Amplify Energy Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 4 speakers on the call.

Operator

Welcome to Amplify Energy's Third Quarter 2023 Investor Conference Call. Amplify's operating and financial results were released yesterday after market close on November 6, 2023, and are available on Amplify's website at www.amplifyenergy.com. During this conference call, all participants will be in a listen only mode. Today's call is being recorded. A replay of the call will be accessible until Tuesday, November 21 by dialing 800 6,000,000,005,563 and then entering access code 10,198,000,000 45.

Operator

I would now like to turn the conference call over to Jim Frew, Senior Vice President and Chief Financial Officer of Amplify Energy Corp.

Speaker 1

Good morning, and welcome to the Amplify Energy conference call to discuss operating and financial results for the Q3 of 2023. Before we get started, We would like to remind you that some of our remarks may contain forward looking statements, which reflect management's current views of future events and are subject to various risks, uncertainties, expectations and assumptions. Although management believes that the expectations reflected in such forward looking statements are reasonable, can give no assurances 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.

Speaker 1

For additional detailed disclosure, we encourage you to read our Form 10 Q, which was filed yesterday afternoon. Also non GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our earnings release or on our website at www.amplifyenergy.com. During the call, Martin Wilshire, Amplify's President and Chief Executive Officer, will provide an update regarding our strategic initiatives, our Q3 performance and an update on our sustainability efforts. Next, Dan Furby, Senior Vice President and Chief Operating Officer will provide an overview of 3rd quarter operational performance.

Speaker 1

Following that, I will discuss Q3 financial results, provide an update on our balance sheet and liquidity and provide additional details on our hedge book. Finally, Martin will provide final thoughts before opening the call up for questions. With that, I hand it over to Martin.

Speaker 2

Thank you, Jim. The restart of operations at Beta and substantial reduction in debt outstanding have positioned Amplify to evaluate strategic opportunities focused on enhancing shareholder value. We are pleased to announce several near term strategic initiatives in more detail today. First, the company has hired an investment banking firm to pursue a monetization of our oil producing assets in Barrow, Wyoming. We are exploring a complete divestiture of the asset, while also considering alternative structures with a goal of maximizing value for our shareholders.

Speaker 2

The marketing process will commence in the Q1 of 2024. 2nd, At Beta, we have conducted an in-depth technical review of the undeveloped potential in the field and will recommence the development program in the first half of twenty 4, economics at current oil pricing are extremely attractive with IRRs well in excess of 100% for wells that can be drilled and completed for approximately $5,000,000 to $6,000,000 The low variable cost nature of this asset allows us to add production with marginal increases in operating cost, greatly enhancing the profitability of the field. We expect the development program when combined with cost savings initiatives outlined on prior calls and the low decline nature of well to this heavy oil reservoir to profitably extend the life of

Speaker 3

the asset. Lastly,

Speaker 2

we've also created a wholly owned subsidiary, Magnify Energy Services, which will provide a variety of oilfield services to Amplify operated wells. Beginning in East Texas and Oklahoma, Magnify is providing compression, well testing and other well maintenance services. Over time, we may expand Magnify's capabilities into other service lines and operating areas. Magnify will improve the company's profitability by providing services at lower cost than current alternatives, while allowing the company to have greater access to and control over these critical services. We look forward to executing these strategic initiatives, which could further reduce leverage And potentially accelerate Amplify's ability to return capital to shareholders.

Speaker 2

Amplify's 3rd quarter operational and financial results were in line with internal projections, including the impact of the planned barrel turnaround in September. Since restarting operations of Beta in late April, Production volumes have continued to exceed initial projections and the wells brought back online have experienced fewer complications than expected. As a result, production is higher and costs are lower than initially anticipated. In the Q3, the company generated adjusted EBITDA of $19,500,000 and free cash flow of $6,100,000 Yesterday, Amplify issued its inaugural sustainability report, Which provides increased transparency to our stakeholders regarding our business and operating practices. This report details our safety procedures, environmental performance, efforts to enhance the long term sustainability of our business and dedication to sound corporate governance.

Speaker 2

We are committed to continuing to improve our disclosures and providing updates on our sustainability milestones. With that, I will now turn it over to Dan to discuss operational highlights from the quarter.

Speaker 3

Thank you, Martin. Total production for the quarter averaged approximately 20,600 Barrels of oil equivalent per day consisting of 38% oil, 18% NGLs and 44% natural gas. As expected, and facility improvements. In addition to the turnaround, a significant flash flooding event impacted production and operation for several days. At Beta, we accelerated our electrification project to utilize more onshore power from the local electric utility.

Speaker 3

Installation of the upgrades required intermittent production interruptions during the quarter. For the Q4, we expect higher production as barrel volumes return to pre turnaround levels and beta production continues to increase. Current production rates at Beaba are back to pre shutdown levels with additional wells scheduled to be returned to production. We anticipate having higher gross production rates compared to the pre shutdown period before FX new development drilling plan for 2024. Effective well treatments including acid stimulation jobs utilizing coiled tubing unit are generating higher production rates as we return wells to production.

