Callon Petroleum Co (CPE) 2003 Q2 法說會逐字稿

Welcome to the Callon Petroleum Company second quarter results of operations conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question and answer session. At that time if have you a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Tuesday, August 12, 2003. I would now like to turn the conference over to Fred Callon, President and Chief Executive Officer. Please, go ahead, sir.

Good morning and thanks for taking time to join us for our second quarter conference call. Before we begin, as usual, we would like to have Terri Trovato, who heads our investor relations, to make a few, brief comments.

Thank you, Fred. We'd like to remind everyone that some of the comments made during this teleconference will be considered forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These comments, which include discussions of the company's financial position, reserve estimates, and business strategy, reflect management's views as of this date. No assurances can be given that these events will occur or that the projections will be attained.

There are a variety of factors that may cause actual results to differ materially from the company's expectations. Many of these factors are identified under risk management or risk factors in Callon's annual report on Form 10-K and other reports filed with the Securities and Exchange Commission. All forward-looking statements attributable to the company are expressly qualified by these factors. Fred?

Thank you, Terry. Again, we appreciate you calling in. We'll begin as we usually do with a review of our second quarter financial results by John Weatherly, our Chief Financial Officer. John?

Thank you, Fred. The second quarter 2003 calendar reported a loss of $647,000 or 7 cents per common share. During the same quarter last year we reported earnings of $2.3 million or 15 cents per common share. The difference between the two quarters, in terms of recurring operations, is not as significant as this would imply. Second quarter of last year included two nonrecurrent items. First, a $2.5 million pretax gain on the sale of Dolphin Island [ph] Pipeline and a $2.5 million pretax gain on the sale of our hedging claims against Enron. Without those two items, the second quarter of last year saw a loss of $866,000 or 9 cents per common share.

The second quarter loss for this year was less than the 9 cent per share average as estimated by the analysts. The production for the second quarter averaged 37.8 million cubic feet equivalent per day, slightly above the guidance range we had given for the quarter. When compared to the second quarter of last year there were three major changes in the second quarter of this year.

Oil and gas sales increased by $3 million, and since 92% of our revenue stream is gas, this was primarily an increase in gas sales. Operating expenses increased by a million dollars with all of this increase coming in noncash DD&A and accretion expense. Interest expense increased by $1.5 million. With respect to the increase in gas sales, gas revenues for the second quarter of 2003 totaled $17.2 million up from $13.9 million in the second quarter of last year. An 11% decline in gas production was more than offset by the 67% increase in realized gas prices. Natural gas production averaged 35 million cubic feet per day in the second quarter of this year. This was down from 38 million a day in the preceding quarter and 39 million a day in the second quarter of last year.

There were two major reasons behind the decline. First, as we pointed out in guidance for the second quarter, the Mobile 952 production facilities were shut in for a total of six days for annual inspections and maintenance. About 60% of our natural gas production does flow through this facility, and the shut in shaved about 2 million cubic feet per day off the average for the second quarter. Second, the East Cameron 294 well remained shut in for most of the second quarter waiting on a recompletion into another sand. This shaved another million cubic feet a day off the average for the second quarter; however, that well is now back on production at about 7 million cubic feet per day.

As I mentioned, realized prices were up sharply from the prior year. The average realized price for natural gas was $5.44 per thousand cubic feet for the second quarter of this year versus $3.25 for the same quarter of last year. With respect to the million dollar increase in operating expenses, although total production was down our DD&A rate did increase by 37 cents per Mcf equivalent. This resulted in a net increase in DD&A charges of $460,000 for the quarter. Accretion expense charges under FAS 143 totalled $727,000. Interest expense increased by 1.5 million versus second quarter of last year.

The increased debt load attributed to continued development at both Medusa and Habanero was certainly a major factor in this increase, and as a full-cost company we do not capitalize interest on construction and progress. In compliance with Reg G we have posted on our website a reconciliations to the non-GAAP financial measure cash provided from operating activities before changes and operating assets and liabilities. I believe this number is substantially ahead of the consensus analyst estimate, but I will not discuss these numbers in this conference call. That really covers the major issues with respect to second quarter results. At this point, I will turn it back over to Fred to discuss [Inaudible] operations.

