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Whiting Petroleum (NYSE:WLL)
Q1 2021 Earnings Call
May 06, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning. My name is Ian, and I'll be your conference facilitator today. Welcome to Whiting Petroleum's first-quarter 2021 conference call. The call will be limited to 45 minutes, including Q&A.

[Operator instructions] I will now turn the call over to Brandon Day, Whiting's investors relations manager. Please proceed.

Brandon Day -- Investor Relations Manager

Thank you, Ian. Good morning everyone. This is Brandon Day, Whiting's investor relations manager. Thank you for joining us to discuss Whiting's first-quarter results for the period ended March 31, 2021.

With me today is Whiting's CEO, Lynn Peterson. Also available to answer questions during the Q&A session will be our CFO, Jimmy Henderson; COO, Chip Rimer; and VP of commercial, Jo Ann Stockton. Please be advised that our remarks today, including answers to your questions, include 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 include risks relating to commodity prices, competition, technology, environmental and regulatory compliance, midstream availability and others described in our filings with the Securities and Exchange Commission, which are incorporated by reference.

We disclaim any obligation to update these forward-looking statements. In addition, we may provide certain non-GAAP financial information in this call. The relevant definitions and GAAP reconciliations may be found in our earnings release, which can be found on our website at whiting.com in the Investor Relations section. Following the prepared remarks, time permitting, we'll open the call for the questions.

I would like to remind everyone that a replay of this audio webcast will be available via the company's Investor Relations page at whiting.com. I'd now like to turn the call over to the CEO of Whiting Petroleum, Mr. Lynn Peterson.

Lynn Peterson -- Chief Executive Officer

Thanks, Brandon. Good morning, everyone, and thanks for joining us today. We followed our 10-Q yesterday, and you can refer to it for detailed information. This morning's prepared remarks will be relatively short as the quarter went pretty much as planned, and our expectations were achieved across the board.

I wanted to thank our staff for their work done during the quarter and our progress today. The work that was put into our planning and budgeting process late last year was executed very well by our field team, despite difficult and adverse conditions caused by the winter weather. One constant that we have working in North Dakota is acknowledged that winter will return each year. Bringing our production levels at the top of our guidance for the first quarter sets the company up for continued success through remainder of the year.

As I look back on the past eight months, it's striking how quickly the industry has changed as oil prices have increased significantly. Now that oil has been trading in the range of $65 per barrel, financial conditions have risen across the board. To reflect the impact of this change on our company, we chose a conservative $55 per barrel crude price to reset our outlook. Using that price for oil, we now expect Whiting to generate approximately $550 million in EBITDAX and approximately $300 million in free cash flow in 2021, choosing our current market cap results in an approximate 20% free cash flow yield.

Keep in mind that this is after the effect of hedges that we're required to execute upon emergence that are now obviously out of the bunny. To put some context around those numbers, we reported $39 million hedging loss for the first quarter and project over $180 million for the full year at current oil prices. The first quarter of 2021 exemplifies the effect of this price environment and our strong asset base. The company generated $108 million of free cash flow in the first quarter of 2021, compared to approximately $89 million in the previous quarter, again, net of hedge settlements.

The free cash flow generated since emerging from bankruptcy has gone toward paying down debt. With oil prices above $60 per barrel, we clearly expect Whiting to have a zero outstanding balance on its RBL at the end of the year. Looking closer at our financial results, we had a net loss on a GAAP basis of $1 million or $0.02 per share during the quarter as compared to a loss of $1.2 million or $0.03 per share for the previous quarter. Adjusting for certain items but primarily the mark to market of hedging instruments, we had adjusted net income of $108 million or $2.79 per share, compared to $56 million or $1.46 per share for the previous quarter.

Notably EBITDAX was $171 million, compared to $154 million in the previous quarter, primarily due to the price changes as our production was relatively consistent. Turning to operations. It's been great to get back in the oil industry through drilling and completing activity. As you recall, we brought in a completion unit in late 2020 and started up our first drilling rig back in February of 2021.

The team has done a great job returning to a more active level of operations while maintaining our safety-first goal. Our production for the quarter average 89.9 thousand barrels of oil equivalent, of which 60% was crude oil, representing a flat line to our exit rate of December 2020 and at the high end of our corporate guidance. We spent $56 million on capital expenditures during the first quarter to bring 14 wells onto production, drilled six gross operated wells and completed 15 operated wells. We ended the quarter with 31 drilled uncompleted wells that will be completed throughout this year.

