Battalion Oil Corp (BATL) 2006 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the RAM Energy Resources conference call. My name is Jaquila and I will be your coordinator for today.

[OPERATOR INSTRUCTIONS]

I would now like to turn the call over to Mr. Robert Phaneuf, Vice President of Corporate Development. Please proceed, sir.

Thanks very much, Jaquila. And welcome to the RAM Energy Resources Third Quarter Conference Call. I'd like to begin with a brief introduction of the participants we have here at RAM today. We have Larry Lee, our CEO; John Longmire, our Senior Vice President and CFO; Larry Rampey, our Senior Vice President of Operations; we have Drake Smiley, Senior Vice President of Land and Exploration; John Cox, Vice President, Secretary and Treasurer is also with us. From an agenda standpoint I'd like to just discuss with you our Safe Harbor statement real quickly and then we'll go on from there.

In our call today we may make statements that are other than historical fact. Information in the presentation and all such statements that refer to management plans or expectations, including capital spending, derivatives positions and industry conditions are forward-looking statements within the Securities and Exchange Act of 1934. The company cautions that such forward-looking statements are necessarily based on certain assumptions which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today. Further information on these risk factors is included in the company filings with the Securities and Exchange Commission and is enumerated at the conclusion of the webcast presentation slides as well. The management of RAM encourages you to review the disclosure in both of these documents.

So with that dispensed with, let me introduce Larry Lee to talk to you about our financial results and review of operations.

Thank you, Bob. I'd like to welcome everyone to our third quarter conference call. This being our first full quarter since our merger, we're pleased to recap for everyone the highlights that we did accomplish during the third quarter. Our financial results, resulted in a net income of $4.2 million in the third quarter or $0.13 per share fully diluted. Our cash flow from operations, which is a non-GAAP measure, was 5.7 million versus 7.7 million in the third quarter of 2005. Our third quarter production of 342,000 barrels of oil equivalent increased nearly 4% sequentially over our second quarter level of 329,000 barrels of oil equivalent.

During the quarter our non-acquisition capital spending was $6.4 million and that raises our total amount of non-acquisition capital spending through the first nine months to $16.3 million. And this puts us on pace towards our full 2006 year planned non-acquisition spending of $24.3 million. The emerging production from our Barnett Shale continues to grow in importance to us and our average net daily production for the quarter was 205 barrels of oil equivalent. And that has recently grown to a current level of 240 barrels of oil equivalent per day.

Consistent with the company strategy of seeking acquisitions in close proximity to our existing operations, the company did complete an acquisition of 447,000 barrels of oil equivalent of reserves with current daily net production of 69 barrels of oil equivalent for a price of $4.4 million or $9.84 per BOE of estimated reserves. In addition or integrated into this acquisition we did acquire associated gathering assets and undeveloped deep rights that included some Barnett Shale acreage. Even though this is a little west of the main play, the deeper rights were included in the acquisition.

We're pleased to report to everyone that our borrowing base was reaffirmed at our mid-year semi-annual redetermination, our borrowing base continues at 140 million with 90 million of term debt and $50 million of revolving credit available to us. Even in spite of the CapEx acquisition and the repurchase of the Amaranth shares during the third quarter, we did conclude the third quarter with liquidity at $44.6 million as of the end of the quarter. Subsequent to the end of the third quarter the company has drilled two vertical wells in our current Wolfcamp Shale exploration play and these wells are currently awaiting technical analysis.

As I did highlight, the company repurchased 739,175 shares of our common stock, which was all of the common stock of RAM Energy Resources that Amaranth LLC owned. We reacquired that at a price of $4.295 cents and we felt that like this mitigated the growing market uncertainty surrounding Amaranth's holdings within RAM Energy. So all in all we feel like we have some pretty significant accomplishments in the third quarter. If you'll turn over to page four, this just breaks down for everyone the sequential results from oil and natural gas liquids, which was up 4%, our dry gas production which was up 5% and therefore our overall production was up just a little over 4% for the quarter sequentially to 342,000 barrels of oil equivalent for the quarter.

Third quarter production, which is on slide five, compares this against the production in the same quarter for 2005, which was the quarter that was reported by RAM Energy, the company that merged within and into RAM Energy Resources earlier this year. Our oil production was up about 2%, our gas production up about three tenths of a percent so our total BOE compared to a year ago was up 2%. Production in the third quarter of '05 was partially impacted by the reversionary interest that vested at a field in North Texas, our Boonesville Field, that vested in September of '05. Had you removed that impact of the reversionary interest, our production on a year-to-year comparison would have been up 5%. So we're reasonably pleased with those results.

