Callon Petroleum Co (CPE) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Callon Petroleum second quarter 2009 results conference call. (Operator Instructions) As a reminder, this conference is being recorded Friday, August 7, 2009.

It is now my pleasure to introduce Fred Callon, Chairman and Chief Executive Officer. You may go ahead, sir.

Good morning, thank you for taking time to call into our second quarter conference call. Before we begin the formal portion of our presentation this morning, I would like to ask Terry Trovato, who heads our investor relations, to make a few comments. Terry?

Thank you, Fred. We would like to remind everyone that some of the comments made during this call would be considered forward-looking statements. As such, no assurances can be given that these events will occur or that the projections will be attained. 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 guidelines strictly prohibit us from using in our filings with them. These estimates are 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 measures were stated in our second quarter 2009 news release and can be referenced there on our website at at www.callon.com for subsequent review. Fred.

Thank you, Terry. This morning we are pleased to have Steve Hinchman, our new Chief Operating Officer, joining us on the call. He will review operations and Bob Weatherly, our Chief Financial Officer, will review our financial results for the second quarter and for the first six months of 2009. Before they begin, I would like to make a few general comments.

First, on the financial said we continue to evaluate alternatives to address Callon's current leverage position which we intend to improve over time in connection with our strategic initiatives. While we have not executed any definitive transactions, we hope to report progress on this front in the coming months. We and our Board recognize it is critical to address the December 2010 senior note maturity in a timely and proactive manner. We are actively evaluating several options for restructuring of our balance sheet and are hopeful to achieve a resolution before our senior notes become a current liability for the company in December of this year. We believe completing such a transaction will provide a solid foundation for the future and greatly increase the spectrum of strategic paths for us to pursue.

In the meantime, during the second quarter the company completed staff reductions affecting approximately 21% of its workforce. The workforce reduction is expected to result in an annual savings of approximately $2.6 million. This was brought about because of the current economic climate and the decline in workload as a result of the disappointing suspension of our Entrada project and the Company's decision to put its offshore exploration program on hold until such time natural gas prices improve and oil field service costs decline.

On the operations side, as I mentioned in previous conference calls and in our presentations at investment conferences, one of our near-term strategic objectives for 2009 is the acquisition of producing properties. While we have not yet completed a transaction this year, our technical and financial teams have been very busy generating opportunities and evaluating potential property acquisitions. As we move through the second half of this year we will continue to explore the acquisition of properties which meet our technical criteria as been reported, though the second quarter of 2009 saw an increase in the ENP acquisition and divestitures market for upstream assets. The activity is still at a ten-year low. One of the factors that was predicted to bring significant properties to the market was to be the impact of significant borrowing base redeterminations by the commercial banks and resulting distress financial situations. With a few exceptions, this has not materialized as commercial banks have been willing to accommodate borrowers rather than seek liquidity from the sale of assets in a challenging divestiture market. While quality assets may still come to the market from this source as advantageous hedges continue to roll off through 2009. However, we are actively pursuing other avenues to proactively seek out assets that fit our criteria and form a catalyst for future growth in addition to organic development and exploration drilling activities.

Our acquisition criteria contains an onshore bias but we will continue to evaluate offshore opportunities with compelling reserve acquisition metrics where we have considerable operating expertise and seasoned technical staff to operate effectively and economically. We are increasing our focus on becoming an operator of acquired properties. We are also evaluating entry into new basins complementary with our existing expertise and institutional knowledge. Any acquisition we make will include a meaningful prude developed producing component to facilitate bank financing coupled with a credit accretive transaction profile. 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.

So in the near term we intend to maintain our focus on liquidity and building production and reserves through bank financeable property acquisitions. In the medium term, as economics improve, we intend to pursue and identify the development and exploration drilling within our current portfolio as well as identify drilling opportunities on newly acquired properties. Longer term, as we have stated on several occasions, is our goal to refocus our asset base to include additional onshore exposure where we have a long history of successful operations and senior management experience as does our new chief operating officer, Steve Hinchman, and at the same time we will continue to evaluate corporate merger and acquisition initiatives in order to accelerate these initiatives.

