Good afternoon. My name is Candice, and I will be your conference facilitator today. I would like to welcome everyone to the Extraction Oil & Gas first-quarter 2019 financial and operating results conference call.

[Operator instructions] Please be advised that the remarks today, including answers to your questions, include statements that the company believes to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated.

Those risks include, among others, matters that the company described in its financial and operating results news release issued this afternoon and in its filings with the Securities and Exchange Commission. Extraction disclaims any obligation to update these forward-looking statements.

While the company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, competition, technology and environmental and regulatory compliance, the company's drilling schedules, capital plans and other factors that may cause its results to differ materially.

I would now like to turn the call over to Louis Baltimore, Extraction's Director of Investor Relations..

Thank you, and good afternoon to everyone. We're glad you could join us today for our first quarter earnings call. With us today on the call, we have Matt Owens, our President and Acting CEO; Rusty Kelley, our CFO; Tom Brock, our Chief Accounting Officer; and Eric Jacobsen, our SVP of Operations.

I'd like to remind you that today's call, in addition to the aforementioned forward-looking statements, also include the discussion of certain non-GAAP financial measures.

Please be sure to read our full disclosures on forward-looking statements and GAAP reconciliations in our earnings release and in our filing on Form 10-Q, which we provided earlier today after the close of trading. I'll now turn over the call to Matt Owens, our president and acting CEO, to go through some of the highlights for this quarter..

Thanks, Louis. Good afternoon, everyone. Welcome to our first-quarter earnings call. I would like to start off by thanking all of our investors and partners for showing such support for Mark during this time. His treatments are going well to date and he is in good spirits.

We appreciate him being in your thoughts and are looking forward to him returning to the team later this year. Turning to our first-quarter results, we are very pleased with the way our operations are progressing. Everything in the first-quarter went according to plan.

Our total equivalent volumes declined about 6% compared to the fourth-quarter 2018, and consistent with our forecast, crude oil declined a bit more.

If you go back to the end of 2018, we did not complete any wells during the last six weeks of the year, and as a result of that frack holiday, we did not turn on any wells until the end of March, which drove the production decline during the quarter as we expected and discussed previously.

As we said before, we anticipate a flattish second quarter with growth to resume in the second half of this year as our Broomfield and Greeley developments come online along with the associated infrastructure.

During the first quarter, we turned online seven wells in the North Hawkeye Area and subsequently began flowback on 12 additional wells in mid-April. This brings our total well count in North Hawkeye to 25 wells, and we continue to be encouraged by the results we see at both the Niobrara and Codell formations.

As we stand today, I am very excited about our company's future. Diligent planning and community collaboration has set us up to drill and complete some of the best wells in Extraction's inventory over the next few years.

We are very pleased with the legislative certainty that the recently passed Senate Bill 181 brings to Extraction and to the rest of the producers in the DJ Basin. And between Rocky Mountain Midstream, DCP, Western Gas and Rimrock, we have strong diversity in our gas processing portfolio with multiple sources of redundancy.

Turning to Senate Bill 181, this is a law that essentially requires operators to work with local governments and receive their approval first, which has been a standard practice for our company.

Extraction is known in Colorado for offering some of the most robust technologies and best management practices available, and we continue to engage in late-stage operator agreement negotiations with multiple local governments since the bill passed.

Most importantly, Colorado legislative leadership has said publicly that the intent of this bill is not to allow for local bands or long-term moratoriums. Instead, it gives local governments more authority to regulate citing and land use within their jurisdiction so long as it is done in a reasonable manner.

We have been particularly encouraged by the administration and legislative leadership's comments on their intent to bring business certainty back to Colorado through this reform and how they do not see a need for future statewide ballot initiatives.

Taking all this into consideration, we see very limited impact to our core DJ Basin drilling inventory or operations. In addition, we have more than 450 state permits approved, which represents almost four years of activity at our current pace.

In light of our robust permitted inventory in Broomfield, Greeley and Hawkeye, we decided to remove our Boulder County acreage from our core acreage and inventory counts. As it relates to our near-term inventory, our Broomfield development program progresses uninterrupted and remains on track for first production late in the third quarter this year.

I'd like to extend invitation for investors or analysts interested to come out here and we'll give you a tour of our Broomfield and Southwest Wattenberg operations, which are some of the best-planned development facilities you'll see anywhere. It's something you really have to see to appreciate and it's only about a half hour from the office.

Turning to our well performance. It's always been Extraction's philosophy to target areas with minimal vertical penetrations. If you turn to Page 10 in our investor presentation, you'll see a map that has our acreage position along with the many thousands of legacy vertical wells in the DJ Basin.

