Doug Atkinson - IR Eric Greager - President and CEO Dean Tinsley - SVP, Operations and Engineering Scott Fenoglio - SVP, Finance and Planning and Principal Financial Officer.

Irene Haas - Imperial Capital.

Good day, ladies and gentlemen, and welcome to the Q2 2018 Bonanza Creek Energy, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-session and instructions will follow at that time. [Operator instructions] As a reminder, this conference is being recorded.

I would now like to introduce your host for today's conference, Doug Atkinson, Senior Manager of Investor Relations. You may begin..

Thank you and good morning, everyone and welcome to Bonanza Creek's second quarter 2018 earnings conference call and webcast.

On the call this morning, I'm joined by Eric Greager, President and Chief Executive Officer; Dean Tinsley, Senior Vice President of Operations and Engineering; and Scott Fenoglio, Senior Vice President of Finance and Planning and Principal Financial Officer.

Yesterday evening, we issued our earnings press release, posted a new investor presentation and have filed our 10-Q with the SEC, all of which can be accessed on the Investor Relations sections of our website. Some of the slides in the August investor presentation will be referenced this morning during our prepared remarks.

Please be aware that our remarks will include forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially. You should read our full disclosures as described in our 10-Q, 10-K and other SEC filings.

Also, during this call, we will refer to certain non-GAAP financial measures, because we believe they are good metrics to use in evaluating performance. Reconciliations of these measures to the most directly comparable GAAP measures are contained in our earnings release and investor presentation.

We'll start the call with prepared remarks and provide time at the end for Q&A. Now, it's my pleasure this morning to introduce Eric Greager, President and CEO.

Eric?.

Thanks, Doug. Good morning, everyone and thank you for joining us for our second quarter earnings call. In April, we laid out a framework for improving the performance of our business through the systematic application of higher intensity completions, operational efficiencies and maintaining financial strength.

I'm encouraged with the progress we're making on these fronts and we're excited about continuing to unlock the potential of our assets. At a high level, second quarter adjusted EBITDA increased 17% sequentially and second quarter production increased 7% sequentially.

Production would have been at the high end of our guidance if not for an out of period adjustment to our interests in an outside operated property. We have carefully studied the cause of this adjustment and its timing and we're working with our partners to improve our communications and workflows to help ensure it doesn't happen again.

We've been drilling and completing some of the best wells in the company's history recently, which is testament to the quality of our operations, people and the acreage. Given the strong performance of our wells today, we are able to raise our full year production outlook.

Our 2018 program now calls for 77 gross wells drilled and 49 gross well turned to sales compared to 90 and 55 previously. Despite the lower well count, we are raising our full year Wattenberg production guidance and lowering our full year CapEx guidance.

Consistent with our plan, we continue to increase the pace and scale of our operations in Wattenberg. Recently, we added a second frac crew and we're planning to add a second drilling rig in September.

Some of you might have noticed that as a result of our recent resources assessment, we announced an economic inventory of over 1,000 wells across our Wattenberg position. We also recently announced the sale of our Mid-Continent operations.

The transaction helps focus our time and attention on efficient growth closer to home, while strengthening our already strong balance sheet. The inventory provides time to remain disciplined as we continue to evaluate opportunities through the lens of value creation and full cycle returns.

Before I turn it over to Dean, I just want to close with how excited I remain about the opportunities ahead of us. Our asset base in the Greater Wattenberg provides a platform to create value across a range of disciplines.

Our Rocky Mountain infrastructure provides a competitive advantage and when combined with our outstanding -- sorry our understanding of the subsurface, fracture stimulation design, reservoir pressure management and artificial lift systems, we believe we are uniquely positioned to grow value in the Wattenberg.

We have ample liquidity to fund our continuous development program, which will drive 25% Rockies production growth in ’18, greater than 50% growth in ’19 and positive free cash flow in the fourth quarter of ’19. With that, I'll turn it over to Dean for his operational update..

Thanks, Eric. Good morning, everyone. We had another successful quarter with the drilling and completion program that continues to exceed our expectations. Production in the second quarter increased 7% sequentially, driven by strong well performance from recent completion designs and consistently low well head gathering pressures.

Our RMI system combined with delivery point flexibility continues to keep system pressures lower, which in turn have resulted in flow assurance for both new and old wells. Line pressure is a key issue in the DJ Basin, so it's important that we discuss how RMI provides us with a distinct competitive advantage.

On slide 10, you'll see a plot of system pressures for both our RMI system and prevailing basin gathering pressures. As you can see from the slide, pressures outside the RMI system have been volatile and have increased significantly over the last year, peaking at up to 375 PSI.

