Callon Petroleum Co (CPE) 2004 Q1 法說會逐字稿

Welcome to the Callon Petroleum Company first quarter 2004 results of operations conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, May 11, 2004. I would now like to turn the conference over to Fred Callon, Chairman and Chief Executive Officer. Please go ahead, sir.

Good morning and thanks for dialing in. We will start this morning as always with Terry Trovato, our head of Investor Relations, and let him make his comments.

Thank you, Fred. We would 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 a discussion 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 obtained.

There are a variety 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.

And again we appreciate everyone taking the time to call in. Needless to say we're very excited about the quarter we've had. What a difference a year makes, and certainly in our Company's history. And we are excited about the quarter and what we have accomplished here in the last couple of months. And we're looking forward to a very active year. So we will start with John Weatherly will give us a review of the first quarter.

For the first quarter of 2004 Callon reported net income of $2.1 million or 12 cents per diluted share. Third-quarter earnings included two charges totaling in excess of $5 million. First, a charge of $2.5 million for the remaining losses on early extinguishment of debt. This is of course a holdover from our year-end (indiscernible) refinancing. And second, a charge of $2.6 million related to the retirements of two executive officers.

Net income, excluding these two charges, totaled $6.9 million, or 47 cents per diluted share. In the first quarter of last year the Company reported earnings of 8 cents per share from net income of $1.4 million. Operating revenues for the first quarter reached a record level of $32 million as a result of both contingent strong prices and significant increased production.

Production for the first quarter of 2004 averaged 63 million cubic feet equivalent per day. This was above the previously stated range in guidance, and was more than 50 percent ahead of production in the first quarter of last year. First quarter production was 54 percent gas and 46 percent oil.

Average realized prices were $5.94 per thousand cubic feet in the first quarter of 2004. That was up by 15 cents per thousand cubic feet from the same quarter of last year. Average realized oil prices were $30.67 per barrel in the first quarter of 2004. This was down by 65 cents per barrel from the same quarter of last year. The lower realized prices results from first quarter hedging transactions which did reduce our realizations this quarter by approximately $1.50 per barrel.

Production from the Medusa Field qualified for royalty relief; however, this exemption from royalties is price sensitive. During the first order we accrued for these royalties under the assumption that oil prices for the full year will average above the estimated $33.29 per barrel threshold price. To the extent oil prices fall below this level for calendar year 2004, we will add back the $900,000 of accrued royalties to revenues. The accrual of these royalties reduced reported first quarter production by 2 million cubic feet equivalent per day.

Lease operating expenses totaled $5.2 million which was the low end of the guidance range. Interest expense totaled $5.9 million which was in the lower half of the guidance range. Reported G&A expense was $3.8 million, and includes a $2.6 million charge associated with the retirement of two executive officers in March. Normal recurring G&A expense for the quarter was $1.2 million which was the low end of the expected range.

In December we issued seven years senior unsecured notes and called 63 million of subordinated notes that were due in 2004. Due to the required thirty-day call period the redemption of the subordinated notes was not completed until January, and at that time we recognized a $2.5 million loss on the early extinguishment of that debt. This charge was anticipated in guidance for the first quarter.

At this point I will turn the call back over to Fred to discuss operations.

Let me start in the Deepwater area. During the first quarter we continued to bring wells on line at our Medusa Field. Our fourth well just came on line, that we're now producing at a combined rate of 29,000 barrels of oil a day and 31 million cubic feet of gas. We expect this to increase further over the next two weeks as the fourth well has not yet come up to its anticipated production potential.

We have recently begun completion of a fifth well, expected to be on line in early July. There is good chance that we will hit capacity of the facility with this fifth well. Regardless, all six wells should be on line by the end of August. And we should almost certainly be at peak production of 40,000 barrels a day and about 40 million cubic feet of gas a day at that time.

Production from the two wells at our Habanero Field continues to do well, 23,000 barrels of oil a day and 62 million cubic feet of gas a day. During the first quarter we drilled an exploratory well at our South Medusa prospect. We encountered non-commercial shows in our objective horizons and have abandoned that project.

Following the evaluation of Medusa South the Medusa North discovery was sanctioned for development. We anticipate commencing completion of this new field discovery in the fourth quarter in order to have it ready to begin production through the Medusa Spar in the first quarter of next year, should capacity be available. We have not yet booked any reserves for Medusa North.

