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GreenHunter Resources, Inc. (NYSEMKT: GRH ) Q1 2015 Earnings Conference Call May 15, 2015 09:00 ET Executives Kirk Trosclair – Executive Vice President and Chief Operating Officer Gary Evans – Chairman and Interim Chief Executive Officer Analysts Brian Butler – Stifel Operator Good morning. My name is Mariama and I will be your conference operator today. At this time, I would like to welcome everyone to the GreenHunter Resources First Quarter 2015 Financial and Operating Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Executive Vice President and Chief Operating Officer, Mr. Trosclair, you may begin your conference. Kirk Trosclair Thank you, operator. Welcome everyone to today’s first quarter financial and operating results conference call. Before we start today, I will go ahead and read the Safe Harbor statement before we get started. Today is Friday, May 15, 2015. And before we begin with the content of today’s call, I would like to advise you that today’s call may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The following discussion provides information, which management believes is relevant to an assessment and understanding of our financial condition and results of operations. The discussion contains forward-looking statements that involve risk and uncertainties and may include statements regarding our expectations, beliefs, intentions, or strategies regarding the future. Actual events or results may differ materially from those indicated in such forward-looking statements. This discussion should be understood in conjunction with the financial statements accompanying notes and risk factors included in our SEC filings. The discussion should not be construed to imply that results contained herein will necessarily continue into the future or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management. Actual events or results may differ materially from those indicated in such forward-looking statements. This disclaimer is an effect for the duration of this conference call. Okay. We will get started here on the first quarter financial and operational highlights. We know it’s only been pretty much exactly 30 days since we have had our 10-K operations update call, but we have had some changes and want to give you an update on all of different projects with the use of proceeds in the capital that we are putting to work from our funding process, which happened in April 15, which we haven’t announced to you guys on the call in the K. So, we will go back through the first quarter here just some of the highlights that we hit in the first quarter and substantially improved our operating margins related to water disposal itself year-on-year from 32% in the first quarter of 2014 to 42% in the first quarter of 2015. Also improved the operating margins as it related to internal trucking, you can see how those went from 12% last year up into the 20s of this year. We mentioned this on the 10-K call as well that’s mostly due to eliminating significant portion of the third-party trucking that we were utilizing inside of our own group and dispatching those trucks in handling the billing for those third-party companies. We have pretty much stopped that and using our internal trucks first and foremost, when you can see what happens with the results when we do that having much more control over that fleet. We also decreased our SG&A from $2.1 million, down to $1.7 million in the first quarter, which is equated to a decrease of 19%. And then also we had mentioned to you guys that we had our first deployment of our rented MAG Tank, which we sent out in late February and so that was – that was really good news in the first quarter. On March 16, we closed our sale of the last remaining renewable asset in the Mesquite Lake project biomass plant for $2 million. And then we also in the first quarter we finished paying off the 2.2 promissory note that with the financing in place for the initial purchase of the first three disposal wells in Appalachia. So, we retired that debt setting us 66,000 or so a month in principal and interest. And then as you all know where at the same time, we have the call on April 15, we announced the new money, the $16 million financing for the capital projects, which we will go into more detail about the actual percentage of completion and where we are at with those projects right now. The operational numbers on the results of the first three months, you can see where the loss from continuing operations was $1.4 million in 2015 and $1.3 million, that’s pretty flat in that area. The revenues were down basically this quarter $5.1 million to $8.5 million. And I will go through the reasons why on that in a second. The majority of that was due to our increased margins in third party trucking, I mean internal trucking by not having that third party expense out there. And then you also were made aware of in our K from the call that we still had a couple of wells that were running at 50% capacity and one of the wells that was down in the first quarter. So and then we also had a – from year-on-year we had a MAG Tank sale in the first quarter of 2014 that we did not have a sale in the first quarter of 2015. So that’s the majority of the difference in your revenues. So we also provided you guys in there a pro forma on the selected balance sheet. If you had a chance to review the press release this morning and in the filings, you will see that we placed the pro forma to show you how much