Feb 26, 2016
Executives
Matthew Skelly - VP, Head of Investor Relations Edward E. Cohen - CEO Daniel C.
Herz - CEO, ARP Mark D. Schumacher - President, ARP Jeffrey M.
Slotterback - CFO, ARP
Analysts
Operator
Good day ladies and gentlemen and welcome to the Fourth Quarter and Year-end 2015 Atlas Energy Group LLC and Atlas Resource Partners LP Earnings Conference Call. At this time, all participants are in a listen-only mode.
Today we will not be conducting a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.
I’d like to introduce your host for today’s conference, Mr. Matthew Skelly, Head of Investor Relations.
Sir, please go ahead.
Matthew Skelly
Thank you, Michelle. Good morning everyone.
Thank you for joining us for today’s call to discuss our fourth quarter and year-end results for ARP and ATLS. As we begin, I’d like to remind everyone that during this call, we’ll make certain forward-looking statements and in this context, forward-looking statements often address our expected future business and financial performance and financial conditions, and may contain words such as expects, will, anticipate, and similar words or phrases.
Forward-looking statements by their nature address matters that are uncertain and are subject to certain risks and uncertainties which can cause actual results to differ materially from those projected in the forward-looking statements. We discuss these risks and other factors from time-to-time in our reports filed with the SEC, including our annual report on Form 10-K, particularly in Items 1, 1A, and 7.
I’d also like to caution you not to place undue reliance on these forward-looking statements, which reflects management’s expectations only as of the date hereof, and except that maybe required by law. Neither ARP nor ATLS undertakes any obligation to update this forward-looking statements or to publicly release the results of any revisions to forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Both Atlas Energy Group and Atlas Resource Partners’ earnings releases provide a GAAP reconciliation to both non-GAAP measures we refer to in our public disclosures, such as adjusted EBITDA and distributable cash flow. With that, I’ll turn the call over to Atlas Energy Group’s CEO, Ed Cohen for his remarks.
Ed?
Edward E. Cohen
Thanks, Matt, and hello everyone. And welcome to the Atlas Energy Group, ATLS and Atlas Resources Partners, ARP joint call.
In our last conference call in November, I warned that “the continuation let alone an intensification of current negative conditions constitute the potential serious threat to virtually the entire U.S energy business, including of course the Atlas companies”. That warning has now been confirmed by events and once again I want to emphasize the daunting challenges that the Atlas companies confront.
In fact, just this morning in its article on energy transfer, the New York Times alluded to their recent Lloyd estimate that “more than the third” of all E&P firms in the world are now threatened with bankruptcy. Now as most of you know, and as my colleagues will review in some detail, we were able to take preemptive actions and reach helpful accommodations throughout 2015.
We will endeavor to do the same in 2016. But the arena in which we interact is currently highly perilous and dangerously volatile and there can be no assurance that we will continue to surmount every wake.
Since most of this call will be devoted to ARP, by far the largest asset of the Atlas Companies, let me now say a few words about our parent company, Atlas Energy Group. ATLS received approximately $600,000 in management fees and cash distributions during the fourth quarter of 2015 from its E&P development subsidiary, Atlas Growth Partners LP.
ATLS also received an additional $600,000 in cash distributions in the fourth quarter 2015 from Arc Logistics Partners LP, ARCX, in the New York Stock Exchange, which is a master limited partnership of which approximately 16% of its general partner interest and approximately 12% of its limited partner interest is owned by ATLS. Atlas Energy distributable cash flow was approximately a negative $100,000 or $0.00 per common unit in the fourth quarter of 2015 compared to $6 million or $0.23 per common unit in the third quarter of 2015.
The decrease in distributable cash flow was in part due to lower amounts of cash received from the Company’s investment in Atlas Resource Partners which of course was adversely affected by the reduction in ARP’s common unit distribution. Cash G&A, general administrative expense, excluding amounts attributable to AGP and ARP was $1.4 million for the fourth quarter of 2015 compared to $2.6 million in the third quarter of 2015.
Finally, ATLS had approximately $72.7 million of debt on its balance sheet at December 31, 2015 and the cash position of approximately $6.5 million. Now let’s focus on ARP.
Daniel Herz, ARP’s CEO will offer an overview of ARP’s position after which Mark Schumacher, ARP’s President will discuss operations in some detail and Jeff Slotterback, our CFO, will do the same for financial matters. Because of the many contemplated initiatives and circumstances that are being discussed directly and indirectly on this call relating to our Company -- our Companies and our industry, we will not be taking questions on this call.
Daniel, take it away.
Daniel C. Herz
Thanks, Ed, and good morning, everyone. We at Atlas continue to persevere through what is obviously is and has been an unprecedented period in the energy industry.
