Callon Petroleum Co (CPE) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter 2009 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded Tuesday, May 12, 2009.

I would now like to turn the conference over to Fred Callon, Chairman and CEO. Please go ahead.

Thank you and good morning. We appreciate you taking time to call into our first quarter conference call. Before we begin the formal portion of the presentation, I would like to ask Terry Trovato, who heads our Investor Relations, to make a few comments.

Thank you, Fred. We would like to remind everyone that some of the comments made during this call will be considered forward-looking statements. As such, no assurances can be given that these events will occur or that the projections will be obtained. Please refer to the cautionary language included in our news release and in the risk factors described in our SEC filings. We undertake no obligation to publicly update or revise such forward-looking statements. It is also important to note that the SEC permits us in our filings with them to disclose only proved reserves that we have demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.

During today's discussion, we may use terms like reserve potential and probable reserves that the SEC's guidelines strictly prohibit us from using in our filings with them. These estimates are, by their nature, more speculative than estimates of proved reserves, and accordingly, are subject to a substantially greater risk of being actually realized by the company. Finally, today, we will be discussing 2009 cash flow, which is considered a non-GAAP financial measure. Reconciliation and calculation schedules for the non-GAAP financial measure were stated in our first quarter 2009 results news release and can be referenced there on our website at www.callon.com for subsequent review. Fred?

Thank you, Terry. Let me begin by taking a few minutes to summarize Callon's operations and business focus so far in 2009. As we pointed out in our year-end conference call, we believe our company is in good financial condition with no major financial hurdles to address in 2009. Although our revenue and profits were below the comfortable quarter last year, due to lower commodity prices and production, we did exceed the analyst expectations for this quarter, and unlike of some our peers, we did not have any negative charges to earnings due to full cost ceiling write-downs. In addition, our production for the first quarter was above previously-provided guidance.

During the first quarter, we have continued to explore the possibility of acquiring, producing properties with future development upside. As we have noted in the past, we believe it appears best use from the company's capital to acquire producing properties rather than to explore. As service costs come down and commodity prices improve, we'll consider increasing our drilling activity. Until we reach that point, we believe the best use for our technical personnel's time and our company's capital is to seek quality acquisition opportunities. Potential asset and corporate acquisition targets are primarily onshore and selective opportunistic offshore opportunities, where is we feel we have considerable operating experience and the technical staff to operate effectively and economically.

Any significant strategic acquisition will fit our criteria of having a significant component of current production and multiyear development opportunities. By prudently using our liquidity and pursuing acquisitions that are largely bank financeable, we plan to add quality reserves as a catalyst for growth over the next several years. While we were not successful in closing a transaction the first quarter, our technical and financial team is dedicated to significant amount of time to analyzing several opportunities, we'll continue to focus on this initiative and hope later this year to complete a transaction that will increase our daily production rate in oil and gas reserve base. When the proper balance of commodity prices and service prices is achieved in the future, we'll once again return to a more active drilling program to continue to build shareholder value.

Regarding Entrada, as reported in our last call, we've begun the process of demobilizing the field operations, including our service contract commitments in selling tangible equipment that have been acquired for the project. We've made significant progress related to this final phase of Entrada project. Our project team continues to market the intangibles and essentially all of the vendor and service contracts have been concluded. The leases for the Entrada [field] blocks expire on June 1st. We continue to discuss the two unresolved financial issues with our partner in the project.

Now on a more positive note, on April 30, we announced a significant addition to our leadership team. Effective June 1st, Steve Hinchman will join the company as Executive Vice President and Chief Operating Officer. Steve is joining us after a successful 29 year career with Marathon Oil Corporation, where he most recently served as Executive Vice President and a member of Marathon's executive committee. Steve's broad operational experience and comprehensive technical project knowledge of essentially all domestic US oil and gas basins will be a tremendous asset as we grow the company and diversify our reserve base. His exceptional qualifications and successful track record make him ideally suited for this position at this point in time and we're very excited to welcome him to our organization.

Now let me take a few minutes to review the status of our ongoing operations. First, at Medusa, our eight wells are currently producing 12,500 barrels of oil and 12 million cubic feet of gas a day. The program of workovers and the drilling of an additional well has been deferred until 2010, due to current commodity prices. As you recall, we own a 15% working interest in Medusa field and Murphy Oil operates. At Habanero, the field is producing 6,500 barrels of oil and 9.8 cubic feet of natural gas per day from two wells, both producing from Hab 52 oil reservoir. We own an 11.25% working interest in the number two well. and a 25% interest in the number one well. Shell is the operator. At west Cameron 295, [the field] is producing 19 million cubic feet of natural gas a day and 120 barrels of oil. An additional well may be drilled on the block here in 2010 depending on well performance.

