Amplify Energy Q4 2023 Earnings Call Transcript

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March 7, 2024

There are 6 speakers on the call.

Operator

Welcome to Amplify Energy's 4th Quarter 2023 Investor Conference Call. Amplify's operating and financial results were released yesterday after market close on March 6, 2024, 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 March 21, 2024 by dialing 800 6,540,1563 and then entering access code 2,802, 40,256.

Operator

I would now like to turn the conference 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 Q4 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, it 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 ks, 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 review our Q4 performance and provide an update regarding our previously announced strategic initiatives. Next, Dan Fervi, Senior Vice President and Chief Operating Officer will provide an overview of 4th quarter operational performance.

Speaker 1

Following that, I will discuss 4th quarter financial results, provide an update on our balance sheet and liquidity and provide additional details on our hedge book. Finally, Martin will conclude our prepared remarks with comments regarding Amplify's 2024 guidance and provide final thoughts before opening the call up for questions. With that, I will hand it over to Martin.

Speaker 2

Thank you, Jim. Amplify had a strong Q4 of 2023, capping off a successful and important year for the company. With respect to the Q4, the company generated $25,200,000 of adjusted EBITDA and $14,400,000 of free cash flow. 4th quarter production averaged 20,800 BOE per day, a 1% increase from the prior quarter, while LOE came in 7% lower than the prior quarter on a per BOE basis. For the year, Amplify generated $88,000,000 of adjusted EBITDA $38,000,000 of free cash flow, which was in line with company's 2023 guidance, despite steep declines in natural gas and NGL prices throughout the year.

Speaker 2

In 2023, the company also materially improved its balance sheet, reducing net debt by approximately $95,000,000 and establishing a new credit facility in the Q3. Operationally, the company achieved average net production of 20,500 BOE per day for the year, successfully returned beta to production and formed Magnify Energy Services to provide a variety of oilfield services to amplify operated wells, reduce operating costs and provide greater operating control. I'm extremely proud of the entire organization for the operational and financial progress we made in 2023, and I expect the company to continue the positive momentum this year. With respect to the strategic initiatives highlighted last quarter, the company engaged an investment bank to pursue the monetization of our oil producing assets in Barrow, Wyoming. As a reminder, we're exploring a complete divestiture of the asset as well as considering alternative structures with a goal of maximizing shareholder value.

Speaker 2

A successful barrel monetization will accelerate our ability to reduce debt outstanding and evaluate return of capital options. We will provide an update regarding this process on our next call. At Beta, following an in-depth technical review of the undeveloped potential in the field, we are pursuing a full well development program in 2024 with the first well having been spud earlier this week. At current prices, the development program is forecast to generate attractive IRRs in excess of 100 percent and payback periods of less than 1 year. The first two wells are scheduled to be in production in the second quarter and we will provide updates to the market when the results are available.

Speaker 2

In summary, we continue to focus on optimizing cash flow generation while simultaneously pursuing our strategic initiative at Beryl and Beta. We believe this plan will unlock additional value in Amplify's portfolio and deliver substantial benefits and long term value to our shareholders. With that, I will hand it over to Dan.

Speaker 3

Thank you, Martin. Total production for the 4th quarter averaged approximately 20,800 BOE per day consisting of 41% oil, 18% NGL and 41% natural care. Full year 2023 production averaged 20,500 BOE per day, which was within our full year guidance range. Production guidance of 190,021,000 BOE per day for 2024 represents volumes which are nearly flat year over year with a 12% increase in oil volumes from beta development, offsetting natural declines of our gas weighted assets. This projection includes approximately 15 days of scheduled shut ins of FADO during the year to complete the electrification of the platforms, which will generate significant cost savings and reduce emissions in the future.

Speaker 3

The beta development program is anticipated to bring on additional oil volumes in Q2 and Q4 of 2024, with the full impact of our initial development campaign realized in 2025. Oil production growth will increase revenue realization in 2024 and improve the company's profitability going forward. Additionally, we anticipate that our operating partners in the Eagle Ford will continue development in the second half of twenty 24, with completions adding incremental liquid weighted volumes in early 2025. Lease operating expenses for the full year 2023 were approximately $140,000,000 or $18.66 per BOE, which was below the midpoint of the 2023 guidance range. As a reminder, we brought the beta field back to production in late April 2020 3.