For ARP, the challenge focuses on maintaining appropriate leverage ratio, liquidity, and positive free cash flow among other things in 2016. I will speak in depth about the efforts in each of these areas.
First, however, I’d like to highlight our financial and operational activities over the last several months and throughout 2015. Let me start by saying we’re hopeful of surmounting the daunting challenges that we confront.
And I can assure you that we’re evaluating all options available to us and we will rule out no possibility that would be advantageous to our various stakeholders. Later in the call Mark Schumacher, and Jeff Slotterback will discuss our operational and financial performance in greater detail.
First, the financial. ARP continues to have a hedge book value at over $400 million.
Even after recollected $179 million in hedge profits in 2015. In November 2015 our bank lenders redetermined our borrowing base from $750 million to $700 million, a relatively benign result.
At the same time, with the support of our bank group, we succeeded in amending our credit facility, adding flexibility to our situation. Following this bank redetermination and lending agreement amendment, in December 2015 we received support from approximately 97% of our bondholders in connection with an amendment to our indentures, which provide us continued access to $1 billion of secured debt, subject to limitations on secured -- senior secured interest expense and other provisions.
Throughout 2015 we consistently monitored our leverage ratio and to help litigate the rising levels, we raised approximately $100 million of equity. More recently the focus on our leverage levels let us to repurchase approximately $32 million of face value of our bonds for $4.5 million or approximately $0.15 on the dollar.
We are no longer in a position to repurchase bonds, absent to a change in resources or circumstances. As I said, we’re looking at all option to strengthen our financial position.
Next, the operational highlights. We’ve been laser focused on cost cutting in every area.
In 2015, we reduced production expenses by approximately $40 million assuming a full-year for all assets currently owned. Over the last 12 months, we reduced our workforce by over 25% across the Atlas franchise to reflect the current environment.
Additionally, we reduced our 2015 CapEx by 40% year-over-year. Reacting to market conditions in 2015, which made almost all basins in North America uneconomic to develop, we moved our entire drilling effort to the Eagle Ford shale, one of the few remaining economically viable energy place in North America.
We’ve reduced drilling and completion costs by 40% or approximately $4 million on a per well basis in the Eagle Ford, which I believe is reflective of the high quality operating team we’ve led by Dave Leopold. This should stand us in good stead as we move to complete the last nine wells in our present program, all of which have already been drilled.
2015 was a record year for oil production at ARP. And as a result of our substantial hedge position, we recognized an average price per barrel of $84.
It has been our strategic focus over the past few years to acquire producing oil assets as well as organic development of oil assets, while consistently locking in prices. These efforts resulted in daily oil production increasing in 2015 by 50% year-over-year.
Protecting our revenue with ARP’s substantial hedge portfolio, which was over 100% hedged on our oil production in the last quarter and 76% hedged on our natural gas production. For 2016, we’re again extremely well hedged with the majority of our oil and gas protected at much higher levels than current spot prices.
With respect to our tax program, our year-end tax program, ARP raised $59.8 million for the 2015 year-end tax program. This fund raising amount is clearly disappointing relative to our expectations of $150 million.
With that said, raising nearly $60 million at the end of 2015 is significant, given the horrible state of the energy market and the incessant negative publicity in the media. As Jeff will discuss, while this fund raising amount impacted our fourth quarter 2015 adjusted EBITDA, as well as our projected 2016 adjusted EBITDA.
Very importantly, it does not have a significant impact on our free cash flow or our liquidity. Finally, I’d like to thank all of the Atlas team for their dedication to the Company and all of their efforts as we work through this incredibly difficult period.
In summary, we recognize it will not be easy to meet all of the challenges we confront, but we do not see any challenge that is impossible to surmount. We will do our best.
I will now turn the call over to Mark Schumacher, who will go into our operational results in more detail. Mark?
Mark D. Schumacher
Thank you, Daniel. The fourth quarter of 2015 and essentially all of 2015 have been challenging times in our industry.
There has been significant volatility in all phases of the business. The one constant throughout the year has been the focus of our entire organization on preserving value.
As we enter 2016, we maintain that same focus through all channels. This includes reducing production costs, strategic deployment of capital on value enhancing projects, and efficiently managing production margin, which may involve shutting in wells or deferring workovers due to economics.
We are constantly evaluating ways to preserve cash flow associated with each operating area and this starts with production expenses. We made great strides in reducing production expenses during 2015.
Production costs were reduced approximately $40 million or 20% year-over-year on a pro-forma basis and 5% or approximately $2 million quarter-over-quarter. Total production costs per unit of production for the fourth quarter was $1.73 per Mcf equivalent compared to a $1.82 per Mcf equivalent in the fourth quarter of 2014.
