Quarterly / Earnings Reports | Third Quarter (3Q) Update

Chaparral Energy Details Q3 2019 Results

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Chaparral Energy, Inc. reported its Q3 2019 results.

Recent Highlights

• Achieved third quarter 2019 total production of 26.2 thousand barrels of oil equivalent per day (MBoe/d) and STACK production of 21.5 MBoe/d, despite ethane rejection elections which lowered production by 0.5 MBoe/d, both within the guidance range and a 23% and 37% increase from the third quarter of 2018, respectively
• Reported net loss of $130.9 million for the third quarter of 2019, or $2.86 per share, primarily driven by a $147.7 million non-cash ceiling test impairment; adjusted net income, as defined below, of $1.2 million, or $0.03 per share
• Generated third quarter 2019 adjusted EBITDA, as defined below, of $35.8 million, an increase of 4% compared to the previous year despite oil (WTI) prices and natural gas liquids (NGLs) realizations decreasing approximately 19% and 52% over the same time period
• Proactively reduced operated rig count from three to two rigs in October
• Optimizing a one to two rig program in 2020 that will significantly reduce capital spend year over year, while growing production and allowing the company to become cash flow neutral
• Decreased full year 2019 capex guidance to $260 to $280 million from $275 to $300 million, while maintaining full year production guidance at 25.0 to 27.0 MBoe/d
• Reduced $18.1 million of debt through the sale of the corporate headquarters facilities and elimination of CO₂ compressor leases

Chief Executive Officer Earl Reynolds said: "We continue to demonstrate the considerable value of our differentiated operational execution and strong year-to-date performance and are proud to deliver operational results within or above our guidances ranges yet again. As we have discussed in the past, the overall timing of our production growth will be uneven from quarter to quarter due to spacing tests, the drilling of larger pads and timing of completions within a quarter. As such, as expected our third quarter total production declined compared to the second quarter, to 26.2 MBoe/d. While we had 13 wells come online in the third quarter, nearly half were in September and three occurred in the last two days of the quarter. This timing of completions will positively impact our fourth quarter production, and through early November, our total production has averaged above 28.0 MBoe/d. We have taken proactive steps to reduce our absolute and per Boe lease operating costs (LOE) and we have reduced our general and administrative (G&A) spend by about 25%. In addition, we have been able to reduce our average well cost by approximately 15% to 20% compared to 2018 for our Merge Miss and Osage drilling program. Increased operational efficiencies allow us to drill and complete wells faster, drive down costs and reduce cycle times, which all positively impact well economics. We continue to learn from our drilling, completion and production spacing test results and apply those learnings to our future development program."

"As we concentrate our efforts on accelerating our timeline to cash flow neutrality, we proactively reduced our rig count from three to two rigs in October which allowed us to further reduce our 2019 capital guidance to $260 to $280 million and will result in a significant reduction to our 2020 capital program. We are reaffirming our original full-year 2019 production estimates and continue to take measures to reduce costs across our entire business," said Reynolds. "We expect to enter 2020 with two rigs running and continue to refine and optimize our development plans for next year, assuming one to two rigs, as we are dedicated to achieving cash flow neutrality in 2020. We are proud of the differentiated STACK/Merge operational execution and remain focused, as ever, on cost management and capital discipline."

Operational Update

Chaparral's STACK production for the third quarter of 2019 was 21.5 MBoe/d, while total company production was 26.2 MBoe/d, both of which were within the company's third quarter 2019 guidance range. As expected, due to timing associated with production from the company's multi-well spacing tests, total company and STACK production decreased on a quarter-over-quarter basis by 7% and 10%, respectively. On a year-over-year basis, STACK production increased 37%, while total company production increased 27%, excluding 2018 divestitures. Overall, total company production consisted of 31% oil, 29% natural gas liquids (NGLs) and 40% natural gas in the third quarter of 2019.

Production continues to be variable from quarter to quarter primarily due to pad drilling and timing of completions. In the third quarter, the company had 13 new gross operated STACK wells with first sales, nine of which were brought online in September with three of these wells with first sales in the last two days of the quarter. This is a significant reduction from the 28 wells with first sales in the second quarter of 2019. Also impacting third quarter production was ethane rejection elections accounting for approximately 500 Boe/d. Of the 13 wells with first sales in the third quarter, nine were in Kingfisher County and four in Canadian County. Chaparral plans to operate two rigs for the remainder of 2019 and one to two rigs in 2020, with all operated activity currently projected to be allocated to Canadian and Kingfisher counties.

The company continues to see overall strong results from its spacing test program. These tests are geologically driven, with some tests performing better than others. Given the performance of Merge spacing results, the company is planning another Meramec full section development in Canadian County, with the drilling of the six-well Greenback project in the fourth quarter as it continues testing the number of wells per section to optimize long-term, full section development. The growth trajectory of Chaparral's STACK/Merge production will continue to be impacted by the number of operated rigs running and spacing tests moving forward, with production dependent on how many wells are completed and brought online in any given quarter.

Chaparral's total oil and natural gas CAPEX during the third quarter was $66.3 million, of which $60.2 million was associated with the STACK. Of its STACK CAPEX, $55.9 million was related to D&C activities, which included $1.6 million of non-operated CAPEX. Additionally, $1.9 million was invested in acquisition activities and $2.4 million in workovers and other enhancement capital.