Early this year at Mobile 955 we drilled and completed a development well. The well began producing in March at a rate of 11.2 million cubic feet of gas a day without any compression. We have just completed the installation of a compressor platform and expect to have a compressor hooked up during the next few days, almost a week ahead of schedule. The new compression should allow the two wells at 955 to produce 13 to 14 million cubic feet of gas a day taking the field production up to 30 million a day.

Moving up to the new drilling, our Bald Eagle North prospect, which is located high on Block 119, has been drilled to total depth and we are currently evaluating it. We expect to have an announcement on that oil within the next week. Westport is the operator and Callon owns a 22 percent working interest.

Our second deep shelf prospect called Bobcat on West Cameron Block 295 is currently drilling at a measured depth of 13,500 feet, where we're setting intermediate casing. Bobcat is an up thrown three-way fault closure with AVO support. It will be drilled to a total measured depth of 17,200 feet. This is a significant prospect with reserve potential in excess of 100 Bcf. We own a 20 percent working interest, and Magnum Hunter is the operator. To date drilling progress is on schedule and we expect to reach total depth by early July.

We expect to start our deep third deep shelf prospect in the next 30 days. We call the prospect Magpie. It is located in East Cam 33 in about 36 feet of water. The initial well will be drilled a total depth of 17,500 feet. Again, the prospect is a well-defined down thrown three-way structural closure, again with AVO support. And it is under an existing shallow field. Total reserve potential is in excess of 150 Bcfe. We own a 12.5 percent working interest, and Houston Exploration Company will operate.

We continue to add to our deep shelf prospect inventory. At the OCS lease sale in March Callon was the high bidder on one of two blocks that we bid on. We were high bidder at West Cameron Black 36 with a bid of $2.2 million against three other bidders. The block covers our Secretariat Prospect which we plant to drill later this year. Subject to the leases being awarded, Callon will own a 67.545 percent working interest. We intend to swap part of that interest in a trade to acquire interest in another deep shelf prospect.

We're actively generating new prospects and expect to bid on several blocks at the Western Gulf sale later this summer. In addition we have got a number of other prospects we are working on in the Central Gulf area that are developing both on a farm out type basis as well as looking forward to the lease sale next year.

So a lot going on, and with that I will turn it back over to John for comments on guidance.

Our production forecast for the last nine months of 2004 remains unchanged in total, although we do expect a slight increase -- slightly higher gas production and slightly lower oil production. We exceeded our production forecast in the third quarter, and production guidance for the full year 2004 has been increased by that amount.

When we issued a neutral guidance for this year the NYMEX price strip for calendar year 2004 was not above $33.29 per barrel. That is the estimated 2004 threshold price for Medusa royalty relief. Given the current MYMEX prices we have now assumed those royalties will be paid. This reduced estimated oil production for 2004 by 190,000 barrels.

On the other hand, the Medusa wells are producing at rates in excess of our original estimates, and we have increased estimated future production accordingly. The net effect is a reduction in estimated oil production of between 50 and 100,000 barrels. We now expect 2004 oil production to total between 2.1 and 2.4 million barrels, once again assuming oil prices average above $33.29, and the Medusa royalties are due.

At the same time we saw better than anticipated gas production materialize in the first quarter, primarily at Mobile 955. We expect better than previously estimated gas production for the year. We now forecast 2004 gas production at between 12 and 13.5 billion cubic feet. In the aggregate, 2004 average daily production is now forecast at 67 to 76 million cubic feet equivalent a day versus 65 to 75 in previous guidance.

The estimated ranges for lease operating expenses, recurring G&A expense and interest expense have each been reduced by between 500,000 and $1 million. A large part of the reductions were actually realized in the first quarter, however, part of the reductions can be attributed to trends that are expected to carry on through the year.

Turning to guidance for the second quarter, we're projecting second quarter oil production to total between 490,000 and 530,000 barrels of oil, and gas production to total between 3.3 and 3.6 billion cubic feet. This equates to between 68 and 74 million cubic feet equivalent per day, which would be a 12.5 percent increase from first quarter actual production.

Second quarter operating costs are estimated to range between 6 and $6.6 million. The increase from first quarter levels is primarily attributable to variable operating costs and throughput fees associated with higher projected production volumes. Estimated G&A expenses for the second quarter are unchanged from the estimates used in the first quarter, between 1.2 million and $1,350,000. Hopefully, we will come in at the low end of this range as we did in the first quarter.

We expect interest expense to decline by about 5 percent in the second quarter versus first quarter levels. First, due to a lower total debt level, and second, with all of the recent rate reduction transactions now in place for a full quarter. We expect no charges in the second quarter. The early extinguishment of debt losses are behind us.

