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

Montage Resources Reports Q2 Results; Cuts 2019 Capex by 8%

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   |    Tuesday,August 06,2019

Montage Resources Corp. reported second quarter 2019 financial and operational results along with initial third quarter 2019 and revised full year 2019 guidance.

Edits Guidance: Spending Down, Production Up

• Full year 2019 production guidance of 535 to 555 MMcfe per day, an increase of approximately 3% based upon the midpoint of the Company’s previously issued guidance range
• Full year 2019 per unit cash production costs of $1.30 to $1.40 per Mcfe, lower by approximately 4% based upon the midpoint of the Company’s previously issued guidance range
• Full year 2019 capital expenditures of $345 to $370 million, lower by approximately 8% based upon the midpoint of the Company’s previously issued guidance range

Second Quarter 2019 Highlights:

• Average net daily production was 535.5 MMcfe per day, 4% above the high end of the Company’s previously issued guidance range and above analyst consensus expectations
• Average natural gas equivalent realized price was $2.94 per Mcfe, excluding cash settled derivatives and firm transportation expenses
• Per unit cash production costs (including lease operating, transportation, gathering and compression, production and ad valorem taxes) were $1.35 per Mcfe, including $0.37 per Mcfe in firm transportation expenses, with the per unit cash production costs outperforming the Company’s previously issued guidance and analyst consensus expectations
• Net income for the second quarter of 2019 was $27.5 million; Adjusted net income¹ for the second quarter of 2019 was $14.6 million; and Adjusted EBITDAX¹ for the second quarter of 2019 was $70.9 million, above analyst consensus expectations
  

Operational Discussion

The Company’s production for the three and six months ended June 30, 2019 and 2018 is set forth in the following table:

John Reinhart, President and CEO, commented, “During the second quarter, we continued to execute upon our “Focus Five” strategy with an emphasis on capital efficiency, cash-margin optimization, disciplined growth and balance sheet protection.  Throughout all stages of our drilling and completions program, the Montage technical team continues to exceed expectations, leading to a 30% reduction in cycle times over 2018 and well costs reaching the target of $870 per lateral foot in the 2019 plan.  These top-tier operating efficiencies, in addition to outstanding well results, contributed to the second quarter production outperformance with capital expenditures below expectations. One of the most important components of delivering upon our strategy and continuing to gain the confidence of investors is our ability to demonstrate superior operational execution as we exhibit a strong track record of repeatable results.

During the second quarter, the Company re-negotiated an advantageous processing contract with one of our existing midstream providers for our Marcellus acreage in Ohio.  The contact allows for a significant improvement in gas processing costs, possesses no additional minimum volume commitments and provides full ethane rejection, which will further improve the overall rates of return and value of our liquids-rich Marcellus acreage.  Given the Company’s focus on increasing liquids-rich production, we believe this will provide a significant benefit during the second half of 2019 as liquids production volumes are expected to grow by approximately 40% - 45% over the first half of 2019.  The quarterly production beat and enhanced pricing across our products, when coupled with cash production costs per unit outperforming expectations, delivers cash operating margins that we believe are among the best in the Appalachian Basin.  The company continues to focus on merger related synergies that may be achieved through commercial agreements that enhance cash margins.

For the second quarter of 2019, the Company generated revenue of $155.5 million, a 50% increase over the second quarter of 2018, while also recognizing a 39% increase in Adjusted EBITDAX¹ over the second quarter of 2018, despite the weaker commodity price environment.  From an operations perspective, the efficiency gains and well productivity results achieved from the development strategy shift are allowing us to place high-quality wells to sales more quickly than originally expected. Given the recent production outperformance, the Company has realized an approximately 30% increase in the mid-year PV-10 value² of its proved developed producing reserves to approximately $1 billion, based upon strip pricing as of June 30, 2019 from the pro forma year end 2018 value, based upon strip pricing as of December 31, 2018.  

The Company is pleased to announce we have raised our production guidance for the full year 2019 by approximately 15 Mmcfe per day and decreased our cash production costs by approximately $0.05 per Mcfe.  As we have previously highlighted, we are committed to maintaining operational flexibility in a cyclical business environment.  The Company has reduced second half 2019 activity levels which results in lowered capital spending for the full year by approximately $30 million. The capital plan in 2019 has been further optimized to focus on the drill-bit, with less than 5% of that capital expected to be dedicated to land spending due to the significant amount of our acreage that is already held by production.