Now we will turn the call over to Steve to give you an overview of operations followed by Bob to report on results of our operations for the second quarter and first half of 2009 along with guidance for the remainder of the year. Steve.

Thank you, Fred, and good morning. It is certainly my pleasure to be participating in this call for the first time since joining Callon on June 1. I'm excited to be here and about the potential we have to properly grow Callon's production and create shareholder value. As Fred has already discussed, the primary focus for Callon is to acquire producing assets that initiate a transition of Callon's resources from solely offshore to a more diverse and less concentrated resource base located both onshore and offshore. Although marketed property dispositions have been limited during the first half of 2009, we have taken a number of proactive steps to increase the deal flow and improve our chances in making a successful acquisition. In addition to our knowledge in the Gulf of Mexico, we have brought in additional expertise and resources with specific knowledge of the permian basin, Gulf Coast, east Texas and Louisiana and Mississippi. We are currently evaluating multiple property acquisitions with additional opportunities queueing up. I'm confident that we will close an acquisition in the second half of this year that will provide a catalyst in redefining our portfolio.

Although our current attention is on strategic acquisitions, we have maintained a drill ready inventory of eight Gulf of Mexico exploration prospects. The exploration portfolio can be monetized through the drill bit or commercially depending on other investment opportunities and risk tolerance. The earliest lease expirations of these prospects is 2011.

We have recently agreed to an area of mutual interest that will include Callon's High Island block 200 and A8 with High Island block A7 which is operated by (inaudible) exploration. It is anticipated that the exploration well will be drilled early in 2010. These growth opportunities are underpinned by a confident base production. Our base production averaged 33.1 million cubic feet of gas equivalent per day in the second quarter of 2009 exceeding our guidance of 28 to 30 million. The has Habanero Garden Banks Block 341 number 1 well reached its 175% payout in late June allowing a back end and reducing our working interest in the well from 25% to 11.25%. Our guidance earlier payout and lower working interest in the well for the second quarter.

Adjusting for the interest conversion, we would have produced approximately 30 million cubic feet gas equivalent per day or at the upper end of our guidance. The second quarter 2009 production was made up of 1.4 Bcf of natural gas and 262,673 barrels of oil. This compares to the second quarter of 2008 of 1.7 BCF and 285,555 barrels or 37.2 million cubic feet of gas equivalent per day. This year on year production decline is primarily due to natural decline including wells watering out in High Island Block 119 and 130 and a mechanical failure Kings (inaudible) field. This was partially offset by East Cameron Number 2 which came online in October of 2008.

The second quarter of 2009 production compares favorably to the first quarter of 1.4 Bcf of natural gas and 263,000 barrels of oil or an equivalent of 33.6 million cubic feet per day. This small difference is primarily due to some flush production continuing from Medusa primarily in January following continued well optimization post Hurricane Ike.

On the expense side, the lease operating expense for the second quarter of 2009 was $4.65 million or $1.55 per MCF equivalent which was slightly above our guidance at $4 million to $4.5 million. This again was due to the higher working interests in the Habanero Number 1 well resulting in higher participation in the cost than what was assumed in the guidance. Lease operating expense for the second quarter of 2008 was $4.9 million or $1.44 per MCF. The lower expenses in the second quarter of 2009 are primarily due to lower production volumes partially offset by hurricane repair costs which were booked in the second quarter.

Lease offering expense in the first quarter at 2009 was $4 million. The higher expenses in the second quarter is due to unscheduled maintenance conducted at Medusa, essentially a compressor repair, and hurricane repair costs at High Island A494. Through the first half of 2009 abandonment costs are $2.6 million. We have a remaining commitment of $3.4 million and the potential for additional abandonments in the year of $3 million which are not committed at this time. This results in a range of $6 million to $9 million estimated to be spent in 2009 which is in line with prior guidance of $10 million.

