Amplify Energy Corp. (NYSE:AMPY) Q1 2024 Earnings Call Transcript May 9, 2024
Amplify Energy Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to Amplify Energy’s First Quarter 2024 Investor Conference Call. Amplify’s operating financial results were released yesterday after market close on May 8, 2024, and are available on Amplify’s website at www.amplifyenergy.com. During this conference call, all participants will be in a listen only mode. Today’s call is being recorded. A replay of the call will be accessible until May 23, 2024 by dialing 800-654-1563 and then entering access code 592-403-315. I would now like to turn the conference over to Jim Frew, Senior Vice President and Chief Financial Officer of Amplify Energy Corp. Please go ahead.
James Frew: Good morning, and welcome to the Amplify Energy conference call to discuss operating and financial results for the first quarter of 2024. Before we get started, we’d like to remind you that some of our remarks may contain forward-looking statements, which reflect management’s current views of future events and are subject to various risks, uncertainties, expectations, and assumptions. Although management believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove to be correct and undertakes no obligation and does not intend to update these forward-looking statements to reflect events or circumstances occurring after this earnings call.
Please refer to our press release and SEC filings for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, the unaudited financial information that will be highlighted here is derived from our internal financial books, records and reports. For additional detailed disclosure, we encourage you to read our Form 10-Q, which was filed yesterday afternoon. Also, non-GAAP financial measures may be disclosed during this call. Reconciliations of those measures to comparable GAAP measures may be found in our earnings release or on our website at www.amplifyenergy. com. During the call, Martyn Willsher, Amplify’s President and Chief Executive Officer will review our first quarter performance and provide an update regarding our previously announced strategic initiatives.
Next, Dan Furbee, Senior Vice President and Chief Operating Officer will provide an overview of first quarter operational performance. Following that, I will discuss first quarter financial results, provide an update on our balance sheet and liquidity and provide additional details on our hedge book. Finally, Martyn will conclude our prepared remarks with final thoughts before opening the call up for questions. With that, I will hand it over to Martyn.
Martyn Willsher: Thank you, Jim. Amplify had a strong first quarter of 2024. The company generated $24.9 million of adjusted EBITDA and $2.3 million of free cash flow during the quarter with both exceeding expectations. Due to our stronger than expected first quarter performance, combined with higher forecasted crude oil prices for the remainder of 2024, we have increased our annual guidance. You can find our updated guidance in our earnings release and investor presentation posted to our website last night. With respect to the strategic initiatives highlighted on our previous calls, the barrel marketing process is progressing as expected. As a reminder, we are exploring complete divestiture of the asset as well as considering alternative financing structures with the goal of maximizing shareholder value.
A successful payroll monetization will accelerate our ability to reduce debt outstanding and to evaluate return of capital options. We will provide an update regarding this process on our next call. At Beta, we continue to make progress on our 2024 development program. Dan will provide more details in a moment, but we remain encouraged about the potential of the program, especially in light of current crude oil prices. Our initiatives at both Bairoil and Beta have the potential to demonstrate those significant upside of our assets that we believe is not currently fully valued. With respect to other initiatives, Amplify has been working hard to put a more robust insurance program in place to enhance our overall risk mitigation plan. A key part of that program was replacing our prior surety bonds.
As a result of taking this holistic approach to our insurance program, we were able to successfully restructure our sinking fund obligations, which will lower our annual payments by approximately $7 million per year. Also of note, Amplify recently renegotiated its pre-existing iodine contracts in Oklahoma. We provide produced water to a third-party for iodine extraction from the brine stream and are paid a royalty on the iodine produced. Starting in the second quarter, but effective as of January 1, 2024, Amplify will start realizing higher revenue from this partnership. Based on current iodine prices, we expect to generate an additional $2 million to $3 million per year in iodine royalties, which are captured as other revenue in our updated guidance.
In summary, we continue to focus on optimizing cash flow generation, while simultaneously pursuing our strategic initiatives at Bairoil and Beta. We believe this plan will unlock additional value in Amplify’s portfolio and deliver substantial benefits and long-term value to our shareholders. With that, I’ll hand it over to Dan.