On our realized pricing, our oil prices did increase to $62.79, which is up from a year ago. Our NGL prices are up to $47.12 versus 39.10, a nice significant increase in NGL prices, although our gas prices did decline in the third quarter of '06 compared to the third quarter of '05 by almost 18%. But when you look at our mix of oil, natural gas liquids and gas, our BOE price was essentially flat compared to the same quarter a year ago. Our third quarter results, which is reflected on page seven, we were at $18.3 million of oil and gas sales in the third quarter of '06 compared to 18 million a year ago. Of course our net income was $4.25 million and that compares with a loss of 4.85 a year ago, and then our non-GAAP cash flow was 5.7 compared to 7.6.

Our drilling success, we continue to experience our drilling rate that we had earlier in the year. We have now drilled 71 wells through the first nine months of this year. At September 30, 61 wells of those were producers, we had three dry holes and seven wells were drilling and are completing at the end of the quarter. So we continue to experience a success ratio in excess of 90%. Page nine, for those of you who have followed us in the past, continues to reflect our principal field, our home office, our field offices, and our exploration projects. This is essentially similar to where we were at the end of the second quarter.

So I'll kind of pass over that and go on over to page 10, this is a recap of the third quarter in our Electra/Burkburnett Area. We have 503 producers in here, we drilled 21 wells during the third quarter, we still have 151 identified PUD locations and this is a field that we continue to drill about six month a month and are continuing to do that into the fourth quarter. We did experience some slight reduction in production in the third quarter in that we had experienced an electrical power, spotty at times throughout the third quarter. With the heat in North Texas and demands on power grid systems, we had a few situations where we had electrical power curtailed to us and that impacted us slightly there in the third quarter.

In our Boonesville Field in Jack and Wise County, this is the field that we own roughly 75%, we operate this field and we drilled the Tarrent D-12 well during the quarter and subsequently to the end of the third quarter brought that well on production. This area also suffered some slight reductions in production as a result of work that Targa performed during the quarter on the Chico Plant. They've been doing some upgrades and improvements to that plant and we believe that that work has been completed, so we're pleased that they made those improvements to that gathering system.

On 12, this is our Barnett Shale, Jack and Wise County. We have continued to accelerate our acquisition of seismic and identification of potential drilling sites on our acreage. I would point out that this area has now become our fourth largest producing area, and it appears to be marching up the importance curve for us and may well end up being our third largest producing area by the end of the fourth quarter. This acreage is all helped by production, over 80% of it is in the core and we have begun permitting some of the additional seismic work that we will do in calendar year '07 on the remaining acreage that is not yet covered by the seismic, the 35 square miles of seismic work that we have undertaken here.

On Page 13 in Vinegarone we did drill two wells. EXCO Resources is the operator of this field. We have a 25% interest in these wells, they were drilled and cased and they are currently being stimulated and we're awaiting stimulation to put those on sales line sometime here in the fourth quarter. We do have four PUDs remaining in this field that we would expect to be drilled out sometime over the next couple of years.

In our Wolfcamp play, this is a play we just announced. It's where we leased 15,000 acres. We own 100% of this. We did drill our first two test wells that were vertical wells, we are awaiting various core, logs, and mineralogy analysis and expect to receive that information late in the fourth quarter and would look for this to be an early 2007 decision as to our next move here. If you look over on page 15, it just recaps for everyone our third quarter daily production which on a total basis was 3,716 barrels of oil equivalent per day. And our Barnett Shale continues to grow in importance there and our minor properties also continue to improve for us in the third quarter as well.

And sort of highlighting our CapEx program, we're still very much on track to accomplish our non-acquisition CapEx program for 2006. And with our gas hedges in place and our oil hedges we continue to feel comfortable that we will fund this program out of operating cash flow. Our derivative position continues to bode well for supporting our CapEx program for the balance of this year and going into 2007 and early 2008. We continue to evaluate the derivatives market with an eye of continuing to place collars around our oil production and our gas production at levels that will provide us with adequate cash flow to execute on our drilling plans going forward.

A recap for everyone of our liquidity analysis at September 30, we did have $7.6 million in cash, $37 million that of immediately available cash or liquidity under our revolving facility, for a total liquidity of 44.6 million. And our long-term debt is essentially the same as it was at the end of the second quarter. And as I spoke earlier, the banks--our lending group did reaffirm our borrowing base at mid year. On 19 once again I think this is reflective of our total enterprise value on a reserve to BOE basis compared to our peer group.

