Whiting Petroleum (WLL) Q2 2021 Earnings Call Transcript

Whiting Petroleum (WLL)
Q2 2021 Earnings Call
Aug 05, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [Operator instructions] I will now turn the call over to Brandon Day, Whiting's investor relations manager.

Brandon Day -- Investor Relations Manager

Thank you, Tom. Good morning, everyone. This is Brandon Day, Whiting's investor relations manager. Thank you for joining us to discuss Whiting's second-quarter results for the period ended June 30, 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; and COO, Chip Rimer. 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 in the Investor Relations section.

Following the prepared remarks, time permitting, we'll open the call to your questions. I would like to remind everyone that a replay of this audio webcast will be available via the company's Investor Relations page on our website. I'd now like to turn the call over to the CEO of Whiting Petroleum, Mr. Lynn Peterson.

Lynn Peterson -- Chairman, President, and Chief Executive Officer

Thanks, Brandon. Good morning, everyone, and thank you for joining us today. You can refer to our 10-Q we filed yesterday and our news release for detailed information. To start with, I would like to commend our team for its continuing efforts to execute on the plan that we set out back in December.

As our first half of 2021 results demonstrate, we have proven our ability to optimize our asset base and take advantage of a dramatically different economic landscape. We are clearly in a great position with current commodity prices, solid assets, an enviable balance sheet, and a talented team. The impact of these strengths is evident in our financial results, as well as the updated guidance that I'll discuss shortly. When we combine our strong first-half results with our expectations for the second half, assuming crude oil price of $60 per barrel, we now expect Whiting to generate approximately $700 million in EBITDAX and over $425 million in free cash flow in 2021, which is over a 20% free cash flow yield at our current equity price.

Looking at our financial results for the second quarter of 2021, we had a net loss on a GAAP basis of $62 million or $1.57 per share during the quarter as compared to a loss of $1 million or $0.02 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 $118 million or $3.01 per share, compared to $108 million or $2.79 per share for the previous quarter. Notably, EBITDAX was $176 million, compared to $170 million in the previous quarter due to slightly higher production and commodity prices. Our production for the quarter averaged 92,600 barrels of oil equivalent, of which 58% was crude oil.

This compares to first-quarter production of 89,900 barrels of oil equivalent. Our oil production has remained relatively flat quarter over quarter at approximately 53,000 barrels per day. The slightly higher BOEs are attributable to an increase in ethane recoveries from our third-party midstream providers with the continuation predicated on supporting ethane fundamentals. As such, we have adjusted both our oil and BOE production forecast for the year to be above the previously guided ranges.

We now expect our oil to average 50,000 to 53,000 barrels per day and total production to be 88,000 to 92,000 BOE per day. The increase also takes into consideration a slight decrease in fourth-quarter BOEs as a result of the transactions we recently announced. On the capex side, we spent $58 million during the second quarter to bring nine gross/5.4 net wells on production. And we drilled nine gross/5.6 operated wells.

We ended the quarter with 21 gross/15.3 drilled uncompleted wells, and we anticipate exiting the current year with around 30 drilled uncompleted wells. The company currently has a rig running in the Sanish Field and intends to bring a second rig into our Cassandra prospect area later this year. Our completion crew was dropped in May, as expected, and we brought them back in the end of July. We plan to keep the completion crew active for most of the remainder of the year, with a short break in the fourth quarter.

We expect to bring the crew back in December, which should help smooth out our 2022 production profile. As a result, we've tightened our guidance range of capex to $240 million to $252 million for the full year, putting it at the high end of our previous estimates. We, like all operators, are seeing some cost increases as oil remains at its current level, and we have tried to adjust our numbers to reflect our expected outcome. At the same time, our team continues to drive efficiency, which to date have more than offset the cost increases.

Lease operating expenses were $64 million or $7.61 per BOE for the second quarter of 2021. We're seeing faster turnaround on maintenance workover days due to better weather and more efficient processes. The benefit of this activity is shown in our production, so we'll continue to keep these workover rigs at work as these barrels are our most effective and cheapest barrels to bring online. Again, we've tightened the range of guidance for LOE to $235 million to $245 million or roughly $7.30 per BOE, putting it at the high end of our previous estimate.

General and administrative expenses of $12 million was modestly higher quarter over quarter as work life continues to transition back to normal. Overall, we continue to run less than our expectations, so we brought our guidance for G&A below the low end of the previous range. A big thanks goes to the team for holding these costs down. Lastly, oil differentials in the second quarter were narrower than the lower end of our guidance range, driven largely by the District Court's decision to deny the motion for injunction on DAPL operations, along with a subsequent dismissal of this case.

With the risk of transportation interruptions inherently stabilized, coupled with the overall basin production levels that remain significantly behind takeaway capacity, oil spot differentials have benefited as a result. Pipeline utilization has started trending downward from the beginning of the year, and we've seen an increase on rail movements likely reflecting alternative marketing arrangements put in place prior to the DAPL ruling. Recent pipeline capacity additions placed into service in July and August have also bolstered the continued improvement of oil differentials, and as such, we've revised our full-year projections to reflect this. Overall, when we look back at the guidance provided back in December of 2020, we are pleased to see our progress and our ability to stay within the cost structure and still improve productivity.