There have been no additional hedging activities since our last conference call. Our previously announced hedges cover approximately 50 percent of 2004 oil production, and 47 percent of projected gas production.

And finally, this morning we announced that we have received and accepted a firm commitment for a new senior secured credit facility. The scheduled maturity of our existing facility is June 30 of this year. We currently have 19 million outstanding on that facility. And the 17 million that was outstanding on that facility as of March 31st was shown as a current liability on the balance sheet because our renewal of our credit facility was still pending.

The new facility will be documented and put in place prior to June 30, of course. Under the new facility we will see an immediate increase in the borrowing base to $60 million and a reduction in the pricing grid. The borrowing base will be reset after three months to reflect the completion off wells No. 4 through 6 at Medusa. And we expect an increase in the borrowing base of up to $100 million at about that time.

So what that, we will now open up the call to questions.

(OPERATOR INSTRUCTIONS) Subash Chandra of Morgan Keegan.

John, you got that any plans on taking the '05s out, the existing bonds you have out there and using your credit facility to do that? And second, could you break down Capex this year for dollars dedicated to Medusa to bring the balance of the wells on? And maybe some additional work original work required either at Entrada and Habanero, and what the actual exploration Capex will be?

Okay. Subash, to answer your first question, I am certainly motivated to take out the '05 notes, the 33 million that has an 11 percent coupon on it. I think I can save about $2 million a year in cash interest by doing that. Probably will not do it with the borrowing base at $60 million, but we will look very hard by doing it as soon as we get the bump in the borrowing base later in year.

And I was having some problems on the speaker reception. I think I got your questions on the capital expenditure budget. But looking at the $65 million budget that we have for this year, 2.3 million of that is for completion at Habanero, 7.9 million of that is wrap up completion of Medusa. There is 4 million in there for the proceeding with the development of North Medusa. And then with respect to in total out of the 65 million, 25 million is designated for the shelf, with 6 million of that 25 million being associated with the Mobile 955 well that we drilled earlier this year.

So the other 19 I guess is deep shelf and other?

I'm sorry. When I said shelf, the 25 million, that was total shelf. So I guess that breaks out to be 19 million for basically deep shelf and 6 million for the Mobile. And I do have a portion in my numbers, 11.5 million of overhead and interest. And the balance is -- we're making a sizable commitment this year for new seismic and leases to generate prospects for next year and the year beyond. And about total of $7 million right now is earmarked for leases and seismic.

Member: Do you have -- you have been talking about Entrada well in the fourth quarter. Is that in there, or is that on top?

Yes, yes. We have -- I think it is 5.5 million in this budget for a well to be drilled at Entrada during the latter part of this year.

And finally, what is the lineup for other satellite exploration in the Medusa area?

I think -- of course, they are going to be drilled as soon as capacity is available for them. As Fred mentioned the time line for North Medusa is to start work in the fourth quarter and have it ready for tie-in in the first quarter of next year. We certainly anticipate that the next one that would be drilled would be Medusa Northwest. Which if you remember that is kind of a takeoff from the Stonemaker prospect we drilled last year, where that prospect actually clipped the edge of the target sand and we have some strong indications about whether or not there is oil in that sand. And it would also secure the flow lines back to Medusa. So to answer to your questions, to develop North Medusa and probably start moving forward on Medusa Northwest after that.

Ron Mills at Johnson Rice.

As it relates to the shelf program the first three well out the blocks here are going to really be deep shelf wells. When and -- do you, and if so, when will you drill some of the more conventional shelf locations?

Ron, it is going to be probably third to fourth quarter I think right now before we drill some of the more conventional kind of Bright Spot type projects. And part of the reason for that is we control the timing. And we had -- the timing was such on deep shelf prospects where we've got plenty of activity here going on in the first half of the year, and we will probably bring a partner in on some of the conventional Bright Spot prospect. So it will probably be, I would say late third, early the fourth quarter.

Okay. And can you give us a little bit of a sense in terms of what kind of shelf inventory you have, just given the fact that you haven't been able to really have any activity in that area over the past couple of years?

We've got in terms of prospects under control, leased if you will, inventory is probably -- prospects that we would intend to drill 12 to 15 that -- in inventory. But as I mentioned, quite frankly as you correctly pointed out, we have not had the budget to drill for the last few years and really weren't in a position to ramp that up. So we think we're working on a number of things that we think we will able to add to that this year. To increase that, some of the prospects will generate -- will probably -- they just move up in the queue and be drilled. But right now I would say 12 to 15 prospects that we currently have in inventory.

And would that get you through a couple of years’ worth of drilling?

