EPG Commentary by Dan Steffens

Transcription

1 Management Jonny Jones, Chairman and CEO Mike McConnell, President Robert Brooks, EVP and CFO Eric Niccum, EVP and COO Jeff Tanner, EVP- Geosciences EPG Commentary by Dan Steffens Jones Energy, Inc. (JONE) has been added back to our Small-Cap Growth Portfolio because they have resumed their drilling program. They should have three rigs running in Oklahoma by the end of June. Thanks to the best hedge position I ve seen, the company should generate free cash flow this year, pay down debt and resume production growth by the 4 th quarter. JONE has over 90% of their 2016 oil production hedged at more than $93.00/bbl. The company s hedge book allowed them to generate strong cash flow from operations and pick up additional working interest in their Cleveland area. They recently started buying back their long-term debt at deep discounts to face value and their balance sheet is now in good shape. Jones Energy was well positioned to survive the oil price cycle, so they can resume growth in Q Goals:

2 Jones Energy was well positioned to take advantage of the low oil price environment. With over 90% of their 2016 oil and gas production hedged at very good prices, the economics on their Oklahoma wells is quite attractive. They have picked up additional working interests since our last profile as many of their non-operating partners, who did not hedge their share of production, elected to go non-consent on the company s aggressive 2015 drilling program. Based on my forecast model attached below, JONE should generate approximately $2.00 operating cash flow per share in As of the date of this report, JONE is trading for less than 2.5X CFPS. My Fair Value Estimate for JONE is $7.80/share Compared to First Call s Price Target of $5.75/share Disclosure: I do not have a position in JONE and I do not intend on buying or selling it in the next 72 hours. I wrote this profile myself, and it expresses my own opinions. I am not receiving compensation for it from the company. I have no business relationship with any company whose stock is mentioned in this article.

3 Company Overview Jones Energy, Inc. (JONE) is an independent oil and natural gas company engaged in the exploration, development, production and acquisition of oil and natural gas properties in the Anadarko and Arkoma basins of Texas and Oklahoma. The Company has accumulated extensive knowledge and experience in developing their Anadarko and Arkoma basin assets, having concentrated their operations in the Anadarko basin for over 25 years and applied their knowledge to the Arkoma basin since Jones Energy s Chairman and CEO, Jonny Jones, founded its predecessor company in The Company is headquartered in Austin, Texas. Jones Energy, Inc. was formed in March 2013 as a Delaware corporation to become a publicly-traded entity and the holding company of Jones Energy Holdings, LLC (JEH). As the sole managing member of JEH, the Company is responsible for all operational, management and administrative decisions relating to JEH's business and consolidates the financial results of JEH and its subsidiaries. Business Strategy Jones Energy s goal is to increase shareholder value by managing their capital expenditures and level of activity to maximize well level returns in the current commodity environment while also evaluating and executing opportunities for growth of reserves, production, and cash flow through potential partnerships, acquisitions, and leasing opportunities. The Company seeks to achieve this goal by executing the following strategies: Developing Their Multi-Year Inventory The Company intends to add production and reserves through the development of their existing drilling inventory, which they believe to be repeatable and low-risk. The Company has a long history in the Midcontinent, having drilled over 775 wells in the area since They believe their historical drilling experience, together with the results of substantial industry activity within their operating areas, reduces the risk and uncertainty associated with drilling horizontal wells in these areas. Maintain the Lowest Cost Structure in the Plays Where They Operate Decades of experience in the Midcontinent and emphasis on operational execution and cost control have allowed Jones to drill and complete wells at significantly lower cost than most other operators and, as a result, to realize compelling economic returns. The Company will continue to apply their expertise while also leveraging their leading position in their focus areas to obtain the best possible pricing from service providers which they expect will further reduce capital costs and ultimately enhance returns. The Company s cost structure is particularly important in periods of low commodity prices and gives them an advantage over other operators as they compete for acquisitions and strategic partnerships. Opportunistically Grow through Exploration, Acquisitions and Strategic Partnerships As a complement to their development program, the Company looks to execute acquisitions, leases and partnerships where their operating experience can be leveraged. Given the Company's ability to decrease costs and ramp up drilling activity, they seek opportunities that have less PDP reserves and a large number of high-quality drilling locations.