If you think back to that time, we had $40 oil and a possible DAPL shutdown, so there are many variables going into our planning models. Now turning to recent business development activities. As previously announced, Whiting entered into two separate agreements to divest its Redtail assets in Weld County, Colorado, and purchase assets in Mountrail County, North Dakota, allowing for a more focused asset portfolio. Net oil production to come from these two transactions is nearly identical, so the net effect was a little impact to our oil guidance.

The Colorado assets had a higher daily BOE, but the oil cut was significantly below the assets we picked up in North Dakota. The Redtail assets have not received capital for several years, and there were no plans to add activity, so it made sense to monetize that asset. The assets acquired in the Williston Basin overlap our Sanish Field and expand our top-tier inventory by over 60 locations. It also included five drilled uncompleted wells.

Sanish was one of the early fields developed in the Williston Basin and was drilled with wellbore azimuth that is not common to today's development standards. This early development resulted in shorter laterals and stranded tracks of land when offset DSUs were operated by different companies. The acquired assets will allow us to maximize lateral length across several DSUs, allow us to develop stranded resources, and eliminate costs for frac protect as acreage is developed. We were fortunate that both of these transactions came together in a timely manner, allowing for an attractive trade with little incremental cash consideration.

Thanks and congrats to our team and the counterparties on both deals for getting the agreements in place. We look forward to closing both transactions in mid-September. Our debt levels continue to drop quickly, and in spite of the two transactions noted above where we anticipate drawing something close to $90 million on our revolver, we still anticipate being in a positive cash position at year-end with nothing drawn on our revolver. Turning to ESG.

We are committed to reducing our emissions and improving transparency on how we measure and report. We are working with trade groups like AXPC and API on reporting comparability while honoring sustainability frameworks like SASB. We are also working with an established third-party to measure and document our emissions. We have stepped up efforts to coordinate discussions between our facility engineering teams and our midstream partners to identify, plan and resolve gas capture limitations for future development.

Narrowing our focus to just the S or social part of ESG, I want to compliment our staff for personally contributing money and then assembling school backpacks with supplies for the Precious Child and their Fill a Backpack drive for underprivileged students in the Denver area. This type of efforts demonstrate the impact our company has on the communities in which we live. Finally, let me address our plans for capital allocation. With the results that we expect and the generation of significant free cash flow, we are in an enviable position financially.

We have had ongoing discussions internally and with our large investors over potential uses of our liquidity. At this point in time, we continue to evaluate options that balance the desire to return capital to shareholders while at the same time expanding and improving our inventory. Our opinion on this decision will continue to evolve as economic and opportunity landscape dictate. But having only completed the bankruptcy process less than a year ago, we have decided to temporarily defer any decisions on returning capital.

We want the return of capital decisions to be sustainable for future periods under a range of economic conditions. With that, I will open this up for questions. 

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] And the first question comes from David Deckelbaum with Cowen. Please go ahead.

David Deckelbaum -- Cowen and Company -- Analyst

Good morning, Lynn, and the team over there. Thanks for taking the questions. 

Lynn Peterson -- Chairman, President, and Chief Executive Officer

You bet, David. How are you doing?

David Deckelbaum -- Cowen and Company -- Analyst

I'm great. I did want to follow up. I know you're talking about deferring the decisions on returns of capital. I guess, can you put a timeline on that? I think our prior understanding was that maybe there was a trigger point when the RBL is fully retired, that we might have some more visibility there.

Is this something that you might be able to update the market on by the end of the year?

Lynn Peterson -- Chairman, President, and Chief Executive Officer

Yeah. I think we're moving in that direction. It's going to be toward the end of the year, first of the following year. I mean, I think we just -- we're trying to show some patience here, David.

Think about our shareholders first. I think it always comes to our minds. We've got a lot of volatility in oil prices going on here. And we want to make sure that these decisions we make have sustainability to them that we can deliver in future periods kind of regardless of oil pricing.

So I guess we're just trying to be patient on top here as we go through this.

David Deckelbaum -- Cowen and Company -- Analyst

I appreciate that. You know, I know it's probably early as well, but there is obviously a considerably -- considerable free cash yield that you can see on '22 with the strip. With that in mind, does that suggest that you would be buying back shares before kind of considering outright payment in terms of cash?

Lynn Peterson -- Chairman, President, and Chief Executive Officer

I think this is certainly one thing we look at when you look at your share price and trying to balance it against the dividend. I mean, that discussion is front and center with us right now.

David Deckelbaum -- Cowen and Company -- Analyst

And if I could just ask one on the operations side. You guys consummated a great bolt-on over in the Sanish Field. You talked about having one active rig there. And does any activity step up at all, I guess, in '22? Or are you guys still kind of configuring units out there and seeing where you can sort of extend some of your lateral lengths, etc.?