Number two and number four wells are operated by Mariner, while the number three well is operated by Cimarex. We own a 20.5% working interest in these wells. Our East Cameron two, that's our north [pronghorn] field is producing 7 million feet of gas and 130 barrels of oil per day. Apache operates and we own a 42.5% working interest. The East Cameron 257 field is producing five million cubic feet of natural gas and SPN Resources is the operator. We own a 50% working interest. And as I mentioned earlier in this low current commodity price environment, coupled with relatively high off-shore service costs, we're not planning to actively pursue our drilling prospect that we have high graded from the Gulf of Mexico inventory. We do have an inventory of prospects that includes nine drill ready prospects with unrisk reserve potential in excess of 280 Bcfe. We're monitoring market conditions, as we see project economics improve as a result of some combination of increasing commodity prices and/or reductions in service cost, we'll of course revisit our drilling plans.

Consequently, other than producing property acquisitions, we're currently planning limited capital expenditures for the remainder of 2009, but we'll continue to monitor attractive opportunities for capital development. Other than approximately $10 million of scheduled plug-in and abandonment expenditures, the estimated [cap less] interest and overhead costs are approximately $15 million. We have no required capital expenditures this year. With that, I'll turn the call over to Bob Weatherly for a recap of first quarter financial results and second quarter and full year 2009 guidance. Following Bob's remarks, we'll open the floor for questions.

Thank you, Fred. As we reported in our news release, the three months ended March 31, 2009, the company reported a net income of $2.4 million or $0.11 per share. This exceeded analysts consensus estimates which was a net loss of $0.07 per share. For the quarter ended March 31, 2008, the company reported net income of $7.6 million or $0.35 per share. For the quarter ended March 31, we reported oil and gas sales of $24.8 million, which was down from sales of $45 million for the same period in 2008. Average production for the quarter was 33.6 million cubic feet of natural gas equivalent per day and above the range of previously issued guidance of 29 to 33 Mcfe a day. First quarter 2009 production was comprised of 1.4 billion cubic feet of natural gas and 263,000 barrels of oil. This compares to first quarter 2008 production of 2.1 billion cubic feet of gas and 290,000 barrels of oil or an equivalent 42.1 million cubic feet of natural gas equivalents per day.

The decline in the year to year production is primarily attributable to a number of our wells exhibiting natural decline during 2008 and the loss of production from Highland Block A-540, after the determination that repairs necessary to return this well to production would be uneconomic. In addition, as part of our 2007/2008 strategy of maximizing liquidity to ensure adequate capital to complete the Entrada project, we reduced our exploration activity. This decision has negatively impacted our current production rate versus prior year, but it assured us of a solid liquidity position in a time when liquidity is king. As Fred mentioned, our current plans are to begin the process of growing production by the acquisition approved, producing properties with development opportunities. Our prior decision to maximize liquidity provides us with the ability to execute this strategy. The average realized oil price for the first quarter of 2009 was $60.59 per barrel or 30% less than the realized oil price in the same quarter of 2008 of $86.66 per barrel. Oil hedging positions increased our average realized price by $22.87 per barrel of oil in the 2009 period. The benchmark oil price for the first quarter of 2009 as measured by the average closing price of NYMEX contract for delivery of WTI was $43.08 per barrel.

As a reminder, the spread between the benchmark oil price and our average realized oil price is primarily due to quality adjustments occurred in the sale of our production from Medusa and Habanero which accounted for approximately 95% of our first quarter oil production. Please refer to our news release for a reconciliation of our realized oil price to the average NYMEX price. Natural gas price realization in the first quarter of 2009 averaged $6.13 per Mcf or 35% less than the realized price of $9.50 per Mcf for the same period in 2008. Natural gas hedging positions increased our average realized price by $1.27 per Mcf for the three months ended March 31, 2009. On the expense side, LOE for the first quarter of 2009 was $4 million or $1.33 per equivalent Mcf production. This was below our guidance range of $5 million to $5.5 million. In the first quarter 2008, LOE was $5.2 million, which is higher than 2009, primarily due to a larger number of producing wells in 2008.

G&A expense was $1.8 million compared to $2.7 million for the first quarter 2008. This was below our guidance. The lower amount was primarily due to the reversal in first quarter of 2009 of previously-approved incentive compensation payments which were not awarded. Interest expense for the quarter was $6.3 million, which was a 36% decrease from the 2008 amount of $9.9 million. This decrease was due to the retirement in April 2008 of the $200 million senior revolving credit facility which was associated with the Entrada acquisition from BP. Our first quarter 2009 guidance range for interest was $6 million to $7 million. Depletion, depreciation and amortization for the first quarter 2009 totaled $9.4 million or just above our guidance range of $8 million to $9 million. This was a substantial decrease from the $15 million in the first quarter 2008, due to lower production volumes and a reduced DD&A rate resulting from the fourth quarter 2008 charge for the impairment of oil and gas properties.