4 Exploit Upside Within Their Existing Assets Jones plans to continue exploiting their proved reserves to maximize production through optimized drilling and completion techniques. Furthermore, the stacked reservoirs within their asset base provide exposure to additional upside potential in several emerging resource plays. They have begun assessing the potential of the Tonkawa and Marmaton formations in the Anadarko Basin. The Company expects to engage in additional development activity within these plays as commodity prices improve. Their current leasehold position provides longer term potential exposure to other prospective formations found in the Anadarko basin, including the Douglas, Cottage Grove, Cherokee Shale, Atoka Shale, and the Upper, Middle and Lower Morrow formations. They continue to apply their proven geoscience expertise in the search for new exploration opportunities in the greater Midcontinent region. Maintain Operational Control Jones operated substantially all of the wells that they drilled and completed during 2014 and 2015, allowing them to effectively manage the timing and levels of their development spending, overall well costs and operating expenses. In addition, the Company expects to operate the drilling and completion phase on approximately 67% of their 2,765 gross identified drilling locations. With over 80% of their acreage held by existing production, they also will not be required to expend significant capital to hold acreage in their portfolio. They believe that continuing to exercise a high degree of control over their acreage position will provide them with flexibility to manage their drilling program and optimize their returns and profitability. Focus on Well-Level Returns The Company s management and technical teams are focused on maximizing well-level returns, which they believe drives shareholder value. In addition to their focus on costs and optimizing drilling and completion techniques, their team maximizes returns by allocating capital to areas with the highest rates of return based on commodity mix. The Company s drilling inventory comprises oil, natural gas and NGLs, which enables them to adjust their development approach based on prevailing commodity prices. Despite recent declines in commodity prices, they currently intend to capitalize on the relatively more favorable oil pricing environment as compared to natural gas and NGLs by continuing to drill acreage with significant oil components. In addition, they expect that continuing to operate the substantial majority of their drilling locations will allow them to reallocate their capital and resources opportunistically in response to market conditions. The Company s disciplined focus on well-level returns in allocating their capital and resources has been a key component of their ability to deliver successful results through various commodity price cycles. First Quarter 2016 Highlights Average daily net production for the first quarter 2016 of 20,374 Boe/d, with oil production of 5,264 Bbl/d, both above the top end of guidance EBITDAX for the first quarter 2016 of $51.1 million and net income of $18.9 million Adjusted net loss for the first quarter 2016 of $3.5 million, or ($0.03) per share Repurchased an additional $20.3 million in face value of senior notes for $11.2 million (55% of par), resulting in total repurchases year-to-date of $190.9 million in face value of senior notes for $84.8 million(44% of par)

5 Year-to-date debt repurchases expected to result in approximately $13 million in annual interest savings and approximately $90 million in interest savings over the life of the bonds Resuming Cleveland drilling program with $2.03 million AFE; expect to have 3 rigs running in June 2016 Updating 2016 production and capex guidance; expect to spend $100 million in capex for 16.8 to 18.7 MBoe/d in production, resulting in an approximately 10% increase in 2016 production guidance Locked in $47 million in gains associated with 2018 and 2019 hedges and added hedges as a result of the drilling program resumption; mark-to-market hedge value of $173 million incorporating strip pricing as of April 29, 2016 First Quarter 2016 Financial Results Total operating revenues for the three months ended March 31, 2016 were $25.9 million as compared to $58.1 million for the three months ended March 31, Total revenues including current period settlements of matured derivative contracts were $68.5 million for the three months ended March 31, 2016 as compared to $94.5 million for the three months ended March 31, The decrease was due to lower commodity prices and production, partially offset by higher current period settlements of matured derivative contracts. Total operating expenses for the three months ended March 31, 2016 were $59.9 million as compared to $79.9 million for the three months ended March 31, Total operating expenses decreased primarily due to lower depreciation, depletion, and amortization expense, lease operating expense, and production and ad valorem tax expense. In addition, the Company had $3.0 million in standby rig costs included in other operating expenses in the first quarter of 2015 that did not recur in the first quarter of For the three months ended March 31, 2016, the Company reported an adjusted net loss of $3.5 million as compared to adjusted net income of $3.0 million for the three months ended March 31, The decrease was primarily due to lower commodity prices and lower production, which was partially offset by a decrease in operating expenses. Capital Expenditures For the full year 2015, the Company spent $200.1 million on capital expenditures, of which $173.2 million was related to drilling and completing operated wells, representing 87% of the total capital expenditures in the year. This compares to revised 2015 capital expenditure guidance of $210 million. The Company s initial capital budget for 2016 was $25 million, the majority of which was dedicated to capital workovers and field optimization activities. During the first quarter of 2016, the Company spent $6.0 million on capital expenditures.

6 On May 4, 2016 the Company announced they were going to resume their drilling program and they increased their capital program to $100 million. Our decision to put rigs back to work in the Cleveland is supported by compelling after-tax returns, which have resulted from our increased type curve, the additional cost savings our team has achieved, and higher commodity prices. Managing our balance sheet is paramount, and we expect our credit metrics to improve with our resumption of drilling and the additional debt buybacks we were able to complete. We expect to generate positive free cash flow in 2016 under our updated capital and operating plan. In addition, our resumed drilling program is expected to reverse production declines in 2016 and puts the Company in a position to deliver production growth in We deployed our first Cleveland rig at the beginning of April and expect to have a total of three Cleveland rigs in the field in June. Jonny Jones, CEO

7 Liquidity In April 2016, through several open market purchases, the Company repurchased an aggregate principal amount of $20.3 million of its 6.75% senior unsecured notes due 2022 for $11.2 million, or 55% of par, excluding accrued interest and including any associated fees. Year-to-date, the Company has repurchased $90.9 million principal amount of its 6.75% senior unsecured notes due 2022 for $38.3 million, and $100.0 million principal amount of its 9.25% senior unsecured notes due 2023 for $46.5 million, in each case excluding accrued interest and including any associated fees. The Company used cash on hand and borrowings from its revolver to fund the note repurchases completed this year. As a result of these repurchases, as of April 29, 2016, the Company had aggregate principal amount of senior unsecured notes outstanding of $559.1 million, outstanding borrowings under its revolving credit facility of $185.0 million, $325.0 million undrawn on its revolving credit facility, and approximately$34.3 million in cash. The Company is still in the process of completing the spring redetermination of its senior secured credit facility and expects the resulting borrowing base to be approximately $400 million.

8 Hedging In March 2016, the Company entered into offsetting hedge transactions in respect of all of its 2018 and 2019 hedges, which resulted in a locked-in gain of $47 million. In addition, with the resumption of a Cleveland drilling program, the Company has begun adding hedges in 2016 and The estimated mark-to-market value of the Company s commodity price hedges was $173 million incorporating strip pricing as of April 29, The following table summarizes the Company s commodity derivative contracts outstanding:

9 Second Quarter and Full Year 2016 Guidance The Company has updated its 2016 capital budget and now expects to spend $100 million in 2016, resulting in projected average production of between 16.8 MBoe/d and 18.7 MBoe/d. Their updated capital plan incorporates current Cleveland AFE of $2.03 million and a plan to spud at least 40 gross wells in 2016 with an average working interest of approximately 80%. This updated plan is expected to result in the decline rate of the Company s average production for 4Q16 compared to 4Q15 being cut in half because the previous plan did not incorporate a drilling program. Please review the table below for full-year and second quarter 2016 production guidance by category: Area of Operations Andardako and Arkoma Basins The Anadarko and Arkoma basins are among the most prolific and largest onshore producing oil and natural gas basins in the United States, enjoying multiple producing horizons and extensive well control demonstrated over seven decades of development. The Company targets formations that are generally characterized by oil and liquids

10 rich natural gas content, extensive production histories, long lived reserves, high drilling success rates and attractive initial production rates, like these two basins. JONE focuses on formations in their operating areas that they believe offer significant development and acquisition opportunities and to which they can apply their technical experience and operational excellence to increase proved reserves and production to deliver attractive economic rates of return. The Company s goal is to build value through a disciplined balance between developing their current inventory of 2,371 gross identified drilling locations and other opportunities within their existing asset base. The Company is actively pursuing joint venture agreements, farm out agreements, joint operating agreements and similar partnering agreements, which they refer to as joint development agreements, organic leasing and strategic acquisitions. In all of the Company s joint development agreements, they control the drilling and completion of a well, which is the phase during which they can leverage their operational expertise and cost discipline. Following completion, JONE in some cases may turn over operatorship to a partner during the production phase of a well. Jones Energy believes the ceding to them of drilling and completion operatorship in their areas of operation by several large oil and gas companies, including ExxonMobil and BP, reflects their acknowledgement of Jones Energy s low cost, safe and efficient operations.

11 Cleveland Formation The Company increased activity from a four rig program to a five rig program in early July, Following the drop in oil prices during the month of August, the fourth and fifth rig were released in early September and activity was reduced to the previous three rig program. For the full year 2015, the Company spud 51 wells, completed 70 wells and brought on first production from 77 wells, all in the Cleveland. Full year 2015 production in the Cleveland was 18.4 MBoe/d for 2015, an 8% increase from 2014 full year production of 17.0 MBoe/d. The Company paused its drilling program in the fall of 2015 and did not spud any wells in the first quarter of JONE resumed drilling with one Cleveland rig in April 2016 and plans to have three Cleveland rigs running in June Daily net production in the Cleveland was 14.9 MBoe/d in the first quarter of 2016 as compared to 17.7 MBoe/d in the fourth quarter of 2015 and 19.0 MBoe/d in the first quarter of 2015.

12 Cleveland is competitive at today s low oil prices

13 Net Income and Cash Flow Forecast Model Publishing, LLC) and is intended for informational purposes only. Readers are encouraged to do their own research and due diligence before making any investment decisions. The publishers will not be held liable for any actions taken by the reader. Although the information in the newsletters and company profiles has been obtained from resources that the publishers believe to reliable, DMS Publishing, LLC dba Energy Prospectus Group does not guarantee its