Meanwhile, our RMI pressures have remained consistently under 100 PSI for the last 24 months. We have been able to do this by strategically adding and maintaining compression as well as increasing the number of delivery points to third party processors like we did with Sterling Energy in late 2017.

We also recently added an additional delivery point to Cureton Midstream that provides an infrastructure backbone to our Northern acreage.

This new contract provides additional flow assurance to our entire acreage position by adding 15 million cubic feet per day of firm gas processing capacity for up to 25 years and additional downstream residue takeaway. To reiterate, consistently low system pressures are critical to optimal production performance of both new wells and base PDP wells.

This will be especially important as we ramp up activity in the latter half of the year. We believe that the RMI system combined with delivery point flexibility will continue to be a differentiating factor in our production performance.

Moving on to some of our recent well results, we have provided several production plots in our August investor presentation. On slide 15, we are providing updated data for our recent slick-water test in our central acreage.

As you can see on the slide, our slick-water result is outperforming the legacy central curve after 260 days, which is encouraging. Additionally, the early results indicate that the slick-water completion is outperforming the offsetting hybrid completion.

While we are pleased with the results of both wells, we will continue to learn from and modify our completion methodologies on all wells going forward to maximize performance. Our next slick-water test result, which will be on our western acreage is expected in the third quarter.

Moving on to slide 16, we are updating the results of our first XRL well that utilized, enhanced completion and flow back procedures. As you can see, these three XRLs are well outpacing the company's original central type curve. And that gap is widening, given the strong sustained daily production that these wells are exhibiting.

On average, these wells are expected to exceed the company's legacy type curve EUR by over 30%. Given that these were our first XRL wells out of the gate, we are very encouraged by this performance. On slide 17, we have updated production data from our first two western area pads that utilized enhanced completions.

Recall that the first pad that was completed was the North Platte 44-13 pad. As you can see, this pad continues to outperform our west acreage type curve. Additionally, we have provided updated results from our F-26 pad, which now has 6 months of data.

This pad of 8 SRLs was completed and turned on line at the beginning of the year and it's tracking above our 44-13 pad. On slide 18, we are providing a first glimpse of well performance in our French Lake acreage. We recently brought on line the last of eight initial appraisal wells.

While two of the wells are hindered by mechanical issues, the other six thus far are outperforming both our central and west area type curves. While still early, we are very encouraged with the well performance and resource potential in this area.

While the basin is experiencing some inflationary pressures on the services side, our teams have done a tremendous job in driving further efficiencies into our operations to offset those pressures, including drill time improvements, refinement of completion operations and use of existing infrastructure.

Consequently, our well cost expectations haven't changed from our initial 2018 budget release. Additionally, we believe that the increased activity from the second rig as well as utilizing two stimulation crews will provide increased efficiency, leverage and scale to our operations.

The increased production volumes from a more scaled operation will also decrease per unit cost going forward. In short, we continue to see encouraging results from our development program. Our new wells utilizing enhanced completion designs are exhibiting significantly improved performance over previous type curves.

We will continually learn and improve upon these designs and are excited to apply new concepts to all segments of our DJ position. Additionally, our base and new production streams continue to benefit from the flow assurance allowed by our RMI system.

I'm very proud of the operations and technical teams, as we continue to deliver solid results, while maintaining a safe and environmentally responsible culture. I will now turn the call over to Scott for his financial remarks. .

Thank you, Dean and good morning, everyone. We were at the low end of our guided production volumes for the quarter, but I think it is worth noting again that if not for the interest change on some outside operated wells, second quarter production would have been at the high end of our guidance range.

We have been very pleased with the performance of the wells utilizing high intensity completions thus far. Turning to our capital spend, in the first 6 months of 2018, we've spent $95 million or roughly one-third of our total capital budget for the year.

As we begin to utilize a second frac crew and prepare to add a second drilling rig to the program in September, our capital spend will be weighted to the back half of the year. This will result in meaningful production growth in the fourth quarter of this year and in 2019.

Our operating expenses were impacted by the acceleration of our compressor replacement program, which was largely complete at the end of the second quarter. Compression costs will decrease significantly in the second half of the year.

Higher commodity prices have also allowed us to undertake economic well servicing and maintenance projects that have benefited our base production. While we are increasing our operating expense guidance for the full year, adjusting for the sale of Mid-Con, the LOE per BOE metric in Wattenberg ends the year in line with our original forecast.

As previously announced, we sold our Mid-Continent operations for $117 million on August 6th. Consequently, we are providing new third quarter and full year guidance that captures the strong production performance in the Wattenberg and the sale of our Mid-Continent operations.