Operating expenses continue to be reduced through aggressively bidding services, vendor renegotiations, and reduction of fixed costs. For example, we’ve had success releasing and downsizing compression across multiple operating areas, with our Eagle Ford asset, achieving the largest reduction in compression.
The consolidation of compression is a process enhancement where we will continue to see the benefit as product prices rebound. Additionally we have seen cost savings in water hauling in the Marble Falls and chemical savings in the Eagle Ford and CMB areas.
We have also temporarily shut in a significant number of natural gas wells that are uneconomic at current prices. We have reduced our operating staff to align with our operating needs and scale back development plan.
We expect all of these savings to continue our trend of year over -- of quarter-over-quarter cost savings through 2016. Our 2015, capital deployment was $127 million, which represents a 40% year-over-year reduction.
This was due to our ability to react quickly to the changing market and focus the majority of the reduced CapEx budget to one of the top-tier oil plays, the Eagle Ford shale. The Eagle Ford is one of the few places in the country where it is still economic to drill wells at current prices and it’s the second most active play based on rig count.
Our development plan for 2016 is largely discretionary and will be evaluated throughout the year. As Daniel mentioned, we have focused the majority of our 2015 capital drilling budget on the Eagle Ford in South Texas.
The well cost for the two Eagle Ford wells connected during the quarter was $5.5 million, which is 40% below the prior year cost. We maintained a one rig drilling program during the quarter and drilled seven wells as part of our 2015 investment partnership program.
A total of nine wells are included in this investment partnership program, which are expected to be completed later this year. We are now projecting the total cost to drill, complete and equip a 7,400 foot horizontal Eagle Ford well to be approximately $4.8 million.
The cost reductions are a result of process improvements, execution and the hard work by the teams to increase efficiency across the entire well construction process. Our portfolio of producing assets, have a low decline profile.
Our 2015, average daily production of 266.4 million cubic feet equivalent per day represents a 5% decrease year-over-year. This change in volume is comprised of a 9% decrease in natural gas and a 50% increase in crude oil production.
This is the result of our decision to allocate capital dollars to diversify our product mix and focus on the highest returning projects. As I mentioned earlier, we are focused on preserving value and not on production volumes.
As a result of this approach, we may see additional declines in volumes based on temporarily shutting in wells due to pricing, delaying workovers due to economics or potential asset sales. We believe this is all part of being a prudent operator in preserving value.
The production during the fourth quarter was 249.5 million cubic feet equivalent per day which is comprised of 81% gas, 12% oil and 7% liquids. Our quarter-over-quarter production decrease of 6% was higher than the previous quarters 2.5% decrease due to the sale of our non-operated interest in the County Line CBM field in Wyoming effective October 1, as well as shutting in high volume Marcellus wells in Lycoming County, Pennsylvania for over half the quarter.
Our oil product increased by approximately 60 barrels per day quarter-over-quarter. The main driver of this increase was the connection of two new wells in the Eagle Ford.
The Eagle Ford along with our non-operated Rangely asset make up approximately 80% of our daily oil production. The Rangely field had a 1% quarter-over-quarter decline which is consistent with the historical 4% annual decline.
As a reminder, Rangely is our enhanced oil recovery project operated by Chevron. In closing, I would like to acknowledge and thank our employees for their focus and dedication during these challenging times.
It is through the collaborative effort and continuous improvement culture that positions us for success through these cycles, and for that I’m very appreciative. Finally, as I stated at the beginning, we are focused on preserving value in this challenging environment.
We have made a lot of progress and expect to add to that progress throughout 2016. Thank you for being a part of our call this morning, and I will now turn it over to our CFO, Jeff Slotterback.
Jeffrey M. Slotterback
Thank you, Mark. Good morning to everyone joining us on the call.
I appreciate the chance to speak with you today. To echo the comments of Ed and Daniel, the current commodity price cycle is certainly challenging.
As we move into 2016, our focus is centered on operating the business on a free cash flow positive basis, including interest expenses, capital expenditures and distributions. With the benefit of our hedge positions, even at current strip pricing, we anticipate maintaining positive free cash flows throughout 2016.
Since our last earnings call, we have completed several financing initiatives that I would like to update you on. In November, 2015, we completed our semi-annual borrowing base re-determination which resulted in our current $700 million borrowing base, a decrease of approximately 7% from the previous $750 million amount.
In addition to the new borrowing base, we amended our credit facility to suspend our maximum total leverage covenant until the first quarter of 2017, and to replace our senior secured leverage covenant with a first lean secured leverage covenant of 2.75 times. Our next borrowing base re-determination is scheduled for May of 2016.
