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spk04: Greetings. Welcome to the conference call of H&R Acquisition Corp. concerning financial and earning results for the second quarter ended June 30th, 2024. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I'll now turn the conference over to your host, Michael Porter, Investor Relations for the company. You may begin.
spk00: Thank you, Matt. Good afternoon, ladies and gentlemen. First, a forward-looking statement. This conference call includes forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. that involves risks and uncertainty that could cause actual results to differ material from what is expected. Words such as expect, believe, anticipate, intends, estimate, seeks, may, might, plan, possible, should, and variations in similar words and expressions are intended to identify such forward-looking statements. But the absence of these words does not mean that a statement is not forward-looking. included in the availability of all the material that you received that is listed with the Securities and Exchange Commission and can be looked under, under www.scc.gov. It is, except as expressly required by applicable security law, the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information further events, or otherwise. I'd now like to introduce you all to our CEO, Dante. The call is yours.
spk03: Thank you, Mike. I really appreciate that. Thank you all for dialing in, those who are investors in H&RA stock and those who are looking at us to potentially invest in us. So for the next 30 minutes, you're going to hear from myself, you're going to hear from Mitch Trotter, our CFO, And then you're going to hear from Jesse Allen, our vice president of operations. First of all, I'd like to just say, you know, the analysts are pegging our stock value at $4 to $7 a share. And those of you that are able to look on their screen, you can see our stock isn't at that level yet. So we think it's a tremendous value at today's pricing level. So I had to give that commercial. Q2 was much better than Q1. However, we did not deliver a profit, but it was a much smaller loss. And just like in your household budgeting, we have two choices. We can make more money or spend less money to get profitability, and we plan to do both. So our top line goal is to increase oil production. We've got a lot of optimism about what we've been doing, and I'm going to I'm going to cheat a little bit and update you a little bit beyond Q2 to tell you what's going on. So first of all, we issued a press release this morning about a test pilot of low cost chemical acid treatments that on average have double production in the wells we did that with. You're going to get all those details coming at you from Jesse. And those treatments on average cost about $5,500 a well and we've done nominally 24 wells, we've got 342 total wells. So simple math would tell you we've got a long way to go. We also developed field-specific frac procedures that cost half of what the previous owner was spending on these without any compromise on the sustainability or the maximum production that those will make. Again, you're going to hear about that from Jesse Allen. Q2 had a substantial reduction in OPEX, and we spent a lot of CAPEX on repairing and improving our field infrastructure. On average, we spent a million and a half in Q1 and another million and a half in Q2. These things together position us to increase oil production without interruption. We also negotiated with the seller A credit that also impacted our Q2 financial substantially. You're going to hear about that from Mitch. You saw some press releases. I'll just bring them up. They all fit the theme of improved infrastructure. This was improvements to our electrical system, improvements to mechanical, purchase of a hot oil machine. And all these things help us with our run time so we're not down due to well plugging or flow line plugging. And in the end, what everybody wants and certainly what all of us in the management team want and our board want is uninterrupted oil production that we sell each month on an increasing basis. And I'm happy to report the numbers are moving up. So now I'm going to talk about the outlook for Q3 and Q4. Half our story in Q3 and Q4 is going to be about improving our financials by cleaning up the overhang from the acquisition. We have a lot of professional charges from legal, from accounting, from auditing, and those are one-time costs and we've just got to pay them off. And our plan to pay those off is from increased production. The second part of what we see in Q3 and Q4 is increased oil production. And I just want to give an example what increased oil production means to us. If we increase oil production by 100 barrels a day, if you assume $70 oil and our NRI of 74%, that's $157,000 a month. If we increase it by 300 barrels a day, that's about a half million dollars a month. to our net gain. And if we increase it by 500 barrels a day, we're at 787,000 a month to our good. Just these little 24 pilot tests, chemical acid jobs, increased our production by about 100 barrels a day. So we're just beginning. But I'm telling you, we're looking forward to a major impact to our bottom line. If we went beyond Q3 and Q4 into 2025, we see 100 to 200 recompletions at a cost of about $100,000 each at an average contribution of about 50 barrels a day. And none of that involves a drill bit where the cost would just jump to a million dollars a well. So we're probably in the... late 25, early 26, before we need to drill because we see so much opportunity just laying on the ground. Now with that, I'm going to turn it over to Mitch to cover the financials.
