Amplify Energy Q1 2023 Earnings Call Transcript

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May 4, 2023

Key Takeaways

  • Amplify settled its Southern California claims, receiving $85 million in net proceeds, restarted Beta field operations on April 24, and says initial crude production rates have exceeded expectations.
  • Q1 adjusted EBITDA was $25.8 million (an 18% increase QoQ) generating $11.4 million of free cash flow, though net income of $352.8 million was boosted by noncash valuation allowance release and settlement gains.
  • Average production was ~19,400 BOE/d (31% oil, 19% NGLs, 50% gas); operating costs fell 8% QoQ to $33 million and capital investments included $5.1 million in Eagle Ford development and workovers in Oklahoma and Southern California.
  • As of April 30, net debt was $109 million (1.1x LTM EBITDA) with liquidity of $81 million; $65 million of settlement proceeds paid down debt, and management is working to refinance its May 2024 credit facility.
  • Management maintains flat production guidance for 2023–25, expects cumulative free cash flow of ~$180 million at current strip prices, and is prioritizing Beta ramp-up, hedge roll-off and credit facility refinancing.
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Earnings Conference Call
Amplify Energy Q1 2023
00:00 / 00:00

There are 4 speakers on the call.

Operator

Welcome to the Amplify Energy's First Quarter 2023 Investment Conference Call. Amplify's operating and financial results were released yesterday after market close on May 3, 2023, and are available at Amplify website at www.amplifyenergy.com. During the conference call, all participants will be in a listen only mode. Today's call is being recorded and a replay of the call will be accessible until Thursday, May 18, by dialing 800 6,414,463 and then access code 40,423,1417. 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 Q1 of 2023. Before we get started, we would like to remind you 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 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.

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 will provide an update regarding our year to date performance with a specific focus on the most recent beta field developments. Next, Dan Furby, Senior Vice President and Chief Operating Officer, will provide an overview of 1st quarter operational performance. Following that, I will discuss Q1 financial results, provide an update on our balance sheet and liquidity and provide additional details on our hedge book.

Speaker 1

Finally, Martin will provide a strategic update before opening the call up for questions. With that, I hand it over to Martin.

Speaker 2

Thank you, Jim. I'd first like to welcome Dan Furby and Jim Frew, who joined the team as COO and CFO, respectively. Their extensive oil and gas experience and depth of operational and financial expertise will be a great asset to our organization and will enable us to deliver additional value to our shareholders. Amplify has had a strong start to 2023. We successfully settled our affirmative claims in Southern California.

Speaker 2

Received approximately $85,000,000 in net proceeds from the settlement and restarted beta field production operations. 1st quarter adjusted EBITDA was $25,800,000 up from $21,900,000 in the prior quarter, Resulting in $11,400,000 of free cash flow. With respect to the beta field, on April 10, we announced that we had received all of the required regulatory approvals restart operations. On April 24, after completing the line fill process, we began selling crude to the market. Although results are still preliminary, initial production rates have exceeded our expectations.

Speaker 2

We continue to gradually bring more wells online and we are encouraged by results so far. The company looks forward to recognizing the incremental cash flow from returning this asset to production. With that, I'll now turn it over to Dan to discuss operational highlights from the quarter.

Speaker 3

Thank you, Martin. Despite some challenges caused by adverse weather conditions and third party compressor disruptions, 1st quarter performance was in line with expectations. Total production for the quarter averaged approximately 19 400 barrels of oil equivalent per day, which consisted of approximately 31% oil, 19% NGLs and 50% natural gas. Across our assets, we are exploring opportunities to economically return offline wells to production and evaluating artificial lift and compressor optimization to reduce production decline and lower operating costs. Our operation teams continue to develop and execute on their inventory of low cost, high return projects.

Speaker 3

In addition, we remain focused on improving operational efficiency. For the Q1, lease operating costs were $33,000,000 gathering, processing and transportation costs were $5,600,000 and production taxes were $5,300,000 In total, these costs were below internal forecast and down 8% from the prior quarter. The company's total capital investment for the quarter was In the Eagle Ford, we invested $5,100,000 towards the completion of 10 gross 1 net development projects in the Q1, including 2 refracs, all of which were brought online at the end of the quarter. As a result, we anticipate higher second quarter production from this asset. The company also invested $1,900,000 in Oklahoma workover projects $1,900,000 in Southern California in anticipation of returning the beta field to production.

Speaker 3

As Martin mentioned earlier, the team worked extremely hard to successfully and safely bring the Beta Field back on production. After receiving the necessary regulatory approvals in early April, We began to methodically bring wells back online and increase production. Current production is tracking ahead of schedule and we remain optimistic About returning the field to its full potential. Going forward, we intend to continue investing in production enhancing opportunities, facility upgrades and projects focused on emission reduction. With that, I'll turn it over to Jim.

