Synergy Resources Corporation (SYRG)

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Synergy Resources Corporation (SYRG)

Q3 2014 Results Earnings Conference Call

July 09, 2014, 12:00 PM ET

Executives

Ed Holloway - President and Co-CEO

Monty Jennings - CFO

William Scaff, Jr. - Co-CEO

Craig Rasmuson – COO

Jon Kruljac - VP, Capital Markets & IR

Analysts

Ryan Oatman - SunTrust Robinson

Irene Haas - Wunderlich Securities

Mike Scialla - Stifel

Welles Fitzpatrick - Johnson Rice

Kim Pacanovsky - Imperial Capital

Michael Kelly - Global Hunter

Joseph Reagor - Roth Capital Partners

Jeff Grampp - Northland Capital Markets

David Beard - Iberia

Joel Musante - Euro Pacific Capital

Steve Emerson - Emerson Investment Group

Richard Dearnley - Longport Partners

Presentation

Operator

Good morning, everyone, and thank you for joining us today to discuss Synergy Resources' Third Quarter Results for the period ended May 31st, 2014.

With us today are Synergy Resources' Co-CEOs, Ed Holloway and William Scaff; and CFO, Monty Jennings. COO, Craig Rasmuson will be available to answer questions during the Q&A 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 everybody that today's audio conference call will be available for replay through July 16th, 2014. The webcast replay will also be available via the company's website 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.

Ed Holloway

Thank you, Brenda, and thanks everyone for joining us today. We issued a press release this morning announcing our financial results for our fiscal third quarter ending May 31st.

Production rate in the third quarter of the fiscal year represented the impact of horizontal drilling for the company as we averaged over 4,100 BOEs per day during the quarter. This production led to a 108% increase in revenue to $25.7 million, compared to $12.3 million in the year ago period. Operating income grew by 131% to $11.3 million.

During the quarter, our oil and gas production increased 83% over last year, approximately 380,000 BOEs with a majority of that production coming from horizontal wells.

Encouraged by the results of our first 16 operated horizontal wells, we're increasing the pace of our development in the Wattenberg Field. We finalized an agreement with Ensign Drilling Company of North America to add a third rig to our fleet beginning in August.

The third rig will be an ADR rig powered by natural gas and will initially be contracted to drill eight wells on our Wiedeman pad, four of which will be 9,000-foot extended reach laterals.

In anticipation of adding a third rig to the program, we have increased our permitting activity and currently have 50 horizontal permits approved and another 104 permits in process.

Our enhanced drilling program is setting the stage for a rapid production growth coming online in fiscal fourth quarter ending August 31st and into fiscal 2015.

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

Monty Jennings

Thanks, Ed, and good day to everyone.

Now, turning to our income statement, our revenues totaled $25.7 million in the third fiscal quarter of 2014. The year-over-year improvement was due to the 83% increase in production. The increase in production was accompanied by a 14% increase in our realized average selling price per BOE.

During fiscal Q3 2014, our average sales prices were $90.91 per barrel of oil and $5.15 per Mcf of gas, as compared to $83.98 per barrel of oil and $4.76 per Mcf of gas for the year ago quarter. Overall, the average price per BOE increased to $67.72.

Negative pricing pressure diminished in the Wattenberg Field since last winter when there was a spike in quoted oil price differentials. Quoted differentials have subsided somewhat from the peak but are still higher than a year ago quotes.

Our current oil differential is $10.53 per barrel, an increase of $1.24 from the $9.29 received one year ago.

Our operating income increased to $11.3 million from $4.9 million in the third quarter of last year. Net income increased 98% from the year ago quarter. It totaled $7.2 million or $0.09 per diluted share versus $3.6 million or $0.06 per share a year ago.

Adjusted EBITDA, a non-GAAP measure, increased to $18.9 million in the third quarter, which represents 74% of revenue and is a 103% increase from the $9.3 million a year ago.

Please refer to our more detailed discussion about the 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 continue our efforts to maintain low overhead structure. And on a BOE basis, we're able to reduce G&A costs by $2.18 per BOE.

Now, briefly turning to the balance sheet. As of May 31, 2014, we had cash and equivalents totaling $48 million, as compared to $79.5 million at August 31, 2013, our fiscal year end.

As a result of the redetermination based upon the most recent reserve report, the borrowing base increased to $110 million. With $37 million outstanding on the credit facility with Community Banks of Colorado as of May 31st, the available liquidity is $73 million. The current interest rate is 2.5%.

We increased our commodity derivative activity during the quarter to mitigate short-term price fluctuations in the price of oil and natural gas. Using swaps and collars, we have hedged oil and gas quantities, covering a portion of our production through May 2016. We have not hedged any of our NGL production.

For oil, our average floor prices range from $75 to $87 per barrel. And our average ceiling prices range from $92 to $99 per barrel. For gas, the average floor prices approximate $4.10 and the average ceiling prices approximate $4.51.

During the quarter, posted prices were higher than our hedge position and produced a realized loss of $800,000 and an unrealized loss of $200,000.

Now, I'd like to turn the call over to Bill Scaff, our Co-CEO, who will provide details of our fiscal 2014 drilling program and the operational aspects of our business. Bill?

William Scaff, Jr.

Thanks, Monty, great numbers.

Our two rig horizontal program hit full stride at the end of our fiscal third quarter with five wells on our Phelps pad coming into production in May. The Phelps wells continue to outperform the Renfroe wells during their second month in production.

Subsequent to the quarter end, the six wells on the Union pad began producing in mid-June. With this new production coming online, we exited the last seven days of June with production of approximately 6,500 BOEs per day.

We have finished drilling four wells on the Kelly Farms pad and six wells on the Eberle pad with the rigs scheduled to move to the Kiehn pad and the Weld 152 pad per our operations update press release we issued two weeks ago.

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