Earnings Transcript for BATL - Q1 Fiscal Year 2021

Operator: Good day, and welcome to the Battalion Oil First Quarter 2021 Earnings Call. This call is being recorded.

I will now turn the call over to Chris Lang. Please go ahead. :

Chris Lang;Manager of Finance: Thank you, and welcome to our first quarter 2021 earnings call. With me today are a few of my colleagues, our Chief Executive Officer, Richard Little; our Chief Financial Officer, Kevin Andrews; and our Chief Operating Officer, Daniel Rohling.

This conference call contains forward-looking statements. For a detailed description of our disclaimer, see our earnings release issued yesterday and posted on our website. This conference call also includes references to certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement released yesterday. We have also published an investor presentation, which may be found on our website and may be referenced during this webcast.:

Our team will begin with a few scripted remarks followed by Q&A. Now let me turn it over to Rich. :

Richard Little: Good morning, everyone. I'd like to thank you for joining us this morning for Battalion Oil's first quarter 2021 earnings call.

The culture of capital discipline, safety and execution were on display this quarter as we delivered strong first quarter results despite the continued challenges related to the ongoing pandemic as well as the disruption caused by the winter storms. I'm proud of what our team was able to accomplish, and I'm excited to share our results and discuss how we were able to remain on plan for 2021 despite lower-than-expected production volumes.:

We got started on our capital program early this year, completing 4 DUCs and spudding 2 additional wells in the first quarter. We recently kicked off the completion program of 2 new wells earlier this month and expect to turn them to sales in the second quarter. A major theme on our last call was our commitment to capital efficiency, and we demonstrated that this quarter by reducing our completion costs from $575 per linear foot in 2020 to $395 per linear foot in Q1. Some of those cost savings were certainly a result of our ability to preempt demand on the service market, but we were also driving cost savings through improved operational efficiencies.:

To date, we're pleased with the performance from our new wells. And while performance from these new wells is certainly a positive, our average daily production in the quarter was down 17% from the fourth quarter of 2020 as a result of the production shut-ins related to the winter storms. That historically long cold snap caused widespread issues for us. Mechanical failures, line freezes and force majeure events are just a handful of examples of the kind of challenges our field team had to overcome. And they did a great job keeping us online while remaining safe.:

We had 0 recordable incidents this quarter, including during those storms, and our team deserves a lot of praise for their efforts. Despite the operational downtime, we exceeded our expectations for revenue, EBITDA and cash flow during the quarter due to an overall improvement in the commodity pricing environment as well as high daily prices realized during February.:

Now I'd like to hand the call off to our Chief Operating Officer, Daniel Rohling. :

Daniel Rohling: Thank you, and good morning.

As Rich mentioned, we got a quick jump on our 2021 capital program by starting work on our first pad of completions in December of 2020. Last fall, as we were preparing for 2021, we saw an opportunity to get in front of what we expected to be an increase in activity across the basin. We strongly believe that, that was the right call. By moving early, we were able to secure attractive pricing. And when we couple that with our improved efficiency, the end result is an overall reduction in average completion costs of $575 a foot in 2020 to $395 in the first quarter of this year. We also spud 2 wells on our Tabor pad in the first quarter. And our drilling performance and costs on those wells were in line with expectation despite working through the February freeze, which impacted our drilling operation over a 5-day period. We also saw an increase in casing cost as a result of the higher commodity pricing. But save those freeze days, we'd be talking about 2 more record wells for this area.:

It's another example of what we talked about last quarter, where we use our G&G knowledge not only to optimize our frac design, but also leverage our understanding of the rock to improve our drilling performance, using real-time adjustments to increase ROP and decrease bit and BHA wear and trips. In all, we continue to execute and are reaping the benefits of repeatable performance improvements and cost savings measures while seeing extremely strong performance across the asset base. The last dozen or so EURs have averaged about 1.4 million barrels equivalent at all-time low CapEx.:

