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Extraction Talks Fourth Quarter 2019 Results; Gives 2020 Outlook

By: Extraction Oil and Gas

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Extraction Oil & Gas, Inc. reported financial and operational results for the fourth-quarter and full-year ended December 31, 2019.

2020 Capital Program, Production and Operating Expense Guidance

During the first-quarter 2020, Extraction sold a substantial portion of its interests in non-operated producing horizontal wellbores for approximately $14.7 million, subject to customary purchase price adjustments. After adjusting for the production associated with this asset sale along with another divestiture closed in December 2019, Extraction now expects its full-year 2020 total equivalent production to be 90-95 MBoe/d with 40-42 MBbl/d of crude oil production.

Extraction's 2020 capital program remains focused on generating Free Cash Flow with an emphasis on strengthening its liquidity and balance sheet as the Company works to pay down debt. Due to its robust hedge book, which covers approximately 86% of the Company's crude oil volumes and over 50% of its natural gas volumes for 2020, along with its lower operating cost structure, Extraction expects to be Free Cash Flow neutral at $50 WTI crude oil and $2.00 NYMEX natural gas on a fully consolidated basis.

Production, Capital Expenditures and Operating Expenses per unit of production for 2020 are now estimated to be:

Q4 and Full-Year 2019 Highlights

• Fourth quarter average net sales volumes of 111,077 barrels of oil equivalent per day (BOE/d), including 50,065 barrels per day (Bbl/d) of crude oil and full-year 2019 average net sales volumes of 88,728 BOE/d, including 42,291 Bbl/d of crude oil
• For the fourth quarter, Extraction reported a net loss of $1.4 billion, or $9.84 net loss per basic and diluted share¹, which includes an impairment related to lower forecasted commodity prices and a more measured pace of development to focus on Free Cash Flow, compared to net income of $100 million, or $0.52 per basic share and $0.51 per diluted share, for the same period in 2018. Adjusted EBITDAX, Unhedged² was $202 million for the fourth quarter, down 9% year-over-year but up 65% sequentially. Adjusted EBITDAX² was $205 million for the fourth quarter, up 5% year-over-year and up 49% sequentially
• Full-year 2019 net loss of $1.4 billion, or $9.29 net loss per basic and diluted share, compared to the Company's full-year 2018 net income of $122 million. Full-year 2019 Adjusted EBITDAX, Unhedged was $635 million, down 20% year-over-year while Adjusted EBITDAX was $611 million, down 7% over the same period
• Generated $122 million and $36 million of Free Cash Flow² for the second half on an upstream and fully consolidated basis respectively
• Reduced outstanding borrowings under its revolving credit facility by $80 million during the fourth quarter, bringing the revolver balance at year-end 2019 down to $470 million, which represents 49% of the $950 million credit facility drawn
• Before-Tax SEC PV10 year-end 2019 proved reserves of $1.9 billion, of which $1.3 billion is classified as proved developed³

CEO Matt Owens said: "We ended 2019 on a high note as robust production and a focus on maintaining our low operating cost structure drove Free Cash Flow above the high end of our guidance range. Our wells in our Broomfield and Greeley focus areas continue to perform nicely, and our strong quarterly production numbers also demonstrate the improvement in midstream availability and reliability across the DJ Basin."

Financial Results

For the fourth quarter, Extraction reported total revenue of $286 million, as compared to $288 million during the same period in 2018, representing a decrease of $2 million. Revenue increased 61% sequentially, primarily driven by an increase in average daily production. For the full year, Extraction's total revenues decreased 15% over the prior year to $907 million.

Extraction reported a net loss of $1.4 billion, or $9.84 net loss per basic and diluted share for the fourth quarter, compared to net income of $100 million for the same period in 2018. This net loss was driven primarily by an impairment of $1.3 billion on its proved oil and gas properties as a result of lower forecasted commodity prices and a more measured pace of development to focus on Free Cash Flow. Adjusted EBITDAX, Unhedged was $202 million for the fourth quarter, down 9% year-over-year but up 65% sequentially. Adjusted EBITDAX was $205 million for the fourth quarter, up 5% year-over-year and up 49% sequentially. Free Cash Flow was $111 million for the fourth quarter on an upstream basis and $97 million fully consolidated. Full-year 2019 net loss of $1.4 billion compares to the Company's full-year 2018 net income of $122 million. Full-year 2019 Adjusted EBITDAX, Unhedged was $635 million, down 20% year-over-year while Adjusted EBITDAX was $611 million, down 7% over the same period. Please read "Non-GAAP Financial Measures," included herein.

