Callon Petroleum Co (CPE) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter full year 2009 results conference call. During the presentation, all participants will be in the listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) It is now my pleasure to turn the conference over to Mr. Fred Callon, Chairman and Chief Executive Officer. Please go ahead, sir.

Thank you. Good morning. And thank you for taking time to call in to our 2009 fourth quarter and year end results conference call. Before we begin the formal portion of our presentation this morning, I'd like to ask Terry Trovato, who heads our Investor Relations, to make a few comments.

Thank you, Fred. We'd 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 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 fourth quarter 2009 results news release and can be referenced there on our website at www.callon. com for subsequent review. Fred.?

Thank you, Terry. And again, we appreciate you calling in this morning. Callon entered 2009 with a new strategic focus looking to emphasize long-term growth through the acquisition and development of low-risk, high impact onshore assets and funding the development of these new assets primarily with the stable cash flow from our deep water Gulf of Mexico properties.

Our two onshore acquisitions in 2009, are the first steps in achieving these objectives. Maintaining liquidity during the company's strategic shift towards on-shore growth was a major focus throughout much of 2009 and we have significantly improved our balance sheet and liquidity position.

I'd like to begin this morning by asking Steve Hinchman, our Chief Operating Officer, to discuss our operations, including our recently announced acquisitions in the Permian Basin and the Haynesville Shale Play and to review our operations for the fourth quarter and full year of 2009. Bob Weatherly, our Chief Financial Officer, will then review our financial results for the fourth quarter and full year 2009 and also the events leading to our improved balance sheet and liquidity position which are significant positive developments for the shareholders and a catalyst for future growth opportunities. Steve?

Thank you, Fred and good morning. Let me begin by highlighting our 2009 major operating accomplishments, beginning with safety. Safety is a top priority and reflects the character of an organization. I'm very proud of Callon's safety performance having had zero employee and contractor OSHA recordable incidents in 2009.

In 2009, Callon set its course and began its transformation. We recognize that continuing to solely focus on the Gulf of Mexico shelf and deep water could not sustain profitable growth at an acceptable level of risk. We needed to initiate a transition of Callon's resources from offshore to a more diverse and lower risk resource base located both onshore and offshore. We would focus our attention on the Permian Basin for oil and the shale gas plays.

During the fourth quarter of 2009, we closed our initial entry into the Permian Basin with the acquisition of EXL's Wolfberry production and development potential and we began to build an acreage position in a derisk area of the Haynesville Shale gas play. These additions alone, already have begun to positively reshape Callon's portfolio and outlook.

In 2009, Callon increased its proven reserves to 58 billion cubic feet of gas equivalent. A 6% increase over year end 2008. We added 15 BCF of gas equivalent of proven reserves and replaced 127% of our 2009 production.

We received MMS approval to reclassify the temporary abandonment status of two Entrada expiration wells to a permanent abandonment, saving up to $18 million in abandoned expenditures planned for 2010 and we delivered on what we said. We produced 32.4 million cubic feet of gas equivalent per day compared to our first of year guidance of 27 million to 35 million gas equivalent per day.

Our lease operating expense including severance was $18.4 million, compared to our first of year guidance of $17 million to $22 million. And our abandonment costs totaled $5.7 million compared to our estimate of $6 million to $9 million. Now, turning to our quarterly and annual comparisons for 2009. Our production averaged 35.4 million cubic feet equivalent per day in the fourth quarter of 2009.

The fourth quarter 2009 production was comprised of 1.52 BCF of natural gas and 288,000 barrels of oil. Production in the fourth quarter of 2008 was 0.93 BCF of gas and 162,000 barrels of oil or 20.7 million cubic feet gas equivalent per day.

The positive variance in the fourth quarter of 2009 is due to the addition of Medusa royalty volumes produced between January and September of 2009 and hurricane down time that occurred in the fourth quarter of 2008 that was associated with Gustav and Ike. Callon suspended MMS royalty payments beginning in September of 2009 following the United States District Court's upholding that the MMS exceeded congressional authority to pay royalties based on price thresholds in regard to the Deep Water Royalty Relief Act of 1995.