Daniel Furbee: Thank you, Martyn. Total production for the first quarter averaged approximately 20,200 BOE per day consisting of 43% oil, 18% NGLs, and 39% natural gas. Oil volumes for the quarter were slightly higher than the previous quarter. Despite a planned shutdown for [indiscernible] upgrade to Bairoil and planned shut ins at Beta necessary for the continued electrification and emission reduction project scheduled to be completed later this year. The oil production increased versus prior quarter, gas production was lower quarter-over-quarter primarily due to third-party interruption and higher shrinks as a result of process and more ethane. As a result, we have adjusted our production guidance accordingly. For the first quarter, lease operating expenses were $38 million gathering, processing, and transportation costs were $4.8 million and production taxes were $4.9 million.
In total, these costs were approximately $2.5 million higher than the previous quarter driven by higher planned LOE costs in the first quarter for certain annual maintenance and one time projects. We are forecasting our total lease operating expenses to decrease throughout the remainder of the year with many of the one-off expense projects completed in the first quarter and several cost saving initiatives starting to take effect. Our lease operating expenses were partially offset by approximately $600,000 of income generated by Magnify Energy Services. Magnify income is expected to continue growing throughout the year as they expand this business by acquiring digital compressors and initiating water hauling services in the second quarter. The company’s total capital investment for the quarter was approximately $19.1 million.
The majority of this capital was invested at Beta as we continue our electrification and emission reduction facility project and initiated our development program. The remaining capital was invested in facility upgrade to Bairoil, various capital workovers across our asset base, and approximately $700,000 for magnified equipment. Capital for the remainder of 2024 will mostly be allocated to continued development and facility enhancements of Beta, high return workovers across our assets, and non-operated projects. With respect to our non-operated activity in the Eagle Ford, the company is expected to participate in 13 gross 0.7 net new development wells and 2 gross 0.4 net recompletion projects. While at East Texas, the company is evaluating participation in 3 gross 0.8 net wells.
At Beta, we completed the second phase of electrification and emission reduction infrastructure project in the first quarter, which involves successfully replacing of a diesel driven injection pumps with electric pumps on the LE platform. We are now proceeding with the third and final phase of the project, which involves installing selective catalytic reducers or SCRs on our rig engines on the LE platform. Amplify remains on target to meet the compliance deadline in the fourth quarter of 2024 as prescribed by the district air quality regulations. After completing these projects, we do not anticipate additional material facility investments at Beta in the near future, which will significantly increase the free cash flow from Beta going forward.
In conjunction with the cost savings being realized by the large facility project at Beta, we also anticipate substantial production growth as a result of our 2024 development program. The company spud the 845 well from the LN platform in March and successfully reached the objective formation. Amplified formation logs reinforce the company’s views that the target interval has a high oil saturation and is expected to deliver excellent results. During drilling operations, Amplify experienced equipment issues including a rig engine failure causing an extended period of downtime with the hole open leading to well stability issues. In turn, we were not able to run our casing to our planned depth of the production formation leading us to set the casing high.
This will require us to complete the well through a smaller casing design resulting in auger completion for the well. Due to equipment availability for their revised completion and because commencement of the third phase of electrification project is critical to achieve the project deadline. We are deferring the completion of A45 well into the Q4 of 2024 when we are finished with the FDR installation on Ellen rig engines. We expect to spud our second development well this month with this completion anticipated in June and we plan to spud two additional development wells in the third quarter. With our facility and development drilling invested in Beta, we anticipate a significant increase in the profitability and overall value of the asset that will be realized as we execute these initiatives this year.
Couple this with continued optimization projects and cost saving efforts across our asset base, including the continued build out of Magnify Energy Services, we continue to expect 2024 to be a transformational year for the company where we start to realize the full value of Amplify’s asset base. With that, I will turn it over to Jim.
James Frew: Thank you, Dan. I’d would now like to discuss the following items. First quarter financial performance, balance sheet and liquidity and hedging. With respect to first quarter financial performance, the company reported a net loss of approximately $9.4 million compared to $43.6 million of net income in the prior quarter. The change was primarily attributable to a non-cash unrealized loss on commodity derivatives due to prices increasing throughout the first quarter. As Martyn previously mentioned, first quarter adjusted EBITDA was $24.9 million exceeded our expectations. First quarter revenue was also higher than expected due to strong crude oil prices combined with less downtime at Beta versus our plan. The futures curve for crude oil is above our initial guidance assumptions, which is providing a strong tailwind for 2024.