spk06: Thank you, Dante. Again, I'm Mitch Trotter, and we have talked to many of you in the past earnings calls and a lot of you individually. So I want to thank you for attending again today. We will drill down into Q2 a little bit, and as Dante had stated, it is better. It's about what we had projected on the base cost when we did Q1. But in this call, I want to give a little bit more insight into the results and operations of H&RA so you understand the company a little bit better. This will roll into a little bit later, Jesse, how he'll explain these results are leading to increasing production. So I will have in a minute, three areas and we'll focus on the revenue component, the drill down into lease operating expenses and capital expenditures. And then like I did before, a little bit of insight onto non-cash expenses impacting our financials. Like we've stated in the past, if you need a deeper dive in, you know, since it is a conference call with a lot of people, please feel free to reach out to Mike Porter. You can find his name on our website. And he'll schedule a one-on-one. We've done this several times with many people in the past. So please advance to the revenue slide. So the sales for Q1 and Q2 for oil and gas were very similar, generating five million in cash each quarter. Steady production and little change in the average prices brought in the five million both times. Now, there wasn't that difference between the two quarters because of the derivative non-cash impact. Q1 had a non-cash gap expense of two million that I explained in Q1, and Q2 was basically minimal as the price of oil had little change. So what is this non-cash impact? It's the hedge derivative's liability And it's a contingent liability calculated at the end of each quarter. So it's not something that you pay. It's just over the next two years. So the market price change does have an inverse impact on the income statement. So if oil goes up, we get a negative hit and vice versa. If oil price goes down, we have a positive. On Q1, oil price went up significantly. So hence the theoretical expense. So in short, that's good for the company because we made more money. Final note, I want to hit on oil prices. If it drops dramatically, we're responsibly hedged to protect the company to cover debt service and base operating expenses. We have 70% plus or minus hedged over $70 all the way through the end of 2025. That I want to drill into the next slide. which is the lease operating expenses, and the LOE and CapEx. In Q1, we did have a reduction of $824,000 of LOE from what we presented before. The earnings have been restated for Q1 and year-to-date, and you'll see that in the 10-Q that was filed. So why this restatement? Well, the LOE cost seemed out of line with the efforts. and it had 80% LOE and only 20% CAPEX. Management did a deep review and we restated it and both quarters are very similar to what our efforts versus feel of a 60% LOE effort and a 40% CAPEX. So why did that happen? Well, the systems we inherited were not adequate for our needs or it's adequate for the predecessor. And hence, we have rectified that, and we have a good review process. It will not happen again. Lastly, on Q1 versus Q2, it does show a Q2 had improvement of $65,000 per month, as we really focused a little bit longer in Q2 on the long-term benefits in the CapEx, hence it drove it down some. And it also drove down the LOE cost per BOE or the lift cost in the 29 range. Now we're taking actions to further reduce costs, and our target is 19 by the end of the year, beginning of next year. As we've always stated, that's where we want to get to. With that, let's drill down into the non-cash expenses. So advance the slide, yeah. Just like in Q1, I want to talk about a few things. If you look to the right, the table has the numbers right out of Q2 that come from the file. I put them there with some reference numbers so that you can follow along. I'm not going to hit them all. Number one, the hedging derivatives we've already touched. And number two, the G&A, it does include non-cash $574,000 in Q1 and $360,000 in Q2. for fees that we paid in stock. And these were on existing agreements. They were just cleaning up a little bit. It better positions the company going forward and ultimately improves our cash and balance sheet positions. Group number three and four together, the warrant and the forward purchase agreement liability, they get assessed at the end of each quarter. The results were a pickup this time of $277,000 in the warrant liability and $24,000 in the FPA liability in Q2. And if you'll note, Q1 both had big expenses. So that's a very positive. And I'm just going to go to the last one. Dante's already hit on it. It's a gain from extinguishing of liabilities, forgiveness of debt. And this is a one-time gain of $1.2 million. It happened in Q2. We had a settlement that removed $1.7 million of payables from our balance sheet to help us clean up. And that's all I really want to talk about. Again, say if you need a deeper dive, feel free to reach out to Mike Porter. And with this, I want to pass it on to Jesse to tell you a lot more about what's going on in the field. Thank you.
spk05: Let's advance to that next slide, please. Yes, I'm Jesse Allen. Good afternoon. I'm the VP of Operations. And first and foremost, we operate safely. We have no reportable incidents, no OSHA reportable incidents so far this year. And that's a good thing. Our field employees do an excellent job of working safely. We want each of them to go home every evening. I'm going to talk a little bit about our production trends. They're increasing, and note the chart there on the right. First quarter, we averaged about 963. Second quarter, it was down a little bit, but currently, and as Dante has alluded to, we've been doing some work to get that production up, and currently, we're about 1,055 barrels oil a day. And also, Field improvements, we're continually optimizing our producing wells, optimization of our injection wells, and our water flood. And as has been mentioned by Dante, our infrastructure upgrades to help us maintain, if we're getting the oil out of the ground, we want to make sure we're getting the oil out of the ground. We'll talk about our development plan, which is our targeted seven rivers workovers, and then workovers to exploit some potential reserves in the The Queen, the Grayberg, and the San Andreas. Next slide, please. Our production trends. As I've said, production is increasing. My focus and my field team's focus is to increase our daily oil production. That's our number one goal, besides working safely. And how have we done that? Well, toward the end of the second quarter and as we were getting into the third quarter here we started doing some chemical acid stimulations and what these do is remove scale buildup that restricts flow around the wellbore we did a pilot program of 24 wells which we've completed we're now evaluating and we've seen an 80 to 100 barrel per oil per day increase about 2x increase over the before the first phase we're going to move ahead with the The next phase of the project where we'll probably do anywhere from 50 to 100 additional wells, obviously we'll monitor those closely to make sure we continue to increase production. And then as I mentioned, our artificial lift optimization and upgrades are an ongoing program for us. Use of our pump off controllers to make sure we're running the wells and getting every drop of oil we can out of each of the producing wells. We've done several pump upgrades where we converted a well to sucker rod lift to a progressive cavity pump, very successful there. We ended up going from about 10 barrels of oil a day to 35 to 40 barrels of oil a day on the first one we did. And we continually make sure that we're putting the water we want to in the areas of the field in our injection wells to optimize our water flood in the Seven Rivers formation. And notice the curve there. You can see as we've gotten into the end of the second quarter, into the third quarter, our production is definitely increasing. Next slide, please. Next, I'm gonna talk about our field improvements today. One of the key items was upgrading our well test facilities so that we knew what each of our wells are testing. In other words, are we increasing production with the work we're doing? So it's important to upgrade our well test facilities, which we've done, troubleshoot, a lot more easily. We also purchased two portable well test units, which we can move around the field, well to well, related basis as needed. In addition, we've upgraded flow lines on some of our producing wells. We'd identified 20 producing wells initially, and we've completed about half of those, so those wells now are back on . And then one of our water flood stations on the Skelly unit When we took over, the main trunk line was inoperable. We've now replaced that trunk line, and we're installing connections as necessary to revive our water station on the Skelly unit. We've been hauling that water to one of the other water stations, and that's been costing us roughly $30,000 a month, so we'll be eliminating that expense in the near future. In addition, we had to do some electrical upgrades, which meant upgrading a transformers on our Russell Turner water station. We weren't able to run the pumps at 100% capacity because of a weak transformer. Transformer has arrived. They're in the process of installing now. We will also upgrade our lightning protection. We've had some downtime as a result of substandard lightning protection, which we'll be upgrading. And then in addition, once we get the transformer installed, we'll be able to install a second H-pump which will increase our injection capacity, which of course is very important to our water flood in the Seven Rivers. And finally, we purchased a hot oil truck and unit. And we use a hot oiler every day, and so it made sense to purchase one, which we've done. And it mitigates downtime, having our own unit there in the field at 100% availability. In the past, sometimes we had downtime just waiting on getting somebody out there. And so we estimate at the end of the day, that's going to save us about $110,000 per year. Next slide, please. Next, I'll be talking about our development plan, providing a little bit of detail there for the audience here. Our main zone that we're going after is the Seven Rivers Zone. And if you look to the right there, there is the geologic column there and you can see that the HMRA zones that we have access to is the Seven Rivers, the Queen, the Grayburg, and the St. Andrews. In Seven Rivers, we have 100 plus re-completions to do. Anticipate we'll do 20 by the end of the year. That'll develop an additional 15 million barrels of proven reserves. The St. Andrews zone, you'll notice, is the deepest of the intervals there. We have bypass pay and under-perforated pay in a lot of wells out there. We anticipate 20 of those by the end of the year. That will help us develop 34 million barrels of potential reserves. In addition, as Dante mentioned, I'm going to talk a little bit about our improved well evaluation and stimulation techniques. One of the things we've done is hired a petrophysicist and well log analyst. Anybody who's worked the Permian Basin, it's a tough area. And you really need to know your petrophysics in order to perforate zones that are truly productive. And we're using, we're now using state-of-the-art well log analysis software, which our petrophysicist is using. And so it results in targeted focus on perforating the right zones, both in our producers and injectors in the seven rivers, which ultimately ends up increasing production. And the cost to perform these re-completions dependent on the complexity and what we encounter in the well. Our chemical treatments, our chemical acidizing treatments, as Dante says, are around $5,000, $5,500. We're seeing 2x production increase, payback in less than 30 days on those, some even faster, depending on the increase. Our Seven Rivers completion, we're going to be in the range of $100,000, $150,000, potential a little higher, depending on the number of stages we do, and we expect average increase of 50 barrels of oil a day payouts less than 60 days. So with that, let's go to the next slide, and I turn the presentation back over to Dante, our CEO.
spk03: Yeah, thanks, Jesse. I'm going to wrap this up. The top bullet to take away from today is that we're a responsible operator. Safety is our number one priority. We want to make sure everybody goes home the same way they came. We also want to take care of the land that we're entrusted with by New Mexico. And we're happy that we're keeping all the regulatory bodies that are involved happy. I want to go back to Jesse's slide for just a second. You know, we're not saying to all our investors, we have 300 wells, we only did 24, and we picked up 100 barrels a day. So what would you get if you did another 300 wells like those 24? We think everybody can do the simple math. We just can't believe it would be that easy. And then nothing's been that easy yet. On these workovers that Jesse talked about, we're using a lot of science with some high-powered petroleum and geologic experts here telling us, yeah, you're going to get 50 barrels a day. Well, again, 50 barrels a day I don't want to do that complicated math for the folks on the call. But my goodness, you know, that's why we're bullish on Q3 and Q4. We're not ready to plant the flag and take a victory lap, but we're saying it's sort of looking good. So we need to do a lot more field testing and make sure that we can multiply 300 times a few wells and 300 times 24 wells to say what this field will do. But we can say there's a bright light getting brighter at the end of Q3 and Q4. We already talked about Q1 and Q2 that they were impacted by so many, you know, it's really $3 million spent to improve our field condition in the boring mundane world of flow line replacement, electrical transformer replacement, you know, satellite, you know, tank and valve replacement, those kind of things. So I go down to the last bullet here. What are the actions we're going to do? For the most part, I mean, we have a billion barrels in place down, down hole. That's almost for, for us, for our little company, that's almost an infinite supply. So as we, as we attempt to unlock how to get more oil out of each one of these wells and We are declaring some victory on these chemical treatments and expect at least 250 barrels a day of sustained production increase by the end of the year. And you're going to see this thing go higher, but it's going to decline a bit. So we're still trying to understand that. The infrastructure improvements, they're coming to an end. We still have a few things on our chore list with electrical and mechanical, but the big nuts behind us. The Seven Rivers and the San Andreas, low-cost recompletions. These acid jobs are crazy cheap, $5,500, and we don't even use a rig. We just move into the well. We put chemical down the backside. We let it set. We circulate it out. We put a little more chemical down. We circulate it out. Within five days, we can see what happens. And we're 23 for 24. Any boxer that wins 23 out of 24 fights is a pretty good boxer. So we're thinking we're pretty good on these acid things. We need to do the same with these recompletions. They cost more money. They're $100,000 to $125,000. And finally there, the last bullet, we want to prove up the 34 million barrels that are behind pipe. And we can't do that without perforating existing well bores and stimulating that. So with that, that's pretty much a wrap for what we have. I'll turn it back over to Mike for Q&A.