Speaker 3

For the Q3, lease operating expenses were $37,100,000 gathering, processing and transportation costs were $5,000,000 and production taxes were $4,900,000 In total, these costs were approximately $1,800,000 higher than the previous quarter, partly offset by approximately $225,000 of income generated by Magnify Energy Services. The increase was driven by expenses related to the restart of Beta and the Bear Oil flooding event. We expect to reduce operating expenses in the coming quarters as our cost saving initiatives start to take effect. Some of these initiatives include electrifying a significant portion of the beta platforms to reduce diesel usage, the installation of selective catalytic reducers at beta to eliminate emission credit purchases, converting wells to more efficient artificial lift methods in Oklahoma and continuing to scale Magnify to provide additional in source compressors and services. The company's total capital investment for the quarter was approximately $9,700,000 The majority of this capital was invested in the facility upgrade of beta related to the electrification of the platforms and the plant facility turnaround of their oil, which will improve efficiencies of the assets.

Speaker 3

Capital investments for the remainder of 2023 will focus primarily on the continuation of facility projects and additional capital workovers at Beta. With that, I will turn it over to Jim.

Speaker 1

Thank you, Dan. I would now like to discuss Q3 financial performance, balance sheet and liquidity and hedging. With respect to Q3 financial performance, the company reported a net loss of approximately $13,400,000 compared to $9,800,000 of net income in the prior quarter. The decrease was primarily attributable and non cash unrealized losses on commodity derivatives from rising commodity prices during the period. As Martin previously mentioned, 3rd quarter adjusted EBITDA was $19,500,000 up $1,900,000 from the prior quarter.

Speaker 1

The quarter over quarter increase in adjusted EBITDA was primarily due to higher commodity prices. Looking forward, We are reaffirming our guidance range of $80,000,000 to $100,000,000 of adjusted EBITDA for 2023. With respect to costs, 3rd quarter lease operating expenses were up $2,200,000 versus the prior quarter. On a per BOE basis, were up 6% compared to the prior quarter. Year to date, LOE has averaged $18.84 per BOE, which is in line with our guidance.

Speaker 1

As Dan mentioned, we think there are several opportunities to reduce LOE and the company is actively pursuing those initiatives. Comparing the Q3 to Q2, gathering, transportation and processing costs were 3% lower, while production taxes were 5% lower on a per BOE basis. Cash G and A in the 3rd quarter was $6,500,000 Which was up $300,000 from the prior quarter and in line with expectations. We expect cash G and A to remain flat in the 4th quarter. In the Q3, we incurred $4,500,000 of interest expense, up $800,000 compared to the prior quarter, primarily due to writing off $700,000 associated with the prior credit facility.

Speaker 1

Free cash flow defined as adjusted EBITDA, less CapEx and cash interest expense was $6,100,000 in the Q3 of 2023 and was in line with expectations. Amplify has generated positive free cash flow in 9 of the last 10 quarters illustrating our strong sustainable cash generating potential. Cumulatively through the Q3, Amplify has generated $23,600,000 of free cash flow. Similar to adjusted EBITDA, we are reaffirming our full year free cash flow guidance of $30,000,000 to $50,000,000 On October 19, 2023, We completed the regularly scheduled semi annual redetermination of our borrowing base, which was reaffirmed at $150,000,000 with elected commitments of $135,000,000 The next redetermination is expected to occur in the Q2 of 2024. As of October 31, Amplify had net debt of approximately $104,000,000 consisting of $120,000,000 are standing under our revolving credit facility and $16,000,000 of cash on hand.

Speaker 1

Net debt has been reduced $79,000,000 or 43% since December 31, 2022. The company's liquidity was approximately $31,000,000 and net debt the last 12 months adjusted EBITDA was approximately 1.2 times. Finally, I would like to discuss our hedge book. As previously announced, we added substantially to our oil and gas derivative positions covering the next 3 years of production to satisfy the covenants under our new credit facility. Improving commodity prices in late summer enabled us to execute trades at attractive levels that support our cash generation profile and provide upside participation should prices increase in the future.

Speaker 1

As of November 6, are forecasted crude oil production was approximately 65% to 70% hedged for the remainder of 20232024, 45% to 50% hedged for 2025 and 15% to 20% hedged in 2026. On the gas side, we are approximately 75% to 85% hedged for the remainder of 2023 through 2025 and 40% to 45% hedged in 2026. With that, I'll turn the call back to Martin.

Speaker 2

Thank you, Jim. Over the past 18 months, the company has continued to deliver on its promises. Having brought beta back online and steadily increased production in a deliberate manner and successfully refinancing our debt under a new credit facility, Amplify is now positioned to unlock additional value from our mature, diversified portfolio of cash flow generating assets. As we near the end of 2023, we reaffirm our 2023 full year guidance and are focused on executing on our strategic initiatives. With that, operator, we are now open for questions.