As you can see, our acreage has very few legacy vertical wells on it, especially compared to the other areas outside our acreage that have been drilled vertically with up to 32 wells per section.

Targeting this less-depleted rock enables us to drill significantly more productive wells in both the Niobrara and Codell formations compared to other horizontal wells drilled by offset operators in the same vicinity but on acreage previously tapped by more vertical wells.

This drives superior capital efficiency and is why we think Extraction acreage is some of the best in Colorado. Before I turn it over to Rusty to provide an update on our capital allocation strategy, I'd like to talk about the valuable midstream gas marketing portfolio that our teams have worked tirelessly to put together.

You can see an illustration of our midstream diversity on Page 11 of our investor presentation. You'll see here that the majority of our operating areas now have multiple outlets for gas processing. Most of the midstream difficulty in the DJ Basin has been related to operators relying entirely on a single midstream system.

We no longer have any area that is entirely reliant on a single gas processor.

If you look at Broomfield and Greeley, our two focus areas over the next two years, you'll see we have redundancy in Broomfield with both Western Gas and Rocky Mountain Midstream, while we have the ability to flow gas from our upcoming Greeley wells to either Rocky Mountain Midstream or DCP.

I'll now turn it over to Rusty Kelley, our CFO, to talk more about our capital allocation thoughts..

Thanks, Mark. I'd like to quickly touch on some financial highlights. Our liquidity and balance sheet remain strong. We exited the first quarter with approximately $1.2 billion borrowing base and $325 million drawn.

During our first quarter, we executed repurchases of approximately 8.9 million shares of our common stock for $37 million, which is an average price of $4.13 per share. This brings our total under the existing repurchase program to just over 30 million shares for about $63.2 million.

This represents a reduction in our share count by over 7% since we started the share buyback program in November of last year. We have another $100 million remaining on our share repurchase authorization, which expires at the end of 2019. We've also been active in repurchasing our senior notes.

Back in January, our Board authorized $100 million senior note repurchase program as well. To date, we've repurchased $46.8 million face value of senior notes for $36.9 million, representing a 21% discount to the face value.

We are targeting a balanced approach to this capital allocation between a measured pace of development, share repurchases and debt repurchases with the previously stated guideline of doing so while protecting our balance sheet and our liquidity.

We expect to stay somewhat flexible on these targets given the volatility of commodity, equity and debt markets over time. Now on to our nonstrategic asset divestiture program. We closed on the previously announced $22 million divestiture of about 5,000 net acres in March.

This more than offset our first-quarter land capex of about $19 million, and we're seeing interest pick up significantly since the passage of Senate Bill 181 as well. We expect to have more divestitures signed in the coming months now that we have SB-181 out of the way.

Both financially and operationally, Extraction remains on track, and we're very well positioned for the future. With that, I'd like to open it up for Q&A..

[Operator instructions] And our first question comes from Welles Fitzpatrick of SunTrust. Your line is now open..

Hey, and good afternoon. If we can, can we start on slide -- sorry, but the update on the Coyote Trails wells? It looks like they're doing, sorry, Slide 10, about 140 barrels in eight months. I mean it looks like those are in the top kind of 1% of the basin's horizontal wells.

Is there -- should we expect that kind of performance out of the 80-something wells that you're going to be putting on in Broomfield? Or as you move a little bit further south, does the rock change at all?.

Geologically, we look at kind of our Broomfield area as being very similar, north, south, east, west. The wells are doing very well. We're very pleased with the rates that we've continued to see out of these since we turned them online, especially given that they're drilled on a 10-well pad. There is a full 10 well pad.

We're hoping that the next wells perform very similar to this, but we're drilling them right now and we'll have those online in the third quarter..

Okay.

And I mean is it safe to say that at 140,000 barrels and I think those cost a little bit more than the foreign change because they're bigger fracks, but is it safe to say that those have paid out already?.

Remember, these are two-mile wells, so they're going to be more than the $4 million. But yes, they're -- they've generated quite a bit of revenue so far since we turned them online.

And in this area, we're going to be looking at, with the two-mile wells, around that $6 million price for the two-mile Niobraras and then about $0.5 million to $0.75 million less for the two-mile Codells..

Okay. That's perfect.

And then on the divestitures that you mentioned heating up a little bit, is the northern stuff still what we should kind of think of as the near-term divestiture candidates? Or is there anything else that might be getting a little bit more interest now that 181 is dead -- or 181 is passed, excuse me?.

Yes. I would say that we're getting interest right now kind of in the northern area, and that's probably the stuff that we're going to be looking at moving first.

