Q.E.P. Co Inc

Good morning, everyone. This is Will Kemp for QEP again. We're going to get moving as people are dialing in. Thank you for joining us this morning, a little bit late, for our third quarter 2020 results conference call. With me today are Tim Cutt, President and Chief Executive Officer, Bill Beze, Chief Financial Officer and Treasurer, and Joe Redmond, Vice President of Energy. If you've not done so already, please go to our website, QEPRES.com, to obtain copies of our press release. which contains tables with our financial results along with the slide presentation with supporting materials. In today's conference call, we'll use certain non-GAAP measures, including EBITDA, which is referred to as adjusted EBITDA in our earnings release and SEC filings, and free cash flow. These measures are reconciled to the most comparable GAAP measure in their earnings release and SEC filings. In addition, we'll be making numerous forward-looking statements. We remind everyone that our actual results could differ materially from our forward-looking statements for a variety of reasons, many of which are beyond our control. We refer everyone to our more robust forward-looking statement disclaimer and discussion of these risks facing our business and our earnings release and SEC filings. With that, I'll turn the call over to Tim.

Thanks, Will, and apologies again, and thanks for your patience. This is recorded, so people will be able to dial in and hear the recording. Good morning, and thank you for joining the call. I'll begin with an overview of our third quarter operational performance. We continue to focus on delivering value over volume, and are holding firm to this principle through these unprecedented times. We remain focused on lowering costs while generating significant free cash flow to pay down debt. Following my update, I'll turn the call over to Bill to discuss our third quarter financial performance. Production declined as expected during the third quarter as a result of limited new wells being brought online. In the Permian, DSUs 0312 and 1125 East continue to perform well as shown on slide 9 of the IR deck. Early in the quarter, we brought two wells online on the disco pad in the Williston. Both wells are outperforming their type curves, as shown on slide 10 of the IR deck, and we look forward to completing the remaining four wells on the pad during 2021. Nine non-operated Williston wells were also brought online and are now delivering approximately 5,000 net barrels of oil per day. We are currently running two rigs in the Permian and resumed completion of operations earlier this month. Given the additional production in the Wilson, along with the increased activity in the Permian, we expect production to begin building during the fourth quarter, leading to an exit rate greater than 50,000 barrels a day. Production performance during the third quarter, along with the expected growth in production during the fourth quarter, allows us to increase the midpoint of our oil guidance from 19.25 to 19.55 million barrels of oil for 2020. Our drilling and completion team also continues to improve on both cost and efficiency. As you can see from slide 11 of our IR deck, wells drilled and completed in the Permian during the first three quarters of the year were delivered at a cost of less than $430 a foot and completed at an average pace exceeding 3,800 lateral feet per day, which remains peer leading. We anticipate drilling and completion costs to improve during the fourth quarter, and we are budgeting $420 a foot in 2021. Our completion performance in terms of stimulated feed per day is well above the industry average as shown on slide 12 of the IR deck. Through the continued improvement to capital efficiency, our outlook for capital spend in 2020 has been lowered from $360 million to approximately $340 million. LOE was up in the quarter primarily as a result of an increase to work over activity focused on returning shedding wells to production. In the Permian, LOE for BOEs is expected to finish the full year at approximately $3.50 per BOE, with full business remaining below $5 per BOE. G&A continues to come down, as demonstrated on slide 13 of the IRR deck, and we spent 49% less on G&A expense in the first three quarters of 2020 as compared to the same timeframe in 2019. I will now discuss briefly our current outlook for 2021 as demonstrated on slide 13 of the IR deck. Although we plan to complete the remaining four wells on the disco pad in the Wilson, our 2021 development program will be primarily focused in the county line area of the Permian, where we anticipate completing 51 new net wells. We expect this program to maintain production relatively flat and deliver positive free cash flow at WTI price of approximately $35 per barrel. Although we expect to drill and complete more wells in 2021 than we did in 2020, we have lowered our expected capital spend in 2021 to approximately $300 million, given the capital efficiencies discussed earlier. In summary, we have adjusted our development base, continue to lower costs, and expect to deliver more than $200 million of free cash flow during 2020 and expect to generate positive free cash flow at $35 WTI in 2021. The increase in expected free cash flow from $150 million to our new forecast of $200 million is a result of continuous improvement in cost and efficiency and is not related to the announcement of an additional tax receivable. Our recent development activity in County Line demonstrates our ability to be a low-cost developer of core acreage while delivering outstanding well results. We believe we're well positioned to move through this unprecedented reduction in demand while continuing to pay down debt as we look forward to things gradually returning to normal. I will now turn the call to Bill to discuss the third quarter financial results, along with information on our liquidity position. Thanks, Tim.