Our focus remains on balancing disciplined growth and cash flow generation while maintaining low leverage and ample liquidity to facilitate strategic optionality.  The natural gas macro environment we are currently experiencing reinforces the importance of being a low-cost producer with high quality assets, maintaining a top performing execution team, and having a Company that possesses limited commitments. We believe the second quarter results demonstrate the effectiveness of our development strategy, the strength of our business, the focus of our team and the fundamental belief in the long term prospects for our Company.”

Financial Discussion

Revenue for the three months ended June 30, 2019 totaled $155.5 million, compared to $103.6 million for the three months ended June 30, 2018.  Adjusted Revenue³, which includes the impact of cash settled derivatives and excludes brokered natural gas and marketing revenue, totaled $145.9 million for the three months ended June 30, 2019 compared to $100.8 million for the three months ended June 30, 2018.  Net Income (Loss) for the three months ended June 30, 2019 was $27.5 million, or $0.77 per share, compared to ($19.0) million, or $(0.95) per share⁴, for the three months ended June 30, 2018. Adjusted Net Income³ for the three months ended June 30, 2019 was $14.6 million, or $0.41 per share, compared to $2.5 million, or $0.12 per share⁴, for the three months ended June 30, 2018. Adjusted EBITDAX³ was $70.9 million for the three months ended June 30, 2019 compared to $51.1 million for the three months ended June 30, 2018.

Per unit cash production costs, which include $0.37 per Mcfe of firm transportation expense, were $1.35 per Mcfe for the second quarter of 2019, a decrease of approximately 8% compared to the second quarter of 2018.  The Company’s cash production costs (which include lease operating, transportation, gathering and compression, production and ad valorem taxes) are shown in the table below.

General and administrative expense (including one-time merger-related expenses) was $13.6 million and $10.7 million for the three months ended June 30, 2019 and 2018, respectively, and is shown in the table below. Cash general and administrative expense⁵, excluding merger-related expenses and stock-based compensation expense, was $9.1 million and $8.7 million for the three months ended June 30, 2019 and 2018, respectively. General and administrative expense per Mcfe (including one-time merger-related expenses) was $0.28 in the three months ended June 30, 2019 compared to $0.38 in the three months ended June 30, 2018. Cash general and administrative expense⁵ per Mcfe, excluding merger-related expenses and stock-based compensation expense, declined 39% to $0.19 in the three months ended June 30, 2019 compared to $0.31 in the three months ended June 30, 2018.

Capital Expenditures

Second quarter 2019 capital expenditures were $115.3 million, including $111.9 million for drilling and completions, and $3.4 million for land-related expenditures.

During the second quarter of 2019, the Company commenced drilling 12 gross (10.2 net) operated wells, commenced completions of 15 gross (13.0 net) operated wells and turned to sales 16 gross (11.4 net) operated wells. 

Financial Position and Liquidity

As of June 30, 2019, the Company’s liquidity was $252.7 million, consisting of $9.4 million in cash and cash equivalents and $243.3 million in available borrowing capacity under the Company’s revolving credit facility (after giving effect to outstanding letters of credit issued by the Company of $29.2 million and $127.5 million in outstanding borrowings).

Michael Hodges, Executive Vice President and Chief Financial Officer, commented, “We remain highly focused on maintaining the strength of our balance sheet.  With no near term debt maturities and a current leverage ratio of approximately 1.7 times⁶, we believe our superior financial condition positions us to dynamically respond to changes in the commodity price environment as demonstrated by the operational flexibility in our previously announced reduction in development activity for 2019.  As we look to the future, our resolve to deliver free cash flow to our stakeholders has not changed. From a top-line revenue perspective, we believe Montage is differentiated amongst other Appalachian peers as crude oil provided over 20% of our Adjusted Revenue⁷ for the second quarter and we expect our leverage to crude oil to further increase for the balance of 2019 and into 2020 as we focus on the development of our liquids-rich locations.  Our second quarter results highlight the strength of our cash margins, with cash production costs continuing to decline as a result of our operational success and increasing scale. Finally, we believe our strong hedge book for the remainder of 2019 and into 2020 provides cash flow assurance for the foreseeable future as we execute our development plans. We believe the benefits of the merger consummated earlier this year have positioned Montage for success, and we believe the unique combination of ample liquidity, low leverage, limited operational commitments and the peer-leading EBITDAX margins leave the Company well positioned to deliver value to its stakeholders in 2019 and beyond.”