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EP Energy Sees Output Drop Due to Completion Cuts; Talks Financial Position

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   |    Tuesday,August 13,2019

EP Energy Corp. reported second quarter 2019 financial and operational results.

Here are the highlights from its report and conference call:

Drop in QOQ Production

In its call, EP Energy commented: "Like last quarter, our overall drop in production quarter-over-quarter as a direct result of the reduced net completion count that we initiated back at the end of the fourth quarter of 2018. We have built a significant DUC inventory over the last couple of quarters and ended the quarter with 62 total DUCs. The second quarter will be the peak of our inventory build this year as we released two of the three rigs, we had drilling in the Eagle Ford during the second quarter. In the second quarter, we also completed an additional three Northeastern Utah horizontal wells. We continue to put Northeastern Utah horizontal wells online in cadence with what our gas gathering system can handle, we are presently running two rigs in the NEU focused entirely on horizontal drilling."

Financial Storm Ahead; May Skip Interest Payment

Talks potential financial storm ahead: "As disclosed in our release and our 10-Q, while EP Energy has sufficient liquidity to make an upcoming August 15 interest payment and company may decide to enter into a 30 day grace period. It is important to reiterate that the Special Committee is still evaluating all options available to the company, and that no decision has been made about which additional actions the board will pursue from a balance sheet perspective. This process remains underway and as we work through the balance sheet initiatives, we are refraining from providing guidance for the second half of 2019."

2Q'19 Results:

  • Equivalent production of 69.8 MBoe/d
  • Oil production of 37.6 MBbls/d
  • Net loss of $50 million, including $29 million gain on financial derivatives
  • Adjusted EBITDAX of $148 million
  • Oil and gas expenditures of $149 million, including $11 million acquisition capital
  • Completed three horizontal wells in Northeastern Utah (NEU)
  • Completed (based on wells fracture stimulated or frac'd) 16 gross (14 net) wells
  • Increased Drilled but Uncompleted (DUC) wells to 62
  • Lease operating expense of $4.84 per Boe
  • G&A expense of $6.77 per Boe, Adjusted G&A expense of $2.02 per Boe
  • Ended the second quarter with $299 million of liquidity, including $52 million of cash

2Q'19 Operating and Financial Performance

Below is a summary of second quarter 2019 results compared to the second quarter 2018:

 

2Q'19
Guidance

2Q'19
Actual

2Q'18
Actual

2Q'19 Actual
vs. 2Q'18 Actual

Oil Production (MBbls/d)

37 - 39

37.6

47.2

- 20%

Equivalent Production (MBoe/d)

70 - 73

69.8

82.5

- 15%

Percent Oil (%)

53

53.9

57.2

- 6%

LOE per Unit ($/Boe)

5.60 - 6.10

4.84

4.95

- 2%

Lease Operating Expense ($MM)

36 - 40

30

38

- 21%

G&A expense per Unit ($/Boe)

2.95 - 3.50

6.77

3.74

+ 81%

Adjusted G&A expense per Unit ($/Boe)1

2.35 - 2.90

2.02

2.59

- 22%

Net Loss ($MM)

 

(50)

(58)

+ 14%

Adjusted EBITDAX ($MM)1

 

148

215

- 31%

Oil and Gas Expenditures ($MM)

 

149

219

- 32%

Adjusted Oil and Gas Expenditures (excl. acquisition capital) ($MM)1

140 - 150

138

203

- 32%

Net completions (frac'd)

13

16

37

- 57%

Change in DUC inventory from prior quarter

19

16

(11)

+ 245 %

 

1 See Disclosure of Non-GAAP Financial Measures for applicable definitions and reconciliations to GAAP terms.

Financial Position and Liquidity

The company ended the quarter with $52 million in cash, $355 million in borrowings outstanding on the RBL Facility, and $27 million in letters of credit, resulting in $299 million of available liquidity and $4.6 billion of net debt. Subsequently, on August 1, 2019, EP Energy borrowed $268 million under its RBL Facility. The company expects such amounts will provide liquidity for the second half of 2019 and may be used, among other things, to provide for working capital and other general corporate purposes. Following the drawdown, the company has no borrowing capacity remaining under the RBL Facility.

