Amplify Energy Corp. (NYSE:AMPY) Q3 2020 Earnings Conference Call November 5, 2020 11:00 AM ET

Company Participants

Jason McGlynn - Vice President, Business Development
Martyn Willsher - Interim Chief Executive Officer, Senior Vice President and Chief Financial Officer

Conference Call Participants

Jeff Grampp - Northland
Noel Parks - Coker & Palmer

Operator

Welcome to Amplify Energy's Third Quarter 2020 Investor Conference Call. Amplify's operating and financial results were released earlier today and are available on Amplify's website at www.amplifyenergy.com. During this conference call, all participants will be placed in a listen-only mode. Today's call is being recorded. And a replay of the call will be accessible until Thursday, November 19 by dialing 855-859-2056 and then entering conference ID 1783609, or by visiting Amplify's website www.amplifyenergy.com.

I would now like to turn the conference over to Jason McGlynn, Vice President of Business Development Amplify Energy Corp.

Jason McGlynn

Good morning and welcome to the Amplify Energy conference call to discuss operating and financial results for the third quarter of 2020. Joining me on the call today is Martyn Willsher, Amplify's Interim Chief Executive Officer and Chief Financial Officer.

Before we get started, we would like to remind you that some of our remarks may contain forward-looking statements, which reflects management's current views of future events and are subject to various risks, uncertainties, expectations and assumptions. While management believes that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this earnings call.

Please refer to our press release and SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books, records and reports. For additional detailed disclosure, we encourage you to read our quarterly report on Form 10-Q, which we expect to file later today.

Also, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures maybe found in our press release or on our website at www.amplifyenergy.com.

With this, I will now turn the call over to Martyn Willsher. Martyn?

Martyn Willsher

Thank you, Jason. During this call, I will provide comments on our third quarter performance, our hedging program and an overview of our liquidity position and balance sheet. I will then turn the call over to Jason to provide additional financial details for the quarter. Following our prepared statements, we will take questions and I will conclude with closing remarks.

Production for the third quarter averaged approximately, 27,700 BOE per day, which mirrored second quarter 2020 production performance, and exceeded our internal expectations. Notably, oil production volumes increased by 5% during the quarter to approximately 10,800 barrels per day from 10,400 barrels per day in the second quarter. This increase in oil volumes was primarily attributable to royalty relief at Beta. However, it is important to note that all asset areas met or exceeded internal expectations despite intermittent third-party weather interruptions and reduced maintenance capital expense. These results demonstrate the sustainable value of our long-lived, low-decline assets.

Third quarter adjusted EBITDA was approximately $24.8 million, meaningfully exceeding internal estimates and validating the exceptional execution of our cost reduction initiatives and hedging program. Capital spending for the third quarter was approximately $5 million, which was slightly above our internal expectations, primarily as a result to additional cost associated with our non-operated Eagle Ford asset. Remaining capital spending for the year will be $3 million and focus on high return capital work of projects and facility maintenance expenses across our operated assets.

Free cash flow defined as adjusted EBITDA less CapEx and cash interest expense was $16 million in the third quarter and was driven by our significant cost reduction efforts. We anticipate a strong free cash flow profile again in the fourth quarter, as we continue to operate with a minimal capital budget and execute on our cost-saving initiatives.

Since our last earnings call in August, we have significantly added crude oil hedges for 2021 and 2022. Currently, we have hedged approximately 75% of our fourth quarter 2020 crude oil production at attractive pricing in 2021. We've hedged a considerable amount of our forecast of crude oil production, where the mix of swaps in collars. Our collar positions are more heavily weighted to the back half of the year, which will allow for greater upside participation in the market recovery. We intend to add to our 2021 hedge book over the coming months, and we'll begin to layer on incremental hedges in 2022 and 2023 as the market allows.

As explained during the second quarter earnings call, we monetize most of our 2021 crude oil contracts in order to capture market dislocation at that time and position the company to fully participate in accrued crude oil recovery moving into next year. This trade was very beneficial to the company, and we have rehabbed those volumes locking in the improved economics. Our hedging program will allow us to protect future cash flows, while also capturing potential upside and then improving commodity price environment.

As of October 30, 2020, our hedge mark-to-market value was a net asset position of $13 million. Amplify's third quarter 2020 hedge presentation contains additional details on our current positions and was posted on our website earlier today under the Investor Relations section.

Moving onto a discussion of our recent credit facility redetermination and our current liquidity position. Since the spring 2020 redetermination, we have reduced indebtedness and compliance with a scheduled monthly $5 million borrowing base reductions using internally generated free cash flow.

As of October 30, Amplify had total net debt of $243 million, with $260 million outstanding under our revolving credit facility and $17 million of cash on hand. With the spring 2020 redetermination borrowing base reductions now concluded, Amplify expects to utilize excess cash flow for further debt reductions and additional capital for higher rate of return projects.

Amplify's fall 2020 borrowing base redetermination process is currently underway, and we anticipate completing the process before the end of November.

