lower our overall well costs.

Brad Heffern -- RBC Capital Markets -- Analyst

OK, got it. And then you guys have this note in the release about the Elevation, this $46 million potential payment. I was just wondering if you could walk through the dynamics of what that is and what needs to happen?

Marianella Foschi -- Vice President of Finance

Brad, this is Marianella. Thank you for your question. So the $46 million, we've yet to determine what if any additional amounts will be paid to Elevation. I'd point you to our disclosure, the one you pointed out in the press release on what that might be.

We're currently working with the Elevation financing partner. So while we can't comment further, those conversations are ongoing and we expect to share additional details in due course on that payment.

Brad Heffern -- RBC Capital Markets -- Analyst

OK. Thank you.

Matt Owens -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question will come from Patrick Sheffield with Beach Point Capital.

Patrick Sheffield -- Beach Point Capital -- Analyst

Hey guys. Congrats on a strong quarter.

Matt Owens -- President and Chief Executive Officer

Thank you.

Patrick Sheffield -- Beach Point Capital -- Analyst

A couple of cap structure questions. Where -- obviously, great job paying down the RBL. Any thoughts on what the spring redetermination might hold given the move in commodity prices?

Marianella Foschi -- Vice President of Finance

Hey Patrick. Marianella here. Thanks for your question. It's a little bit early to say yet.

I think the biggest determining factor there is going to be what happens to spring price decks. I think those are being redetermined as we speak. So I think it's a little bit too early to comment on that at this juncture.

Patrick Sheffield -- Beach Point Capital -- Analyst

OK. And what do you get? What's the latest thinking on the prep and the spring immaturity on the revolver? And on a related note, did you guys decide to pay the pick and -- sorry, pay the prefs in cash or did you pick it?

Marianella Foschi -- Vice President of Finance

So on that Patrick we don't have any updates on the preferred at this time. We're currently evaluating all of our options there. And while we can't go into any specifics, liquidity is first and foremost for us. And we're evaluating anything on -- with that lens.

On the pick, you pointed to our press release, but we did end up picking that for the fourth quarter.

Matt Owens -- President and Chief Executive Officer

And we plan to do that for the foreseeable future.

Patrick Sheffield -- Beach Point Capital -- Analyst

That's great. Thank you very much.

Marianella Foschi -- Vice President of Finance

You're welcome.

Operator

Thank you. Our next question will come from Leo Mariani with KeyBanc.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Yeah. Just wanted to check in with you guys to see if there was any update on the plans to divest some of the midstream here.

Matt Owens -- President and Chief Executive Officer

There's no update that we can give at this time. It's something that we're obviously going to be always in the back of our mind, and we'll pursue it when the time is right. But right now, given the macro environment, I don't know if right now would be the best time. But again, it is something that we will actively pursue in the future.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. And have you folks had any new deals in terms of new operator agreements out there with any of the local municipalities or counties or anything like that recently to discuss?

Matt Owens -- President and Chief Executive Officer

We haven't added any new ones since the last press release with Commerce City. So that was the last one. But we're still working on other ones that hopefully we can announce in the upcoming quarters.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. Thanks.

Matt Owens -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes Kafe Chowdrey from with Ivy Investment.

Unknown speaker

Hi guys. Congratulations on the good quarter. And Matt, congratulations on being named permanent CEO. Just a question sort of on the midstream.

On the preferred you guys have with GSO, can we get the balance of what is available and what's currently outstanding on there as we sort of -- or trying to run our math on the midstream assets?

Marianella Foschi -- Vice President of Finance

This is Marianella. Thanks for the question. We have $250 million outstanding. It was a $500 million facility.

Keep in mind though that that was a facility put in place to build two subset assets, Broomfield and Hawkeye. We're focusing -- just by nature of the slowdown plan and the focus on free cash flow, we're focusing on Broomfield with Hawkeye to be TBD if you will. So I think that the balance was I think continues to be $250 million strong on the price.

Unknown speaker

OK. And you guys have been picking interest on that since it was drawn, right? So there's the -- whatever is accrued on the balance.

Marianella Foschi -- Vice President of Finance

Yes. That's correct.

Unknown speaker

OK. And then just one more other question on the midstream. Can we get some sort of idea of what profitability is at Elevation currently today? And where we think it's going to be kind of at the end of the year?

Matt Owens -- President and Chief Executive Officer

With profitability?

Unknown speaker

I mean whether it's operating income or EBITDA, whatever you guys want to -- can disclose.

Matt Owens -- President and Chief Executive Officer

We haven't really disclosed any of that specifically for Elevation, but we did give a fully consolidated guide which -- with an upstream guide that you can back out.

Unknown speaker

All right. Well thank you guys. I appreciate the time.

Marianella Foschi -- Vice President of Finance

Thank you.

Matt Owens -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Irene Haas with Imperial Capital.

Irene Haas -- Imperial Capital -- Analyst

Yeah. Just kind of curious, your fourth-quarter exploration expense was high. Wondering what that is related to? Also maybe for 2020, your G&A guidance is cash G&A. Can you give me a little color as to what is the like all-in expectations? That's all.

Matt Owens -- President and Chief Executive Officer

Sorry. Clarify that second part on the G&A again. I didn't quite get that.

Irene Haas -- Imperial Capital -- Analyst

Yeah. What is your all-in G&A guidance for next year, cash and noncash?

Matt Owens -- President and Chief Executive Officer

For cash, we're at $50 million to $60 million. So about $10 million down from what the midpoint of our guide was last year. For the -- yes, we don't have noncash that we guide to.

Irene Haas -- Imperial Capital -- Analyst

And should we just kind of look at what you have done historically and expect that trend to continue?

Matt Owens -- President and Chief Executive Officer

Yes. I would.

Irene Haas -- Imperial Capital

OK. Great. Thank you.

Matt Owens -- President and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Jeffrey Campbell with Tuohy Brothers.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Hi. I just wanted to come back and ask one more. I was just wondering if there's any effort or any necessity to do a reverse stock split to reset the stock price at some point in 2020 or beyond?

Matt Owens -- President and Chief Executive Officer

We don't -- we're not planning anything like that right now. We did just recently dip below $1. So we've got plenty of time to address getting our share price back up and not having to worry about doing any reverse stock split.

Jeffrey Campbell -- Tuohy Brothers -- Analyst

OK. Great. Thank you. Appreciate it.

Matt Owens -- President and Chief Executive Officer

Thank you.

Operator

Speakers, I'm showing no further questions in the queue at this time. I would now like to turn the call back over to management for any further remarks.

Matt Owens -- President and Chief Executive Officer

Thank you everybody for joining our full-year conference call. We'll be talking again shortly after the first quarter. Thank you. Bye.

Operator

[Operator signoff]

Duration: 23 minutes

Call participants:

Louis Baltimore -- Director of Investor Relations

Matt Owens -- President and Chief Executive Officer

Marianella Foschi -- Vice President of Finance

Welles Fitzpatrick -- SunTrust Robinson Humphrey -- Analyst

Jeffrey Campbell -- Tuohy Brothers -- Analyst

Brad Heffern -- RBC Capital Markets -- Analyst

Patrick Sheffield -- Beach Point Capital -- Analyst

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Unknown speaker

Irene Haas -- Imperial Capital -- Analyst

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