Thank you, John. Let me begin with a recap of our operations on currently producing properties. During the second quarter, we averaged approximately 38 million cubic feet of gas a day. Again, consisting [Inaudible] over 90% natural gas. This was down from approximately 41 million cubic feet a day during the first quarter. Production for the third quarter should remain about the same as the second quarter, and then we should see an increase in the fourth quarter when Medusa and Habanero are coming online.

The Mobile 864 area delivers approximately 70% of our current production. The two production facilities are producing at a combined gross rate of 40 million a day, almost 30 million a day net to Callon's interests. We did have some downtime during the second quarter. Production for the quarter was down due to schedule compressor inspections and maintenance, also tropical storm downtime and some mechanical problems that we are currently addressing. East Cam 294, where we own a 50% interest, was down for most of the quarter. The well has been successfully recompleted and is now producing 7 million a day. Unocal is the operator there. Ship Shoal 2835 continues to produce approximately 15 million a day, and we own a 22% interest and operate that property.

In the deepwater during the second quarter the deck was successfully lifted onto the truss bar at our Medusa field. We expect to start loading drilling equipment onto the platform this week. First production is now anticipated to be mid-October rather than September. The delay was due to several factors, including some unfinished topside work from the shipyard that had to be completed offshore, some design modifications to the production risers, as well as two hurricanes in the Gulf earlier in the season than we had anticipated. Assuming a mid-October startup date, we should reach peak production rates by February resulting in a doubling of the company's daily production.

At Habanero first production is now expected in mid-October. Two wells have been completed as take points for the Hab 52 oil sand and the Hab 55 gas sand. Modifications to the Auger platform have been completed. Shell is currently waiting on the Derrick Barge to arrive to lay flow lines to the Auger platform. Initial production rate is expected to be 25,000 barrels a day and 70 million cubic feet of gas a day.

With respect to new drilling, we have recently, successfully, completed drilling North Medusa, our first satellite prospect in the Medusa area. Located three miles north of the Medusa Spar on Mississippi Canyon Block 538, reserves are estimated to be in the 5 to 7 million barrel range. North Medusa will be produced with a tieback to the Medusa Spar when capacity becomes available which is currently estimated to be mid- to late-2004. We own a 15% working interest in North Medusa.

We are now drilling our Stonemaker [ph] prospect located to the northwest of Medusa. Stonemaker [ph] has more risk than North Medusa but also has larger reserve potential, approximately 40 million barrels equivalent. We own a 15% working interest at Stonemaker and Murphy, of course, is the operator. We expect to reach total depth by the end of September. We also expect to spot a well in the next 30 days or so at our North Bob [ph] prospect located at Mississippi Canyon, Block 815, 816 area. We own a 3.4[Inaudible]% interest in the southern block drilling unit which is operated by Chevron/Texaco. This is an exploratory prospect but it has very high reserve potential, in excess of 400 million barrels gross. With that I will now turn it back over to John to discuss guidance. John?

Thanks. Yesterday afternoon we issued the revised guidance numbers for both -- well, issued guidance numbers for the third quarter of this year and revised guidance numbers for the entire year 2003. Production is really the only aspect of our new guidance numbers that warrants discussion. In May we issued guidance for 2003 estimating production for the year to average 50 million cubic feet equivalent per day. Our revised guidance is for an average of between 44 and 45 million cubic feet equivalent per day for the year. The total revision to production volumes is, of course, attributable to the second half of 2003.

Simply stated, we've reduced our production forecast for the second half of 2003 by 2 billion cubic feet equivalent with 100% of this attributable to the revised startup date for Medusa and Habanero. Allocated between properties this 2 Bcf equivalent reduction in guidance of 1.5 billion cubic feet equivalent of the revision is attributable to Medusa and remaining .5 Bcf equivalent is attributable to Habanero. Allocated between quarters, .5 Bcf equivalent of the revision is attributable to the third quarter and the remaining 1.5 billion cubic feet equivalent is attributable to the fourth quarter.

For the third quarter all production will come from the shelf and should remain 92% gas and 8% oil. We're estimating gas production of between 34 and 35 million cubic feet per day, basically flat with the second quarter of this year. Oil production is projected to come in at about 40,000 barrels total for the quarter. The scenarios that we have incorporated into our guidance, specifically for the fourth quarter with respect to our two deepwater properties coming online are as follows: At Medusa we have assumed first production in the first half of October.

