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

Riviera Resources Talks Q2 2019 Results, Ops

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Riviera Resources, Inc. detailed its financial and operating results for the second quarter 2019 and provides a strategic update.

Highlights:

• Increased previously announced $100 million share repurchase authorization to a total of $150 million
• Returned over $140 million of capital to shareholders through share repurchases and tender offer since the beginning of the year, and over $290 million in the last twelve months
• Closed the sale of certain non-operated properties located in the Hugoton Basin for proceeds of approximately $31 million, and Michigan assets for proceeds of approximately $39 million, both at a premium to PDP PV-10 value
• Ended the second quarter with a consolidated cash balance of ~$80 million and $33.5 million drawn on the Blue Mountain Credit Facility

Blue Mountain highlights:

• Continued its ongoing engagement with Tudor, Pickering, Holt & Co. to review strategic alternatives to unlock unrealized value
• Executed crude oil gathering agreement with Roan Resources, Inc.
• Initiated water management services and moved approximately 5.1 million barrels in the second quarter
• Acquired 100% interests in Lumen Midstream Partnership, LLC in August 2019, for a total investment of less than $5 million

Riviera Upstream highlights:

• Outperformed second quarter upstream guidance, as provided in our May 2019 earnings release, with respect to Adjusted EBITDAX and production, on lower capital spending
• Drilled and completed 6 NW STACK operated wells and 2 North Louisiana operated wells in the first half of 2019 with excellent results

David Rottino, Riviera's President and Chief Executive Officer, commented, "I am very pleased with Riviera's performance in the second quarter. Operationally, our base assets outperformed original guidance and our drilling program focused in the Northwest STACK and North Louisiana looks very encouraging. We remain relentlessly focused on our commitment to maximizing shareholder value through our strategy of capital discipline, returning capital to shareholders and efficiently managing our assets. We continue to believe our shares are deeply undervalued and we are committed to finding ways to monetize assets and use cash on hand to return capital to shareholders. So far this year, we monetized our Arkoma and Michigan assets, a portion of our helium reserves, and our interests in certain non-operated assets in the Hugoton Basin. Additionally, we returned over $140 million of capital to shareholders through our ongoing share repurchase program and recently completed tender offer. Furthermore, the Board authorized an increase to the previously announced $100 million share repurchase program to a total of $150 million. Finally, we continue to grow our exciting Blue Mountain midstream business, and recently announced the execution of a new crude oil gathering agreement with Roan Resources, expanding and diversifying their service offerings, as well as better positioning it towards a value enhancing transaction."

Second Quarter 2019 Activity Upstream Assets

Riviera's production for the second quarter averaged approximately 286 MMcfe/d, which exceeds the high end of our original guidance range. The outperformance in production is mainly due to the outperformance of our NW STACK and North Louisiana drilling programs.

With respect to costs, the Company had strong results in the second quarter. Upstream capital expenditures were approximately $17 million compared to original guidance of $19 million. Adjusted G&A expenses were approximately $7 million. Operating expenses were approximately $44 million, 8% below the mid-point of our original guidance for the quarter, primarily driven by a non-recurring net refund of Texas sales and use tax of approximately $4 million.

Northwest STACK / North Louisiana Operated Drilling Program
Riviera's operated NW STACK drilling program progressed on schedule with the Company turning to production 3 operated wells in the second quarter, for a total of 6 operated wells turned to production year to date. The average IP30 rate of the 6 operated wells is approximately 670 boepd with 55% oil and 72% liquids. All of these wells are single mile laterals with a target capital cost of $4.9 million to $5.2 million, which is expected to generate a 30% to 40% IRR.

The Company completed a two well pad in North Louisiana late in the first quarter. These wells achieved a choke restricted average IP30 of approximately 20 MMcfe/d. The expected IRR of these wells is over 100% and payback is expected in less than 12 months.

Key Financial Results

Strategic Update

The Company's Board of Directors (the "Board") and management believe the Company is trading at a significant discount to its sum-of-the-parts net asset value. The Company has engaged Tudor, Pickering, Holt & Co. to assist in the review and execution of strategic alternatives for Blue Mountain through a value enhancing transaction. Furthermore, the Company will continue to return capital to shareholders through free cash flow generated from efficiently managing our assets, and by opportunistically monetizing additional assets.

Opportunistic Asset Monetizations

Thus far in 2019, the Company has closed four transactions that in combination generated proceeds of approximately $216 million. The proceeds from the four deals are at a premium to the PDP PV-10 value. The four transactions include the sale of the Arkoma Basin assets (closed January 2019), the sale of certain non-operated properties located in the Hugoton Basin (closed May 2019), the sale of properties located in Michigan (closed July 2019), and the monetization of a portion of the Company's helium reserves in the Hugoton Basin utilizing a VPP structure (closed March 2019).