With respect to lease operating costs, first quarter lease operating expenses were approximately $38.3 million and averaged $20.78 per BOE. LOE was higher than the prior quarter in large part to a one-time adjustment that occurred in the fourth quarter, in addition to scheduled maintenance and other routine annual expenses. Amplify expects quarterly LOE for the remainder of the year to be lower than the Q1, with full-year LOE remaining within the original guidance range. First quarter GPT costs were $4.8 million or $2.59 per BOE. First quarter GPT was down 3% versus the prior quarter. We expect these lower costs will continue into 2024. Cash G&A in the first quarter was $7.9 million or $4.05 per BOE, which was up $1.7 million from the prior quarter.
This increase was in line with expectations and primarily due to year end processes that impact various cost drivers annually in the first quarter and a onetime cost associated with the early termination of our Tulsa office lease. Adjusting for the early lease termination cost, G&A was flat compared to Q1 2023. The company anticipates that quarterly cash G&A expenses will be materially lower throughout the remainder of the year. And as a result, we have not adjusted our original G&A guidance range. In the first quarter, we incurred $3.5 million of interest expense, down $0.3 million compared to the prior quarter and down $2.2 million versus the same quarter a year ago. Amplify invested $19.1 million of capital in the first quarter. In addition to ramping up activity at Beta, the company also elected to accelerate a short turnaround at Bairoil.
Originally planned to occur in the second quarter, Amplify opted to conduct the turnaround in the first quarter to take advantage of the downtime associated with another project. As a result, first quarter capital was slightly higher than expected, but because it was an acceleration, the company is electing not to adjust capital in our 2024 guidance. As Dan mentioned, we are also participating in development wells in the Eagle Ford and evaluating several in East Texas, and we expect to see production from those wells starting in 2025. Free cash flow, defined as adjusted EBITDA less CapEx and cash interest expense was $2.3 million for the first quarter of 2024. Despite accelerating capital into the first quarter, this result exceeded expectations and Amplify has increased our annual free cash flow guidance range.
Amplify has now generated positive free cash flow in 15 of the last 16 quarters, illustrating the strong sustainable cash generating potential of our mature diversified asset base. On May 2, 2024, we completed the regularly scheduled semi-annual redetermination of our borrowing base, which was reaffirmed at $150 million with elected commitments of $135 million. The next redetermination is expected to occur in the fourth quarter of 2024. As of March 31, Amplify had net debt of approximately $112 million consisting of $115 million outstanding under our revolving credit facility and $3 million of cash and cash equivalents. At the end of the first quarter, the company’s liquidity was $23 million and net debt to last 12 months adjusted EBITDA was 1.3x.
The increase in net debt versus the prior quarter was primarily due to expected changes in working capital and increased investment activity. As of May 8, our forecasted crude oil production was approximately 70% to 75% hedged for 2024, 45% to 50% hedged for 2025 and 10% to 15% hedged in 2026. On the gas side, we are 80% to 90% hedged for 2024 through 2025 and 55% to 60% hedged in 2026. In the first quarter, we added gas hedges covering a portion of our expected 2026 production and crude hedges covering a portion of our 2024 expected production. We will continue monitoring the market to supplement our strong hedge positions going forward. With that, I’ll turn the call back to Martyn.
Martyn Willsher: Thank you, Jim. As I mentioned earlier on this call, we are increasing guidance based on better than expected first quarter results and continued strength in crude oil prices. Amplify’s updated guidance is now based on flat commodity prices for WTI crude oil of $78 a barrel and Henry Hub Natural Gas of $2.25 per MMBtu. As previously disclosed, the company expects to invest 85% to 95% of its capital in the first three quarters of the year, primarily in connection with the Beta projects. Additional guidance details were provided in our earnings release and can be found in the latest investor presentation currently available on our website. In summary, 2024 is off to a good start with a strong balance sheet, compelling strategic initiatives underway and a motivated and capable workforce, we are optimistic about our future.
We believe the barrel monetization and Beta development have the potential to provide a catalyst for market outperformance, while also enhancing our flexibility as we consider and evaluate potential capital return options. We will continue to find ways to enhance shareholder value through diligent asset management, a relentless focus on managing our cost structure and prudent capital allocation. We remain confident that the initiatives Amplify is actively pursuing this year have the potential to be transformative for the company. With that, operator, we are now open for questions.
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