Certainly it will get us through this year and well into -- through next year. And again, plus things that we -- I'm not including that we're working on that while we don't -- I can't tell you we have leases and title to, but other things that we're working on I think would certainly take us through next year.

Okay. Habanero, you gave us the production rates. It sounds like those are a little bit at least as what you expected, if not a little bit above. How is that production holding up in terms of -- are you starting to see any declines there? And what is the future drilling activities planned?

I think before we brought Habanero on our forecast was 20,000 barrels of oil and 70 million cubic feet of gas. We're making a little more oil than that, maybe 23,000 barrels, a little less gas in the 64 range. But on an Mcf, or barrel equivalent basis, it is producing a little above where we got it would be. And, Ron, it is looking really good, because that rate of 23,000 barrels and 64 million a day was the rate two days ago, 30 days ago, 60 days ago and 90 days ago. So it is holding real well.

Okay. And when that project does start to show some decline, which unfortunately it will, do you have additional opportunities at Habanero?

Well, there are two things. First, remember one of the wells is completed in upper very sick oil sand, and one is completed in lower less thick gas sand which is a smaller reservoir. And so that will -- that one will fall off first. And, of course, but that well will then be recompleted up until into the thicker more productive oil sand when that happens. And then when it is time to move one of those well bores, yes, there is a sidetrack across a fault that we will then tap into an even different reservoir. So there are several moves that will happen over the course of that productive life that will kick production rates back up after they decline.

Okay, and then finally, at Entrada you mentioned drilling another well probably later this year. Is this is this an appraisal well? And if so, it is in preparation of a development program that I think as of now is kind of an early '06 plan? Is that still on the track?

I would say it is little bit more than an appraisal well. It would be a take point well also. And we're real pleased with the way things are going at Entrada. We see some real opportunity to accelerate first production at Entrada. And given the negotiations involved, I would really just like to say we're real pleased with it, and that's about it.

Alright, and congrats on the new facility as well.

David Anderson.

For the rest of the year what is your assumption on cash taxes (multiple speakers)?

I'm sorry, David, something happened with our reception, and I think we just missed the first half of your question.

Okay. Did you hear the question on taxability?

No.

No. I'm sorry we missed you.

I'm sorry. First of all I said congratulations on the quarter and congrats to -- kudos to Ron Mills at Johnson Rice for getting the EPS number right. (indiscernible) the Street. But my question was twofold, one on taxability, I am curious about your assumptions on cash taxes for the rest of this year. And then as that flows into your cash flow for the year it look like, based on your guidance, your cash flow is going to be significantly above the budget number you have gotten. I am just wondering what your -- you know, the first thing in the queue is going to be that you might accelerate into this year that you're looking at to bring in.

On the taxability issue, there will be no cash taxes. As a matter of fact, because of that -- what I consider kind of bizarre accounting rule where we had to write-off our deferred tax asset last year, there will be no booked provision period. So count on no tax provision and no cash taxes for the year.

Sorry, I still had a problem. I know you asked a second part and we couldn't hear.

Yes, can you hear me?

Now we can.

The second question was given the excess cash flow as applied by your projections I am wondering above the 60 odd million budget, what is the first thing you're going to potentially accelerate into this year?

Reduction of debt.

Is that right? You would pay off the debt rather than -- is that because you don't think you can speed up Entrada or you can't speed up (multiple speakers).

I'm sorry. We have some expenditures for Entrada in that budget. You are exactly right. That is the one thing that would probably surpass just continued -- we will reduce debt some. But yes, for everything going to reduction of debt, acceleration of Entrada could certainly get moved ahead of that.

Greg Wash (ph) of Wachovia.

A question for you. Looking at the guidance of '04 going forward, I know it was only guidance, but based on the numbers I see 150 million in sales and 110 in expenses. So we're looking at 40 million before taxes. Is that an accurate number?

You're looking at a forecast of earnings. I think it is probably possible. I'm sitting here looking at our internal numbers and we're not using a current price deck on that. We're using a price deck where prices collapsed to $32 a barrel in the second quarter. So I would see revenues of maybe 100 -- on that basis, assuming that prices retreat to the floor levels of our collars being $30 oil and $5 gas, I can see revenues being as low as 130 million. And I can see expenses, of course, being -- I could see expenses running as high as 114 million. So on a more downside price scenario I can see earnings as low as 15 to $16 million.

(OPERATOR INSTRUCTIONS) Mr. Callon, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Great. Once again we do appreciate everyone calling in. As always, feel free to give either of us a call at any time. Thanks again for calling in.

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