But that doesn't mean that we won't do small deals still on our core area, like we did in the first quarter where we were able to piece off a small amount of our core inventory for a decent price.

So I think it's safe to say we've seen it -- seen the appetite for M&A pickup decently kind of north and south across the field since the passage of the bill..

And our next question comes from Brad Heffern of RBC Capital Markets. Your line is now open. .

Hey, afternoon, everyone. Best wishes to Mark if he's listening. You guys mentioned the 470 permits that you have in hand. I was just wondering if you thought that there's any risks to those permits and how long you have to use those..

We don't believe that there's really any risk to the permits that we have in hand right now. Most of that number, 470, that we referenced, they -- if they are in municipal areas, we already have municipal agreements with those localities, and then a good majority of the others are County permits that we already have full approval on.

And then as far as timing goes, right now, the state permits last for two years, so that would be kind of the time frame to get those drilling began or the wells spud..

Okay. Got it. And then you obviously give the commentary on the turn online timing for the first quarter.

Can you talk a little about how the rest of the year plays out it? Sounds like based on the commentary around 2Q production, it's going to be pretty back-end loaded, but can you confirm that?.

Yes. For the full number of wells we guided to turn online in the year, I'd say about -- I mean very little turned online in the first quarter at all. Like we mentioned, the only seven that did were at the very end of the quarter.

So we'll turn out about a third of the wells that we guided to for the year in the total first half, and then the remaining will be coming in the third and fourth quarters..

Okay.

And finally, the D&C capex number for the quarter was decently below a quarter of the annual, so is that just related to timing as well or is there a chance that you come in low?.

We have been seeing some cost reductions on some of our completions that we've done in the first quarter, so I would say that we're safe with the number that we guided to. But we do have more spending coming in the second and third quarters with that ramp that's associated.

So the second quarter, there'll be lots of completions going on that will be turning online in the third quarter, and then same with the third and fourth quarter. So we'll be more heavily weighted toward the second and third quarter for our total spend..

And our next question comes from Jeffrey Campbell of Tuohy Brothers. Your line is now open..

Since well outperformance allowed you to stay on track despite the inclement weather, is it possible that this outperformance could lead to at least the upper end of guidance if you get smooth sailing the rest of the year?.

I don't think we want to go as far to say that right now. We are pleased with the well performance and the fact that despite the bomb cyclone and other weather issues we had earlier in the year that we were still able to stay on track with our internal plan.

But like you said, we have been seeing pretty good well performance out of what we've turned online so far in Broomfield, and we do have a lot more Broomfield and Greeley wells coming on later this year..

Okay. Regarding the asset sales, you mentioned the northeast area up.

Are you intending to hold on to the Grover area for the time being? Or could that be one that could go for the right price?.

It's something that we intend to hold right now, but that's not to say that we're not always open to receiving offers. That is a piece of our acreage that we mentioned previously that's a large contiguous block that's mostly held by production, so it's something that we don't have a gun to our heads on having to monetize quickly.

So as offers start to come in on that acreage block, we'll evaluate those and then make the right decision at the time..

Okay. That's helpful. And then my last one is I realize SB-181 still won, so this might not be the best time to ask the question but let me just try anyway. I was just wondering -- and you mentioned that you are talking to locals, I just wondered if you noticed anything discernibly different in relations with local stakeholders since the passage..

As it relates to Extraction individually, we have continued our negotiations and our agreements with the local municipalities that we're still working with post the announcement of the bill and post the signing of the bill. So we're very confident that we're going to be able to continue those negotiations moving forward.

We haven't really seen any slowdowns in the ones that we had been actively working on. So we're very optimistic on being able to get those wrapped up in the next couple of quarters and then add some more locations to our inventory..

And our next question comes from Irene Haas with Imperial Capital. Your line is now open..

Yes. Hi.

I'm curious, any update on Adams County? How's the discussion going on there?.

So as it relates to Adams County, as you know, they have the moratorium in place, but a lot of the wells that we -- or permits that we had in Adams County were already preexisting, so those are still in hand. And in fact, some of those we had been drilling and completing in the first quarter and turning online.

So we have a decent amount of inventory there already that was premoratorium. But then the bulk of our inventory that we have in Adams County is actually not under the moratoriums because they're in local jurisdictions. So those would be some of the municipalities that we're working with right now on our local operator agreements..

And our next question comes from Paul Grigel of Macquarie. Your line is now open. .

Hi. Good afternoon, and best thoughts to Mark here.

Looking at the quality of crude comment that you guys made in the release, could you elaborate on that on some of the discounts and maybe what the average gravity of the crude you're producing is?.