Speaker 3

When normalizing for a full year of beta operations, 2023 lease operating expenses would be approximately 147,000,000 dollars Our team has been extremely focused on reducing operating costs throughout the asset base, and we began to realize the positive results from these efforts in the Q4. We expect to continue improving our cost structure throughout 2024 and our guidance of midpoint of $143,000,000 Our guidance range for these operating expenses does not include the impact of Magnify Energy Services, which is expected to ultimately generate between $2,000,000 $3,000,000 of adjusted EBITDA that would have otherwise been captured by third party service providers and LOEs. Accounting for the effect of Magnify to our operating cost structure, we are projecting full year 2024 lease operating expenses to total $140,000,000 which represents a $7,000,000 savings compared to the normalized 2023 run rate, despite $7,000,000 of non controllable inflation related items such as higher insurance rates and electric utility costs taking effect in this year. A detailed reconciliation bridging last year's operating expenses to our expectations for 2024 can be found our latest investor presentation currently available on our website. The cost savings realized in late 2023 and expected to continue in 2024 are the result of the significant reduction in diesel usage for our ongoing electrification project at Beta, optimizing chemical programs in our Oklahoma and East Texas fields, improving workover efficiencies and several other initiatives.

Speaker 3

Magnify currently owns and operates compressors in East Texas, which eliminates significant third party rental fees, performed nearly all Amplified's pipeline work in East Texas and Oklahoma, utilizes its own well test units and provides other ancillary services for well remediation work. In 2024, Magnify intends to expand the scope and size of the services it provides to Amplify, including additional compression and water hauling services in the field where we find it to be advantageous to operate our own vacuum trucks. Between the continued cost saving projects being undertaken by Amplify and the expanded services provided by Magnify, we endeavor to be the most efficient operator of mature, low decline, long life assets. In 2023, we invested a total of $33,700,000 in capital projects, which was near the low end of our guidance range. Approximately $19,000,000 was invested beta with $10,000,000 spent on our electrification and emission reduction project and $9,000,000 spent on workovers and other capital projects necessary to bring beta back to production in April 2020 3.

Speaker 3

We also invested $7,000,000 in non op Eagle Ford development in which 10 gross and 0.9 net wells were brought online in the first half of twenty twenty three and have performed at or above expectation with average projected IRR exceeding 50%. The remaining capital for 2023 of $8,000,000 was on high return well workovers and facility projects in our Oklahoma, East Texas and Bear Oil assets. For 2024, our capital investment is expected to be between $50,000,000 to $60,000,000 As Martin mentioned, we have initiated drilling program at Beta, where we anticipate drilling 4 wells in 20 of $20,000,000 to $24,000,000 Also at Beta, we will finish the electrification project and other one time facility upgrade investing between $13,000,000 $15,000,000 The remaining of the anticipated capital expenditures in 2024 is allocated to non operated high rate of return oil weighted Eagle Ford drilling, other capital workovers and facility projects across our operated asset base and approximately $1,000,000 invested in Magnify to expand the oilfield services business. The Astuti project at Beta, which will be completed in the second half of twenty twenty four, involves the upgrade of our electric facilities, the replacement of diesel driven injection pumps with electric pumps and the installation of selective lead producers on all natural gas and diesel driven engines, which will almost completely eliminate our non emissions of data.

Speaker 3

Upon completion, we will see a further reduction in power cost by eliminating almost all diesel usage for production operations, which will be sub with our produced natural gas and additional electricity purchased from the local utility onshore. We will also eliminate the purchase of NOx emission credit, which is currently a significant operating cost. After completing these projects, we do not anticipate additional material facility investments of Beta in the near future, which will increase the free cash flow from Beta going forward. In conjunction with the cost savings we realized by the large facility project at Beta, we also anticipate substantial production growth through our 2024 development program. We have spotted our first of 4 planned wells in 2024 and expect to bring online 2 wells in the 2nd quarter and an additional 2 wells in the 4th quarter.