And, finally, our capital program for our producing assets is purposely limited in 2009 while we focus our available resources on producing property acquisitions. Through the first half of 2009 we have spent $6.9 million. We expect to spend $16 million in 2009, most of which is capitalized interest and general and administration expenses. Approximately $1.4 million will be spent on capital projects on producing assets. $1.2 million of that is at High Island A494 for the B1 development project which came on line in late July at a gross rate of 3-1/2 million cubic feet per day. We have no other acquired expenditures in 2009.

So as you've heard, our production volumes, lease operating expense, our abandonment costs and our capital expenditures are all meeting our targets in the guidance that we previously provided. Our focus is very clear and we'll execute. With that I'll turn the call over to Bob Weatherly.

Thank you, Steve. As we reported in our earnings release for the three months ended June 30, 2009, the company reported a net loss of $925,000 or $0.04 per share. This was better than analysts consensus estimate which had us at a net loss of $0.09 per share. The primary drivers for the improvement of the second quarter results over estimates was our daily production rate of 33.1 million cubic feet of natural gas equivalent per day which exceeded the top end of our guidance range for the second quarter and the positive impact of our hedge position.

Thus far we have received $12 million from hedging position settlements for the first half of 2009 and we estimate that we could receive an additional $7 million for the remainder of the year based on current pricing forecast. We continually monitor our hedging position and we anticipate by the end of the third quarter we will reach our announced goal which is to hedge approximately 50% of our 2010 legacy production.

Regarding expenses, Steve discussed our lease operating expenses for the second quarter. General and administrative expenses in the second quarter were $5.4 million. This was more than our previous guidance and, as Fred has discussed, is largely due to the impact of a nonrecurring charge of $2.2 million related to staff reductions and retirements in the second quarter. Interest expense excluding interest related to the Callon Entrada nonrecourse credit agreement was $4.8 million and within our guidance range. The in kind interest expense accrual related to the Callon Entrada nonrecourse credit facility was slightly more than our guidance.

I'd like to take a minute now to discuss one item in our June 30, 2009, balance sheet which we provided in our earnings release. As we previously reported on April 2, 2009, Callon Entrada, which is a special purpose subsidiary formed to execute the deep water Entrada project received a notice from CIECO Entrada advising of an alleged events of default under this nonrecourse credit agreement. This notice of default invoked CIECO Entrada's rights to accelerate payment of the principal and interest due under the Callon Entrada nonrecourse credit agreement. This acceleration caused the principal and interest balances as recorded on the books of Callon Entrada to be reclassified at the current liability from long-term liability under US generally accepted accounting principals or GAAP. Also under GAAP Callon Petroleum is currently required to fully consolidate the financial statements and results of operations of Callon Entrada.

As a result, at June 30 in our consolidated financial statements Callon Entrada's nonrecourse liability is reflected in a separate line item in the consolidated financial statements and included in our consolidated current liability. Callon Entrada does not have adequate assets to pay the balance due on the Callon Entrada nonrecourse liability. Further, Callon Petroleum is not obligated to repay the principal, accrued interest or any other amount which may become due under the Callon Entrada credit facility.

As required, we have prepared our interim consolidated financial statements in accordance with GAAP. However, all readers of the Callon Petroleum consolidated financial statements need to carefully review note 1 to the consolidated financial statement in our second quarter form 10-Q which will be filed next week so that they can fully understand that Callon Petroleum is not responsible for payment of the liability that appears on the consolidated financial statements which are prepared in accordance with US generally accepted accounting principals.

I apologize for this lengthy and possibly confusing explanation, but I felt it was important that readers of our consolidated financial statements have the situation properly explained to them. Also, please review our earnings release for further details on our results of operations for the second quarter ended June 30, 2009, and the six-month period ended June 30, 2009. As Fred and Steve have both discussed, our current plans are to begin the process of regrowing production by the acquisition approved producing properties with development opportunities. Our prior decisions to maximize liquidity provide us with the ability to execute on this strategy. With that being said, I'd like to discuss guidance for the third quarter and the full year for 2009.

