Synergy Resources Corporation (SYRG)

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Synergy Resources Corp (SYRG)

F2Q2014 Earnings Conference Call

April 04, 2014 12:00 PM ET

Executives

Ed Holloway - President and Co-CEO

William Scaff - Co-CEO

Monty Jennings - CFO

Craig Rasmuson - COO

Analyst

Mike Scialla - Stifel

Kim Pacanovsky - Imperial Capital

Ryan Oatman - SunTrust Robinson

Michael Kelly - Global Hunter

John Malone - Mizuho

Welles Fitzpatrick - Johnson Rice

Irene Haas - Wunderlich Securities

Joseph Reagor - Roth Capital Partners

Jeff Grampp - Northland Capital Markets

David Beard - Iberia

Richard Dearnley - Longport Partners

Presentation

Operator

Good morning everyone and thank you for joining us to discuss Synergy Resources' Second Quarter Results for the period ended February 28, 2014.

With us today are Synergy Resources' Co-CEOs Ed Holloway and William Scaff Jr.; and CFO, Monty Jennings. COO, Craig Rasmuson will be available to answer questions during the question-and-answer session. Following the prepared remarks, we'll open the call to your questions.

Then before the conclusion of today's call, I'll provide the necessary precautions regarding forward-looking statements made by management during this call. I would like to remind everyone that today's audio conference call will be available for replay through April 11, 2014. The webcast replay will also be available via the company's web site at www.syrginfo.com.

I would now like to turn the call over to Co- CEO of Synergy Resources, Mr. Ed Holloway. Sir, please proceed.

Edward Holloway

Thank you Shae and thanks to everyone for joining us today. We issued a press release this morning, announcing our financial results for our fiscal 2014 second quarter ending February 28, 2014. The second quarter of the fiscal year represents another significant milestone for the company as we have reached 3917 BOEs per day during the quarter. This level of production is nearly double the rate we sustained during fiscal ’13 and demonstrates accelerated pace of growth from horizontal drilling. This level of production was achieved in spite of the significant challenges posed by severe weather, third party drilling contractor problems and continued mid-stream constraints experienced in the quarter.

This record production led to an increase in revenue to $23 million compared to $10.9 million in the year ago period. Our operating income grew to $9.5 million in the second quarter of ’14 versus $4.5 million for the second quarter of ‘13. During the quarter, our oil and gas production increased 90% over last year, to over 352,000 BOEs. We also achieved a 22% production growth in the second quarter over the first quarter even though the six horizontal wells we completed on Leffler pad did not come online until the lateral part of the quarter.

Encouraged by the early results and execution of our operated horizontal drilling program in January, we added a second rig to increase the pace of our leasehold development and growth. We are completing the six wells on our Phelps pad which will average over 25 stage fracs per well that will cost significantly less than our original budget of 4.5 million per well previously estimated for standard leak horizontal wells with a 16 stage frac.

This further demonstrates the increased efficiencies of our horizontal operations. I would like to point out that approximately half of our current production comes from horizontal wells and in the few short months that we have focused on developing horizontal wells we have equaled the production from the vertical wells drilled and acquired over five year period. Now our two rig program is setting the stage for a continued rapid production growth coming online in our fiscal fourth quarter ending August 31, 2014.

I would like now to turn over the call to CFO Monty Jennings to take us through the details of the financial results for the second quarter of our fiscal year. Thank you, Monty.

Monty Jennings

Thank you, Ed, and good day to everyone. Now, turning to our income statement; our revenues totaled $23 million in the second fiscal quarter of 2014. This represented an increase of 111% from the same quarter one year ago. The year-over-year improvement was due to the 90% increase in production.

The increase in production was enhanced by an 11% increase in our realized average selling price per barrel of oil equivalent. During fiscal Q2 of 2014, our average sales prices were $86.82 per barrel of oil and $5.93 per MCF of gas, as compared to $84.20 per barrel of oil, and $4.77 per MCF of gas for the year ago quarter.

Our operating income increased to $9.5 million, an increase of 111% from the second quarter of last year. Net income increased 89% from the year ago quarter, totaling $5.2 million or $0.07 per diluted share, versus $0.05 per share a year ago. Net income was reduced by an unrealized derivative loss from hedging activities of $1.8 million. Unrealized losses are a non-cash item. In this case the unrealized loss was equivalent to $0.02 per diluted share. Adjusted EBITDA, a non-GAAP term, increased to $17.5 million in the second quarter, which represents 76% of revenue, and is a 122% increase from the $7.9 million a year ago. Please refer to a more detailed discussion about our use of adjusted EBITDA, and its reconciliation to GAAP in the earnings release, which can be found in the news section of our website.

We were able to improve our margins even though certain cost increased during the period. Lease operating cost increased to $5.13 per barrel of oil equivalent from $4.19 per BOE, reflecting the impact of horizontal production, integration of acquired properties and increased environmental compliance costs. Especially during the early stages of production the operating cost for horizontal wells are greater than vertical wells. During the quarter, we integrated the newly acquired properties and incurred some integration costs. Notably, the disposal well has a slightly different cost profile than the other wells and it added about $0.50 per BOE to our average lease operating costs.

Finally, we are incurring additional compliance cost as we work diligently to meet the rigorous Colorado environmental standards. We also saw an increase in the DD&A rate, which increased $22.90 from $17.07 per BOE. The higher rate reflects the higher cost of horizontal development and the impact of our two acquisitions. The producing properties that we acquired have a higher cost per BOE than the wells that were developed internally. Although some cost increased, I would like to point out that we were able to reduce our G&A costs to $5.02 per BOE compared to $7.46. We continue to focus on maintaining overhead costs and being an efficient and low cost operator.

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