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Operator: Ladies and gentlemen, thank you for standing by, and welcome to Chaparral Energy’s First Quarter 2020 Financial and Operational Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, Patrick Graham, Senior Director of Corporate Finance. Thank you. Please go ahead, sir.
Patrick Graham: Thank you, operator. Good morning, everyone, and welcome to Chaparral Energy's first quarter 2020 conference call. Before I turn the call over to our Chief Executive Officer, Chuck Duginski, I'd like to encourage you to download our 10-Q and corresponding earnings release as well as our updated Company presentation, which are currently available in the Investors section of our website. You can also sign up to automatically receive updates about Chaparral through e-mail alerts feed on our Investors page. Please be aware that during the call, we will discuss certain topics that contain forward-looking statements based on our beliefs, assumptions and information currently available to our management team. Although, we believe expectations reflected in such forward-looking statements are reasonable, we can give no assurance that they will prove to be correct. There are numerous factors which could cause actual results to differ materially from what is discussed. You can read our full disclosure on forward-looking statements and the risk factors associated with our business in our most recent 10-Q. In addition, we will also present certain non-GAAP measures, reconciliations to which can be found in our 10-Q. With that said, I will now turn the call over to Chuck.
Charles Duginski: Thank you, Patrick. Good morning, everyone, and thank you for joining us today. Before I go into our first quarter 2020 results, I'd like to discuss the unprecedented environment the entire energy industry is facing and how Chaparral is responding to these challenges. The global COVID-19 pandemic coupled with worldwide supply and demand imbalances have created significant uncertainty in oil prices and further tighten the capital markets. We have a long history of commitment to the health and safety of our employees and contractors. As such, in early March, we provided all employees in our corporate office with the equipment and software needed to work-from-home and shortly after, remote work became the policy for corporate employees. Field employees have been provided additional personal protective equipment to protect themselves and others, and all in-person field meetings have been suspended. We have adhered to the advice and directives of federal, state and local governments as well as health leaders. Operationally and financially, we've taken decisive action to minimize our capital spend, maximize our annual cash flow and provide financial stability. Leveraging our operational flexibility, improved cost structure and strong 2020 oil hedge book, we are reducing our exposure to the current abnormally low wellhead prices to preserve value and maximize cash flow for the year. We dropped our operated rigs, stopped all drilling and completion operations and are in the process of shutting in substantially all non-essential oil production. We've also deferred completions of our three most recently drilled wells. In addition, we are increasing crude storage at our operated well sites to preserve value and better position the company for a rapid restart of sales when pricing is more favorable. In early April, we borrowed an additional $105 million under our revolving credit facility to increase our cash position. We have also engaged advisors to assist in evaluating strategic alternatives to enhance the value of the company. We believe in the long-term viability of our strong production base in the Mid-Con region and our core acreage position in the oil window of the Anadarko basin. These geologically advantaged core assets and the outstanding team here are the real strength of Chaparral. This can be seen in our solid first quarter results where we performed well on the factors within our control. Production increased to nearly [31,000] BOE per day and was above the high end of guidance due to the timing of new wells brought online, strong well results and operational performance. In addition, the companywide cost-cutting initiative, I mentioned on our last call has helped us continue to capture savings in our drilling completion CapEx, LOE, and G&A, all while putting the health and safety of our workers and contractors first. The solid operational performance coupled with our hedge position resulted in strong first quarter adjusted EBITDA generation of nearly $41 million and net income of $4.9 million. For the first quarter, our production was 30.7 MBOE per day, which was 3% higher than the fourth quarter of 2019. Production mix for the first quarter was 30% oil, 31% NGLs, and 39% natural gas, reflecting our election to reject ethane were available for most of the quarter. Diving into first quarter operational results, we had 15 new gross operated wells with first sales, all in Canadian County. Included in those wells was the six well Greenback development that came online ahead of schedule and was performing above expectations prior to