Lynn Peterson -- Chairman, President, and Chief Executive Officer

Yeah. Let me ask Chip Rimer here to address that. And again, we haven't put out '22 plans yet, but we're moving in that direction. Chip?

Chip Rimer -- Chief Operating Officer

Yes, Dave, thanks. Yeah, we drill the Sanish in pods, and that's important to us. We also have to redo some permitting for a three-mile lateral. So we're planning it right now, but we'll be doing some of the wells we've picked up with [Inaudible] in 2022.

Lynn Peterson -- Chairman, President, and Chief Executive Officer

I think you can kind of, of course, run a two-rig program for '22, assuming that the oil prices stay where they're at.

Chip Rimer -- Chief Operating Officer

Yeah, we'll have one rig stay in Sanish when the rig comes at the Cassandra, and then it will go back into Sanish. But for the most part, we'll have -- end of the year will be most of Cassandra and then go back into Sanish.

Lynn Peterson -- Chairman, President, and Chief Executive Officer

All kind of the eastern half of our properties.

Chip Rimer -- Chief Operating Officer

That is correct, yes.

David Deckelbaum -- Cowen and Company -- Analyst

I appreciate that color. It was definitely encouraging to find some undeveloped locations left in Sanish, so nice job. Thank you, guys.

Lynn Peterson -- Chairman, President, and Chief Executive Officer

We're pleased with the transaction. Thank you, David.

Operator

[Operator instructions] The next question comes from Chris Dendrinos with RBC Capital Markets. Please go ahead.

Chris Dendrinos -- RBC Capital Markets -- Analyst

Hi, yeah. Thank you. I guess just kind of following up here on the deferral, I guess, of the shareholder returns. Can you kind of comment how much the consideration for additional M&A or acquisitions plays into kind of that decision or that thought process.

Obviously, the recent Williston acquisition was, in our view, very accretive and extended that inventory life. So I guess with that in mind, what's the appetite for additional M&A? And how does that play into the shareholder return thought process?

Lynn Peterson -- Chairman, President, and Chief Executive Officer

Yes. I think we've treated our M&A process very much like we're looking at a return of capital. We're trying to be patient. We're trying to think through these things.

We want to build something here to have long-term sustainability here. So yes, I think there's some more things to do up there. At the same time, we're very aware of our shareholders and we do want to return capital, but we want to try to do it the right way. So again, I think we're just talking patience here a little bit.

I know everybody wants everything yesterday. And I think when we reflected back and when we think about emerging from bankruptcy in less than a year ago, we thought maybe we ought to just give this a little more time and see what commodity prices do and how this plays out. So we're thinking about all those things, and we're certainly trying to build something bigger than what we have here today.

Chris Dendrinos -- RBC Capital Markets -- Analyst

Got it. Thank you. Then I guess just pivoting over to some operational stuff. I think previously, you mentioned the opportunity to drill a three-mile lateral.

Can you just provide an update on when you expect to move forward with that and then the opportunity for, I guess, additional ultra-long lateral development?

Lynn Peterson -- Chairman, President, and Chief Executive Officer

Yes. I'll ask Chip maybe if you don't mind.

Chip Rimer -- Chief Operating Officer

Yes. What we typically see, Chris, on our -- we go over to three miles, especially in Sanish, we'll see 40%, 45%, 50% increase in rate of returns. And so we've got to repermit some things because of the acreage we picked up, but we will definitely be doing something in 2022. We have it planned.

We'll be looking also up in our Cassandra area to be doing some of that and increase that value also. So it's an ongoing process. We continue to look -- we can manage our business, improve our returns on our capital.

Chris Dendrinos -- RBC Capital Markets -- Analyst

Thank you.

Lynn Peterson -- Chairman, President, and Chief Executive Officer

Thank you, Chris.

Operator

Ladies and gentlemen, there are no further questions at this time. I'll turn the floor back over to management for closing remarks.

Lynn Peterson -- Chairman, President, and Chief Executive Officer

Thank you, Tom. So in closing, I just want to thank our staff for their continued effort and dedication to rebuild our company. I want to thank our shareholders for their continued and growing faith in our program, and I look forward to the continued dialogue. We'll be attending some virtual conferences over the coming quarter, and hopefully, we'll get a few in person, and we look forward to talking to many of you at these events.

I'd like to thank all of you for joining us this morning and your interest in Whiting Petroleum. Stay safe and healthy, and we look forward to meeting you soon. Thank you. Have a good day.

Operator

[Operator signoff]

Duration: 21 minutes

Call participants:

Brandon Day -- Investor Relations Manager

Lynn Peterson -- Chairman, President, and Chief Executive Officer

David Deckelbaum -- Cowen and Company -- Analyst

Chip Rimer -- Chief Operating Officer

Chris Dendrinos -- RBC Capital Markets -- Analyst

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