Callon Petroleum Co (CPE) 2009 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Callon Petroleum Company third quarter 2009 results conference call. During the presentation, all participants will be in a listen-only mode. Afterward, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Friday, November 6, 2009. I would now like to turn the conference over to Mr. Fred Callon, Chairman and Chief Executive Officer at Callon Petroleum Company. Please go ahead.

Good morning. Thank you for taking time to call into our third 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. Terry?

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 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'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 third quarter 2009 results news release and can be referenced there on our website at www.Callon.com for subsequent review. Fred?

Thank you, Terry. Again, we appreciate you joining us this morning. I'd like to begin by asking Steve Hinchman, our Chief Operating Officer to discuss our transitional operation strategy including our recently announced acquisition in the Permian Basin, as well as to review our operations for the third quarter.

Bob Weatherly, our Chief Financial Officer, will then review our financial results for the third quarter and the first nine months of this year, as well as discuss our recently announced exchange offer for our senior notes due 2010. Completing this exchange offer will be a significant positive development for our shareholders and a catalyst, we believe, for future growth opportunities. So let's start with Steve.

Thank you, Fred, and good morning. As we have previously discussed, a primary focus for Callon is to acquire producing assets that initiate a transition in Callon's resources from solely offshore to a more diverse and lower risk resource base located both onshore and offshore.

Our transition strategy is to use cash flow from our strong base production anchored by two deep water properties, Medusa and Habanero, which have both strong current cash flow and growth opportunities to fund our growth onshore in the Permian Basin, which would be focused on oil and on shale gas plays.

During the third quarter, we executed an initial step in this transition by entering into a purchase sale agreement with ExL for Wolfberry production and development potential in the Permian Basin located in West Texas. The transaction was successfully closed on October 28th for $16.25 million with an effective date of the sale of September 1st.

This acquisition, which entails four producing and development areas located in Crockett, Ector, Midland, and Upton counties, provides an initial footprint in the Basin and a foundation to build on. The properties have 1.6 million barrels of oil equivalent of proven reserves, 23 producing wells, 14 proven, undeveloped locations, and over 140 non-proven locations, assuming a 40-acre development and many more if the play is ultimately downspaced to 20 acres.

Callon will operate substantially all of the production and development with a working interest between 85% and 100%. The Wolfberry development is a statistical play, where the Sprayberry and Wolfcamp formations are co-mingled and stimulated using hydraulic fracture technology.

Wells typically come on production at 20 barrels of oil per day and clean up after a couple of months to about 80 barrels of oil per day. And then decline over a 20- to 25-year period.

We estimate that individual well ultimate recovery in our areas will range from 85,000 to 100,000 gross barrels of oil equivalent. 90% of that is oil and natural gas liquids.

Operations are in transition over the next month with a Callon business manager and production superintendent on the ground. We will initiate an 11-well drilling program beginning in the first quarter of 2010. And we are currently pursuing additional acquisition opportunities that would further complement these assets.

Now, turning our attention to the performance of our base assets beginning with our safety performance. Safety is a top priority and reflects the character of an organization. And I am proud of Callon's safety performance, having had no employee or contractor OSHA-reportable incidents so far in 2009.

Also in the third quarter, Callon received MMS approval to reclassify our temporary abandonment status for two Entrada exploration wells to now a permanent abandoned status. This entailed a detailed review of the well bores and had a good collaborative effort working with the MMS. This reclassification removes between $7 million to $18 million of net abandonment costs that would have otherwise occurred in 2010.

Now, turning to production. Our base production averaged 27.4 million cubic feet equivalent per day in the third quarter of 2009 in line with our guidance of 25 million to 28 million. The third quarter 2009 production was comprised of 1.34 Bcf of natural gas and 197,000 barrels of oil. This compares to the third quarter of 2008 of 1.15 Bcf of gas and 205,000 barrels of oil or 25.9 million cubic feet equivalent per day.