¹Includes non-operated costs of $1.6 million and $0.5 million of drilling joint venture
²Includes capitalized G&A, capitalized interest and asset retirement obligations

Updated 2019 Guidance

Chaparral expects CAPEX in the fourth quarter of 2019 to be significantly lower than the first nine months of 2019, due to the reduction to two operated rigs, increased drilling and completion efficiencies per well, lower-than-anticipated non-operated activity, and lower acquisition capital. The company is reducing full year 2019 CAPEX guidance to $260 to $280 million, which is a reduction from the midpoint of the original 2019 guidance of approximately 6%.

The company is also re-affirming its original production guidance range of 25.0 to 27.0 MBoe/d for the full year 2019, despite the reduction in total CAPEX. Chaparral expects fourth quarter 2019 total company production to be between 27.5 and 29.0 MBoe/d and total STACK production to between 23.0 and 24.5 MBoe/d.

Financial Summary

Chaparral reported a net loss of $130.9 million, or $2.86 per share, during the third quarter of 2019. The company's adjusted net income for the quarter was $1.2 million or $0.03 per share. The quarterly net loss included a $147.7 million non-cash ceiling test impairment charge primarily due to a decrease in the prices used to estimate its reserves, partially offset by an $18.7 million non-cash gain in the fair value of hedge derivative instruments. Chaparral's adjusted EBITDA for the third quarter was up 4%, or 8% when excluding 2018 divestitures, on a year-over-year basis to $35.8 million, driven by increased production and lower operating costs, partially offset by lower pricing. The price change on a year-over-year basis has had a significant impact with WTI prices and NGL realizations decreasing 19% and 52%, respectively.

Total gross commodity sales for the third quarter of 2019 were $58.0 million, which included $40.5 million from oil, $8.8 million from NGLs and $8.7 million from natural gas. This represents a 20% quarter-over-quarter decrease compared to $72.5 million in the second quarter of 2019 and a decrease of 17% year-over-year compared to $70.1 million in the third quarter of 2018.

Chaparral's average realized price for crude oil, excluding derivative settlements, decreased to $54.82 per barrel in the third quarter of 2019, down 6% from the second quarter of 2019 and down 22% from the third quarter of 2018. Chaparral's realized NGL price during the third quarter of 2019 was $12.57 per barrel, which represents a 15% quarter-over-quarter decrease and a 52% year-over-year decrease. The company's realized natural gas price during the third quarter of 2019 was $1.50 per thousand cubic feet (Mcf), which represents a decrease of 18% compared to the second quarter of 2019 and a decrease of 28% compared to the third quarter of 2018.

Total company LOE for the third quarter of 2019 was $12.4 million, which was down by $1 million compared to the second quarter. Total company LOE per Boe was $5.14, which was down 1% compared to $5.19 per Boe in the second quarter of 2019 and down 19% compared to $6.36 per Boe in the third quarter of 2018. Chaparral's STACK LOE for the third quarter of 2019 was $7.9 million which was down as compared to $8.4 million in the second quarter. STACK LOE per Boe for the third quarter was $3.99, which was up slightly from $3.90 in the previous quarter and down 8% from $4.34 in the third quarter of 2018. The decrease in LOE as compared to the previous year was driven primarily by the increase in production and reduced saltwater disposal costs, along with efficiency improvements in the field operations. The increase in STACK LOE per Boe as compared to the second quarter of 2019 was driven primarily by the 10% decrease in STACK production over that same time period.

To better align Chaparral's G&A and overhead expenses with current industry conditions, the company implemented a workforce reduction in August. Since the beginning of 2019, the company has reduced its corporate workforce by 23% and implemented cost reduction initiatives that will result in estimated annualized G&A savings of 20% to 25%. The full impact of these reductions will be realized in 2020, with initial savings flowing through in the second half of 2019. During the third quarter of 2019 Chaparral's net G&A expense was $7.8 million, or $3.24 per Boe, which was an increase of 7% compared to the $7.3 million in second quarter of 2019. The increase was primarily driven by severance charges and increases in professional fees and insurance. Adjusted for severance charges and non-cash compensation, Chaparral's cash G&A expense for the quarter was $6.1 million or $2.52 per Boe as compared to $6.5 million or $2.52 per Boe in the second quarter of 2019.

Liquidity and Balance Sheet

The company's $325 million borrowing base was reaffirmed during its semi-annual fall redetermination, which closed on September 27, 2019. As of September 30, 2019, Chaparral had approximately $21.5 million in cash and cash equivalents and $110 million drawn under its $325 million borrowing base, and no significant debt maturities due until 2022.

During the third quarter the company took meaningful steps in reducing a portion of its secured debt. On August 29, Chaparral closed on the sale of the building housing its headquarters for $11.5 million. Proceeds from the sale were used to pay off the outstanding balance of the real-estate note of $8.2 million and Chaparral estimates annualized savings of approximately $1 million will be achieved. In addition, the company was successful in eliminating $9.8 million of financing lease obligations for compressors associated with the sale of its EOR properties in late 2017. These compressors were being subleased to the buyer of the EOR properties and therefore Chaparral did not utilize any cash to eliminate this debt obligation.