Production is expected to reach 17,000 barrels of oil equivalent per day by December and then 40,000 barrels of oil equivalent per day by March. At Habanero we've assumed first production in the second half of October. We expect to reach rates of 70 million cubic feet per day of gas and 21,000 barrels of oil per day during the month of November. With these assumptions from Medusa and Habanero, fourth quarter production is expected to total 310,000 barrels of oil, 3.7 billion cubic feet of gas or an average of 61 million cubic feet equivalent per day. So with that, we will now open the conference call for questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a 3-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Our first question comes from the line of Subash Chandra with Morgan Keegan. Please proceed with your question.

All right, guys. What's your bank lines right now?

The bank line is 75 million or 70 million drawn [Inaudible].

Okay. And where do you see that going in third quarter?

I think it will get close to the 75 in the third quarter.

Any further talk, you know, El Paso or somebody to take Medusa off your hands?

You mean to ...

To take the facilities off your hands?

Are you talking about the transactions we had discussed about possible sale of the spar itself and then using it on a throughput basis?

Right.

Yeah. There are still some very active discussions going on, Subash.

Still we need to see first production, or could there be some kind of, you know, letter of intent or something ahead of that?

There could certainly be a letter of intent ahead of that, but I don't think we've ever had any discussions that would have prefunded prior to first production.

Okay. Got it. And, finally, the deferred items in the quarter, what was your cash G&A? Do you have that number?

We didn't understand the question.

What the cash G&A was, cash G&A expense?

For the second quarter?

Yes.

Capitalized was 2.1 million and expense was -- that would be in addition to what's on the income statement.

Got it. Okay. Thanks a lot.

Okay.

Our next question comes from the line of Van Levy with CIBC World Markets. Please proceed with your question.

Good morning, gentlemen. How are you?

Hi, Van.

Good morning, Van.

Congratulations on making progress. Looks like you are almost here.

Thank you.

Kind of easy questions first. Can you give us the prehedging kind of floating prices for oil and gas for the quarter?

The efforts realization?

Yes, sir.

Bear with me for a second.

Okay. And while you are looking for that, it looked like based on your guidance, LOE for the last half of the year jumped up quite a bit, and I'm wondering if that really makes sense? I think you guys were saying 2.7 million a quarter or something like that? In your press release ? But it seemed to put -- the first quarter, based on my numbers, just for lifting not taxes, was 74 cents a unit Mcfe and second quarter was 70 cents. And it looked like the third and fourth quarter implied a much, much higher price than that, or unit cost from that.

Not the third, really. I'm looking. I'm thinking we were at 2.6, 2.7 in the first, 2.4 maybe in the second, and I think our guidance is around the 2.6, 2.7 range for the third. Now, with the fourth, we naturally would see a increase in LOE as a result of Medusa coming online. Plus, remember, with respect to Habanero, we don't own that facility and pay a throughput charge which goes to LOE.

So that would take you from the 70 cent range to the 80 cent range, and I guess the increment is the throughput charge?

Yes.

Okay. Next question. John, could you take us through the third and fourth quarters, you know, liquidity, address the liquidity argument, you know, sources of cash, uses of cash, you know, required capex, et cetera?

Dan, I think -- I get real hesitant about discussing cash flow given Reg G.

We're just discussing the required capital expenditures and well, and then we can talk about ...

Capital expenditures could total up to, in the $35 to 37 million range for the third and fourth quarter combined.

Can you break that up by quarter?

22 in the third, 15 in the fourth.

Okay. And aside from cash flow, what is your incremental liquidity source?

Well, we have a beginning cash which we did have a fair amount of cash at the beginning of the quarter and you've got the $5 million of -- well, almost $5 million cash at the beginning of the quarter, from 5 million of availability on the line of credit.

Okay .

I'm sorry, Van. And in addition to that I think [Inaudible] amounts and some very minor sales. One is a production facility that was a net liability to us that we'll realize a million and a half for and then another's a rather inconsequential field that we'll probably [Inaudible] 6 to 700,000 on. So we'll probably have about 2 million additional proceeds in the third quarter from ...

So your plans and vision, you just to squeak by without any equity or anything like that in between? I mean you are very close right now.

It's very close right now, but -- yes.

Okay.