Currently, both our drilling and completion activity is in our Sanish Field in North Dakota, as was planned. Lease operating expenses were $59 million or $7.34 per BOE for the first quarter of 2021. As expected, winter did return to North Dakota, and we increased our work over program for well maintenance during the quarter. As always, I want to express my appreciation to the operations team for working through the challenging conditions in such a safe manner.

Turning to oil differentials. In the first quarter, our oil differentials have been at the lower end of our guidance range. As the Dakota access pipeline has remained operational with the Army Corps of Engineers electing not to take enforcement action with regards to its policy on encroachments while continuing to monitor the ongoing EIS bindings. As we look ahead and await the pending district court ruling, we estimate that even with the possibility of a near-term negative outcome, our 2021 average oil price differentials will fall within the full guidance range.

During the quarter, we secured additional crude sales and transportation arrangements that serve as flow assurance and price protection in a DAPL shutdown scenario. In addition to supporting longer-term value, we believe we are well-positioned, regardless of the outcome. As a reminder, under our credit facility, we're required to have certain minimum levels of our PDP production, and we have exceeded those levels for the coming year. We currently have approximately 68% of our total forecasted crude oil hedge in 2021 and about 75% of our natural gas.

We have utilized combination of fixed-price swaps and callers, which are detailed in our 10-Q. On April 7, whiting's revolving credit facility was reaffirmed at 750 million by unanimous consent of the lenders of our RBL facility. We appreciate the continued support from the lending group. The company ended the quarter with $245 million drawn and $25 million of unrestricted cash, resulting in total liquidity of $527 million. We remain focused on our strategy of generating free cash flow while mitigating the impact of production declines. In the near term and in accordance with our credit facility, we will use a free cash flow to continue paying down debt to ensure continued liquidity.

Our credit facility precludes us from making any restricted payments before September, and we want to continue to focus on pursuing accretive acquisitions. Currently our board and management are evaluating all options for returning capital back to shareholders, including dividends and stock buybacks, and we intend to layout our plans later this year. Last but not at all least, our commitment to operating in an environmentally conscious and safe manner continues to be a priority of Whiting. Towards us we have established an ESG committee under the board of directors that is focused on oversight of our efforts in meeting best practices.

Further, we have tied elements of ESG to compensation, including safety, human capital management and gas capture. We continue to work toward transparent sustainability reporting that is index to establish frameworks that can demonstrate our progress. With that I'll turn it back to Lynn and open it up for questions. Thank you.

Questions & Answers:


Operator

[Operator Instructions] Our first question comes from David Deckelbaum of Cowen. Please proceed.

David Deckelbaum -- Cowen and Company -- Analyst

Good morning, Lynn and everyone. Thanks for taking my questions.

Lynn Peterson -- Chief Executive Officer

Hi, David.

David Deckelbaum -- Cowen and Company -- Analyst

The last comment you're probably going to get the most feedback on today. As we look out here, you mentioned, obviously, you're going to be debt free by the end of the year. The strip sort of as you guys earning your entire enterprise value in five years. How do you kind of square that with the types of opportunities you should be looking at vis-à-vis M&A.? Obviously, there's been several deals in the bucket, and transaction values are moving higher.

What sort of has this sort of secret sauce or recipe changed versus what you would have been looking at when you guys took over the company?

Lynn Peterson -- Chief Executive Officer

Yeah. David, without a doubt, I think things have changed dramatically. I mean, when you think back eight months ago, we were in a $35, $40 environment. And I think there was several opportunities to combine our clean balance sheet with maybe somebody had some debt whereas prices moved up.

People have been able to improve their balance sheets, and so you've seen a change there. I think what we continue to look for is really some type of transformational acquisition that will bring, not only PDP production, but also inventory. I think the Bakken was one of the more mature players out there, and I think all companies are kind of facing this for the most part. And so this is what we continue to focus our attention on.

I think the transaction that was announced earlier this week was interesting, and I think when we read through that thing for equity, I think this is what was interesting to me. As you can see from our most recent Q, we have over three times the production from a barrel of oil, from a barrels of oil equivalent, certainly a much greater runway of inventory. Yet, when you look at three times the price that was paid in cash and compare that to our current market cap, you can see a significant implied upside to our share price. So, I mean, these are some of the things that we're trying to work through as we look at opportunities here.

David Deckelbaum -- Cowen and Company -- Analyst

So telling me you picked up the phone and offered the company up for sale?

Lynn Peterson -- Chief Executive Officer

No. Didn't said that. I said you can see the implied ups, right to our share.

David Deckelbaum -- Cowen and Company -- Analyst

There's an arbitrage, for sure. I guess you mentioned inventory as well. Is this commodity environment causing you guys to kind of pick up the magnifying glass a bit more about what you have organically right now, either looking at, including perhaps more secondary zones? Are we testing some concepts? Or do you feel like everything under the hood is pretty well fed at this point?