This positive variance is due to the significant production impact of hurricanes Gustav and Ike in the third quarter of 2008, along with the start-up of production from East Cameron 2, well #1 in October of 2008 and the High Island A494 well #A-3, and Mobile Bay 864 Well #A-2 in July of 2009. These gains were partially offset by the overall natural decline and the reversion of interest in Habanero Garden Banks 341, #1 well, which occurred in June of 2009.

The third quarter 2009 production compares to the second quarter 2009 production of 1.4 Bcf of natural gas and 263,000 barrels of oil, or an equivalent of 33.1 million a day. The negative variance is primarily due to a full quarter of production from the Habanero Garden Banks Block 341 #1 well at a lower interest after the well had reached 175% payout in late June, allowing a back-end, which reduced our working interest from 25% to 11.25%.

For the first nine months, our production averaged 31.3 million cubic feet equivalent per day, 4.2 Bcf of gas and 723,000 barrels of oil. We expect full year production to fall within the range of 29 million to 32 million per day.

Production from the Permian asset is included in this range and is expected to average 350 barrels to 400 barrels of oil equivalent per day in November and December. October production will be a part of a post-closing adjustment.

Now, on the expense side. Our lease operating expense for the third quarter of 2009 was $4.96 million or $1.97 per Mcf equivalent, which was slightly above our guidance of $4.4 million to $4.8 million. The increase was due to additional hurricane repair expense at High Island A494 and a Medusa workover program that we had originally estimated would occur in the fourth quarter, but was accelerated to the third. Lease operating expense for the third quarter of 2008 was $3.7 million or $1.55 per Mcf equivalent.

The higher expenses in the third quarter of 2009 were due to lower produced volumes in the third quarter of 2008 due to the hurricanes, and a higher workover activity and higher insurance costs in the third quarter 2009. Lease operating expense in the second quarter of 2009 was $4.65 million. The higher expense in the third quarter was due to the Medusa workover activity.

Lease operating expense for the first nine months in 2009 is $13.65 million. We expect lease operating expense to range between $18 million and $20 million for the full year, in line with our prior guidance. Again, the Permian basin assets are included in this guidance and will average about $250,000 in the fourth quarter.

Through the first nine months of 2009, abandonment costs are $5.4 million. And for the year, we expect to be at the low end of our prior guidance of between $6 million and $9 million.

As you have heard, our production volumes, our lease operating expense and our abandonment costs were all in line with our original guidance. We will continue to focus on our transition, execute on our operations and development, and deliver on what we say.

With that, I will turn the call over to Bob Weatherly, our Executive Vice President and CFO.

Thank you, Steve. Before I discuss the results of operations for the third quarter and guidance for the full year, I would like to give you a brief update regarding our recently announced offer to exchange our 9.75% senior notes due in December of 2010 for new senior secured notes.

On October 21, 2009, we commenced an exchange offer for any and all outstanding senior notes due in 2010. In summary, the terms of the exchange are as follows.

For each $1,000 principal amount of outstanding senior notes tendered in accordance with the exchange offer, tendering note holders will receive $750 principal amount of 13% senior secured notes due September 2016; 20.625 shares of common stock, and 1.6875 shares of convertible preferred stock.

Each share of the convertible preferred stock will be automatically converted by the Company into 10 shares of common stock, following shareholder approval of an amendment to the Company's charter which will increase the number of authorized shares of common stock as necessary to accommodate the Company's conversion.

When we launched the exchange offer, 73.5% of the senior notes had already committed to tender their notes into the exchange offer. The new senior secured notes will have a second lien on the assets of the Company until such time that less than $10 million of the old senior notes are outstanding. The exchange offer will become effective when 80% of the aggregate principal amount of the senior notes have tendered their notes for exchange. The exchange period will remain open until November the 19th.

Now, let me discuss the third quarter results of operations as we reported in our earnings release. Oil and gas revenue for the third quarter of 2009 totaled $21.3 million. For the nine month period ended September 30, oil and gas revenues were $71.1 million. For the three months ended September 30, 2009, the Company reported a net loss of $955,000, or $0.04 per share versus an analyst estimate, which was a net loss of $0.10 per share.