The adjustment in the fourth quarter considered those royalty volumes produced in January through August of 2009. If we had continued to pay royalty, the fourth quarter production would have been 31.4 million cubic feet of gas equivalent per day. Production in the third quarter of 2009 was 1.34 BCF of gas and 197,000 barrels of oil or 27.4 million cubic feet of gas equivalent per day.

The positive variance in the fourth quarter of 2009 is, again, due to the adjustment for 2000 -- for 2009 MMS royalty volumes at Medusa and production from the Permian Basin following the October 2009 closing and High Island A494 which came on production in July of 2009. For the full year, our production averaged 32.4 million cubic feet of gas equivalent per day or 5.7 BCF of gas and 1 million barrels of oil and compares favorably to the guidance provided in the third quarter of 29 million to 32 million cubic feet of gas equivalent per day.

On the expense side, lease operating expense for the fourth quarter of 2009 was $4.8 million or $1.47 per MCFE equivalent. Lease operating expense for the fourth quarter 2008 was $5.5 million or $2.87 per MCF equivalent. The higher expenses in the fourth quarter of 2008 was due to repair costs following hurricanes Gustav and Ike.

The lease operating expense in the third quarter of 2009 was $5 million or $1.97 per MCF equivalent. The higher expense in the third quarter of 2009 was due to hurricane repairs following the final inspection of the riser at High Island A494.

Lease operating expense for 2009 totaled $18.4 million or $1.56 per MCF equivalent and compares favorably to the guidance provided in the third quarter of between $18 million and $20 million. And the total 2009 abandonment costs were $5.5 million at the low end of the guidance of $6 million to $9 million.

Turning our attention to 2010 operating guidance, in the Permian Basin, we have drilled and are currently completing our first of 16 wells planned for 2010. These wells will more than double our current Permian Basin production of 350 barrels of oil equivalent per day by the end of the year.

We have also contracted our drilling rig for the Haynesville Shale gas development where we plan to drill two wells this year. We will spud the first well by mid-year and have both wells completed and producing in the fourth quarter of 2010. We're estimating the first quarter production to range between 27 million and 29 million cubic feet of gas equivalent per day.

The first quarter production is being negatively impacted by a fire which occurred on the nonoperated East Cameron 2 host facility on January 12, of this year. Production is expected to be restored in the second quarter. East Cameron 2 produces 2.5 net million cubic feet of gas equivilant per day. We are estimating full year production from our current properties of between 27 million and 30 million gas equivilant per day with an exit rate of 35 million.

Of course, any acquisition in 2010 would positively contribute to these estimates. Bob Weatherly will talk more about the liquidity Callon has for additional growth. Our lease operating expense including severance will range between $4 million and $5 million in the first quarter of 2010 and $18 million to $22 million for the full year, again, assuming no additional acquisitions.

As you have heard, we have begun our transformation. Our new onshore properties and their development have already started to reshape our portfolio and our outlook. Our resources and reserves set the foundation for our growth and in 2009 we delivered on our operating measures and guidance.

In 2010, we'll continue to focus on our transition. We'll execute on our operation and development and we will deliver on what we say. I'll now turn the call over to Bob Weatherly, our Executive Vice President and Chief Financial Officer.

Thank you, Steve. Before I review our results of operations for 2009 and provide guidance for the first quarter and full year of 2010, I would like to briefly discuss several recently announced actions which have significantly improved our liquidity and strengthened our balance sheet.

During the fourth quarter of 2009, we completed a very successful exchange of substantially all of our senior notes due December 2010. As a result of this exchange, we have reduced $184 million of the outstanding principle of our senior notes to $138 million. The maturity of the new senior notes has been extended from December of this year to September of 2016.

The remaining $16 million of our old senior notes will be retired this year. In connection with the exchange, we issued an additional 6.9 million common shares. Upon the issuance of this common stock, we recorded an increase in shareholders' equity of $11.5 million with the balance of the reduction in face amount of the senior notes or $31.2 million being recorded as a deferred credit. This credit will be amortized as a reduction of interest expense over the term of the new senior notes.