Lynn Peterson -- Chief Executive Officer

Well, I think one of the things maybe different jump in here with me, but one of the things we're looking as longer laterals in some of our areas that maybe are not quite our top-tier one or two-type anchorage. Like we're doing some of those things. Chip, you want to comment?

Chip Rimer -- Chief Operating Officer

Yeah. Thanks, Lynn. We're looking at those some three-mile laterals versus your typical two miles. We're tweaking some of our completions and seeing what that does for us in some of our areas, especially in the Foreman Butte areas, and so additional sand and water.

We'll see how those turn out this year. So we're tweaking a few things and hopefully get some upside, especially in these prices.

David Deckelbaum -- Cowen and Company -- Analyst

Thanks for the answers, guys. Best of luck, Lynn.

Lynn Peterson -- Chief Executive Officer

Yeah. Thanks, David. I think we want to reiterate again. Our board is totally focused here where we've had a lot of discussions.

I think there will be a dividend or a stock buyback combination of both as we look to the-exit the year here. Again, we're just trying to comply with our revolver. But stay tuned, I'd say, I think you'll be pleased.

David Deckelbaum -- Cowen and Company -- Analyst

Thank you, Lynn.

Lynn Peterson -- Chief Executive Officer

Thank you.

Operator

Your next question comes from Neal Dingmannhend of Truist. Neal, please proceed.

Neal Dingmann -- Truist Securities -- Analyst

Knowing your inventory, I'm just wondering, could you walk through that again? It seems like you still have a long runway. I'm just wondering, could you talk about current inventory, including the DUCs, as it sits today?

Lynn Peterson -- Chief Executive Officer

Yeah. I think if you look back at the presentation on our website, we show over 400 locations at a $55 level. And again, we kind of keep conservative at that $55 range. But I think you can see as we look the next three years, it's highly focused in the Sanish area.

Chip, do you want to add anything to that?

Chip Rimer -- Chief Operating Officer

No. That's correct. We've got probably three-quarters of those are Bakken in the Sanish area. Quarter of those are three-quarters, so we'll continue to focus on that area, that's our best area.

We know that area very well, and we're seeing great results from that. And then there is stuff down at the [Inaudible] point of view areas that we think also make that level and looking forward to getting some of those areas to get better than what we've seen in the past. And so like I said before, we're tweaking some of our completions. We're looking at three mile.

I think we regret some great value out of some of those areas that we have explored before in the past.

Neal Dingmann -- Truist Securities -- Analyst

Great details. And Lynn, just that kind of brought up my follow-up. What Chip was saying for you or Chip? Are you doing, I guess, going forward, I don't know either Sanish going forward more co-development. You obviously have some other zones you mentioned besides Bakken and a lot of that.

So is today or in the future you'd be doing more co-development we're thinking about that?

Lynn Peterson -- Chief Executive Officer

I mean, it's more Bakken, and that's majority of our-that we're chasing right now.

Neal Dingmann -- Truist Securities -- Analyst

OK. And if I could take one last one. And Lynn, just on service costs today. Any inflation yet up in the North?

Lynn Peterson -- Chief Executive Officer

We're starting to see some pressures. We've been able to hold them pretty much to bay right down. But I think if we look at the second half of the year, we've talked about this. I think you can see and I wouldn't be surprised to see a 5% to 8% increase over time.

Jimmy Henderson -- Chief Financial Officer

Yeah. I really appreciate what our team has done. Our supply chain or operations folks, they've locked in contracts and service providers. We've done a lot of strategic partnership to allow our prices to stay pretty constant, like Lynn said, through the first three quarters may seal upside pressure on the back side.

You're seeing a little bit on fuel side. You're seeing a little bit on the steel side. We've locked our steel in a little bit on the labor, but I think you're right, Lynn. It will be single digit.

Lynn Peterson -- Chief Executive Officer

But to the team's spread, I mean, we actually try to think through this when we were doing our budgeting, I think a lot of this has been built in. I mean, you're never perfect on these things, but I think we've actually thought through that pretty clearly. So I don't think we'll have any big surprises as we go down the year here.

Neal Dingmann -- Truist Securities -- Analyst

Thanks, guys.

Lynn Peterson -- Chief Executive Officer

Thanks, Neal.

Operator

And our next question comes from Noel Parks of Tuohy Brothers. Please proceed.

Noel Parks -- Tuohy Brothers -- Analyst

Good morning.

Lynn Peterson -- Chief Executive Officer

Good morning, Noel.

