Quarterly / Earnings Reports | Second Quarter (2Q) Update

Chaparral Reports Q2 2019 Results

Share Print Bookmark    |    Thursday,August 08,2019

Chaparral Energy, Inc. reported its second quarter 2019 financial and operational results. The company will hold its quarterly earnings call Thursday, August 8, at 9 a.m. Central.

Recent Highlights

• Achieved second quarter 2019 total production of 28.3 thousand barrels of oil equivalent per day (MBoe/d), 1.5 MBoe/d above midpoint and 0.8 MBoe/d above high end of guidance and a 36% increase from the first quarter of 2019
• Increased STACK production to 23.8 MBoe/d in the second quarter, 1.5 MBoe/d above midpoint and 0.8 MBoe/d above high end of guidance and a 50% increase from the first quarter of 2019
• Reported net loss of $45.2 million for the second quarter of 2019, or $0.99 per share, which included a $63.6 million non-cash ceiling test impairment charge, partially offset by a $17.6 million non-cash derivative gain
• Grew second quarter 2019 adjusted EBITDA, as defined below, to $43.7 million, an increase of 54% compared to the previous quarter
• Decreased total company and STACK lease operating expense per Boe (LOE/Boe) to $5.19 and $3.90, respectively, a 21% decrease from the previous quarter for both
• Lowered cash general and administrative expense per Boe (G&A/Boe), as defined below, to $2.52, which represents a 27% decrease from the previous quarter
• Updated full year 2019 guidance, including a 5% reduction in total capital expenditures compared to the previous midpoint of the company's guidance and decreases in LOE/Boe and cash G&A/Boe expense, while reaffirming its previously stated production range
• Implemented proactive G&A cost reduction initiatives resulting in corporate workforce being reduced by 23% year to date and expected annualized G&A reductions of approximately 20% to 25% to better align G&A with current industry conditions
• Continued drilling and completion execution improvements, with recent average Osage and Merge Miss well costs declining materially compared to the company's 2018 average, ranging from $3.5 to $4.0 million in 2019
• Finalized an agreement to sell the current corporate headquarters facilities; proceeds from the sale will be used to eliminate related debt of approximately $8.3 million and is expected to result in annual savings of approximately $1 million
• Announced 120-day initial production (IP) results above oil type curve expectations from its 11-well cube style, co-development Foraker spacing test in Canadian County

"Since becoming a publicly traded company in 2017, we have consistently delivered operational results within or above our guidances ranges and this quarter is no exception," said Chief Executive Officer Earl Reynolds. "We continue to demonstrate the considerable value of our differentiated acreage position through our outstanding operational execution. Our total company production increased to 28.3 MBoe/d, our adjusted EBITDA grew to $43.7 million and our operational expenses and capital costs per well continue to decline. Through the first half of this year 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. Our ability to consistently execute, coupled with the operational efficiencies we continue to capture, including increases in drilling footage per day, more efficient frac designs and doubling the number of frac stages completed per day, have all contributed to our reduced well costs. These efficiencies allow us to drill and complete wells faster, drive down costs and reduce cycle times, which all positively impact well economics."

"In addition, we continue to be very pleased with the outstanding drilling, completion and production results from our cube style, co-development Foraker spacing test, which we brought online in late March," said Reynolds. "The average 120-day IP oil rates for both the Meramec and Woodford wells continue to outperform type curve at 148% and 101% respectively. I am extremely proud of our execution on this project and we are applying the learnings from this one-mile, full section development moving forward. We are reconfiguring our second half drilling schedule based on these results and plan to begin drilling the Greenback, which is a Canadian County Meramec full section development in close proximity to the Foraker, in the fourth quarter of this year."