Some of the highlights of this period are as follows. Our third quarter results continued to benefit from hedging positions we put in place in 2008. For the third quarter of 2009, our realized oil price was $87 per barrel of oil before basis differentials and transportation. This realized price was $19 per barrel over average NYMEX of $68 for the quarter.

For the first nine months of 2009, we have received $16.1 million from our hedging settlement and expect to receive a further $3 million in the fourth quarter based upon current price forecast. We continue to monitor available hedging positions for 2010, and as has been our practice in the past, we do expect to hedge approximately 50% of our 2010 legacy production by end of the year.

Depreciation, depletion, and amortization in the third quarter was approximately 40% less than DD&A in the third quarter of 2008. This decline is due to lower production volumes in the third quarter of 2009, and a lower DD&A rate in 2009 versus 2008. The DD&A rate of $2.72 per Mcfe for the third quarter of 2009 is compared to $4.83 per Mcfe for the third quarter of 2008.

This lower rate is a result of a full cost ceiling writedown we recorded at year-end 2008 and a downward revision in the third quarter of 2009 of plugging and abandonment costs of the Entrada field.

Depreciation, depletion, and amortization declined 41% for the nine months ended September 30. Steve Hinchman has discussed LOE expense as a part of his comments. G&A expenses in the third quarter of 2009 were $3 million as compared to $1.5 million in the third quarter of 2008.

This increase in G&A in this quarter versus the same quarter last year is primarily a result of not receiving overhead fees as operator of the Entrada fields. Because in the third quarter of 2008, $1.1 million of overhead fees were recorded as a reduction in G&A expense.

Interest expense, excluding interest on our non-recourse debt, was $4.9 million and within the guidance range for the third quarter. Please review our earnings release for further results of operations detail for the quarter ended September 30 and the nine months period ended September 30, 2009.

Regarding the September 30, 2009 consolidated balance sheet which was provided as part of the earnings release and as discussed last quarter, there is an $84.5 million item included in current liability on our consolidated balance sheet which represents the balance of a non-recourse credit facility.

This liability is a liability of Callon Entrada Company. The 100%-owned, special purpose subsidiary of Callon Petroleum Company, which was formed to execute the Entrada Deep Water Project. This non-recourse debt is due to CIECO Entrada Energy LLC, our partner in the Entrada project.

Under generally accepted accounting principles, Callon Petroleum is currently required to consolidate the financial statements and results of operations of Callon Entrada, which results in Callon Entrada's non-recourse liability being reflected in a separate line item in Callon Petroleum Company's consolidated financial statements.

As we have previously reported to you, Callon, it's subsidiaries other than Callon Entrada, does not guarantee or is not otherwise obligated to repay the principal, accrued interest, or any other amount which may become outstanding under the Callon Entrada credit facility. We suggest that you review note one to our consolidated financial statement from the third quarter 10-Q for further details regarding this situation. The 10-Q will be filed on Monday, November 9th.

I would now like to discuss guidance for the full year of 2009. As Steve mentioned earlier, we are holding the Company's current year production rate guidance within previously issued guidance [against] a narrowed range of 29 million to 32 million cubic feet equivalent per day. Approximately 50% of this projected production is oil. We have not added any additional hedges for 2009, and I would ask that you refer to the guidance press release for more details on our hedging position.

We have made minor adjustments to the full year guidance for lease operating expense, depletion, G&A, and interest expense. And we did lower attrition expense guidance due to downward revisions for estimated plugging and abandonment costs and timing adjustments. Please refer to our guidance release, which provides additional guidance for the full year.

With that, I would like to turn the microphone back to Fred for his final comments.

Again, we thank you for calling in and would now like to open the call to any questions you may have.

Thank you. (Operator Instructions) There are no audio questions at this time, Mr. Callon.

Once again, we do appreciate everyone taking time to call in. And as always, if you have any questions, please don't hesitate to give us a call. Thank you.

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