Unfortunately we continue to have a TEV to reserve basis that's below our peer group in spite of the fact that our reserve life is very similar to it and we have a higher percentage of our reserves that are developed. If you look at our net asset value strictly on our proved reserves only, that number is $6.45 a share and does not account any of our Barnett Shale acreage in the Fort Worth Basin, our acreage position in West Texas and the West Texas Shale or our Wolfcamp acreage or any of our hardware or midstream assets. So we continue to like to point that out and hope to rectify that and get our share price value up as time goes on.

So just to summarize, we think we had a good third quarter. We were very pleased to show a nice profit, a nice sequential production growth and to get our borrowing base reaffirmed to eliminate the momentary cloud that was associated with the Amaranth stock position within the company, and continue to position ourselves to grow the company through both acquisitions, exploitation, and exploration. And with that I'd be happy to turn it over to the moderator and we'll attempt to answer any questions that anyone might have.

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of [Jeff Markley] with Helios Partners. Please proceed.

Hey guys, how are you doing?

Hi, Jeff.

First off nice quarter and I wanted to congratulate you once again on the purchase of the shares from Amaranth, that was an excellent move and definitely shows your confidence in the business going forward and we were very happy to see that.

Thank you.

I have a couple questions. The first one is on the Investor Relations front. Obviously we think this is an intriguing story, a lot of people don't seem to know the RAM story though. Have you made any progress as far as contacts with sell side analysts or anything else to report in that area?

Jeff, I hope you did see the research report that Ferris, Baker, Watts issued on us during the third quarter. That was the first official research report to come out. We have had numerous meetings with several of the analysts, Bob can speak more directly to it, but we know several of them are working on models. This is my take on it, I think that one of the things they would like to see is a little more of the history and performance, and so I'm hopeful that as we've rolled out the third quarter maybe that will encourage some of them to consider going ahead and following through. I know there's probably, how many would you say, Bob, four?

Yes four or five I think that have models, Jeff, in some stage of completeness. And yes we have a whole list of essentially sell side analysts that we have on our target list, if you will, to make contact with and go visit as time goes on. In the third quarter I know we saw one or two more than we had earlier, the most recent being Sanders Harris Morris, the analyst Carol Coale who just joined them seemed to give us a good reception. So you know we're working with all those folks. And I think, as you can probably guess, the best evidence we can give them that we're performing as we say we are is putting a quarter like this together and coming out and then hopefully getting some good new press from those folks that we've accomplished what we set out to do.

Jeff, I'd call it have story will travel. You know we went to Charlotte for an investor conference, we addressed [Ojis West] in San Francisco, we did the Sanders Morris Harris conference in New York City, it seems like we did one other non-deal road show. So we've try to make ourselves as accessible to those opportunities as we possibly can to just let people meet us and understand the story.

And we'll continue to do that, Jeff. I think we're kind of in the stage right now of trying to just gain awareness. Because of the way that we came public it made it a little bit more of an uphill battle than if we had an immediate sponsor. But we continue to have that as a high priority.

Okay great. A couple more questions, I saw your production costs per BOE declined going into the third quarter from the second quarter, have you seen costs begin to moderate?

Jeff, I think what I would attribute that to is we did add a little more gas production on that, even though we report in BOEs because we are at the moment so heavily oriented towards oil. Our Barnett Shale production is principally gas. There is some associated liquid so the operating cost is lower on that. Some of the minor properties were more gas oriented, so that operating costs are less there. And also we believe we're beginning to see some reduction in our electrical cost in North Texas as a result of the naturally gas fired electrical generating units that we installed and a lot of the compression replumbing work that we did in the Electra/Burkburnett Field. So we think it's a little bit of each of those that is resulting in the operating cost being reduced.

I don't know, Larry's sitting right here next to me, I don't think we would say that we're seeing the service cost, I don't think we feel like it's escalating like it was, but I don't think we're yet seeing reductions in those costs are we, Larry?

No I think it's flattened but we certainly don't see it reducing right now.

So I think it has more to do with the mix of the new production we're bringing on as well as the favorable results of our electric generation units where we're generating some of our own electricity in North Texas.

Okay. And then final question, do you know when you're going to release your 2007 capital budget?

I don't know the exact time, we had a Board meeting last week in New York City and we began to look at the preliminary numbers on that. I would think we'll probably have our CapEx, I guess sometime probably about mid-December. We'll certainly announce it before the beginning of the year.

Okay. All right well that's it. Thanks guys, nice job.

Thank you.

Thanks, Jeff.

[OPERATOR INSTRUCTIONS]

And your next question comes from the line of Barry [Sagle] with Gelber Securities. Please proceed.