Operator

And it appears that we have no questions at this time. I will now turn the program back over to our presenters for any additional or closing remarks.

Speaker 2

Thank you. As always, we like to listen to questions that have come into us through our investors, kind of aggregate them and respond to them. So Jim, if you'd like to ask some questions that have come in.

Speaker 1

Yes. So I think the first question that came in was around Magnify. So obviously we've announced that for the first time and the question is around what is Magnify's What could it be? How are you guys thinking about that? So I don't know, Dan, if that's something you want to take?

Speaker 3

Yes, we appreciate the question. We see Magnify really as a way to help us better control costs And the reliability of services we use in the field daily. Over the past couple of years, there has been obviously inflation pressure on prices and we've in some instances where you have trouble getting certain services. So we think by in housing some of these services, it will help us To better control our own destiny. Thus far, we've spent a pretty nominal amount of capital on this endeavor and the payback on this investment has been a matter of months.

Speaker 3

So these are very high pay quick payback, high margin services we're bringing in house. And like we mentioned In her remarks, that's been mostly compression, well testing equipment and some other ancillary services. Just overall, Our type of assets, mature low decline assets, we think it's very important to try to squeeze every bit of LOE cost out of the system as we can. And this is A way we think we can help do that. Thanks for the question.

Speaker 1

Yes. Another question I guess I can take. So there's been some questions around the barrel marketing process, test why we're thinking about that asset, what our plans are there, timing, etcetera. So I guess 1st and foremost, we believe it's a great asset. It's with a great operating team.

Speaker 1

It generates a significant amount flow for us and it's a low decline asset. But that all being said, based on where it is, it might have more value to somebody else, especially if they can leverage any kind of infrastructure they may have in the area. So we're going to run a dual process. We've hired an investment bank to do that. We'll pursue both an outright asset sale as well as other alternative monetization structures.

Speaker 1

Certainly, there have been a lot of folks in our industry recently announcing asset backed securitizations. So that's something we will pursue in parallel with that asset. Our goal would be to maximize the value And part and parcel of that is our current credit facility has some restrictions on when we are allowed to return capital to shareholders. Most notably, we need to have capacity or availability above 30% pro form a for any capital return we do. So certainly if we were to monetize the asset at the appropriate value that would allow us to accelerate any kind of return of capital options that we may have at our disposal.

Speaker 1

Lastly, I guess I'd say we're under no real pressure to sell the asset, So we will only transact if the value exceeds what we believe to be the hold value. We think we'll run a thorough process with our investment bank advisor, But we'll have more to announce upon that next year following the Q1 when we initiate the process. So I think that Covers most items related to barrel oil. So the final thing I guess that came up and it was part Part of the 3 strategic updates was any kind of information around beta. So Martin, do you want

Speaker 2

to take that? Certainly. Obviously, beta is an important asset to us and we've been spending time, money, effort to get that asset back up to full production, Which it already is and going higher, thanks to the efforts of Dan and the operating team out at Beta. So really encouraged about where we are. Obviously, we had to as we've done this, we've also been initiating the cost reduction initiatives, which We haven't seen the flow through financials and that you'll start to see them in the Q4 and going into next year, but we've substantially reduced diesel usage, which will start to flow into the financials, but also has an impact on emissions credits and things of that nature that we spend money on.

Speaker 2

So all that is coming through the Q4 and beyond. But we've also looked at and we did this back in 2021 is There is an incredible opportunity here to develop this asset. As we mentioned before, This is largely a fixed cost asset and there's very little incremental variable costs from bringing new production online just And with ours moving to the power generated from electricity and shore power, it's even less. And so these wells that are $5,000,000 to $6,000,000 have very short paybacks of call it 6 to 12 months at current pricing and we're really Intrigued by the potential of these wells going forward. So we've been we waited until we've got most of the workovers done.

Speaker 2

We are obviously going to try to kind of finish off the majority of the workers through the end of the year and the very beginning of next year and then quickly pivot into that development program. We're currently expecting we're planning about 4 wells. Obviously, we have some flexibility there. The better things go, the more we can potentially increased the number of wells going forward, but it's currently planned as a 4 well program in 'twenty four and a 3 well program in 'twenty five. But obviously, we have flexibility there Depending on how things progress.

Speaker 2

But we're really excited about, like I said, the fact that we're already back at pre shutdown levels and going higher as we're throughout the quarter and going into next year. And once again, that development program will be on top of that. So, really excited about the potential for that asset. With that, I think that's all the kind of the aggregated questions we got from our shareholder base. Obviously, we are available to shareholders who want to call and ask additional questions.

Speaker 2

But I'd just like To close by saying thank you to all of our employees for the outstanding efforts and dedication. I'd also like to express my appreciation to our syndicate lender and all of our shareholders for their patience and their support. Thank you for participating on the call today. And as always, if there are any questions, please don't hesitate to reach out. Thank you, everyone.

Operator

That concludes today's teleconference. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Amplify Energy Q3 2023
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