"For the full year of 2019, we are updating our corporate guidance. We continue to proactively take measures to reduce costs across our entire business. As a result of our G&A cost reduction initiatives, we are reducing our G&A per Boe guidance by 11% and as a result of our operational success are lowering our STACK LOE/Boe guidance by 4%. We are reaffirming our original full-year 2019 production estimates but lowering our capital expenditure guidance by approximately 5%. As we have discussed in the past, the overall timing of our production growth will be uneven from quarter to quarter due to the drilling of larger pads and full section developments. As such, we expect our third quarter total production guidance to be between 26.0 to 27.5 MBoe/d. While we continue to expect strong growth, the timing of completions and performance of our new wells will impact our quarter-to-quarter rates going forward," said Reynolds. "We are proud of the differentiated STACK/Merge position we have built and how we have been able to execute operationally. We remain focused on generating strong adjusted EBITDA, which is driven by our operational execution, capital discipline and cost management, and maintaining a strong balance sheet. We are continuing to grow production and proactively taking additional steps that are allowing us to move progressively closer to achieving cash flow neutrality as we create long-term value for our shareholders."

Operational Update

Chaparral's STACK production for the second quarter of 2019 was 23.8 MBoe/d, while total company production was 28.3 MBoe/d, both of which are above the high end of the company's second 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 increased significantly on a quarter-over-quarter basis by 36% and 50%, respectively. On a year-over-year basis, STACK production increased 80%, while total company production increased 55%, excluding 2018 divestitures. Overall, total company production consisted of 34% oil, 29% natural gas liquids (NGLs) and 37% natural gas in the second quarter of 2019.

Chaparral completed the drilling of its 11-well cube style, co-development Foraker spacing test in Canadian County during the first quarter of 2019 and finalized completion of the wells early in the second quarter. The multi-well test was drilled from three pads into three distinct drilling targets, the Upper Meramec, Lower Meramec and Woodford. There were four wells drilled into the Upper Meramec, five wells in the Lower Meramec and two wells in the Woodford. The average lateral length of the Meramec and Woodford wells were 4,934 and 4,949 feet, respectively. To maximize completion efficiency, the wells were fracture stimulated in a manner which was designed to create the greatest amount of near wellbore complexity, while maintaining sufficient pressure boundaries to minimize inter-well frac communication.

The average 120-day IP rate for all 11 wells was 877 Boe/d, with 36% oil and 67% liquids. The nine Meramec wells had an average 120-day IP rate of 967 Boe/d, with 36% oil and 67% liquids. All nine Meramec wells are significantly outperforming the company's oil type curve expectations with an average 120-day oil IP rate at 148% of type curve. The two Woodford wells had an average 120-day IP rate of 468 Boe/d, with 35% oil and 67% liquids. These Woodford wells are outperforming the company's oil type curve expectations, with an average 120-day oil IP rate at 101% of type curve.

The company continues to see overall strong results from additional spacing tests. These tests are geologically driven, with some tests performing better than others. Given the performance of the Denali, Foraker and other recent tests, the company is now planning another Meramec full section development in Canadian County, with the drilling of the six to eight 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 spacing tests moving forward, with production dependent on how many wells are completed and brought online in any given quarter.

The company had 28 new gross operated STACK wells with first sales during the second quarter, three of which were part of its drilling joint venture. In addition, the full production impact of its 11-well cube style, co-development Foraker spacing test in Canadian County contributed materially to the increased production during the second quarter. Of its 28 wells with first sales, 14 were in Canadian County, 10 in Kingfisher County and four in Garfield County. Chaparral currently plans to operate three rigs for the remainder of 2019, with all capital in the second half of 2019 allocated to Canadian and Kingfisher counties.

Chaparral's total oil and natural gas capital expenditures (CAPEX) during the second quarter were $75.7 million, of which $69.1 million was associated with the STACK. Of its STACK CAPEX, $64.7 million was related to drilling and completion (D&C) activities, which included $2.1 million of non-operated CAPEX. Additionally, $3.2 million was invested in acquisition activities and $1.8 million in workovers and other enhancement capital.