At this time, we cannot predict where commodity prices will be or where borrowing base re-determinations will be set in the coming year. In December, 2015 we were able to complete the consent facilitation of our senior unsecured notes.
Amending our dentures to increase the fixed dollar amount of secured debt permitted to $1 billion from the previous $500 million level. The consent facilitations received support from approximately 97% of bond holders.
Since January 1 of this year, we have been able to repurchase approximately $32 million of our bonds for an average price of around $0.15 on the dollar. This translates to slightly more than $2.5 million of annual interest savings.
As many are aware, both ARP and ATLS have received continued listing notices from the New York Stock Exchange which are becoming more and more prevalent in the industry. The notices reflect reaching minimum share price or market capitalization requirements.
As we have stated in the respective press releases, we intend to do what we can to return to compliance with the NYSE. In the event we are unable to stay compliant, we will have an orderly transition to another exchange and we do not believe it will impact the ability of our investors to trade in the security.
Turning to our fourth quarter results, ARP generated adjusted EBITDA of $57.8 million or $0.55 per unit, including both growth and maintenance capital expenditures as well as preferred and common distributions -- the partnership had positive free cash flow of $3 million. We distributed $3.75 for the period on common limited partner units.
Production margin for the fourth quarter of $69.1 million was essentially consistent with the $69.4 million realized during the third quarter. We were able to keep production margins flat in spite of a nearly 20% decrease in NYMEX natural gas prices, and nearly 10% decrease in NYMEX oil prices between the periods.
During the period realized natural gas prices including hedges were $3.42 per Mcf for the fourth quarter, $0.24 lower than the fourth quarter of 2014, while Henry Hub first-of-the-month prices declined $1.73 or 43% over that same period. Our natural gas production was approximately 76% hedged during the quarter at realized hedge prices of $3.89 per Mcf.
Regarding oil, our realized prices including hedges were $85.26 per barrel for the fourth quarter of 2015, slightly higher than the $84.81 realized during the fourth quarter of 2014, as our production was more than 100% hedged. For comparison, WTI prices fell more than $70 -- fell from more than $70 per barrel during the fourth quarter of 2014 to $42 for the average current quarter’s price, a 40% decline.
Our hedge book, which had a fair value above $400 million as of yesterday has positions covering approximately $151 billion cubic feet of natural gas production at an average contract floor price of approximately $4.13 per Mcf for periods through 2019, and approximately 4.2 million barrels of oil at an average contract floor price of over $76 per barrel for periods through 2019. These positions which are almost exclusively fixed price swaps are the result of our conservative hedging strategy over the last several years.
Please see the tables within our press release for more information about our hedges. As Mark, indicated during his remarks, we continue to be very focused on our efforts to reduce costs throughout the business, expanding on the reduced operating costs we have already realized to date.
Total production costs declined an additional $2.1 million from the third quarter of 2015, which is approximately $10 million less than the comparable prior year quarter. Production costs per Mcfe fell to $1.73 for the fourth quarter down from $1.82 in the prior year’s fourth quarter.
Turning to production volumes, we generated just under 250 million cubic feet of equivalent per day during the quarter, which was in line with our expectations for the period. Gross margin for the fourth quarter was approximately $7 million lower than the previous sequential quarter due to the short fall and funds raised within our drilling partnership program.
While the funds raised during the year was less than intended, the $59.8 million raised given the commodity price climate during the later half of the year and particularly during December is a testament to the hard work of our sales team. At December 31, we have approximately $21.5 million left to deploy within our drilling partnership program.
Regarding general and administrative expense net cash G&A was approximately $15.5 million for the period or $2.5 million higher than the fourth quarter of 2014, also due to the short fall in funds raised for the current year investment program. Total capital expenditures were just under $25 million for the fourth quarter, compared with approximately $62 million of total CapEx for the prior year comparable quarter.
Over the year, total capital expenditures were $127 million compared with $213 million during the year ended December 31, 2014. The decrease between the years was driven by $30 million lower direct well drilling, $40 million lower related to contributions to our investment partnership programs, and $12 million lower lease hold acquisition costs.
Quickly turning to our financial position at ATLS, at December 31, ATLS had a debt balance of $72.7 million with the cash position of $6.5 million. We continue to expect to use any excess cash flow generated from ATLS’s ownership interests to be used to reduce its debt balance.
With that, I thank you for your time, and return the call to our CEO, of Atlas Energy Group, Ed Cohen.
Edward E. Cohen
Thanks much, Jeff. And to all of you I say that I hope to be speaking once again with all of you on our next conference call.
Thanks for participating or at least thanks for listening. Bye-bye all.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect.
Everyone have a great day.