spk04: Certainly. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We do ask that participants please ask one question and one follow-up, then re-enter the queue. Once again, if you have any questions or comments, please press star 1 on your phone. One moment, please, while we poll for questions. Your first question is coming from Todd Felty from Ages Financial. Your line is live.
spk02: Hey, guys. I really appreciate you taking my questions. You know, we've heard a lot about the improvements and the recompletions going on. And when I look at your 10Q, even if I take out the gain and loss of a derivative instrument, I see in the six months, of 2023 that you all did just under $14 million in revenues from crude oil and natural gas. And then the six months of 2024, you just did over $10 million, which is about a 35% drop in revenues. With all these improvements and recompletions going on, given that the price of oil now is similar to what it was a year ago, why have the revenues gone down instead of up?
spk06: All right, let me take that one, Todd, and good to always talk to you again. We're not comparable, again, to last, to the predecessor in 2023, and it had a lot to do with, and we had shown the curve in the past. The predecessor, the production dropped off from its peak at the later part of 2022 going into 2023. And it had a steady decline from 1,400 to about 900 BPO barrels of oil per day by November, December when we took it over. So we spent Q1 and Q2 stabilizing it. So you're working off a significantly different volume of oil that was... produced. Last year, the production was over 90,000. This year, it's around 60. One-third of it went away. That had a whole lot to do with it. The price, I think it was similar. If you go back to 22, it was different. Hopefully, that answered your question.
spk02: That's great to hear. If I'm reading between the lines, it I think the comparables for Q3 and Q4 should then look a lot better if we reverse the trend. And then my follow-up is, you know, we're hearing a lot of, especially this week, of politics. If one of the candidates was to win that, let's say, proposed a ban on fracking, would any of our improvement operations or operations overall be affected by a ban on fracking? I'll let Dante take that. Yeah, I'll take that.
spk03: You know, the ban on fracking affects more new wells than old wells. So when we're dealing with all old wells and we're calling these remedial stimulations or recompletions, we don't think the fracking is going to be, you know, as critical. And part of what I hope we, we convey today is, you know, we're moving toward a frack sand less frack, meaning what we're really doing is more of, you know, just call them mini stimulations. I mean, a frack that I think concerns the environmentalists are these million pound fracks with, 40 trucks and 40 tanks set at a well site. We're talking about something that's, you know, not a whole lot different than a, than an asset stimulation. So I believe if we had the word, if the worst were to happen to us and they said, you can't exceed the frack gradient in a well board, we would modify what we do and comply. And I don't think it would make a whole lot of difference because the, the, the folks on this team for this company were, Are that good? You know, I mean, we're not fracking at all with regard to these chemical acid treatments. But I'll also ask Jesse. Jesse, did I say it right? I'd like him to weigh in on your question, Todd.
spk05: Yes. As Dante has said, the chemical slash acidizing treatments that we're doing, that's safe acid. So this is an acid that you could actually pour on your hands. It doesn't work on our tubulars, but it doesn't like calcium carbonate. So, yes, essentially what Dante has said is correct. We would just modify what we're doing. And like he said, instead of 40 trucks and 40 tanks out there, we're talking about one truck and maybe one or two tanks to pump our stimulation. So a whole level or a whole degree of difference. And we're not using... You know, several hundred thousand barrels of fluid and about 300 or 400 barrels of fluid, which our environmentalists really like.