The Company has also signed definitive agreements to sell its interest in properties located in Illinois, and certain non-core properties located in North Louisiana that are expected to close in Q3 2019, that in combination are expected to generate estimated proceeds of approximately $7 million.

Successful Tender Offer
The Company continues to focus on enhancing shareholder value and finding ways to return capital to its shareholders. On June 13, 2019, it announced the intention to commence a tender offer to purchase $40 million of the Company's common stock. The tender offer was completed on July 16, 2019. The Company repurchased an aggregate of 2,666,666 shares of common stock at a price of $15.00 per share for a total cost of approximately $40 million (excluding expenses of the tender offer). The shares acquired represented approximately 4% of the Company's outstanding shares as of June 13, 2019.

Continuation of Share Repurchase Plan
On August 16, 2018, the Board authorized the repurchase of up to $100 million of the Company's outstanding shares of common stock. Through June 2019, the Company repurchased an aggregate of 6,589,110 shares at an average price of $14.56 for a total cost of approximately $96 million. In the second quarter alone the Company bought back 3,147,156 shares at an average price of $13.76 for a total cost of approximately $43 million.

In accordance with the Securities Exchange Commission's regulations regarding issuer tender offers, the Company's share repurchase program was suspended concurrent with the June 13, 2019 announcement of the intent to commence a tender offer as discussed above.

The Company expects to continue repurchasing shares, and on July 18, 2019 announced that the Board authorized an increase to the previously announced $100 million share repurchase program to a total of up to $150 million. Subsequent to July 18, 2019, the Company repurchased an aggregate of 2,122,478 shares of common stock for a total cost of approximately $22 million. As of August 7, 2019, approximately $32 million was available for share repurchase under the program.

Blue Mountain Business Update

On average for the second quarter of 2019, natural gas throughput was 120 MMcf/d and Natural Gas Liquids ("NGLs") produced were 10,590 bpd, a 92% increase as compared to the second quarter of 2018 at 62 MMcf/d and a 2% increase compared with the first quarter of 2019 at 117 MMcf/d. During the second quarter, five wells were turned to sales on our system; however, throughput volumes were slightly impacted as our primary customer temporarily shut-in five wells due to hydraulic fracturing of neighboring wells. Throughput volumes are expected to increase during the remainder of 2019 based on the current well attachment schedules provided by our customers. On August 5, 2019, Blue Mountain acquired 100% interests in Lumen Midstream Partnership, LLC, including approximately 55 miles of natural gas gathering pipelines and an 18 MMcf/d processing plant. The Lumen system will be interconnected to the Blue Mountain system for a total investment of less than $5 million. "The acquisition of the Lumen assets will secure over 15 customers, reroute volumes to our Cryo I plant by the fourth quarter and extend our reach into the Merge for our three gathering service options," commented Greg Harper, President and CEO of Blue Mountain.

On April 1, 2019, Blue Mountain began providing water management services for Roan Resources. During the second quarter, the company hauled 5.1 million barrels of water in total, averaging 56,100 bpd, for Roan Resources and a third-party customer. In addition, during the quarter, Blue Mountain made significant progress in the construction of its water gathering system, with first pipeline connections in service in July. Also, Blue Mountain acquired the land and permits for two of its future owned and operated saltwater disposal wells and expects completion of at least one well by the end of the third quarter of 2019.

During the second quarter of 2019, Blue Mountain was impacted by overall lower commodity prices, including a 20% reduction in the weighted average barrel NGL price from the first quarter of 2019. Despite this major challenge, Blue Mountain's second quarter Adjusted EBITDA decreased by only $1 million compared with first quarter results, benefited by the new fee-based water margins and steady gas throughput volumes. In the second quarter of 2019, the business continued to be impacted by the NGL pricing differentials at Conway and Mont Belvieu. The elimination of the basis exposure would have added $0.7 million to Blue Mountain's margin. Management has hedged a material portion of its exposure to the NGL pricing differentials at Conway and Mont Belvieu for 2019 and expects to eliminate all basis dislocation by the first quarter of 2020 when ONEOK's Arbuckle II Pipeline is completed.

Capital expenditures for the second quarter were approximately $24 million, with the majority of capital being invested in the construction of water gathering pipelines.

Harper added, "I'm very pleased with Blue Mountain's performance over the quarter. Our water business is off to a solid start, and we have made significant strides in diversifying our revenue stream going forward with the addition of crude oil gathering. As our water business becomes established moving to our piped system coupled with our recently announced crude oil gathering system, and with Roan's projected volume ramp during the second half of 2019, I'm excited about our momentum becoming a top tier midstream enterprise as we move towards 2020."