Larry, can you give us some color as to the profile of reserves that you acquired? Were they mostly GAAP? I would imagine they probably were.

Barry, they were. They were about 70 plus percent GAAP. What it was then conglomerate production, very similar to what we have in the Boonesville Field. So it's fairly rich BTU gas with some associated liquids with it, I think less than 30% was liquids and 72% was gas. You know Barry, as you know when we spoke to you prior to the merge were felt like that there were going to be, as we I think described it at that time, tuck in acquisition opportunities in and around the areas that we operate. This just happened to be the first one that kind of crossed our door step at a price that we felt like was a good price to execute on.

Also can you talk a little more, Larry, about the Wolfcamp Shale wells? Give us a sense of the competitive landscape. Give us an idea of what you paid for your acreage out there if that's not competitively sensitive information. And how do you see this playing out in 2007?

Barry, it is competitively sensitive so I'm not going to talk about how we've been leasing out in that area, I hope you appreciate that, it still is an active lease play and there are other companies that are leasing in areas immediately around us. We have drilled those wells and we have cased them and we logged them and we've done a lot of core sampling and a lot of mineralogy, and all of that information is in the various labs that evaluate that stuff. That's about really all I think we can say about it at this point.

Can you comment, Larry, as to who the other industry players are that are focused on this play?

Barry, I'd rather not. I'd rather not try to identify the competition or encourage any other competition that might be interested if they knew who some of our neighbors are. I apologize, I'd love to be more open about it, but it still is very much an active exploration play on our part as well as our neighbors and competition.

Not to flog this horse dead, is your competition mostly the larger independents or the smaller local mom and pops?

They're pretty good size guys.

Okay.

They're not the mom and pops, I definitely will say that.

Okay one last question in terms of philosophy, looking for 2007, how do you think you view the acquisition market obviously subject to commodity pricing? But give us a sense of how you'd like to navigate through 2007, allocating capital, using the drill bits relative to an acquisition strategy.

Barry, we think there will be acquisition opportunities in two areas. We think there will be acquisition opportunities in what we call the tuck ins, the add ons where you're seeing smaller mom and pop operators that they're seeing the valuation that people have been able to get on reasonable properties. And so I think more of those will be available and we continue to source those and look at those on a daily and weekly basis. So I think that we would, as we said before, we would expect to continue to pursue tuck in acquisitions in and around areas where we already have operating infrastructure in place.

I think that the little shake out in the gas market has brought a little more sensibility to some of the unconventional resource plays, we certainly are seeing a lot of once again smaller players attempting to get out of some of the resource plays, and so we think that will also accelerate next year. And so I would expect that once we announce our non-acquisition CapEx that we would anticipate a reasonable amount of acquisition CapEx as we charge into '07. I think the landscape is not a bad landscape to be blocking and tackling and increasing your asset base. Commodity markets on the front end are a little soft, but if you look out the curve they look pretty good and you can continue to take an awful lot of the front end price risk out of acquisitions and I think that's an opportunity.

Terrific. Well thanks much and come by and visit the next time you're in New York, Larry.

I'll look forward to it, Barry, thank you very much.

Thank you, sir.

And your next question comes from the line of Evan Templeton with Jefferies. Please proceed.

Hi thanks, can you just comment on the capital structure. You still have these 11.5% senior notes, the stumpies outstanding, can you just tell us what the cost of your term and revolver are and kind of your current thoughts whether or not you'll call the bonds in February of next year?

Evan, you issued those bonds, you know exactly what it is, but the call provision at February of '07 is 103 plus, I think 103.5, something like that. Given the premium on it it's about a push to call them at that point if we so chose to do that. The rate on our credit facilities are disclosed in our Q, we're paying LIBOR plus two on the revolver and LIBOR plus I think it's a matrix between five and six based on the borrowings, I think right now we're at LIBOR plus five, it's either five or 5.25 at the moment. So we are looking at that, Evan, in terms of when is the right time from a liquidity standpoint and otherwise do we pull those in next year or do we let those roll to maturity?

[multiple speakers] okay. Okay thank you.

Thank you.

[OPERATOR INSTRUCTIONS]

And there are no further questions in queue at this time. I would now like to turn the call over to Mr. Larry Lee for closing remarks. Please proceed, sir.

Well just once again we'd like to thank everyone for taking the time to join us on our conference call. And as always, feel free to call Bob or myself or anyone here at RAM, we're more than happy to visit with you as appropriate. And until our next call, thank you very much.

Thank you for your attendance at today's presentation. This concludes the presentation, you may now disconnect. Good day.