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Chaparral Energy Fourth Quarter 2019 Results

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   |    Wednesday,March 11,2020

Chaparral Energy, Inc. reported its Q4 2019 results.

Highlights

• Achieved fourth quarter 2019 production of 29.7 thousand barrels of oil equivalent per day (MBoe/d), exceeding the high end of guidance
  • Delivered full year production, lease operating expense per barrel of oil equivalent (LOE/Boe), cash general & administrative expense per barrel of oil equivalent (G&A/Boe), and total capital expenditures within original production guidance and updated lower expense and capital guidance ranges
• Reported net loss of $189.2 million for the fourth quarter of 2019, or $4.14 per share, primarily driven by a $169.7 million non-cash ceiling test impairment and non-cash mark to market losses on derivatives of $25.5 million; adjusted net income, as defined below, was $12.6 million, or $0.28 per share
  • Reported net loss of $468.9 million for 2019, or $10.28 per share, primarily driven by a $430.7 million non-cash ceiling test impairment and non-cash mark to market losses on derivatives of $40.8 million; adjusted net income, as defined below, was $20.6 million, or $0.45 per share
• Grew fourth quarter 2019 adjusted EBITDA, as defined below, to $46.7 million, an increase of 30% compared to the previous quarter
  • Generated $154.5 million of adjusted EBITDA in full year 2019, an increase of 24% over 2018 despite oil (WTI) prices, natural gas (HH) prices and natural gas liquids (NGLs) realizations decreasing approximately 12%, 15% and 38% year over year
• Increased year-end 2019 proved reserves to 96.6 million barrels of oil equivalent (“MMBoe”)

“We continue to extend our track record of strong operational results within our guidance ranges or better,” said Chief Executive Officer Chuck Duginski. “The accomplishments and hard work of the great team here at Chaparral are evident in our 2019 results.  Chaparral has a strong, oil focused and geologically advantaged position in the oil window of the proven Mid-continent region. In 2019, we grew production and reserves, lowered LOE and G&A costs and expanded adjusted EBITDA to nearly $155 million, all accomplished in a difficult pricing environment.”

“The market is changing for energy companies and the turbulent environment has been difficult for many to navigate. Chaparral is adapting to the current conditions and preparing for the future.  We must continue to differentiate ourselves and leverage our geological and technical expertise to high grade our acreage and maximize the impact of every capital dollar invested.  As we remain focused on our goal of cash flow neutrality, we are aligning our capital spending with our revenues and improving the profitability of the business.  We are committed to further driving down our LOE and G&A costs as well as our drilling and completion costs to improve margins and returns.”

“We are entering 2020 with significant flexibility in our operating plan derived from a high percentage of held-by-production acreage, short-term rig contracts, no minimum volume commitments and an attractive hedge book. We remain focused on operational and corporate cost reductions, while directing our drilling toward our best performing areas.  Investing our cash prudently, delivering on our guidance, and continued strong operational performance are all key to moving toward cash flow neutrality.  Chaparral’s flexible approach is not only designed to manage through the current cycle, but to position us to capture value and opportunities in the future.”

Operational Update

Production results continue to be driven by strong well performance.  Chaparral’s production for the fourth quarter of 2019 was 29.7 MBoe/d, which exceeded the high end of the Company’s fourth quarter guidance range of 27.5 to 29.0 Mboe/d. As expected, due to timing associated with production from the Company’s multi-well pad drilling, production increased on a quarter-over-quarter basis by 14%. Production consisted of 32% oil, 31% natural gas liquids (NGLs) and 37% natural gas in the fourth quarter of 2019.  Production for the full year 2019 was 26.3 MBoe/d, which represents a 28% increase from the previous year and was above the midpoint of the Company’s guidance range of 25.0 to 27.0 MBoe/d.

Production continues to be variable from quarter to quarter primarily due to pad drilling and timing of completions. In the fourth quarter, the Company had 10 new gross operated wells with first sales.  In addition, nine wells were brought online late in the third quarter, which helped contribute to the quarter over quarter increase. Of the 10 wells with first sales in the fourth quarter, eight were in Canadian County and two were in Kingfisher County.

Chaparral’s CAPEX during the fourth quarter was $51.1 million. Of that amount, $42.4 million was related to drilling and completion (D&C) activities, which included $0.3 million of non-operated CAPEX. Additionally, $3.7 million was invested in acquisitions and $1.2 million in workovers and other enhancement capital. The Company’s CAPEX for the full year 2019 was $269.8 million, of which D&C CAPEX was $228.8 million.

1For Q4 2019 and full year 2019, includes non-cash acreage trades of $0.8 million and $1.4 million respectively

2For Q4 2019 and full year 2019, includes non-operated of $0.3 million and $7.0 million respectively and $0.1 million and $4.1 million of drilling joint venture   respectively

3Includes capitalized G&A, capitalized interest and asset retirement obligations

Financial Summary

Chaparral reported a net loss of $189.2 million, or $4.14 per share, during the fourth quarter of 2019. The Company’s adjusted net income for the quarter was $12.6 million or $0.28 per share. The quarterly net loss included a $169.7 million non-cash ceiling test impairment charge primarily due to a decrease in the prices used to estimate its reserves as well as a $25.5 million non-cash loss in the fair value of hedge derivative instruments. Chaparral’s adjusted EBITDA for the fourth quarter was up 30% compared to the previous quarter to $46.7 million.  For the full year 2019, adjusted EBITDA was $154.5 million, a 24% increase on a year-over-year basis from $125.1 million in 2018.  This strong year-over-year increase was driven by increased production and lower operating costs, partially offset by lower pricing.  The price change on a year-over-year basis had a significant impact with oil, NGL and gas realizations decreasing 13%, 38% and 23%, respectively.