spk02: Okay, that's great to hear, and I really appreciate you taking my questions. Thank you.
spk04: Thank you. Once again, everyone, if you have any questions or comments, please press star, then 1 on your phone. Your next question is coming from Chris Recuso from Partner Cap Group. Your line is live.
spk01: Good afternoon, guys. Just one question that is macro-based. It seems apparent that we're moving into a slowdown here in the United States, and we've been in a macro slowdown in a recessive environment in China for the duration of the year. Obviously, these are the two defining oil markets of the globe. If macro softness persists well into 2025, Does that have any impact? Does that have any influence on you gentlemen in terms of your production strategy, so to speak, in the foreseeable future?
spk03: Yeah, I'll try to answer this. First of all, Chris, we're hedged up pretty good. So we're a little bit immune to oil prices through 2025. and Mitch could give you more detail on just exactly what the percentage is and what we're hedged, but we're pretty much hedged everywhere at $70. And so if your question was, would we curtail activity? I mean, we're looking at the economics of the return for the money we deploy in the near term. And the second influence is, would the buyer, which is Chevron in our case, need to take less less oil but we we we check that and they're right now they're saying you could produce four times what you're producing we wouldn't flinch so we think we have a a buyer that will let us double triple quadruple the production we also think we're hedged pretty good so it's you know whoever wins the election whatever happens in china and russia you know for us it's It's kind of Katie bar the door. We're going for it. So these chemical acid stimulations are so cheap, and the results are so substantial. I have a hard time thinking we're not just going to blow and go through that. So that's one. Then when you get to the next level of investment, which are the recompletions, You know, it may give us pause if there's some international event out there, but for the most part, we're not very big. And so if we were to double, triple, quadruple production, I just don't think we're going to dent anything. Now, if oil prices were to just take a precipitous drop and we were naked with no hedge on that, we absolutely would consider that when we deploy capital and maybe we use the money to pay down debt or something else. But that's my two cents. Mitch, do you agree with that?
spk06: I agree exactly what you said. Yeah, we're properly hedged and you asked the percent again. We're in the 70% range. Maybe just a little bit more for the rest of this year and just right at 70 or slightly less for 2025 based on the current level of production. Production goes up. We'll still be in the 50 to 60% range for next year. So I feel pretty comfortable in that arena.
spk03: Now, maybe one more point, Chris, on that. We do see, you know, I was kind of thinking that the market would drive oil prices up until the election and then oil prices would come down. But, you know, it's very tough to predict. But I would tell you that as a management team, we believe $70, $80, $85 a barrel is a good number. So if oil prices were to go up to 85, 90, and as we increase production, I'm confident that Mitch is going to increase our hedging amount beyond what the banks require. So we'll continue to try to buy a cushion against geopolitical unrest through 25 and beyond as the market gives us opportunities.
spk01: Thank you. That's, that's pretty reassuring. If you're telling me that Chevron's willing to wave in two, three X of what you guys are producing right now, that's a, you know, that's a pretty reassuring profile. Thanks.
spk06: Yeah. They, they definitely said, uh, four times and they said, well, even probably 10 times, cause you know, we're small compared to the amount of oil they need. They, they, they need a lot. Exxon needs a lot. So if they cut back, then we're in the pipeline. So you've got other big players that want as much oil as possible. So, Feel pretty good about that. Thank you. Thank you.
spk03: Thank you. Thank you, Chris. Thanks. All right.
spk04: Thank you. There are no further questions in the queue.
spk03: Well, holy cow, guys. You're easy on us. Look, all of us felt Q1 and Q2 were no fun. You know, we want to deliver, you know, big-time profits. But I tell you, Q3, I think Q3 is going to be better than Q2, but it's probably still going to be negative, but not by much. And Q4, we're pinning a lot of hopes on. And our promise that we've stated to all of you before, before the end of the year, we'll go past 1,400 barrels a day, and we need that for credibility with all of you. And, of course, that's not a real number. It's a higher number, but I can't let that out. Otherwise, you'll hold me to that. So I think with that, I'll just turn it back over to the MCs, and thank you all.
spk04: Thank you. This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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