we have improved the balance sheet with the funding that we have in place. And I will go into some more details how that use of proceeds is being put to work currently right now. So I think what we will do is just go straight into that and give you an update on all the projects. And since it’s been a short time and really after I give you this update we will probably just go ahead and open it up for questions. And I had failed to mention earlier that Gary is on the line as well with me. And we can answer those questions for you as soon as I go through the update on the projects itself. So I guess the biggest improvements that we have had is obviously been done in the Mills – at the Mills facility, that is our largest project, our hub. And we have – I will give you basically some updates on each individual step of what’s been taking place since we started putting the capital to work. But before I do that, I guess I want to give you guys an update. We announced the funding on April 15 and there was a good process for us here at GreenHunter Resources, it really made us dot our eyes and cross our tees and get everything cleaned up in the back office. You know that when you do a senior secured funding like that you really have to have everything in order and it really it was a good process for us. And it will help out here going forward. We were delayed a little bit in funding because of some of that and had to jump through hoops to get all this type of back end paperwork and recording of some leases that were not recorded and things like that. But we have gotten that cleaned up and we have been funded as of two weeks ago. And we are ready and proceeding as quickly as we can with the projects. So at Mills the last time we had spoken we had only had maybe 10% or 15% of the actual injection lines in the ground. The pipe was actually on-site, but it was not deployed. Now we have made considerable progress and all but one line has been laid to all of the additional four injections wells at the Mills Hunter facility. The final line will be complete in approximately two weeks. It’s the furthest away from the injection facility. And we will get that complete in the next couple weeks. All the roads and the creek borings have been done. And we have witnessed those yesterday. I was in the field in Appalachia and we saw where those guys had just completed all the bores. So that allows them to really move forward and finish this rather quickly. The pump house section is currently 90% complete. The last few electrical items are being installed today. And we should have the completion of the pump house to write it at about 100% by the end of next week. The construction on the third pump house, we had to do a little redesigning of the facility, which will in turn save us the money and become more efficient on our processes. So we started construction of that third pump house. We witnessed that yesterday and it’s been under construction for about three weeks now and will be complete in about five to six weeks for the second two wells. So what’s crucial to understand there is that the initial pump house that’s almost 100% complete, will feed the two wells that will go online first. If you remember, we had mentioned in the last call, we will have two wells that will go online in approximately – now that we have a little delay, will probably in the second week of June for those, the first two wells to get operational. And then in that time, we’re finalizing the third pump house and all of the lines will be complete, all the pumps would be in, and the second two wells to make the total of six wells at Mills Hunter will go online near the end of June. The secondary containment is complete, about 95% complete. We have to do a little dressing up on the walls and then we’re awaiting the installation of the 20,000 barrel tank, which is about three to four weeks out. The first set of the aged pumps will arrive next week and be installed in the first pump house and then the following set of pumps will come in the following week. And then as you remember in the use of proceeds, we also have other aged pumps coming in to change out the existing pumps at all of our facilities, which will help us decrease that maintenance expense at all of the facilities. But we will wait to deploy those additional pumps at the other facilities once we complete Mills, that’s our number one priority right now is getting Mills up and running. An update on the Ritchie Number 2, we had mentioned I think when we were on the call K, that we were actually just completing the drilling of that well. The well is complete and it’s ready for injection. We’ve done everything we can do on our side. We’re awaiting the final permit from the West Virginia DEP, which we hope to have in the next 30, 45 days. It’s been brought to our kitchen that those guys at the WVDEP, our backlog quite a bit at this point and that’s why we were typically getting those permits and turned around in less than 60 days. And it’s already been 60 days since we filed, but – so they have up to six months and we just – we anticipate we will see in the next 30, 45 days. We are also looking at some additional wells around the Ritchie County area. As you can imagine that’s a hotbed for Marcellus and the Stacked Utica play in the Northern portion of West Virginia there, it is right off of Route 50. So we look to doing somewhat similar to what we did on at Mills and find additional wells that we can hook into the existing facility and maximize