Speaker 1

Thank you, Dan. I would like to discuss the following items: 1st quarter financial performance, balance sheet and liquidity and hedging. With respect to the Q1 financial performance, the company reported net income of approximately $352,800,000 during the quarter, Which was positively impacted by 2 nonrecurring events. First, the company received approximately $85,000,000 in net proceeds from the beta settlement. 2nd, net income had a one time adjustment of $259,500,000 related to the release of a substantial amount of the company's valuation allowance.

Speaker 1

The valuation allowance release increases the company's book value, but has no impact on Amplify's current or future cash flows. As Martin previously mentioned, 1st quarter adjusted EBITDA was approximately $25,800,000 an 18% increase compared to the prior quarter. The increase was primarily attributable to lower operating expenses and higher realized commodity prices, net of hedges, Which were partially offset by lower production and lower LOPI proceeds. As a reminder, per the terms of the LOPI policy, LOPI coverage specific to the incident ended on March 31, 2023. With respect to costs, 1st quarter operating expenses were lower than the prior quarter.

Speaker 1

This result was primarily due to lower production taxes, reduced workover expenses at Bairoil and in Oklahoma and a positive one time production tax adjustment related to our Eagle Ford asset. Cash G and A in the Q1 was $7,600,000 Which was up from prior quarter, but in line with expectations. The company anticipates that quarterly G and A expenses will decrease throughout the remainder of the year. Free cash flow defined as adjusted EBITDA less CapEx and cash interest expense was $11,400,000 in the Q1 of 2023. This was in line with expectations.

Speaker 1

Finally, due to the significant one time gain associated with the beta settlement, The company incurred approximately $12,500,000 of current income tax expense in the Q1. The company is evaluating opportunities to mitigate this expense With regards to our balance sheet and liquidity, as of April 30, Amplify had net debt of approximately $109,000,000 Consisting of $125,000,000 outstanding under its revolving credit facility and $16,000,000 of cash on hand. With a borrowing base of $190,000,000 The company's liquidity was approximately $81,000,000 and net debt to last 12 months adjusted EBITDA was approximately 1.1x. Of the $84,900,000 in proceeds from the beta litigation settlement, dollars 65,000,000 was used to pay down debt and the remainder was used to pay incident related expenses. The company expects to recover a majority of these incident related amounts through the insurance claims process, which will positively impact working capital over the remainder of the year.

Speaker 1

Currently, the company is working with new and existing capital providers to refinance its credit facility, which matures in May 2024. We expect to complete the refinance process in the latter part of the second quarter or in the early part of Q3 of this year. Finally, I'd like to discuss our hedge book. As of May 3, our forecasted crude oil production is approximately 40% hedged for 2023 and 5% hedged in 2024. On the gas side, we are approximately 70% hedged for 2023 and 10% hedged for 2024.

Speaker 1

We continue to realize the benefits from the scheduled roll off of our hedge book and have the potential to capture additional upside in the current commodity price environment. The company will continue to evaluate opportunities to hedge more volumes. With that, I'll turn the call back to Martin.

Speaker 2

Thank you, Jim. As we progress through 2023, we expect to increase our free cash flow profile through prudent asset management and capital allocation was to be further improved by the roll off of our hedge book, lower leverage and contributions from Beta's return to production. Currently, our forecasted 2023 through 2025 production is expected to remain relatively flat and generate cumulative free cash flow of approximately $180,000,000 at current strip pricing. Our strategic focus near term is to build production rates at beta and refinance our existing credit facility. Achieving these key milestones will provide us the flexibility to pursue additional value enhancing initiatives.

Speaker 2

In the future, we'll provide updates on these short term priorities In addition to outlining our broader strategic plans. With that, operator, we are now open for questions.

Operator

Absolutely. At this time, we will open the floor for questions.

Speaker 1

Are onenow.

Operator

It appears that there are no questions at this time. So I would like to turn the call back to our presenters.

Speaker 2

Great. Thank you. As has become accustomed here, we are Taking questions from investors and consolidating them and answering them as best we can so that we can do this in orderly fashion. So obviously the first question and most prevalent question is obviously to give as much detail as we can on the beta return to production. Obviously, as disclosed, we started the platforms up by pushing some production from on the platform storage into the pipeline.

Speaker 2

We filled the pipeline through incremental production and we're done by essentially April 23rd, at which point in April 24th, we started selling into the market. The good news so far is that as We've discussed before being offline for 18 months. We weren't sure what to expect from the wells that we started bringing them back online. This is a long time for the facilities to be offline and so there was a little bit of uncertainty there. So far, I'd say that The wells have performed extremely well.

