Coming off a strong quarter in which production volumes exceeded guidance, Oklahoma pure play Chaparral Energy plans to maintain its two-rig program for the foreseeable future. However, the producer continues to monitor the current price environment to ensure spending is in line with revenues, management said.
“2019 was a challenging year within the industry, and that is continuing in the first quarter of 2020,” CEO Chuck Duginski said last week on a fourth quarter earnings call. “There has been prolonged volatility and weakness in commodity prices, macro fears of excess supply and falling demand, a tightening of capital markets and a clear lack of confidence in energy equities. Chaparral is prepared for this environment with a high degree of operational flexibility, with no long-term rig contracts,” no minimum volume commitments and “nearly all of our core acreage is held by production.”
That said, the producer anticipates a large reduction of capital spending relative to 2019. “Our drilling and completion activity will remain focused in areas of Canadian and Kingfisher counties, in which we have achieved our best economic results. We entered 2020 with two operated rigs and remain at that level today,” Duginski said.
The CEO said Chaparral could cease drilling after the current wells, with minimal financial impact but won’t jump the gun on halting activity. “We're four days into this pricing war. We've got the ability to wait and see how things develop. No one knows what's going to happen next, but we are prepared to react and react aggressively.”
Chaparral has about 2.5 million barrels of oil hedged at an average strike price of over $51 for this year. In 2021, some roughly 700,000 barrels of oil are hedged at an average strike price of $46. The company has 7.7 Bcf of natural gas hedged at an average strike price of more than $2.70/MMBtu in 2020 and basis hedges of 7.1 Bcf at an average strike price of 46 cents. Around 600,000 barrels of NGLs are hedged at an average strike price of $30.34/barrel in 2020.
“We continue to be an efficient and disciplined operator and maximize every dollar we spend,” CFO Scott Pittman said. “We proactively took steps in 2019 to right-size our operations, increase efficiency and lower our cost structure and we will continue to do so in 2020.”
The company, which restructured in 2017 after emerging from bankruptcy, reduced its corporate and field workforce by approximately 37% and 40%, respectively, last year and implemented cost reduction initiatives that combined are expected to result in estimated annualized general and administrative (G&A) savings of $7.5 million to $8.5 million. It also realized $14.7 million in proceeds for non-core asset sales.
“This was significantly above our initial guidance range of $5 million to $10 million, and we will continue to be opportunistic as it relates to potential non-core asset sales moving forward,” Duginski said.
Chaparral, which once again is under pressure to shore up its stock price or face delisting from the New York Stock Exchange, reported that fourth quarter production increased 14% sequentially to a total of 29.7 Mboe/d. The majority of this increase was in the STACK, aka Sooner Trend of the Anadarko Basin, mostly in Canadian and Kingfisher counties, where production rose 18% from the third quarter to 25,300 boe/d.
The exploration and production (E&P) company had 10 new gross operated wells with first sales during the quarter, all located in Kingfisher and Canadian counties. The production mix during the quarter was 32% oil, 31% natural gas liquids (NGL) and 37% natural gas, according to the company.
Looking back at the “notable lessons” of the 2019 program, five of the seven infill sections drilled in the Canadian County Mississippi Lime interval were classified as successes, according to Duginski. The remaining two were “less than successful, but provided valuable experience specifically.
“In retrospect, the wells in the Foraker development were too tightly spaced and suffered from competitive drainage. The Burke development, on the other hand, was properly spaced but unexpectedly depleted” in the Mississippi Lime by vertical wells from an earlier stage of development, the company chief said. “These issues were diagnosed quickly, and we have adjusted our pre-drill planning to avoid them in our current program.”
Chaparral's year-end proved reserves increased 2% year/year to 96.6 million boe, and the producer booked extensions and discoveries of about 21 million boe, which were mostly offset by pricing revisions and production. Proved reserves are weighted at 28% oil, 34% NGLs and 38% natural gas.
Chaparral’s capital expenditures (capex) for 2019 were at the midpoint of its updated guidance at $269.8 million, the majority of which was related to drilling and completions.
The company reported a net loss of $189.2 million (minus $4.14/share) for the fourth quarter, including a $169.7 million non-cash ceiling test impairment charge, primarily due to a decrease in prices used to estimate reserves and a noncash mark-to-market loss of $25.5 million on hedges. Revenues rose 25% sequentially to $72.5 million during the quarter, which included $49.3 million from oil, $13.1 million from NGLs and $10.1 million from natural gas.
Full year net loss was $468.9 million (minus $10.28/share), driven by a $430.7 million non-cash ceiling test impairment and $40.8 million of non-cash mark-to-market losses on hedges.
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