We will make it. It's based on our weekly forecast of cash and actual timing of payment of some of these expenses, and the fact that some, you know, the concentration force is on the cost of Medusa and Habanero. We're certainly generating cash on a monthly basis in the second -- in the third quarter we should be generating at least 2 million a month. And to the extent these completion of Medusa and Habanero have slid, so will some of the payment requirements. And we hadn't been real aggressive in -- in the numbers I gave you with respect to third quarter capital expenditures I hadn't been real aggressive in sliding those.

Okay. And then once the properties are on and producing at full tilt, what do you plan? Just to cash flow them or would you plan to sell them to pay off some of the debt?

As far as Medusa and Habanero?

Right.

We have no current plans to sell them.

No, I mean, clearly, Van, the plan is as we get Medusa, Habanero and as you -- could it reach full capacity, you know, we're certainly going to be looking at -- which we are right now -- refinancing. Certainly our objective would be, you know, complete refinancing of all of our long-term debt. But at the same time taking a part of the cash flow and paying down debt. And those are numbers that we are looking at now here. Kind of in the third quarter going into the fourth quarter is kind of, if you will, coming up with those specific plans as to how much we want to target where we pay down over the next couple of years with the cash flow that we have. And based on the numbers we are looking at, we think we'll have healthy cash flow that will allow us to pay down some debt and still have a, you know, a good capex budget, you know, to continue to grow the company. And clearly with cash flow picking up, we think we are in a position to go do some refinancing and refinance the debt, you know, longer term.

Van, I think there's adequate amounts to work with in 2004. We have not given any guidance for 2004, of course; but if you look at where we are forecastling to be in the fourth quarter and look at those rates peeking on out in the first quarter of next year, anything close to current prices we certainly have the potential to generate $80 to 90 million in cash flow next year. And our nondiscretionary, our remaining capital expenditure obligations are 30 or less for next year. So there will be an adequate amount of money to work with for a combination of an ongoing capital budget to increase reserves and to [Inaudible].

Okay. My thought was just that you've added the value you could there and then you flip it and -- on the other hand, I guess you have now a base to do other deepwater projects from.

Absolutely. Keep in mind, you know, with all these projects we have some satellite opportunities like we are starting to see there at Medusa. And we would like to think that over the next several years we will have opportunities around a number of our deepwater projects to add some new reserves.

Okay. Next question on hedging. I know you gave the quarterly hedging, but going forward and into next year what is your hedging position?

Not much different than what was in the press release. The press release just addressed the third quarter, but the total position at this point is for July through October. There is 250 million cubic feet per month or about 8.2 million a day collared with a 350 floor and a 476 ceiling. And then looking at, there is second strip in there, 200 million cubic feet per month or about 6.5 million cubic feet per day with a $5 floor and a 580 ceiling. Now, of course, two out of those four months are already resolved given the contracts that have already gone off the board. July I think we ended up having to pay $250,000 under the per prices in excess of the 476 ceiling. And then for August we actually received $60,000 because, I think, it closed at 470 so we had some support by the $5 floor.

What about into 2004, John?

2004 -- Van, we've always hedged the issue just for the next 60 days until Medusa and Habanero are online as liquidity.

Right.

And we saw that at the beginning of this year when we hedged into that frequently-rising market that margin calls under hedges can get to you [Inaudible] and we just, frankly, for the next 60 days do not have liquidity to take on that additional exposure.

Okay.

However, we will by the fourth quarter of this year.

Okay. Thanks. Have a good day.

Thank you, Van.

Our next question comes from the line of Ron Mills from Johnson Rice. Please proceed with your question.

Good morning, guys. Mine relates to some of the additional deepwater wells, Stonemaker and North Bob. What eventually would be the potential development plans [ph] for Stonemaker if that well comes in successful?

The development plan for Stonemaker would, of course, be routed through Medusa. Stonemaker is the -- I'm sorry. North Medusa is the block immediately north of Medusa and Stonemaker is on the block immediately west of North Medusa. So it's routed through Medusa.

And if successful, is that something that would then -- you would be able to also fill in with late '04 or would that be more of a 2005-type development?

Well, hopefully, there won't be capacity for it for a long, long time; however, based on our prove reserve scenario North Medusa and Stonemaker could actually be brought online by fourth quarter of next year.

All right. And can you walk again through Medusa in -- I think you have four take points that you're going to bring online; is that correct?

Six. There are six wells drilled and cased [ph].