Although, the borrowing base was reduced in spring 2020 as a result of market disruptions related to the ongoing COVID-19 pandemic and commodity price volatility, we anticipate that the current redetermination process will provide a result that supports our liquidity position and a solid foundation for substantial free cash flow generation.

With this in mind, I'll now turn the call over to Jason McGlynn. Jason?

Jason McGlynn

Thank you, Martin. As previously mentioned production for the third quarter averaged approximately 27,700 BOE per day, which was flat with the prior quarter and exceeded internal expectations. This outstanding result can be attributed to strong performance across all of our asset areas and Beta royalty relief, which took effect at the beginning of the third quarter. As mentioned in our earnings release, our crude oil volumes grew by 5% quarter-over-quarter, resulting in a third quarter production mix of 39% oil, 17% NGLs and 44% natural gas.

Lease operating expenses for the third quarter were $27.6 million or $10.86 per BOE, down from $27.8 million or $11.03 per BOE for the prior quarter and considerably exceeding our internal expectations on both a total dollar basis and a per BOE basis. The reduction in lease operating expenses was due to the continued execution of our cost-saving initiatives instituted earlier this year and production outperformance.

As we look to close out the remainder of 2020 and move into 2021, Amplify remains committed to operational excellence and efficiency, and our outstanding operating team will continue to identify and capitalize on additional cost reduction efforts.

GP&T was up this quarter to $5.3 million or $2.07 per BOE compared to $4.7 million or $1.86 per BOE in the second quarter of 2020. This increase was primarily related to an increase in oil and gas revenues during the quarter.

Taxes and other income increased this quarter to $3.8 million or $1.48 per BOE compared to $2.2 million or $0.87 per BOE in the second quarter. Again, this increase was primarily related to the increases in oil and gas revenue during the quarter.

G&A expense for the third quarter was $6.4 million, including approximately $0.5 million dollars of non-cash compensation and $0.3 million of non-recurring transaction costs and bad debt expense.

Excluding the non-cash and non-recurring costs, the third quarter cash G&A totaled of $5.6 million or $2.20 per BOE compared to $6.2 million or $2.45 per BOE in the second quarter of 2020. This reduction in reoccurring cash G&A expenses validates the company's commitment to delivering approximately $2.5 million in annualized cost G&A savings by the end of the third quarter and paved the way for achieving an annualized run rate of approximately $22 million.

That concludes our prepared statements. With that, operator, we are now ready for the questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions]

And our first question is going to come from the line of Jeff Grampp, Northland.

Jeff Grampp

Good morning, guys.

Martyn Willsher

Good morning, Jeff.

Jeff Grampp

Hey, Martyn, wanted to start on the borrowing base front. I know, obviously, you don't have a number in hand yet, but it at least directionally do you have a sense is flat a possibility, I imagine ups off the table, but can you be kind of flattish? Or do you have any sense of if there was a cut -- the kind of magnitude? And do you think the banks are going to want kind of the forced amortization feature to be extended, or do you think that might be able to be removed?

Martyn Willsher

So, obviously, we have to get through the process. But I think as far as an assumption, obviously prices have increased since our last redetermination and we've executed on the cost reduction initiatives that we had implemented. And so, I believe that a flat result is very attainable. No guarantees at this point, but I think a flat reduc -- a flat borrowing base with no additional mandatory reductions is the most likely outcome at this point.

Jeff Grampp

Okay. That's very clear. On the capital side, it seem gas kind of rallying here into the winter and you guys obviously have kind of multi commodity exposure in terms of capital flexibility. Do gas projects make sense for you guys at these prices or just generically, maybe it would be great to get your thoughts on how you're thinking about capital deployment here beyond kind of the few million of mandatory maintenance CapEx we see from you?

Martyn Willsher

Yeah. So, obviously, as part of our 2021 budget, we're taking a look -- a hard to look at some of those gas projects. There's a mixture of operated project potential, but there's also some non-operated projects that we have a fairly significant working interest in, that could be of interest to us. So, we're certainly looking at those. Obviously, we're managing for free cash flow and managing -- making sure that all those projects make sense and from both an IRR and payback period perspective. So, we -- so, certainly, they're much more on the table than they'd been in the last couple of years and that will be kind of fleshed out in our budget process over the next couple of months.

Jeff Grampp

Okay. Great. Last one for me. Just on the CEO side of things, I know, kind of you're on the interim side, is the Board looking to kind of formalize that, or has a search undergoing or any kind of color you can provide us on that?

Martyn Willsher

Well, obviously, we've -- our primary focus for the last six months has just been making sure we got everything executed on the operation side. As far as I know, there's no ongoing search for this -- and a different CEO, so I expected something we'll review that in the coming months and going into 2021.

Jeff Grampp

Okay. Sounds good. Thanks for the time guys.

Martyn Willsher

Thanks, Jeff.

Jason McGlynn

Thanks, Jeff.

Operator

Our next question will come from the line of Noel Parks, Coker & Palmer.

Noel Parks

Good morning.

Martyn Willsher

Good morning, Noel.

Noel Parks

Hope, everyone was doing well down there. And just a couple questions. You did talk -- or you just refresh your memory about the monetizations you did earlier in the year. And -- but I was just looking at the updated hedge totals. Were there any monetizations performed in the quarter, or were there normal settlements?