On the production side, our team really had their work cut out for them as a once-in-a-lifetime winter storm came barreling in. But they did a tremendous job keeping us online both in the midst of the storm and the aftermath as we assessed the damage. We mentioned earlier that improved pricing led to strong financial results, but the pricing only matters if the production is flowing. So our ops team deserves a tremendous amount of credit for the results we were able to report today.:

Before jumping into the financials, I'll finish by noting that we continue to make strides on the ESG front. During the quarter, we had no recordable incidents. We substantially reduced our flare intensity and have continued to work with the communities in West Texas to make an impact with youth programs. While we are pleased with the progress we have made on ESG, we hold ourselves to a very high standard and will continue working hard to improve across the board.:

Now Kevin will walk you through some of our financial highlights. Kevin? :

R. Kevin Andrews: Thank you, Danny, and good morning, everyone.

Let me walk you through a few financial highlights from our first quarter. Total production in Q1 2021 averaged 14,333 barrels of oil equivalent per day compared to 17,293 barrels of oil equivalent per day for Q4 2020, a 17% decrease driven primarily by the shut-in of producing wells as a result of the severe weather during the winter storms.:

Total revenue was $55.5 million for the first quarter of 2021, of which oil represented 74%. We realized 99% of the average NYMEX oil price during the quarter but recognized a $9.7 million loss from our hedge program.:

We reported a GAAP net loss to common shareholders for the first quarter of 2021 of $33.4 million or $2.06 per share. After adjusting for certain items, including the effect of net unrealized derivative losses, I refer you to the press release for details of those adjustments, the company reflected net income of $2.7 million or an income of $0.17 per share. Adjusted EBITDA totaled $15.3 million for the first quarter of 2021.:

Capital expenditures for the first quarter totaled $21.6 million. Of that $21.6 million spent in Q1, $18.8 million was related to the drilling and completion activities and $2.4 million was related to development of our treating and gathering support infrastructure. And as previously discussed, we expect the majority of our remaining 2021 capital budget to be spent during the second quarter of this year.:

I'll close with some comments on our liquidity. At March 31, 2021, the company had liquidity of $34.2 million, consisting of $1.7 million of cash and $32.5 million of availability under our revolving credit facility. In May, as part of the company's spring 2021 redetermination process, the company entered into a fourth amendment to its senior credit facility, which, among other things, reduces our borrowing base to $185 million effective June 1, 2021 and further reduces the borrowing base to $175 million effective September 1, 2021. While this amendment certainly reduces the availability under our credit facility, we believe our current liquidity and expected cash flows are more than sufficient to execute on the remaining 2021 capital program. :

Richard Little: Thanks, Kevin.

The results we delivered in the first quarter set us up well to meet or exceed our 2021 guidance, and we were able to deliver those results despite the widespread operational disruption that was caused by the winter storms as well as the ongoing challenges faced as a result of the pandemic. Our operation teams really have done an incredible job so far this year, and we expect that exceptional work to carry us through the rest of 2021. As we enter this year, our goal was simple, use a disciplined approach, deliver flat to single digit production growth while increasing free cash flow. While we remain committed to that goal, we are eager to return to growth and remain at the ready to take advantage of whatever opportunities the market might present us, whether that growth comes through M&A or through the drill bit.:

Again, thank you for your interest in Battalion. That concludes our scripted remarks. I'll now turn it back to the operator to facilitate the Q&A. :

Operator: [Operator Instructions] All right. It appears there are no questions at this time. Mr. Little, I'd like to turn the conference back to you for any additional or closing remarks.

Richard Little: Great. Thank you.

Again, I just want to thank everybody for their interest in Battalion Oil. First quarter came with a lot of challenges, and I'm really proud of how our team responded to those challenges. So we look forward to speaking to you again in the near future. Thanks, again. Goodbye. :

Operator: This concludes today's call. Thank you for your participation. You may now disconnect.