Additionally, in the next six months, EP Energy has several near-term interest payments due on its indebtedness, including an approximately $40 million interest payment due under the indenture governing its 8.000% 1.5 Lien Notes due 2025 (the "2025 1.5 Lien Notes") due on August 15, 2019. While no decision has been made at this time, the company may determine not to pay the interest due on its 2025 1.5 Lien Notes on the August 15, 2019 interest payment due date, and to utilize the 30-day grace period under the indenture governing the 2025 1.5 Lien Notes. Any failure to make payments of interest and principal on the company's outstanding indebtedness on a timely basis, including with respect to the 2025 1.5 Lien Notes, would likely result in a default under that indebtedness and likely cause cross-defaults and/or cross-acceleration under the company's other indebtedness.

Strategic and Financial Alternatives Update

During the second quarter, the company's Board of Directors (the "Board") appointed a special committee (the "Special Committee") of the Board consisting of independent members of the Board and engaged financial and legal advisors to assist the company in evaluating a number of potential actions that may be taken in order to address the liquidity and balance sheet issues. EP Energy is evaluating certain strategic alternatives including financings, refinancings, amendments, waivers, forbearances, asset sales, debt issuances, exchanges and purchases, out-of-court or in-court restructurings (pursuant to which the company may seek relief under Chapter 11 of the United States Bankruptcy Code and/or similar transactions involving the company), none of which have been implemented at this time. However, there is no assurance that the company's actions will be successful in alleviating any of the concerns discussed above. The company does not expect to comment further unless and until a specific transaction is approved by its Special Committee or the company otherwise decides further disclosure is appropriate or required.

Operations Update

For the second quarter 2019, average daily production was 69.8 MBoe/d, including 37.6 MBbls/d of oil. During the second quarter 2019, the company completed (frac'd) 16 gross (14 net) wells and incurred capital expenditures of $138 million, excluding acquisitions. The company had lower production in the second quarter 2019 compared to the second quarter 2018 due to lower net completions during the first half of 2019. In the second quarter 2019, Eagle Ford and Permian production volumes were also negatively impacted by downstream third-party operational issues and constraints.

Northeastern Utah (NEU)

In the second quarter 2019, the company's assets in NEU produced 15.6 MBoe/d, including 10.3 MBbls/d of oil, a 7% and 12% decrease, respectively, from the second quarter 2018. EP Energy averaged approximately one drilling rig and completed (frac'd) three gross (three net) wells in the second quarter 2019. In late June the company picked up another drilling rig focused on horizontal drilling. Total capital invested in NEU in the second quarter 2019 was $35 million excluding acquisition capital.

Eagle Ford

EP Energy's assets in Eagle Ford produced 32.5 MBoe/d, including 21.0 MBbls/d of oil in the second quarter 2019, a 17% and 19% decrease, respectively, from the second quarter 2018. In the second quarter 2019, production was impacted 0.5 MBoe/d by downstream third-party operational issues and constraints. EP Energy averaged approximately three drilling rigs, invested $101 million excluding acquisition capital and completed (frac'd) 13 gross (11 net) wells in the second quarter 2019. The company released two of the three rigs at the end of the second quarter. In the second quarter, the company increased the DUC inventory by 17.

Permian

EP Energy's assets in the Permian basin produced 21.7 MBoe/d, including 6.3 MBbls/d of oil in the second quarter 2019, an 18% and 35% decrease, respectively, from the second quarter 2018. In the second quarter 2019, the company did not drill or complete any wells in the basin. In the second quarter 2019, production was impacted 0.9 MBoe/d by downstream third-party operational issues and constraints.

Hedge Program Update

EP Energy maintains a solid hedge program which provides continued commodity price protection. A summary of the company's current open hedge positions is listed below:

   

2019

 

2020

Total Fixed Price Hedges

       

Oil volumes (MMBbls)1

 

6.8

   

11.7

 

Average ceiling price ($/Bbl)

 

$

66.41

   

$

65.11

 

Average floor price ($/Bbl)

 

$

55.95

   

$

55.90

 
         

Natural Gas volumes (TBtu)

 

12.9

   

-

 

Average price ($/MMBtu)

 

$

3.72

   

$

-

 

Average floor price ($/MMBtu)

 

$

2.86

   

$

-

 
 

Note: Positions are as of August 1, 2019 (Contract months: July 1, 2019 - Forward)

 

1 The table includes WTI three-way collars of 6.1 MMBbls and 11.7 MMBbls in 2019 and 2020, respectively, and WTI collars of 0.7 MMBbls in 2019.

Second Half 2019 Outlook

EP Energy has determined not to provide guidance pending the outcome of the strategic and financial alternatives process.


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