Jimmy Henderson -- Chief Financial Officer

Good morning, Noel.

Noel Parks -- Tuohy Brothers -- Analyst

I just wanted to get your thoughts on sort of just the basin as a whole with different deal activity and so forth. It seems like it's kind of a glass half full, glass half empty. You look at some parts of the basin, and it seems like it's maturing, not a lot of running room left. Look at other parts, and there is still more, more inventory out there.

And I guess if-could you just talk a little bit about the-, I guess, unevenness that their basin has been developed at? Of course, you're being early in the Sanish area. And just what you think might be revisited from early vintage drilling out there that with your scale could maybe offer you an advantage that like a smaller operator or a smaller consolidator might not be able to match.

Lynn Peterson -- Chief Executive Officer

Yeah. I would say, as you look at the basin, a lot of the remaining inventories are in the hands of the bigger companies, the majors. I think as the pace of activity -- think back over the last 10 years of our industry, companies were driven for growth. That's what everybody wanted.

So there was a lot of drilling by the independents, where the majors, I think, took a different pace. So I think when we sit there and look today that's where we see a lot of the remaining inventory. These things change over time, and I guess we're aware. We know what we want to do, but we can be patient doing it.

We don't have to a knee-jerk here by any means. I think we're in really good shape. And we just got to keep pushing forward here and try to find some of those areas where we can peel off some inventory. So --

Noel Parks -- Tuohy Brothers -- Analyst

And just to follow up, I am sorry.

Lynn Peterson -- Chief Executive Officer

No. I'm just going to ask Chip. Have you got any other thoughts in that regard?

Chip Rimer -- Chief Operating Officer

No. I think you're right. I think you're right, spot-on.

Noel Parks -- Tuohy Brothers -- Analyst

And just sort of explain the discussion to include the midstream part of the equation. We-with the pipeline and the sort of federal issues, that's kind of a different uncertainty introduced into the mix. But it is on the spectrum of further investment in midstream versus trying to consider-well, I guess, consolidate up or consider spinning off your assets. Just where do you think the-where do the best hands for the midstream operations to be in these days, would you say? And does that play into your thoughts about consolidation?

Lynn Peterson -- Chief Executive Officer

I think when we look at the infrastructure, the basin, I think we're in pretty good shape. I think you'll continue to see some consolidation on that side of it. We've always set ourselves up to be operators of the E&P side of it and stayed out of the midstream. We do have some gas plants and stuff like that that we'll continue to evaluate and operate.

But I think our whole industry, whether it's upstream or midstream, it's going to go through some additional consolidation here. Jo Ann, do you have any thoughts on that that you're hearing in the field or anything?

Jo Ann Stockton -- Vice President of Commercial -- Analyst

Hearing anything differently, I mean, I think as you alluded to we're going to evaluate it on a situational basis as it relates to, for example, the specific plants and what our plans are layered on top of that.

Lynn Peterson -- Chief Executive Officer

Jimmy, you got any comments?

Jimmy Henderson -- Chief Financial Officer

No. I think that's-your initial question about is the glass half full or half empty in a matured basin like this, I think that you could say that's one of the positive things as you do have good infrastructure in place, especially at production levels that a basin is currently experiencing. We're in really good shape. As Jo Ann has talked before about where we are with DAPL down and how that turns out based on production levels in this-in the basin, generally, we're in a good shape.

And I think you'll continue to see gathering, put in the ground to service our operations. But for the most part, we've got some-we've got pretty good level of service providers and good partners that we work with on that side up there.

Noel Parks -- Tuohy Brothers -- Analyst

Great. Thanks a lot for the perspective.

Lynn Peterson -- Chief Executive Officer

Well, thank you.

Operator

Thank you, ladies and gentlemen. There are no further questions at this time. I'll turn the floor back to management for closing remarks. Thank you.

Lynn Peterson -- Chief Executive Officer

All right. Thank you. Again, I'd like to thank everyone for joining us this morning and your interest in Whiting Petroleum. We'll be attending some virtual conferences over the coming quarter and look forward to seeing many of you in those events, and we look forward to meeting soon in person.

So thank you very much for your time. Have a great day.

Duration: 24 minutes

Call participants:

Brandon Day -- Investor Relations Manager

Lynn Peterson -- Chief Executive Officer

David Deckelbaum -- Cowen and Company -- Analyst

Chip Rimer -- Chief Operating Officer

Neal Dingmann -- Truist Securities -- Analyst

Jimmy Henderson -- Chief Financial Officer

Noel Parks -- Tuohy Brothers -- Analyst

Jo Ann Stockton -- Vice President of Commercial -- Analyst

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