our efficiency there. The trucks we – that’s part of the use of proceeds as well. We’re evaluating bids right now on new and some pre-owned trucks that are out there to mix and match between straight trucks and tractor-trailers. The availability on 407 trucks out there is still pretty tight at this point, but we have gotten in several bids over the last couple of weeks and we plan to make that decision and get those trucks ordered possibly today or no later than Monday or Tuesday of next week. The MAG Tank, we’re still working on securing some new contracts. As you are definitely aware with commodity prices kind of had a low rebound this week, but has been a little slow in Appalachia on the completion side, therefore slowed down the process of actual deployment of tanks. We have been in contact with our clients that had requested the court back in February and in March. And they are still very interested. It’s just a little slowdown in the actual drilling program and the completion that follow. So we still anticipate that to pickup during the second half of the year. We are – something that’s new right now to tell you guys about, we’ve started in the first quarter and into the second quarter, the initial stages of securing some LOIs for a pooling agreement with several E&P companies to utilize brine and freshwater pipeline network in the Southeastern Ohio area and basically taking that down through via the trunk line to the Ohio River for anticipation of barging brine further south. So just to give you an update on that, now you guys can ask some questions about the Coast Guard on the permitting. We have hired an internal government relations manager, who will help us expedite that process and we have also hired outside help to basically provide a detailed plan to the Coast Guard of how we plan to execute the barging of oilfield waste. We were actually at the site yesterday with one of the professionals from the Appalachian region who barge this product up and down the Ohio River every day and looking at the dockside facility and given us some recommendations on how we can expedite that as far as once we have given the forego ahead to have a dock in place and ready to go. So all-in-all everything, the outlook for the company with the funding in place is really good. We have a lot of work to do in a short time to get it done. And I can’t express my gratitude enough to our management staff and our field employees out there in the Appalachian region here in the office, in the corporate office that had helped us get everything done and expedite the process. So with that, I’ll go ahead and open it up to some questions. Question-and-Answer Session Operator [Operator Instructions] Your first question comes from the line of Michael Hoffman from Stifel. Your line is open. Brian Butler Michael, this morning. Kirk Trosclair Good morning, Mike. Brian Butler This is Brian. Kirk Trosclair Hi, Brian. Brian Butler Hi, just kind of on a macro activity level on the Utica and Marcellus. You touched on it a little bit about completions going on. But can we get a little bit more color on kind of where the drilling stands and the trend. Is it rising, declining and then what you kind of just thoughts on it progressing through 2015? Gary Evans This is Gary. Maybe I can respond to that a little better. Of all the shale plays in the United States, the Marcellus and Utica has seen the least drop in activity, predominantly for a couple of different reasons. Number one, it’s the lowest finding cost reserves in the country with respect to gas, but number two, most of the companies are very well-capitalized, larger companies and they have ongoing programs. So we’re turning down about 20 to 25,000 barrels a day of water that we can’t handle because we’re full. And based on the drilling programs and the budgets that had been established by our customers and others, we don’t see that changing. As soon as we get all these wells up and running they will be full. And so we got to go to the next level of where do we go to take this from 30,000 barrels a day to 50 to 60,000 barrels a day. So, we are in a very unique area. Water has to be handled properly. There’s people bringing water six and eight hour truck drives to get disposal. So we don’t see that changing. The permitting process is a long process. The states are not – they don’t bend over backwards to get these permits push through. So we’re in a unique part of the country that is going to require us to continue to build out new disposal capacity. Brian Butler Okay, that’s helpful. And on that new capacity, it sounds like almost all of its going to be up and running on – at the beginning of the third quarter. Is that the right way to think about, does it ramp immediately to near capacity, full capacity or is there a ramp up timeline as the next capacity comes on? Gary Evans It’s a ramp up there. As Kirk mentioned, we’ll be able to turn a couple of wells on mid to late June, they could add between 5 and 8,000 barrels a day of capacity, then there would be other wells coming on. So it will be a gradual increase in June, July, August. Would you agree with that, Kirk? Kirk Trosclair Yes, I agree, Gary. I mean – the volumes are there, but we definitely want to – we are known for protecting our wells and we don’t want to just turn this, pick it on and start pumping aggressively at that point, we’d like to take it easy for the first couple of days and really massage the well and then go to full capacity after that. So yes there will