In addition to our standard guidance, we're also providing third quarter guidance pro-forma of the Mid-Con sale to provide more color on the Wattenberg standalone performance. Both actuals and guidance for just the Wattenberg operations can be found in the appendix section of our August investor presentation on the company website.

Our balance sheet remains exceptionally strong. Pro forma for the Mid-Continent sale, liquidity at the end of the second quarter was approximately $255 million. This is inclusive of our $192 million RBL, which remained unchanged after the sale of Mid-Con.

Based on current pricing, our announced 2018 plan and a continuous two rig program in 2019, we continue to forecast our debt to EBITDAX metric to remain below one term throughout 2019, becoming cash flow positive in the fourth quarter of next year.

Lastly, our hedging philosophy revolves around protecting our capital investments by providing predictability to our future cash flows. To that end, we continue to layer on hedges for both oil and natural gas at prices that provide line of sight to being free cash flow positive by the end of 2019.

We recently started hedging our gas basis in the Wattenberg to better protect against volatility in gas differentials. Details of our current hedge position are included in our second quarter earnings release and in the appendix of our August investor presentation. With that, I will turn the call back to the operator for Q&A..

[Operator Instructions] Our first question is from Irene Haas with Imperial Capital. Your line is now open..

Hey, good morning. My question has to do with 1000 locations you guys have talked about and I think this is the first time you actually openly speak about. Firstly, are those net locations and then secondarily, could you give us a little insight as to what that would translate into if you were to be drilling more extended reach laterals..

Yeah. Hi. Thanks, Irene. This is Eric Greager.

It is the first time we've indicated because we needed to complete the resources assessment that we started when I first came on board in April and that resource assessment, if you've been through these before, starts with a fundamental understanding of the resource itself, as you work your way through the resource across the acreage position, combine it with what you understand about spacing, stacking, stimulation design and the latest application of well performance initiatives.

You roll all of that together and that has yielded the 1000 plus locations. They are and I want to point out, we've stated in our press release and elsewhere, these are SRL equivalents. That's our measure to keep things clear on that.

And the other point of clarification I think I need to make is that their gross locations and that provides some opportunity for us as we continue to develop the resource and continue to drive and apply more cutting edge subsurface engineering and development. There's an opportunity to continue to grow this.

But I wanted to qualify, a, they’re gross, and b, they are SRL equivalents..

What is the net equivalent?.

Because these are SRL equivalents, I don't know that we have released the net working interest on all of those leases, Irene. We're going to take a little bit more time and continue working on that.

But it's -- our working interest is large on much of our contiguous acreage and all of these wells are sticked [ph] in our contiguous acreage meaning, we didn't stick up scattered acreage that kind of sat out all by itself. So there's upside potential with additional acreage that will be sticked up.

We wanted to stick with the more contiguous acreage position, one, because we better understand the continuous resource potential and, two, because we wanted to get this information out as quickly as possible..

Okay.

May I have a follow up? Of these locations, how many are Niobraras and do you have some Codells in there and maybe a little bit on spacing and EURs?.

Yeah. I think EURs are kind of in the same space as net working interest, although we'll be able to guide on net working interest relatively quickly. EURs are something that evolves over time and that's something that you can expect to get periodic guidance on.

I think what we intend to do going forward here is when we finish our assessment throughout 2018 for the well performance and we move into our budget season for 2019, we will begin to lean in and start providing our type curves to help model the business and the programs for 2019 and then each year, you can expect to get new type curves that indicate our best guess, but the thing about given EURs and type curve performance for the longer run is that it fails really to recognize the upside potential that we continue to drive into the business and I think there's a significant amount of upside potential yet to come in terms of how we intend to develop our resource over time..

And also the split between Niobrara and Codell..

Yeah. I think you can look at the Niobrara and Codell, you can look back on our current distribution between Niobrara and Codell and that's going to represent itself largely proportionally going forward.

So if it turns out to be a typical six well pad for example has one Codell and five Niobrara and perhaps two benches, then I think you can expect that same distribution over time.

The thing you got to keep in mind is we're going to continue to optimize every pad going forward with the very best information we have in terms of spacing, stacking and stimulation design and the interdependencies of those and I think what you'll see in the well performance that we're releasing this quarter is even in a period as short as a quarter, you can create some pretty substantial uplift in well performance and we certainly don't anticipate that growth slowing down over time..

Okay, great. Thanks. .

Thank you, Irene..

Thank you. [Operator Instructions] At this time, I'm showing no further questions. I would like to turn the call back over to Eric Greager, President and CEO, for closing remarks..

Thanks, GG. Thank you all again for joining us this morning and for your continued interest in Bonanza Creek. I look forward to speaking with some of you later this month at Intercon..

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect..