Quarterly / Earnings Reports | Third Quarter (3Q) Update | Capital Markets | Capex Decrease | Capital Expenditure - 2019 | Capital Expenditure - 2020 | 2020 Guidance

Extraction Cuts 2019 Capex 15%; IDs 2020 Plans, Q3 Results

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Extraction Oil & Gas, Inc. reported its Q3 2019 results and preliminary 2020 outlook.

Preliminary 2020 Guidance Highlights

- $510 - $580 million capital budget, including $450 - $500 million for D&C

• D&C capex is down 11% from 2019 at the midpoint

- Expected to drive total equivalent production of 92 - 97 MBoe/d, including 41 - 43 MBbl/d of crude oil production

- Expected to deliver approximately $50 million of free cash flow³, assuming $55 WTI crude oil and $2.75 NYMEX natural gas prices

2019 Guidance Revision Highlights

• Reduced the midpoint of drilling and completion capital expenditure estimate by 15% to $520 - $550 million, down from $585 - $675 million
• Full year total equivalent production now expected to be 84 - 88 MBoe/d, including 41 - 43 MBbl/d of crude oil production

Third-Quarter 2019 Highlights

• Average net sales volumes of 80,327 barrels of oil equivalent per day (Boe/d), including 39,098 barrels per day (Bbl/d) of crude oil
• Net income of $48 million, or $0.28 per basic and diluted share, driven by a gain on commodity derivatives of $88 million. This compared to net income of $65 million, or $0.33 per basic and diluted share¹, for the same period in 2018. Adjusted EBITDAX, Unhedged² was $143 million and Adjusted EBITDAX² was $158 million
• Expects to generate free cash flow³ of $100 - $120 million during the fourth quarter
• Entered into a large-scale operator agreement with Commerce City covering over an expected 150 wells in our Hawkeye Area

Extraction's President and Acting CEO Matt Owens said: "While our third-quarter production was negatively impacted by approximately 8,000 Boe/d due to a prolonged unplanned midstream outage in our Southwest Wattenberg area, we are pleased to announce that our midstream diversification efforts are all operational, and we are no longer constrained by the midstream bottlenecks we have experienced over the past few years.

"We are now moving gas from East Greeley down Rocky Mountain Midstream's gathering line, select volumes from our Windsor area to RimRock's Pierce plant, and volumes from Broomfield to Elevation Midstream's Badger central gathering facility. Going forward, we expect our midstream diversification and redundancy to enable more reliable and consistent production while improving our capital efficiency."

Operational Results

Third quarter crude oil volumes of 39,098 Bbl/d were roughly flat year-over-year and decreased 2.5% sequentially. Third quarter average net sales volumes were 80,327 BOE/d, an increase of 6.1% year-over-year and a decrease of 3.1% sequentially. Crude oil accounted for approximately 87% of the Company's total revenues recorded during the third quarter.

Extraction's third-quarter 2019 aggregate drilling, completion, and leasehold capital expenditures totaled $135 million, of which $122 million was for D&C. This excludes the impact of a decrease in outstanding elections of $4 million. In addition, Elevation Midstream, our wholly owned midstream subsidiary, incurred $65 million of capital expenditures during the quarter.

During the third quarter, Extraction drilled 27 gross (20 net) wells with an average lateral length of approximately 10,900 feet, completed 37 gross (31 net) wells with an average lateral length of approximately 8,900 feet and turned to sales 22 gross (18 net) wells with an average lateral length of approximately 9,500 feet.

Updated 2019 Capital Program

Driven primarily by well design optimization efforts, Extraction now forecasts 2019 drilling and completion capital expenditures to be $520 - $550 million, which represents a reduction of 15% versus the midpoint of the original capital expenditure guidance.