For the third quarter we are projecting a daily production rate of 25 to 28 million cubic feet equivalent per day and are projecting the full year production to be 28 to 34 million cubic feet equivalent per day. Approximately 50% of this approximate will be oil. We have not added any additional oil hedges but have put in place gas hedges for the fourth quarter of 2009 with $4 to $4.50 and a ceiling of $6.30. Please refer to the guidance press release for more detail regarding our hedges.

We have made minor adjustments to the full year guidance for lease operating expense, G&A and interest expense excluding the portion related to the Callon Entrada nonrecourse debt. Also, we have reduced the high end estimate of DD&A for the full year to $37 million from $41 million. This is a result of lowering production guidance as discussed and a lower forecasted rate for the year. Interest expense which is accused accrued in kind related to the Callon Entrada nonrecourse debt is estimated to range $1.8 million to $2 million for the third quarter and between $7 million and $7.4 million for the full year if the nonrecourse debt remains on Callon Entrada's balance sheet and a part of our consolidated financial statements for the full year. The increase is due to the increase in the interest rate resulting from the default notice received by Callon Entrada. Please refer to the guidance release which provides guidance for the third quarter and full year 2009. Now I'd like to turn the call back to Fred for his final comments.

Thank you, Bob. I think that concludes our formal remarks. We'd now like to open the call to questions.

Thank you. (Operator Instructions) Our first question from the line of [Don Chris] from Johnson, Rice & Company. You may proceed.

Good morning, guys.

Good morning.

Can you talk a little bit about your recompletion schedule at Medusa and Habanero. I know they're not set for 2010, but is that first quarter event or is that more toward the later half of the year?

The recompletion schedule for Medusa?

Correct.

There is a workover program that is planning to be done that will be done in the fourth quarter. That involves some reperforating some stimulation and some gas lift analysis. That will be really the only activity that goes on in Medusa in 2009. In 2010 there is the potential for a development well. That is still being kicked around and it is suspect whether it will actually be executed in 2010.

Okay. And following on the theme with the acquisition market, did I hear you all correct in saying that you were all looking at onshore basins?

That's correct. We want to begin to diversify our portfolio from being solely offshore to moving onshore. So our focus on acquisitions onshore, permean basin, Gulf Coast, east Texas, Louisiana, Mississippi are the areas that we are currently focused on.

Are you looking for more gas, gassy play or are you looking for more oil or does it really matter at this point as long as the economics are good?

Long-term I think it is important that we keep our portfolio reasonably balanced between oil and gas. So as we work through and begin to change the portfolio at one time it might be a little oilier and another time a little gassier but our long-term objective is to keep it reasonably balanced which is where we are at today.

Do you have any size in mind? Do you want to stay under the $48 million limit on your revolver or are you interested in issuing equity to build the company that way?

Our plans resolve around $50 million for an acquisition here in 2009.

That's all I've got. I'll turn it back. Thank you.

Thank you.

(Operator Instructions) Our next question from the line from [Zach Nabile] from Capital One Southcoast. You may proceed.

Can you speak a little bit more about the CIECO deal and restructuring the debt?

CIECO I think we have boast in our financials and in prior calls that we have financial issues, two issues related to unfunded loan request and an invoice that is disputed that we feel like is owed to us and we are continuing to have conversations with them on those issues. And with respect to the notes -- With respect to the notes, I think we have said

With respect to the notes, I think we have said that our objective clearly is to add some restructuring in place certainly before the end of the year when our notes become current. We have continued to look at several alternatives on how we might accomplish that and we are putting a good bit of effort into that now.

Okay. That was it for me.

Thanks.

Speakers, there are no further questions at this time. You may resume with your presentation or closing remarks.

Again, we appreciate everyone taking time to call in and, as always, if anyone has any further questions please don't hesitate to give any of us a call at any time. Thank you so much.

Ladies and gentlemen, this does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a good weekend, everyone.