Speaker 3

The value proposition of further developing the Beta asset is very attractive. Beta is a world class oilfield initially discovered and developed by Shell in the 1980s, drilling low angle wells through massive highly burnable stacked sand zones. The last significant drilling program in the asset consists of 7 wells drilled by Amplify's credit facility. 3 of these wells were drilled horizontally, targeting the V sand and delivered 1st year average production of approximately 3 50 gross barrels per day per well. Our current development plan is designed to sidetrack out of existing shut in well and horizontally target the deep sand, utilizing the latest in rotary steerable and mapping well drilling technology to optimally place our wells in areas with the highest remaining oil saturation.

Speaker 3

With an estimated well cost between $5,000,000 $1,000,000 and minimal incremental operating costs associated with these additional wells, we anticipate IRRs exceeding 100% and payback of less than 1 year. The beta field has central field large growth asset for years to come, as there are still significant resources remaining to be recovered. The original oil and clay cut in the field range from 600,000,000 to 1,000,000,000 barrels of oil and with only approximately 100,000,000 barrels recovered to date, the implied recovery factor is only between 11% to 16%. There are many analog fields in Southern California Basin with very similar reservoir properties that have recovered between 30% to 40% of original oil plays. These analogous fields generally have much tighter well spacing compared to beta fields, which presents the opportunity for significant infield drilling.

Speaker 3

With beta development underway, the beta facility projects scheduled to be completed this year, the expansion of Magnafone Energy Services and the continued focus on cost saving initiatives and identifying and executing high return work over projects, we expect 2024 be a transformational year for the company where we start to realize the full value of Amplify's asset base. With that, I will turn it over to Jim.

Speaker 1

Thank you, Dan. I would now like to discuss full year 2023 and 4th quarter financial performance, balance sheet and liquidity and hedging. With respect to 4th quarter financial performance, the company reported net income of approximately $43,600,000 compared to a $13,400,000 net loss in the prior quarter. The increase was primarily attributable to non cash unrealized gains on commodity derivatives during the period. For 2023, Amplify generated $88,000,000 of adjusted EBITDA.

Speaker 1

Despite falling gas prices, the company's adjusted EBITDA was near the midpoint of its guidance range. As Martin previously mentioned, 4th quarter adjusted EBITDA was $25,200,000 up $5,700,000 from the prior quarter. The quarter over quarter increase in adjusted EBITDA was primarily due to lower lease operating expenses and slightly higher oil production. Of note, with beta coming back online in April, 4th quarter oil production increased to 41% of total production, up from 31% in the Q1 of 2023. With respect to lease operating costs for the full year 2023, Amplify's average LOE was $18.66 per BOE.

Speaker 1

This was slightly below the midpoint of 2023 guidance. In the 4th quarter, lease operating expenses averaged $18.14 per BOE, down 7% compared to the prior quarter. As Dan mentioned, we think there are several opportunities to continue reducing LOE and the company is actively pursuing those initiatives. For full year 2023, gathering, processing and transportation costs averaged $2.78 per BOE, which was below the low end of the guidance range. 4th quarter GPT costs were $2.66 per BOE.

Speaker 1

We expect these lower costs will continue into 2024. Cash G and A in 2023 was $26,400,000 or $3.53 per BOE, which was below the midpoint of guidance. In the Q4 of 2023, cash G and A was $6,200,000 or $3.25 per BOE, which was down $300,000 from the prior quarter. Full year 2023 cash interest expense was $16,300,000 This was slightly above the high end of our guidance range. Despite aggressively paying down debt throughout the year, rising interest rates created some headwinds.

Speaker 1

In the 4th quarter, we incurred $3,800,000 of interest expense, down $700,000 compared to the prior quarter. As we continue to pay down debt, we expect interest expense will trend lower in 2024. Free cash flow defined as adjusted EBITDA, less CapEx and cash interest expense was $38,000,000 $14,400,000 for full year 2023 and Q4 2023 respectively. Both of these results were in line with expectations. Amplify has generated positive free cash flow in 14 of the last 15 quarters illustrating the strong sustainable cash generating potential of our mature diversified asset base.