be a small ramp up period and then obviously you’re going to have your cash flow lag as invoices go out and you start to see them payables come in. So you will have somewhat of a lag but it won’t be that much. Brian Butler Okay. And of those wells that are coming on, kind of in the next, call it month or so. That’s the two wells at the Mills facility and the Ritchie well, right? Kirk Trosclair And as the Ritchie well is ready to go we are just waiting on the state. Brian Butler Right. But that’s 30 days or 45 days, so it’s not going to taking anything for a month? Kirk Trosclair Mills Hunter, Brian, already has two active injection wells currently today that we are injecting into now. And then the second too will come on in a couple weeks through two or three weeks out. And then following that will be the last two wells, which will go, one will be like a week later and then the final well which is the furthest away from the injection facility is the one injection line that still has to be completed and that will be the last one to come on. So you will have two come on at same time, then one first to follow and then the last one will come on sometime late June timeframe. Brian Butler Right. That’s just to know [indiscernible] that will be in addition to that once you get the permit? Kirk Trosclair That’s correct. Brian Butler And that’s typically incremental 16,000 plus barrels per day. Kirk Trosclair Because if you remember, right, we had to pull back our injection capacity at the Ritchie while we were drilling that well until we get the permit for the new Ritchie number two we are running at half capacity at the Ritchie number one. Brian Butler Okay. So then thinking it through by the end of the third quarter we should expect these are at – all the new wells are more or less that capacity or very close? Gary Evans That’s correct. But end of the third quarter you should have them all operating at 100% utilization and capacity, ready to go. Brian Butler Okay, that’s good. And then on the new plan for the barging, so what’s the timeline now look like for when you might actually see barrels offloaded on from the barges? Kirk Trosclair We are still looking at September, August timeframe. So we have given the new group that we have hired to help along with our government relations manager a 90-day push period to try to get this thing done. They have already been to DC once last week – week before last. And they have got several more meetings lined up with some dignitaries and congressional health and we are trying to get with the coast guard to work through the issues to lay out the plans on how we proposed to operate at the terminals. I would propose to do everything to the – to load the barges and offload down at Mills and just have everything in place once for that final go ahead. Brian Butler Okay. And then we will have another one now kind of in the fourth quarter hopefully you will be able to taking volumes from the barges? Kirk Trosclair That’s correct. Brian Butler Okay. And last one here, just any update on – or maybe one more – two more – any update on the MLP status? Gary Evans We received a letter from the IRS about a month and a half ago asking specific questions about our business. We responded to that letter and we have been told that other water companies are looking to go public got similar letters. And we are waiting for that response. So, it’s back in the IRS hands. I will still say though they have given out some more information it appears that water is going to be clear. Their real focus has been on chemical companies’ ethylene, polyethylene, various chemical products that we are trying to do MLP. So we feel pretty good about the feedback we have been hearing regarding our sector. Brian Butler Okay. And then this one for you a little last one. Just regulation wise, with news about seismic activity on the disposal wells, any color on what maybe going on or if there is any pending changes? Gary Evans Our neck of the woods, we haven’t seen anything. The areas that had seismic issues, there had been areas that have either been injecting into a much deeper horizons or near falls. And we have been very careful in the selection of our disposal wells, not to have either. So I haven’t noticed anything in West Virginia or Ohio that would lead us to be concerned that they were going to – the stage we are going tightening up activity or producing permitting activity in anyway. It’s been in other parts of the country. Brian Butler Okay, great. Kirk Trosclair To validate that Brian, we had a meeting yesterday with one of our customers on one of our sites. And he had just left meeting at the Ohio Department of Natural Resources. And they had a meeting on that same very subject. And the guys in the DNR told him that there has been no change. They don’t foresee anything coming down the pipe for the next foreseeable future. And so that was promising to hear that coming from one of our customers as well and the USA guys. Brian Butler Okay, great. Very helpful. Thank you very much guys. Kirk Trosclair Thank you. Operator There are no further questions at this time. I will turn the call back over to the presenters. Kirk Trosclair Thank you so much operator. And with that, no other questions, I think that will conclude today’s call. Thanks for dialing in and we will talk to you next quarter. Bye. Operator This concludes today’s conference call. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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