being shut-in due to the current market conditions. In addition, we began to see our cost savings initiatives materialize as the Greenback’s average D&C per well came in just under $3.8 million per well. These new wells and strong base well performance helped to contribute to our favorable first quarter results. In the first quarter, our total capital investment was $55.7 million with $43.3 million on drilling and completion activity, $4.2 million in acquisitions, and $3.5 million in workovers. An additional $4.7 million was incurred in corporate allocations consisting of capitalized G&A and capitalized interest and asset retirement obligations. Given the drop in pricing and uncertain macro environment, in early March, we provided notice to our drilling contractors that we were ceasing activity. By early April, we had released both rigs and stopped completion activities, which include delaying the completion of a three well pad for the future. We will continue to monitor the oil price environment, but we currently do not expect to bring any additional wells online in the near-term. In addition to suspending drilling and completion activities, we are shutting in substantially all non-essential oil production, which excludes only wells associated with waterfloods and those with well-specific mechanical or other risks. These actions minimize our exposure to low wellhead pricing for crude oil and preserve value for a more favorable pricing environment. We expect the results of these actions to significantly decrease our operated production in the second quarter and potentially longer. The overall timing of bringing curtailed production back online will be responsive to the commodity markets. In the process of shutting-in wells, we are increasing crude storage at operated well sites to be positioned for a rapid restart of sales when prices become more favorable. Because of the uncertainty and fluctuation in commodity pricing, we have decided not to issue guidance for the second quarter, but we do plan to issue guidance again in the future when appropriate. From an expense perspective, we continue to make progress and decreasing our operating costs. For the first quarter of 2020, LOE was $10.1 million, which was lower by $1.5 million or 13% compared to the fourth quarter of 2019, even though our production was up as compared to the fourth quarter. This decrease in LOE was driven primarily by reduced saltwater disposal costs, lower well maintenance costs along with efficiency improvements in field operations. These reductions are in large part driven by the companywide effort to reduce our cost structure and include incremental efficiencies and fundamental changes to our operations that will continue to provide benefit in the future. On a per BOE basis, the first quarter LOE was $3.61 per BOE, which was a reduction of 15% compared to $4.23 per BOE in the fourth quarter of 2019. During the first quarter of 2020, Chaparral's net G&A expense was $8.1 million or $2.89 per BOE, a decrease of 25% compared to $10.8 million in the fourth quarter of 2019. The decrease was primarily driven by reductions in severance costs, partially offset by an increase in bad debt expense. Adjusted for severance changes, non-cash compensation, and bad debt expense, Chaparral’s cash G&A expense for the first quarter of 2020 was $5.4 million or $1.94 per BOE as compared to $6.1 million or $2.25 per BOE in the fourth quarter of 2019, representing a 14% decrease on a per BOE basis. And our continual effort to better align Chaparral's G&A and overhead expenses with current industry conditions and our reduced activity levels, the company has further reduced its corporate and field workforce since the beginning of the year by a total of 18 employees or approximately 15%. We have absorbed the incremental responsibilities with the talented employees that we retain, of whom, I am very proud. Turning to our financials. Chaparral reported net income of $4.9 million or $0.11 per share for the first quarter and we reported adjusted net income for the quarter of $10.8 million or $0.23 per diluted share. Net income included a $71.4 million non-cash ceiling test impairment charge, primarily due to a decrease in the prices used to estimate our reserves as well as a $69.2 million non-cash gain in the fair value of our hedge derivative instruments. Chaparral's adjusted EBITDA for the first quarter was $40.7 million, a decrease of 13% compared to the fourth quarter of 2019, driven by a 19% and 22% reduction in WTI oil prices and Henry Hub natural gas prices, respectively, and partially offset by increased production and lower operating costs. Revenues for the first quarter declined to $55.4 million, which included $37 million from oil, $9.7 million from NGLs, and $8.7 million from natural gas. Revenues decreased 24% in the first quarter compared to the previous quarter, driven by decreased pricing across all three revenue streams. For the first quarter, the average realized price for crude oil, excluding derivative settlements was $44.08 per barrel. The realized NGL price was $11.03 per barrel and the realized natural gas price was $1.34 per thousand cubic feet. During this period of low prices, Chaparral