Martyn Willsher

No. There were just normal settlements during this quarter. Those hedge monetizations took place in the second quarter when the Cal 2021 strip was in the mid-thirties. And we felt like before the end of the year, we'd have the chance to rehedge those volumes at a much better environment. And so, somewhere between 42 and 45, depending on the hedges, we've rehedged those volumes, kind of locking in that gain. And so, that was kind of always the idea and we were able to execute on that during this quarter.

Noel Parks

Great. And I know you don't generally formally guide on what your expectations are for a price realization, but you could just even characterize generally sort of what you're -- what you're seeing or -- just what -- or maybe more importantly what trends you're watching for the different products.

Martyn Willsher

Yeah. Obviously, in the past, we've got to price realizations. I think, obviously, you've seen NGLs be a little bit stronger recently than they've been over the last, call it, year prior. So, the realizations relative to crude are doing a little bit better. Gas is, obviously, doing better. For example, the Mid-Con region has obviously improved its net backs as well.

So, by and large, I think it's improved. There's some areas that are -- we have a non-operated position Eagle Ford where I think the oil pricing has been a little bit weaker. But in the Rockies it's been a little bit stronger. And so, it's been kind of a little bit of a mixed bag. And so, I think, for now kind of the realizations from this quarter would be your best estimate for kind of a go-forward look and hopefully by -- prior to you for our next call, we'll be implementing guidance again for 2021 and can give great color on those questions.

Jason McGlynn

Yeah. Noel, the only thing I'll add there is -- this is Jason -- there's a lot of disruption this year, a lot of movement and volatility in the commodity side. And some of our stuff out in Beta, that's midway sunset that said a little bit of dislocation and we'd anticipate that kind of going back to the norms as we move farther out into 2021 in forward pricing. And there's been some of that stuff happening in the Mid-Con area too. And as we said -- but we've actually had some better pricing as Martyn mentioned in the Rockies. So, we anticipate that going back to more historical norms and moving forward, I think as Martyn said, a good proxy for Q4 is kind of where we're at right now.

Noel Parks

Okay. Great. And I believe in the past you've talked about sort of a baseline maintenance CapEx level of just $5 million to $10 million. And we've had some -- well, gas is look pretty good, but we certainly had more disruption on oil pricing in just the last couple of months. And if we were -- if we started turning the corner with COVID and things that stabilized or improving a little bit for oil, we have at least been in contango. So, we, at least, have that little bit of encouragement in the strip. Do you have any sense of -- at a higher price, whether there are any sorts of projects that sort of low-hanging fruit that might have to the front burner, if say a quarter from now, we were sort of closing back in on 50 sort of where we were headed sort of like in late summer.

Martyn Willsher

Yeah. I'll address that. Obviously, we have a number of work over opportunities across the company, especially in Oklahoma, as we've talked about those -- some of those ESP projects might make more sense at 50 than they do at 40, bringing some of that production that's basically just offline right now, bringing that back online. Those are kind of low-hanging fruit in the right economic environment. Obviously, at the beginning of this year, we talked about developing Beta. And so that's something that if we see some continued price improvement through 2021, that might be we'll revisit those projects.

And then, obviously, we already talked about the fact that gas is a lot more attractive now, and that applies to both East Texas and some Oklahoma -- small Oklahoma projects potentially as well. So, we have a -- we have some opportunities, but we're also, like I said, going to be very conscious of free cash flow in 2021 while it's -- we're still in this depressed environment, but if we can start to get a little bit of clearance in that, especially in that 50 and above level, then maybe do start to moderately increase activity levels at that point.

Noel Parks

Great. And as an example for those work over opportunities, especially the ESP substitution, what's roughly the payback time on a project like that?

Martyn Willsher

Typically, we look at high grading the ones that are a year or less. And so, there's several of those still in inventory right now. And obviously, if the price -- both the gas price and the oil price improves, the greater number of those kind of move up the ranking. And so, those are the kinds of things we'll be looking at as the market continues to recover, because they are a mixture of gas, oil and NGLs, obviously. And so, we're cognizant of all three streams there and the impact that has on the economics.

Noel Parks

Okay. Great. Thanks a lot.

Martyn Willsher

Thanks, Noel.

Jason McGlynn

Thanks, Noel.

Operator

Thank you. At this time, we have no further questions.

Martyn Willsher

All right. Thank you. So, this year has been challenging for the industry and our company. While the ongoing COVID-19 pandemic has continued to impact demand and prices have been slow to recover, the organization has demonstrated its resiliency and ability to adapt to the current environment.

I cannot express my appreciation enough to the company's employees for their outstanding efforts and continued dedication. I would also like to thank our stakeholders for their continued support as we persevere through these difficult times. With strong free cash flow expected for the remainder of 2020 and 2021, we look forward to continuing to execute for all of our stakeholders and preparing for future opportunities.

Thank you for joining us today. And as always, please do not hesitate to reach out to us with any additional questions.

Operator

Thank you for participating on today's conference call. You may now disconnect.