Speaker 2

Obviously, there's as of right now, there's only a few wells that haven't come back on out of Probably the 70% or 75% that we brought back. There's still a number to bring back online and there's still the possibility that some may go down after 30, 60 days. But so far what we've seen is just a few wells that look like they're traditional type ESP replacement projects That will need to be done over the next few months. But so far, we haven't seen a rash of wells going down like We thought was a possibility as we brought the facility back online. So production rates are doing well and exceeding where we expected to be at this point and we So have a number of wells to bring back.

Speaker 2

Those as we continue to bring those back online and see the results of those obviously that'll Have direct impacts on our thoughts on guidance on oil production, etcetera for the rest of the year. But we are waiting a little bit longer just to see how That asset continues to respond as we go forward through the Q2 and I think we'll have an update by guidance for what we put out after the 2nd quarter earnings. The second question that we got obviously is related taxes, there's 2 pieces to this tax update. There was a very large non cash basically reversal of the valuation allowance. These are NOLs that are essentially restricted on an annual basis as to how much you can use, due to the large settlement that pushed into a position where we had to bring that valuation allowance back onto the books.

Speaker 2

It doesn't have any material near term impact. We could still use the NOLs that we're planning to use going forward. It's just a book adjustment that We had taken at one point and now we've reversed it. In regards to the current income tax, dollars 85,000,000 in one large chunk is a lot of a significant gain for a company that doesn't hasn't spent a lot of capital traditionally over the last few years especially. So as of right now, we do have a $12,500,000 income tax payable due to this one time gain.

Speaker 2

We're exploring ways to Mitigate that somewhat during the rest of the year, but since we received the funds in Q1, we had to take the full impact of the income tax payable during Q1 as well. So that is the result of that large $85,000,000 one time gain associated with the settlement. The third question that I got the most is, given their initial results at Bay then in Eagle Ford, Did you think about updating guidance? We did, is the short answer. But there are some moving pieces.

Speaker 2

Obviously, we only put guidance out less than 2 months ago. I do want to see how beta responds. Eagle Ford came on slightly earlier Than anticipated. So obviously there's a little of incremental production there that started in the very, very tail end, the very tail end of Q1. But we are anticipating most of that production not coming on until 2Q that obviously increased the capital in Q1, but it's Going to help production rates in Q2 a little bit as well.

Speaker 2

On top of that though, we've also got in East Texas, we had We've been drilling some wells later in the year. Those are in the $2 $2.10 gas environment. We may push those wells out. Those weren't intended to be completed this year. They were intended to be drilled this year and completed next year.

Speaker 2

So those are under review for whether or not those move forward in this current natural gas environment and obviously we're keeping a close eye on kind of what projects make sense and what don't In both East Texas and Oklahoma given the current natural gas pricing environment. So with all those kind of moving pieces, I think we'll We stuck to kind of our original guidance so far, but given a little bit more time, especially on the beta side, we'll see how that Impacts our go forward production guidance and we'll certainly look to update that in our August earnings presentation. I think that was it for the majority of the questions. I did have one more actually on supply chain and inflation. I think for the most part, it's the impacts have slowed down a little bit on the inflation side, specific to the things that we The drilling the guys that drill a lot may have a different answer.

Speaker 2

But our biggest issue that we've seen in the field is related to compression and The midstream guys in particular are projects that used to take half a day or taking a few days. It's materials, it's equipment, it's personnel. So that's where we're kind of seeing the biggest impact and that Has a little bit more of an impact, especially in our East Texas and Oklahoma area, but it can impact if we have a part that we need in barrel and whatnot. So that's where we're Seeing kind of the impact of call it supply chaininflationary pressures. But overall, I think the impact is mitigating somewhat as prices have come down a little bit and there's not as much of a demand for the services.

Speaker 2

So We'll see how that continues as we move forward. With that, I think that's the majority of the questions that we've been asked through There are investor outreach. As always, if you have questions going forward, I encourage all of our investors to feel free to send those across to us. And like I said, we'll try to consolidate and answer the questions we get the most or the most impactful questions. With that, I will So say that, I want to thank our employees for once again for their outstanding efforts over the last 18 months.

Speaker 2

I think this has been a very difficult and trying period for everyone. But I also want to thank all of our investors that have stuck with us through this time. It's been a kind of a long road, but we are moving forward and very excited about what the potential is for beta moving forward. And with that, I will I'll just say thank you once again. And if you have any additional questions, please don't hesitate to reach out.

Speaker 2

Thank you, everyone.

Operator

Thank you, ladies and gentlemen. This concludes today's program. You may now disconnect.

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