Speaker 1

As Dan mentioned, we are investing significant capital at Beta in the first half of twenty twenty four and expect to realize the positive impacts to revenue and free cash flow in the second half of the year. On October 19, 2023, we completed the regularly scheduled semi annual redetermination of our borrowing base, which was reaffirmed at $150,000,000 with a LECA commitments of $135,000,000 The next redetermination is expected to occur in the Q2 of 2024. As of December 31, Amplify had net debt of approximately $94,000,000 consisting of $150,000,000 outstanding under our revolving credit facility and $21,000,000 of cash and cash equivalents. Net debt has been reduced approximately $95,000,000 or 50% since December 31, 2022. At year end, the company's liquidity was $40,000,000 and net debt to last 12 months adjusted EBITDA was 1.1 times.

Speaker 1

As of March 6, our forecasted crude oil production was approximately 70% to 75% hedged for 2024, 45% to 50% hedged for 2025 and 10% to 15% hedged in 2026. On the gas side, we are 85% to 90% hedged for 2024 through 2025 and 45% to 50% hedged in 2026. The company will continue monitoring the market to opportunistically supplement its strong hedge positions going forward. With that, I'll turn the call back to Martin.

Speaker 2

Thank you, Jim. On to guidance. Yesterday, we provided operational and financial guidance for 2024 with the current assumption that we retain Beryl for the full year. If our monetization process is successful, we will update guidance as appropriate later in the year. As Dan previously mentioned, Amplify's 2024 capital budget is forecasted to be between $50,000,000 $60,000,000 On the development side, we expect to drill 4 operated wells at Beta and participate in 0.5 to 1 net non operated wells in Eagle Ford.

Speaker 2

We also anticipate completing the electrification and emissions projects at Beta, while funding facility and high return workover projects throughout our entire portfolio. Due to the timing of the beta development and facilities projects, we expect to invest 85% to 95% of our capital budget in the 1st 3 quarters of 2024. As a result of these investments, we anticipate that by the Q4 2024, the company will see a substantial increase in oil production and a lower cost structure at beta, which will significantly increase our cash flow and the long term value of the beta asset. Our average daily production forecast for the year ranges between 19,021,000 BOE per day with a commodity mix of approximately 42% oil, 16% NGLs and 42% natural gas. Due to the development program beta, we anticipate oil production as a percent of total production will increase throughout the year.

Speaker 2

For guidance purposes, we've assumed a WTI price of $75 per barrel and a Henry Hub natural gas price of $2.50 per MMBtu for 2024. Based on these assumptions, we anticipate generating adjusted EBITDA of $90,000,000 to $110,000,000 and approximately $20,000,000 to $40,000,000 of free cash flow this year. Additional guidance details were provided in our earnings release and can be found in the latest investor presentation currently available on our website. As we look ahead to the remainder of 2024, we are excited by the potential of our beta development program and the impact of a successful monetization of our variable asset. We believe these two critical initiatives combined with our relentless focus on managing our cost structure will provide a catalyst for market outperformance while also enhancing our flexibility as we consider our strategic path forward and evaluate potential capital return

Operator

Our first question comes from Jeff Grampp with Alliance Global Partners.

Speaker 4

Good morning, guys. Thank you for the time.

Speaker 5

Good morning, Jeff.

Speaker 4

I was curious, starting first with Beta. So you guys have drilled in the first well there now, results coming in Q2. Do you have kind of a best guess for when those wells start flowing, just to get a sense of kind of the contribution in Q2 and maybe into Q3? And I know IP rates aren't everything, but any kind of internal estimate or expectations you could share to kind of benchmark maybe what makes a good well there early on?

Speaker 5

Yes. Let me talk about timing and then give Dana the floor. And the other part of your question, these usually will take a couple of months to kind of by the time you've drilled them, completed them and started flowing them back. And so we may have some initial results by early May in our next call, but we're anticipating better results by kind of later in May June and kind of that timeframe. So we'll provide what we can by the next earnings call, but I think this is more likely a later in 2Q results and impact on our production base.

Speaker 3

Yes, Jeff. This is Dan. Initial production results, we said we're expecting our 1st year average production to be approximately 3.50 barrels of oil per day, kind of based on the latest wells drilled here. And I'd say the profile of these wells is much shallower decline than what you would see in a typical shale well being conventional assets. So we're expecting IP rates obviously higher than 3 50 barrels of oil per day with a not an extremely steep decline is kind of the characteristics of this reservoir and the results.