But initially, are you only going to hook four wells up which will then get you to your, the facility capacity?

My understanding now is that they're going to go ahead and complete all six. There is -- and I think the plan is to go ahead and batch run the risers on the first three and bring those on and then run the risers on the other. But, no, the idea is to go ahead and complete all six. Now needless to say, some of them will have to be [Inaudible] back.

Right. Which would then serve to -- potentially extending out that [Inaudible] until late 2004?

Correct.

Okay. And North Bob I know is about to get drilling. Is that in an area where there is any infrastructure at all, or is that going to be another long-term [Inaudible]

Well, North Bob is maybe three blocks west of Thunder Horse [ph] but it's immediately south of Devil's Tower. So there's infrastructure in terms of lines developing in the area. Hopefully, it will just require a huge TLP to produce.

All right. And, finally, on the shelf I know that you've, for the most part, taken most of the last two years off. You've drilled some shelf wells. But is that activity expected to ratchet back up in 2004 as you have cash flows coming in from the deepwater discoveries, and what are you are plans there?

Absolutely, Ron. And that's -- you know, we have mentioned -- we don't seem to go back over each quarterly conference call, but we have continued to do some what we think is some very good work on the shelf. You know, we have got several hundred blocks of Fairfield [ph] data we've been working doing the, you know, really doing the kind of work you need to do to we think with using ABO and identifying a number of prospects. Remember, we picked up three prospects at the last lease sale and continuing to add to our inventory. So, yes. And you're absolutely right. It's strictly a question of capital funding. And by late this year, certainly going into '04, we certainly plan to step up our shelf drilling. And we think we've got some excellent, good-looking prospects with some, you know, with some nice reserve potential. We have not finalized budget for next year; but, you know, tentatively some six prospects, I think, certainly [Inaudible] be scheduling to drill next year. And, again we'll finalize that as we go end of the year, at the end of the fourth quarter.

All right. And then, John, just to clean up on the second half capex, roughly the $37 million. Can you break that down between capitalized interest, capitalized G&A and then actual drilling expenditures?

Third quarter capitalized interest and overhead totals -- I'm sorry, it is 3.6 million in both quarters.

Okay. And so what's that? 7 -- so you would have $30 million of actual drilling/development expenditures?

That looks about right.

Thank you, guys.

Thanks, Ron.

Ladies and gentlemen, as a reminder, to register for a question, press the 1, 4. Our next question comes from the line of David Lifschultz with Lifschultz Industries. Please proceed with your question.

Good morning, gentlemen. I had a question on cash flow for the second quarter as conventionally calculated. Do you have a cash flow figure ...

For the second quarter? David, we posted guidance or Reg G reconciliation, which I'm required to point out, that reconciled to these two numbers. For the first three months, we reported 12 million of cash flow. For the first six months, we reported 21, which would lead you to believe that the second quarter was 9.

Okay. That answers the question. Thanks.

Thank you, David.

Our next question comes from the line of Frank Bisk [ph] from Pilot Advisors. Please proceed with your question.

Hi, good morning.

Good morning, Frank.

Just on North Medusa, could you just go over that in a little more detail? You own 15%. And just to us, what would we get once that comes on, I guess, in Mcfe per day? And when do we think that would even come on, or are we close enough to know that?

Frank, remember, again, North Medusa will be tied into the Medusa Spar, and so really it will be part of the -- it's part of the plan for the entire area. So John I think mentioned a little bit earlier, currently we are -- our best guess is we bring Medusa online here in October. That hopefully will remain at capacity, you know, through the middle of next year. As we go into the third quarter of next year, maybe even fourth quarter, we'll have capacity available; so that's when we'll bring North Medusa online. Hopefully, we'll be there to make up the capacity, you know, getting [Inaudible] third quarter next year, fourth quarter. And if we are successful with Stonemaker, then it will come right behind it to try to keep the production through the Medusa Spar flat [ph].

Okay. I got you. Thank you very much.

Ladies and gentlemen, as a reminder to register for the question, press the 1, 4. Gentlemen, I am showing there are no further questions at this time. Please continue with your presentation or closing remarks.

Once again, we thank everyone for taking time to call in. If you have any questions in the meantime, please don't hesitate to give us a call. Thank you.

Ladies and gentlemen, that does conclude your conference call for the day. We thank you for your participation, and ask that you please disconnect your line.