As a result of production associated with asset sales that occurred during the first and third quarters of 2019 and a significant unplanned midstream outage during the third quarter, Extraction now expects its full-year 2019 total equivalent production to be 84.0 - 88.0 MBoe/d with 41.0 - 43.0 MBbl/d of crude oil production. Extraction estimates the impact of these asset sales to 2019 production to be approximately 2,000 Boe/d and 1,000 Bbl/d of crude oil production. This represents a reduction of five percent compared to the Company's original 2019 production guidance, and a reduction of three percent when adjusted for asset sales to date.

2019 Guidance for production, capital expenditures and operating expenses are now estimated to be:

Preliminary 2020 Capital Program

Extraction's preliminary 2020 capital program is focused on generating free cash flow with an emphasis on strengthening its liquidity and balance sheet as the Company works to pay down debt while maintaining operational momentum.

Preliminary 2020 Guidance for production, capital expenditures and operating expenses are estimated to be:

⁽¹⁾Net of assumed divestitures of $10-$20 million

Update on Asset Sale Program

During the third quarter, Extraction completed the sale of its working interest in non-operated wellbores for $22 million. In total, the production impact to 2019 from asset sales is approximately 1,000 Boe/d and 2,000 Boe/d. During 2019, Extraction has closed on sales of approximately $46 million of non-strategic assets, which has slightly exceeded the approximately $44 million of leasehold expenditures year-to-date.

Financial Results

For the third quarter, Extraction reported crude oil, natural gas and NGL sales revenue of $197 million, as compared to $282 million during the same period in 2018, representing a decrease of 30%, driven primarily by lower crude oil, natural gas and NGL prices. Revenue was approximately flat sequentially, primarily driven by similar levels of production.

Extraction saw modest improvements in its crude oil differential during the third quarter as new pipelines from the Permian Basin to the Gulf Coast were brought online and started to alleviate the congestion of light crude oil in Cushing.

Extraction reported net income of $48 million, or $0.28 per basic and diluted share for the third quarter, driven primarily by a $88 million gain on commodity derivatives. This compared to a net income of $65 million for the same period in 2018. Adjusted EBITDAX, Unhedged was $143 million for the third quarter, down 33% year-over-year and down 7% sequentially. Adjusted EBITDAX was $158 million for the third quarter, down 7% year-over-year and up 22% sequentially. Please read "Non-GAAP Financial Measures", included herein.

Debt and Liquidity

During the fourth quarter, Extraction expects to generate $100 - $120 million of free cash flow, which it intends to use for liquidity enhancement and debt reduction. The Company expects to exit 2019 with less than 50 percent drawn on its revolving credit facility.

Extraction ended the third quarter with $58 million of cash on its balance sheet and $550 million drawn on its revolving credit facility. On November 4, 2019, Extraction's borrowing base under its revolving credit facility was lowered to $950 million from $1.1 billion driven primarily by lower NGL prices. Pro forma for the lower borrowing base and after giving effect to letters of credit, Extraction ended the third quarter with approximately $358 million of available liquidity.

The following table provides a summary of our sales volumes, average sales prices and certain operating expenses on a per BOE basis for the three and nine months ended September 30, 2019 and 2018, respectively:

(1) One BOE is equal to six thousand cubic feet ("Mcf") of natural gas or one barrel ("Bbl") of oil or NGL based on an approximate energy equivalency. This is an energy content correlation and does not reflect a value or price relationship between the commodities.
(2) Average prices shown in the table reflect prices both before and after the effects of our settlements of our commodity derivative contracts. Our calculation of such effects includes both gains and losses on settlements for commodity derivatives and amortization of premiums paid or received on options that settled during the period.
(3) Excludes amounts allocated to a satisfied performance obligation, recognized within oil sales for the three and nine months ended September 30, 2019, pursuant to ASC 606, Revenue Recognition.
(4) Cash general and administrative expenses for the three and nine months ended September 30, 2019 includes expense of $1.9 million related to the terms of a separation agreement with a former executive officer. Excluding this one-time expense results in cash general and administrative expense per BOE of $1.92 and $2.01 for the three and nine months ended September 30, 2019, respectively.