Speaker 4

Okay, great. That's really helpful. Thank you. And sticking with beta, so production is kind of above pre incident levels. I'm curious if you guys have any read or expectation on the sustainability of that.

Speaker 4

Is that maybe just a short term boost since it's been offline for a while or what you guys are kind of expecting on the PDP base wedge of production there?

Speaker 3

Yes. Since we brought beta back on, we've been able to do some much more extensive clean outs of the laterals and the wells and the screens in the wells. And we've been able to utilize a coiled tubing unit that was not previously available on our assets. So bringing in that unit, the uplift we've seen seems to be sustainable and we've seen that uplift now on individual wells for going on 6 months since we started our workover program, since we brought the asset back on. So we're confident to be able to continue seeing these results on our workovers and hopefully get increasing uplifts from these projects.

Speaker 4

Okay, great. And maybe one more for me on the LOE bridge slide that you guys have and appreciate the detail that went into that. On the cost inflation component specifically, I think you guys hit on a couple of items in the prepared remarks. But, could you just kind of review specifically what you're seeing there on cost inflation? And then curious if you guys view that as kind of just a structural change to the cost profile going forward?

Speaker 4

Is that something Magnify could help with? Are there other things you guys could do to maybe mitigate that? Any kind of commentary there to just review again would be helpful.

Speaker 5

Yes, I think we highlighted 2 main items, which are an increase in regulated power costs which are basically just they got approved at a higher rate, in some cases, almost double digits. And those came kind of late in the year. And so we obviously pushed those into the forecast. And then our insurance costs, really not related to Amplify anyway. This is not just an industry wide.

Speaker 5

I think this is a all company wide increase in liability costs. A lot of it's associated with automobile kind of incident costs. It's kind of impacting the entire market for general for liability claims and costs in the marketplace. I think this is something that a

Speaker 2

lot of companies will have

Speaker 5

to absorb. And we're obviously pointing it out specifically, but that's one of those are 2 of the things that kind of impacted us the most. Dan, do you want to go into that any other parts of the question there?

Speaker 3

Yes. On the other parts of it, Magnify has done a really good job to offset some of these inflationary costs. If you go back to like 2022, much higher gas prices in East Texas, we saw a lot of inflation with things specifically around compression costs and we have a lot of rental compression. Bringing a lot of that compression in house, we may offset a lot of that. And we do expect compressor rates to come down over time as obviously it's going on with natural gas prices.

Speaker 3

There's just not as much activity in the East Texas region. And then, yes, like Martin said, most of the cost inflation we are expecting this year are mainly the insurance rates and the regulated power costs, which we are currently looking for ways to reduce our power consumption across all of our assets. We think there's additional upside there to realize this year.

Speaker 5

And this is obviously the bridge to 2024. A lot of the things we're doing this year will impact later in 'twenty four and into 'twenty five especially as we finish these electrification and emissions projects. So we've already gotten some benefit from them, but there will be incremental benefits that will flow through later in the year and into 2025. And so this is kind of where we are now and obviously but not where we intend to continue to progress from here. Okay, understood.

Speaker 5

Great. I appreciate the time guys. Thank you. Before we always try to survey our questions from our investors,

Speaker 2

one that we received that we

Speaker 5

barrel process from here. Barrel is a very technical asset and so what we've started by doing is obviously reaching out the most interested buyers which is a pretty long list and really working with them on the technical aspects of this deal. Keep in mind, we are running this as a parallel process between both an asset outright asset sale and a monetization through a different kind of securitization or other structure. So that's going to take a little bit longer than your traditional divestiture timing. We anticipate this will lead to some kind of result or decision somewhere between kind of the Q1 and Q2 earnings calls.

Speaker 5

So probably sometime in that kind of midsummer timeframe, June, July somewhere in there. So we expect to have more information as of the May call, but likely the kind of the conclusion somewhere in the months in between that call and the August call. With that, I just wanted to say thank you to all of our employees for their outstanding efforts and dedication this year. I'd also like to express my appreciation to all of our stakeholders for their continuing support. Thank you for participating on the call today.

Speaker 5

And as always, if there are any questions, please don't hesitate to reach out. Thank you, everyone.

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at

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