Discretionary cash flow in the first quarter totaled $14.2 million or $0.66 per share. Discretionary cash flow is non-GAAP financial measure -- measurement and we have provided reconciliation to cash provided by operating activities in our news release. Following is a summary of the guidance for the second quarter and full year 2009, which was provided in our news release. For the second quarter, we are projecting a daily production rate of 28 million to 30 million cubic feet per day, and are holding the year at our previous guidance of 27 million to 35 million cubic feet equivalent per day. Approximately 50% of the projected production is oil. Lease operating expense should be approximately $4 million to $4.5 million and $17 million to $22 million for the second quarter and full year 2009 respectively.

G&A expense should be between $2.5 million and $3 million for the second quarter and from $9.3 million to $10.8 million for the full year 2009. Interest expense excluding the portion related to the Callon Entrada nonrecourse debt should range from $4.7 million to $5.1 million for the second quarter in between $19 million to $21 million for the full year. Interest expense which is accrued in kind related to the Callon Entrada nonrecourse debt is estimated to range from $1.5 million to $1.7 million for the second quarter and $6 million to $6.5 million for the full year, if the nonrecourse debt remains on our consolidated balance sheet for full year. With regard to DD&A, we're projecting ranges of $8 million to $9 million for the second quarter, and for the full year, between $30 million and $41 million. For the remainder of 2009, we have 270,000 barrels of oil hedged as collars with an average price of $175.75 and an average floor price of $110. We have no gas hedges currently in place for the remainder of 2009. Just a reminder that realized oil prices will continue to be affected by quality differentials and transportation costs. We anticipate transportation costs should average about $1.30 to $1.35 per barrel. With that, we'll be pleased to take your questions.

Thank you. (Operator Instructions) One moment, please, for the first question. Our first question comes from the line of Ron Mills with Johnson Rice & Company. Please proceed with your question.

Good morning.

Good morning.

A couple of questions, just on your balance sheet. Bob, I think your borrowing base is a $48 million borrowing base which is currently undrawn at this time. Go ahead.

Yes. $48 million is the borrowing base.

Okay. It is fully undrawn right now, correct?

No. Right now, we have $7 million drawn on the borrowing base and this was in -- as a result of a draw against our letter of credit that we had posted with Diamond Offshore, and I think as we reported, we had -- are continuing to discuss with CIECO, their payment of their portion of the settlement with Diamond Offshore which was $7 million. But that's the only thing that's drawn.

Okay. And I'm assuming that's one of the couple of financial discussions you're in with CIECO. What else are you discussing with them about tying up the Entrada piece?

Well, as we've noted, the first matter is the settlement of the termination payment with Diamond on the drilling contract. And Callon timely paid its share of the settlement of $7.3 million back in March. CIECO's failed to fund its share, and as we reported April 1st, they drew that down. So that's the first one. The second unresolved financial matter is, as we reported on our K and in the Q, is CIECO's figured to fund two loan requests back in 2008, which totaled $40 million under the nonrecourse credit agreement with Callon Entrada. We submitted these loan requests back in October/November, prior to abandonment of the project. And they were to cover Callon Entrada's share in the costs incurred in the development. We continue to have active discussions with CIECO regarding both of these matters and we look to resolve them on a timely basis.

Okay. And as it relates to your borrowing base and the search for potential acquisitions, are we in a new world in terms of how the bankability of potential acquisitions in terms of relative to the prior financial abilities, if you have $48 million available and you have some producing properties with those reserves, which should add some future borrowing base. How big of acquisitions do you think you all could be targeting in this environment with your current borrowing base?

Well, I think, Ron, as you point out, and as we have pointed out, as our primary focus on acquiring properties, are producing properties that would be added to our borrowing base. And clearly, with our borrowing base, we're look toward the properties that would actually offset some of the concentration we have currently in our borrowing base with our two deep water fields. So, we'll continue to look for those, and from a size standpoint, I don't know that we have any real target from a size standpoint but as a practical matter, we wouldn't do something that would fully draw down the availability on our borrowing base.

Okay. And lastly, as it relates to Steve Hinchman coming over, seems like he's done kind of a little bit of everything at Marathon. Was there any in particular that he was focused on here on-shore in the United States, that as you all pursue this acquisition strategy that he'll play a pretty vital role in evaluating opportunities?

Well, I think, in our -- first of all, I would echo what Fred said in his comments. All of us here are very excited about having Steve, and Steve has got a deep background in onshore and offshore with Marathon, with quality company, quality reserves. And we just look forward to him bringing that expertise and abilities with him. We're very excited about it.

Okay. Let me let someone else jump on. Thanks.

Thank you. (Operator Instructions) One moment, please. There are no further questions. At this time, please continue with your presentation or closing remarks.

Once again, we appreciate everyone taking time to call in, and as you know, we're always available for questions any time. So, feel free to give us a call any time. Again, thank you for taking time to call.

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