is benefiting from a strong hedge book. For the remainder of 2020, we have 1.7 million barrels of oil hedged at an average swap price of $51.16 per barrel, $5.3 billion BTU of natural gas, hedged at an average swap price of $2.72 per MMBtu and 210,000 barrels of NGLs hedged at an average swap price of $29.08 per barrel. At March 31, 2020, Chaparral had approximately $13.3 million in cash and cash equivalents and $145 million drawn on our $325 million borrowing base. On April 1, we borrowed an additional $15 million and on April 2, provided notice to draw another $90 million from the borrowing base, which once funded increased the total amount outstanding to $250 million. We made these draws as precautionary measures in order to increase Chaparral's cash position and provide additional flexibility in the current challenging environment. On April 2, 2020, the lenders provided notice that they had exercised their right to make an interim redetermination of the company's borrowing base and decrease the borrowing base from $325 million to $175 million effective April 3. Since we had drawn the revolver to $250 million, this redetermination created a $75 million deficiency. We have elected to pay this deficiency in six equal monthly installments and the first payment was made on May 1. On May 5, 2020, the company's lenders reaffirmed the borrowing base at $175 million during its semi-annual spring redetermination. I want to stress that Chaparral is not in violation of any of the covenants in our credit agreement and no premium or penalty will be charged with respect to the six equal monthly installments. Before we open the call up to Q&A, I would like to briefly touch on our decision to engage financial and legal advisors who have been tasked with reviewing and evaluating strategic alternatives. Like many other small-cap E&Ps, we are looking at multiple options that may enhance Chaparral's value. We won't be talking about or making any future announcements concerning this process until we have something material to announce. In closing, we remain focused on protecting cash flow, prudently investing our capital and lowering LOE and G&A while we work to shore up the balance sheet and position Chaparral for the future. In addition, we have taken proactive, measured and decisive action to retain value and maximum flexibility. While we have suspended our drilling and completion activity, we remain confident in the quality of our geologically advantaged acreage position in the oil window of the Anadarko basin. We are focused on the things that we could control and by continuing to execute operationally, we can best position Chaparral to navigate the near-term difficulties and better position the company for the future. And with that, operator, we'll open it up for Q&A.
Operator: Thank you. [Operator Instructions] Your first question comes from Derrick Whitfield from Stifel. Your line is open.
Derrick Whitfield: Thanks. Good morning, all.
Charles Duginski: Good morning, Derrick.
Patrick Graham: Good morning.
Derrick Whitfield: With regard to your 2020 outlook, I certainly appreciate and understand the challenges associated with providing quarterly guidance in the current environment. If we were to assume strip pricing, could you walk us through the likely production trajectory for 2020? And I'm speaking of directions directionally. And also note the economic conditions where it may make sense to bring curtailed volumes back on line or complete new wells?
Charles Duginski: Yes. Sure thing, Derrick. As I said, we're shutting in the majority of our production. The way we're executing on that is that we are producing wells until their oil tanks are full. So we're not selling any of the oil, we're retaining it on location. So as tanks spill, we're progressively shutting in more and more wells, so it's kind of a rolling shut-in as those wells progress. The way that plays out is that our oil – strongest and oil leased wells get shut-in first because they built the tank's fastest. And lower producing wells take longer to produce the tanks gas kit to fill the tanks. The gassier wells take longer. So it's a gradual decline in our daily rates as we shut-in these wells. So we're continuing to shut them in. If we play this out to the full, if we don't see a recovery in prices, we could have upwards of 70%, 75% of our production shut-in by sometime in late June or July. When things turn around, when we think about bringing production back on, when we look at few months out and when we look at prices that we see in the third quarter that starts to look attractive to us from an overall pricing perspective on the crude side. The other thing that we're watching in that regard is the shape of the curve, the steepness of the contango because we do have an adjustment associated with the role, the one-third, two-third role that in contango serves as a deduct on our pricing. So we need to see a flatter curve and a higher curve to bring production back on. But again, if we see a flatter curve with pricing that's just a few months out, I could see us looking at bringing wells back online and associated with that, that starts the discussion about getting our DUCs completed as well.