Debt and Liquidity

During the fourth quarter, Extraction used Free Cash Flow to repay $80 million on its revolving credit facility and ended the fourth quarter with $32 million of cash on its balance sheet and $470 million drawn on the $950 million revolver. After giving effect to letters of credit, Extraction ended the fourth quarter with approximately $452 million of available liquidity.

Operational Results

Fourth quarter average net sales volumes were 111,077 BOE/d, an increase of 29% year-over-year and 38% sequentially. Fourth quarter crude oil volumes of 50,065 Bbl/d increased 7% year-over-year and 28% sequentially. Full-year 2019 average net sales volumes were 88,728 BOE/d, an increase of 17% year-over-year, while full-year 2019 crude oil volumes increased 5% year-over-year to 42,291 BOE/d. Crude oil accounted for approximately 77% and 80% of the Company's total revenues recorded during the fourth quarter and full-year 2019, respectively.

Extraction's fourth-quarter 2019 aggregate drilling, completion, and leasehold capital expenditures totaled $86 million, of which $79 million was for drilling and completion. For the full-year 2019, the Company's drilling, completion and leasehold capital expenditures were $598 million, of which $543 million was for drilling and completion.

During the fourth quarter, Extraction drilled 16 gross (14 net) wells with an average lateral length of approximately 11,500 feet, completed 6 gross (4 net) wells with an average lateral length of approximately 12,800 feet and turned to sales 50 gross (43 net) wells with an average lateral length of approximately 11,300 feet. For the full year, Extraction drilled 107 gross (90 net) wells with an average lateral length of approximately 9,400 feet, completed 119 gross (104 net) wells with an average lateral length of approximately 8,900 feet and turned to sales 115 gross (101 net) wells with an average lateral length of approximately 8,800 feet.

Elevation commenced moving crude oil, natural gas and water through its Badger central gathering facility in the fourth quarter of 2019. For the year ended December 31, 2019, Elevation had revenues of $6.9 million. In the fourth quarter of 2019, Elevation received $16.2 million in connect fees from Extraction pursuant to its commercial agreements. Elevation incurred $10.0 million of capital expenditures during the fourth quarter of 2019 and full-year 2019 capital expenditures totaled $202.6 million.

Update on Asset Sale Program

During the fourth quarter of 2019, Extraction closed on approximately $10 million of additional non-operated working interests, bringing the full-year 2019 asset sale total to approximately $56 million, which offset the Company's 2019 leasehold and surface acreage capital expenditures of approximately $55 million.

Extraction's asset sale program remains ongoing, and during the first-quarter 2020 Extraction sold its working interests in non-operated producing horizontal wellbores to an undisclosed buyer for approximately $14.7 million, subject to customary purchase price adjustments.

Proved Reserves at December 31, 2019

Extraction's estimated 2019 year-end proved reserves are 254 MMBoe, a 27% decrease when compared to year-end 2018 proved reserves of 348 MMBoe. This decrease was driven primarily by revisions of PUD expirations in accordance with the SEC five year drilling rule caused by the change in business strategy to focus on Free Cash Flow generation rather than production growth. The Company's estimated proved developed reserves at year-end 2019 were 143 MMBOE, an increase of 3% year-over-year. Year-end 2019 reserves are comprised of approximately 91 MMBbl of oil and 66 MMBbl of NGLs.

During the fourth-quarter 2019, Extraction recognized $1.3 billion in impairment expense on its proved oil and gas properties as a result of lower forecasted commodity prices and a more measured pace of development to focus on Free Cash Flow. In accordance with Securities and Exchange Commission ("SEC") guidelines, Extraction's proved reserves at December 31, 2019 were computed using SEC pricing of $55.69 per barrel of crude oil and $2.58 per million British Thermal Units for natural gas, before adjustments for energy content, quality, midstream fees, and basis differentials. Prices adhere to the SEC requirement to use the unweighted arithmetic average of the first-day-of-the-month price for the preceding twelve months without giving effect to derivative transactions. Reserve estimates for 2019 were prepared by Extraction's independent reservoir engineering firm, Ryder Scott Company, L.P.