Good morning, everyone. I'll spend my time this morning providing you with some details about our third quarter results. including the improvements to our balance sheet and liquidity position, updating you on our 2020 guidance, and finally opening the call for Q&A. However, before providing those updates, I wanted to highlight a couple of noteworthy items that we announced during the quarter. On August 27th, we announced the receipt of our $170.7 million AMT credit refund, which included $5.6 million of interest income. We followed that announcement with a second press release on August 31st, announcing that we had issued a notice of redemption for the remaining $275 million of our 2021 senior notes. On September 30th, we announced the completion of that redemption, which left us with fewer outstanding senior notes than we have had since the third quarter of 2012. Finally, yesterday we reported that during the quarter we recognized an additional income tax receivable of $81 million from an additional AMT credit refund, of which approximately $50 million is carried on our balance sheet as a current asset and is expected to be received within the next 12 months. We were pleased to receive the $171 million AMT refund ahead of our anticipated timeline, as its receipt, along with cash on hand, allowed us to redeem the remaining outstanding 21 notes earlier than expected. The repayment of the notes, coupled with our cash on hand, continued free cash flow generation, and the additional AMT refund receivable should allow us to continue to execute our plan of creating value for our shareholders through the strengthening of our balance sheet and improving our liquidity. Turning now to our third quarter results, we delivered another strong quarter of financial results despite the ongoing industry and market challenges. During the quarter, we generated net cash provided by operating activities of $329.6 million, and we reported free cash flow of $98.3 million, a $3 million improvement compared with the $95.3 million of free cash flow generated in the second quarter of 2020. We have now generated free cash flow of $162 million during the first three quarters of 2020, compared with an outspend of $66 million during the first three quarters of 2019, an improvement of more than $225 million. The improvement was primarily due to a $212 million decrease in accrued capital expenditures, which was primarily driven by two factors. First, a significant reduction in operating activity in the third quarter, and second, and equally as important, by our peer-leading drilling and completion costs. A $12 million increase in adjusted EBITDA and $10 million decrease in interest expense also impacted the increase in free cash flow. We reported a net loss of $49 million in the third quarter compared with a net loss of $184 million in the second quarter. The $135 million decrease in net loss was primarily driven by a $115 million decrease in unrealized derivative losses and a $16 million decrease in DD&A expense. In the third quarter, we generated $160.4 million of adjusted EBITDA a $3.1 million increase compared with the $157.3 million generated in the second quarter. The increase was driven by a $57 million increase in oil and NGL sales in the quarter, which were partially offset by a $51 million decrease in realized derivative gains, both largely driven by higher commodity prices. Combined total LOE and transportation expense was up nearly $7 million compared to the second quarter to a combined $48 million for the quarter. The increase was largely tied to our work over activity returning to more typical levels during the third quarter. Finally, G&A expense decreased by more than $5 million quarter over quarter, primarily due to a decrease in the mark-to-market adjustments of our deferred compensation plan. We continue to enter into commodity derivative contracts during the quarter, and we currently hold swap contracts totaling 4.3 million barrels of oil at an average price of $57.58 per barrel for the remainder of 2020. For 2021, we currently hold swap contracts totaling 10.4 million barrels at an average price of $43.48, and costless collar contracts totaling approximately 400,000 barrels at a 40 by $49.20 collar. Please see the 10-Q for additional details on our derivative portfolio. Turning briefly to our balance sheet, at the end of the third quarter, total assets were approximately $5.2 billion, and total shareholders' equity was approximately $2.8 billion. Total gross debt was approximately $1.6 billion. We had no borrowings outstanding under our credit facility, $12 million of letters of credit outstanding, and $9.5 million of cash on hand. On the liquidity front, at quarter end, we estimate that we could borrow up to $747.6 million under our credit facility and incur up to $500 million of junior guaranteed indebtedness and still remain in compliance with our financial covenants. You can find more details about our liquidity on slide 18 of the IR deck. With regard to the liability side of the balance sheet, as I mentioned earlier, we redeemed the remaining $275 million of our 21 senior notes during the quarter. In 2020, we have now either redeemed or repurchased more than $430 million of our senior notes, leaving approximately $1.6 billion of those notes outstanding. As shown in slide 16, you can see that since January 2019, we have now repaid more than $900 million of outstanding debt. Moving on to guidance, as provided in yesterday's release, we have updated the company's 2020 guidance to reflect our current expectations for the balance of the year. Tim already shared updated guidance for oil production and capital investment earlier, so I'll just provide a couple of other quick updates. The midpoint of our 2020 guidance for lease operating expense is $4.75 per BOE, while the midpoint for adjusted transportation and processing costs is $3.65 per BOE. This results in total lifting cost guidance of $8.40 per BOE at the midpoint, a $0.50 per BOE decrease from our prior quarter guidance. And finally, our 2020 guidance for G&A expense is $86.5 million at the midpoint, of which approximately $11 million was related to share-based and deferred compensation expense, which fluctuates with the price of QEP stock as well as other general stock market changes. The midpoint of our updated guidance represents a $1 million decrease from our prior quarter guidance. Please see our earnings release for additional details on this guidance. With that, I will now open the call up for questions.