Derrick Whitfield: Thanks, Chuck. Very helpful. And as my follow-up, I wanted to focus on your cost improvements and certainly wanted to compliment you and your team on the progress you guys have made. Would it be fair to assume that nearly all of the Q1 improvements are structural in nature? And if you could note if there are incremental savings you could pursue in the coming quarters?
Charles Duginski: Yes. Sure. Thanks. Thanks for the question. Very proud of the team. We talked about our companywide initiative to generate cost savings ideas and start to implement those. In the first quarter, we certainly saw those start to flow through to the financial results. When we look at the overall – at the nature of the savings, I'd say that the vast majority of them are structural in nature. Changing the way we do things, changing uplift designs, changing the way we're operating in the field. As I recall, I think it was about – only about, maybe 15% to 25% of those were market-related and the balance were structural and should be sticky as we go forward. So very proud of the team and that's not only field operations, that's also the G&A at the corporate level that we're generating those savings. So tremendously proud of the efforts of the team. Those are going to be sticky in a market turnaround and we're going to be much better positioned to succeed as we go forward.
Derrick Whitfield: That's helpful. Thanks for your time.
Charles Duginski: Great. Thanks, Derrick.
Operator: [Operator Instructions] Your next question comes from Dun McIntosh from Johnson Rice. Your line is open.
Duncan McIntosh: Hi, Chuck. Quick question on the increasing storage. I mean, is the plan there to just bring in additional tank batteries in some of your larger pads and what kind of costs would be associated with that?
Charles Duginski: No cost associated with it. What we're talking about is just using the existing tank battery on each location. Those tanks are built to handle the crude, bringing in temporary tankage would – I think, have a risk of spillage that we wouldn't be comfortable with. The tank batteries that we've got on location have safety equipment. They've got monitoring equipment. They've got secondary containment. So if there were a release from the tank, that it would be contained on location and those things are hard to achieve with temporary tanks. So we're just filling up the equipment that we've got installed on location currently.
Duncan McIntosh: All right. Great. Thanks. And then, I guess, with potential for an improving gas strip, particularly as looking out in the back half of this year, do you have some maybe gassier or entire NGL and gas content wells that might come on before some of your earlier wells?
Charles Duginski: Yes. I'd say that would be the potential. Certainly we've got a broad mix of wells in the portfolio. The gassier wells, we are benefiting from gas and NGL revenue streams even now. It's really the disconnect in the oil price that is driving the shut-in. So we look at gas and NGLs a little bit differently. And that roll calculation is really what, I would say, triggered the decision to shut-in in May. What was $0.40 deduct in April to our crude pricing widened out to nearly $8 – an $8 deduct in May, and that was the point where we said it doesn't make sense to expose ourselves to these sorts of wellhead prices when we see better pricing just a couple of months down the road. So we do look at NGLs and gas a little bit differently and with a little bit more strength, particularly looking ahead to next winter and 2021, that's – we're looking forward to enjoying higher prices for those streams.
Duncan McIntosh: All right. Great. That's it for me. Thank you.
Charles Duginski: Great. Thanks Dun.
Operator: We have no further questions. I'll turn the call back over to the presenters for closing remarks.
Charles Duginski: Great. Thank you. And thanks everyone for joining us on the call today. We are facing some very unusual challenges in the industry, but I believe we have the right team at Chaparral to manage through these difficult times. Thanks for your time this morning.
Operator: Ladies and gentlemen, this concludes today's conference call. You may now disconnect.