Total gross commodity sales for the fourth quarter of 2019 were $72.5 million, which included $49.3 million from oil, $13.1 million from NGLs and $10.1 million from natural gas. This represents a 25% quarter-over-quarter increase compared to $58.0 million in the third quarter of 2019, driven by both increased production and improved pricing across all three revenue streams. For the full year, Chaparral recorded $256.2 million in total gross commodity sales, including $173.6 million from oil, $42.1 million from NGLs and $40.5 million in natural gas. This represents a 1% year-over-year decline compared to $258.8 million in 2018, driven by lower realized pricing nearly entirely offset by increased production.

Chaparral’s average realized price for crude oil, excluding derivative settlements, increased to $55.90 per barrel in the fourth quarter of 2019, up 2% from the third quarter of 2019.  For the full year 2019, the average realized crude price was $55.79 per barrel, a decrease of 13% from 2018. Chaparral’s realized NGL price during the fourth quarter of 2019 was $15.55 per barrel, which represents a 24% quarter-over-quarter increase.  For the full year 2019, the average realized NGL price was $15.04 per barrel, a decrease of 38% from 2018.  The Company’s realized natural gas price during the fourth quarter of 2019 was $1.66 per thousand cubic feet (Mcf), which represents an increase of 11% compared to the third quarter of 2019.  For the full year 2019, the average realized natural gas price was $1.83 per Mcf, a decrease of 23% from 2018.

Chaparral’s LOE for the fourth quarter of 2019 was $11.6 million, which was $0.8 million lower compared to the third quarter.  LOE/Boe was $4.23, which was a reduction of 18% compared to $5.14 per Boe in the third quarter of 2019.  For the full year, LOE was lower by $4.6 million or 9%, despite a 28% increase in production compared to 2018.  LOE/Boe for 2019 was reduced significantly from $7.24 in 2018 to $5.17 in 2019, a decrease of 29%.  The decrease in LOE/Boe 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.   

To better align Chaparral’s G&A and overhead expenses with current industry conditions, the Company implemented two workforce reductions in 2019, one in August and one in November.  Since the beginning of 2019, Chaparral has reduced its corporate and field workforce by approximately 37% and 40% respectively as well as implemented cost reduction initiatives that are expected to result in estimated annualized G&A savings of $7.5 million to $8.5 million. The full impact of these reductions is not reflected in the Company’s 2019 results, but should be fully realized in 2020. 

During the fourth quarter of 2019, Chaparral’s net G&A expense was $10.8 million, or $3.94 per Boe, which was an increase of 38% compared to the $7.8 million in third quarter of 2019, and an increase of 22% on a per Boe basis.  The increase was primarily driven by severance charges and increases in professional fees.  Adjusted for severance charges and non-cash compensation, Chaparral’s cash G&A expense for the fourth quarter of 2019 was $6.1 million or $2.25 per Boe as compared to $6.1 million or $2.52 per Boe in the third quarter of 2019, representing an 11% decrease on a per Boe basis.  Adjusted for severance charges and non-cash compensation, Chaparral’s cash G&A expense for full year 2019 was $25.2 million or $2.63 per Boe as compared to $27.6 million or $3.68 per Boe in 2018, representing a 29% annual decrease on a per Boe basis.  

Q1 2020 Operational Guidance

For the first quarter of 2020, production is expected to be between 28.5 and 30.0 MBoe/d. The mid-point of this range is slightly lower than the fourth quarter of 2019 due to timing of new wells coming online. Chaparral entered 2020 with two active rigs drilling.

The Company has significant operational flexibility with a large proportion of the Company’s acreage held by production, no long-term rig contracts or minimum volume commitments and 2020 oil and gas hedges in place averaging over $51 and $2.70 respectively.  Recognizing the recent amplified degree of commodity price and general market volatility, and equipped with this operational flexibility to react to the developing situation, Chaparral does not believe it is appropriate to issue full year guidance at this time.  The Company continues to evaluate its full year operating plan and will issue full year guidance when appropriate.

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 December 31, 2019, Chaparral had approximately $22.6 million in cash and cash equivalents and $130 million drawn under its $325 million borrowing base, with no significant debt maturities due until 2022.

In the second half of 2019, Chaparral took meaningful steps in reducing a portion of its secured debt. On August 29, the Company 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 by novating the leases to the 2017 buyer of its EOR properties. Chaparral did not utilize any cash to eliminate this debt obligation.

In the fourth quarter of 2019, Chaparral had a non-cash ceiling test impairment of $169.7 million and $430.7 million for the full year 2019, primarily due to a decrease in SEC prices utilized to estimate our proved reserves.  Additionally, in the fourth quarter of 2019, the Company had non-cash mark to market losses on its derivatives of $25.5 million and $40.8 million for the full year 2019.

2019 Reserves

Chaparral’s year-end SEC 2019 proved reserves increased to 96.6 MMBoe, which was a 2% year-over-year increase, despite a difficult pricing environment. The Company’s reserve estimates were prepared by third-party reserve consultant Cawley, Gillespie and Associates. The net present value of the Company’s year-end SEC proved reserves, discounted at 10% (“PV-10”), was approximately $514 million, which represents a decrease compared to the previous year despite an overall increase in reserves. Pricing negatively impacted total reserves by approximately 6.7 MMBoe and $252.8 million in PV-10 value.  Chaparral’s reserves were classified as 67% proved developed and were 62% liquids and 38% natural gas.