Yes. So what we've been seeing is a little bit of a backup in Cushing, which has changed the normal differential that we've been seeing for DJ common crude. The areas that we're drilling right now, really the Greeley and the Broomfield areas, those are going to be slightly higher gravity.

So instead of the low to mid-40s, like our Hawkeye areas and our Windsor area and other places we've been producing in the past, those two areas are going to be in the upper 40s to very low 50s. So it will be a slightly higher differential overall, but remember, that also gets mixed in the pipeline with our lower crude.

So the differential we've seen we think is mostly due to just that backup in Cushing from the Permian crude moving that way. And we're already starting to see that discounted DJ common soften in the second half of the year as some of those pipelines are expected to start moving inventory out of Cushing back down to the coast..

Okay. No. That makes sense. And then I guess on the first-quarter wells kind of put -- turn to sales given some incompletions. Is that just pad timing that they didn't get turned on? Is there a system constraint? Just trying to understand maybe the difference in the large numbers there. .

No. That was all just pad timing. So we took that frack holiday kind of at the end of last year and we picked back up in January this year. And so those wells are the ones that came online right at the end of March, and they were quickly followed by another 12-well pad that we also mentioned that has come online in the first few weeks of April.

And we should have a steady amount of pads coming on each month from now to the rest of the year -- through the end of the year..

Okay. And then maybe just one last clarification item on the comment about 2Q production being flat relative to 1Q. Is there any -- is that, I guess, net of the bomb cyclone impact in March on the weather? Or is that kind of inclusive of that on an absolute basis? Just want to make sure I have that taken the right way..

Yes. We're expecting it to be kind of flattish to the numbers that we reported..

[Operator instructions] And our next question comes from Brian Downey of Citigroup. Your line is now open..

Just a quick one on the repurchase program.

The $100 million you have remaining on the stock repurchase authorization, are you counting or thinking about the $37 million you've used to repurchase senior notes as a deduct against that? Or are you thinking of those as completely separate buckets?.

This is Rusty. We're thinking of those as different buckets from an authorization perspective. As you've seen in our financials, we have an authorization for $100 million of note repurchase, of which the number I quoted earlier is out of that $100 million.

And the incremental $100 million that was announced just after quarter end, that is new and incremental to what's previously been purchased. So we have $100 million additional authorized.

And again, as mentioned before, we're going to be taking a balanced approach that protects the balance sheet and looks at our liquidity, make sure that we're doing it at a pace that protects liquidity, as well as using hedging, as well as other means to make sure that our debt to EBITDAX stays in a very comfortable range, as well as our liquidity is not degraded..

And our next question comes from Welles Fitzpatrick of SunTrust. Your line is now open..

Hey, guys. Thanks for letting me hop back in here. On -- first of all, looking forward to getting out and seeing the build-out on the midstream for Elevation in a couple of weeks.

Can you talk to exactly where you are in that process? I know you have about 75% of it laid, if I'm remembering correctly, but where you are on the CGF specifically? And then how far along on the drilling schedule in Broomfield you are? I believe those wells have spud..

Yes. Right now, you're correct, we have laid about 75% of the pipeline through Broomfield, and we expect to have that finished up in the next quarter to two at most.

And as far as the CGF itself goes, we've done all the dirt work there necessary and we've begun building the structures right now, and that's something that we anticipate to be done in the late -- or the beginning of the third quarter as well.

I know we're scheduling some field trips right now so I'd reach out to Louis, but we'll have some of those set up in the second half of this month. So if anybody would like to go, again, please reach out to Louis Baltimore, and we can get those signed up. And lastly, your question on the wells, we are drilling the first pad in there right now.

And we have drilled quite a few more wells off the Coyote pad, and that's all the production that will be completed in the -- starting in this quarter, the second quarter and then will be what's coming online first when the CGF and the pipelines are complete..

Okay.

And are you guys -- are you going to be running one rig and one spudder through year-end? Or is it just going to be the rig?.

We did have two rigs down there until the -- we had one Coyote and one on our first Broomfield pad. That one on Coyote did just move, but we will have pretty much one full time going through Broomfield for the remainder of the year. A second one may come in here or there, but for -- on average, about one..

Thank you. And that concludes our question and answer session for today. I'd like to turn the conference back over to Matt Owens for closing comments..

Thank you to everyone for joining our conference call today. We look forward to updating you on the exciting things we have going on in the upcoming quarters and first production from our Broomfield wells and our very high-quality wells in Greeley.

We also remain confident in our ability to navigate the changing regulatory environment and deliver on our stated plans. Thanks, again, and have a good afternoon..

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..