¹Includes non-cash acreage trades of $0.6 million
²Includes non-operated costs of $2.1 and $3.5 million of drilling joint venture 
³Includes capitalized G&A, capitalized interest and asset retirement obligations

Financial Summary

Chaparral reported a net loss of $45.2 million, or $0.99 per share, during the second quarter of 2019. This included a $63.6 million non-cash ceiling test impairment charge primarily due to a decrease in the prices used to estimate its reserves, partially offset by a $17.6 million non-cash gain in the fair value of hedge derivative instruments. Chaparral's adjusted EBITDA for the second quarter was up 54% on a quarter-over-quarter basis to $43.7 million, primarily due to increased production. On a year-over-year basis, adjusted EBITDA was up 62% primarily due to higher production and lower operating costs. Total gross commodity sales for the second quarter of 2019 were $72.5 million, which included $51.0 million from oil, $11.0 million from NGLs and $10.5 million from natural gas. This represents a 36% quarter-over-quarter increase compared to $53.2 million in the first quarter of 2019 and an increase of 16% year-over-year compared to $62.3 million in the second quarter of 2018.

Chaparral's average realized price for crude oil, excluding derivative settlements, increased to $58.41 per barrel in the second quarter of 2019, up 10% from the first quarter of 2019 and down 12% from the second quarter of 2018. Chaparral's realized NGL price during the second quarter of 2019 was $14.72 per barrel, which represents a 19% quarter-over-quarter decrease and a 40% year-over-year decrease. The company's realized natural gas price during the second quarter of 2019 was $1.83 per thousand cubic feet (Mcf), which represents a decrease of 27% compared to the first quarter of 2019 and a decrease of 9% compared to the second quarter of 2018.

Total company LOE for the second quarter of 2019 was $13.4 million, or $5.19 per Boe, which was down 21% compared to $6.56 per Boe in the first quarter of 2019 and down 38% compared to $8.36 per Boe in the second quarter of 2018. Chaparral's STACK LOE/Boe for the second quarter of 2019 was $3.90 per Boe, which was down 21% from $4.96 in the previous quarter and down 26% from $5.30 in the second quarter of 2018. The decreases were driven primarily by the increase in production due to timing of new wells being brought online 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 recently implemented a workforce reduction. 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. Chaparral's net G&A expense was $7.3 million, or $2.84 per Boe, during the second quarter of 2019, a reduction of 36% compared to the first quarter of 2019 and a reduction of 38% compared to the second quarter of 2018. Adjusted for non-cash compensation, Chaparral's cash G&A expense per Boe in the second quarter of 2019 was $2.52, which is a 27% reduction compared to the first quarter of 2019 and a 31% decrease compared to the second quarter of 2018.

Balance Sheet and Liquidity

The company's $325 million borrowing base was reaffirmed during its semi-annual spring redetermination, which closed on May 2, 2019. As of June 30, 2019, Chaparral had approximately $33 million in cash and cash equivalents and $85 million drawn under its $325 million borrowing base. The company's balance sheet remains strong with no significant debt maturities due until 2022.

On August 5, Chaparral entered into an agreement to sell the building housing its headquarters. Proceeds from the sale of the building will be used to eliminate related debt of approximately $8.3 million and Chaparral estimates annualized savings of approximately $1 million will be achieved.

In the second quarter of 2019, the company had a non-cash ceiling test impairment of $63.6 million, primarily due to a decrease in the price used to estimate its reserves.

Updated Guidance

Chaparral expects capital expenditures in the second half of 2019 to be lower than the first half due to the reduction from four to three operated rigs, 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 $285 million, which is a reduction from the midpoint of the initial guidance of approximately 5%. Chaparral is also lowering its guidance ranges for LOE/Boe to $4.90 to $5.40, STACK LOE/Boe to $3.60 to $4.10 and cash G&A/Boe to $2.50 to $3.00 per Boe as a result of cost reduction initiatives.

The company is also re-affirming its original production guidance range of 25.0 to 27.0 MBoe/d for the full year 2019. Chaparral expects third quarter 2019 total company production to be between 26.0 and 27.5 MBoe/d and total STACK production to between 21.5 and 23.0 MBoe/d. The decline from its second quarter actual production is primarily due to the impact of reducing operated activity from four rigs to three in late March and the associated timing of new operated development wells being placed online, going from 28 wells in the second quarter to an estimated 10 to 15 in the third quarter.