As reported in our third quarter form 10-Q in November of 2009, we filed for recoupment of deep water royalty payments related to our Medusa deep water field. These payments were made from the date of first production in late 2003 through August of 2009.

In January 2010, we received a cash payment from the MMS in the amount of $44.8 million. We expect to receive an additional payment from the MMS for accrued interest on this royalty recoupment in the amount of approximately $7.7 million.

The total amount of the recoupment or approximately $52 million equates to $1.79 per share of outstanding common stock. Also in January 2010, we entered into a new $100 million credit facility with Regions Bank, secured by the company's reserves. This facility represents a continuation of a long business relationship between Callon and Regions Bank. The new facility has an initial borrowing base of $20 million and presently there are no outstanding borrowings on that line.

The borrowing base will be redetermined semi-annually. The cumulative effect of these events, have dramatically improved the Company's liquidity as we begin 2010 and provides us with financial strength to fund our strategy for growing our onshore business as we enter the next phase of the Company's development.

Now, I'd like to discuss a matter regarding a non-recourse debt on our balance sheet, which we had mentioned in the past. However, I'll skip to the end of this story first. As of January 1, 2010, we will no longer be required to include the accounts of our subsidiary, Callon Entrada Company, in our consolidated balance sheet. The impact of this change for reporting periods after December 2009, will be a reduction in our consolidated debt of $84.8 million and an increase in shareholders' equity of approximately $85 million.

Now, as you'll remember and as I detailed in our previous conference call, at December 31, 2009, our balance sheet has a -- excuse me -- has an $84.5 million line item in current liabilities for the nonrecourse credit facility of this subsidiary which was formed solely to execute the deep water Entrada project. This non-recourse debt is due to CIECO Energy Entrada LP our partner in the Entrada project. At December 31, 2009, US Generally Accepted Accounting Principles, or GAAP, requires us to include the financial statements and results of operations of Callon Entrada in the consolidated financial statements of Callon Petroleum Company. As we previously discussed, Callon and it's subsidiaries other than Callon Entrada did not guarantee and are not otherwise obligated to repay principle, accrued interest, or any other amount which may become outstanding under the Callon Entrada nonrecourse credit facility with CIECO.

Under new accounting rules, included in SFAS 167, which is effective January 1, 2010, we will deconsolidated Callon Entrada from Callon Petroleum Company's consolidated financial statements. Also, we will no longer be required to include in our consolidated income statement, interest expense associated with this nonrecourse debt.

For more details, I would suggest you review note two to the consolidated financial statements which are included in our 2009 form 10-K which will be filed on March 12. In summary, our liquidy has been greatly improved with recoupment of the Medusa royalties and the new credit facility which we entered into in early 2010. Also, with the successful senior note exchange, which extended $138 million of our debt until September 2016, and the deconsolidation of Callon Entrada as of January 2010, our debt has been significantly reduced and our consolidated shareholders' equity is substantially increased.

Callon is now positioned to advance our new business strategy for reinvesting the cash flow generated from our Gulf of Mexico properties into lower risk, longer life onshore assets. Our planned capital expenditures for 2010 of $61.7 million, will be fully funded with expected cash flow from operations and cash on hand. Based on our current financial projections and current planned capital expenditure budget, we anticipate ending 2010 with strong liquidity.

Now let me discuss the fourth quarter results of operations as we reported in our earnings release. Oil and gas revenue for the fourth quarter of 2009 totaled $30.1 million. For the full year of 2009, oil and gas revenue was $101.3 million. For the year ended December 31, 2009, the Company reported net income of $54.4 million or $2.45 per share. Earnings include recoupment of royalties and interest from the Minerals Management Service of $51.5 million or $2.32 per diluted share. The 2009 results compared to our 2008 net loss of $438.9 million or $20.68 per share. This resulted primarily from a noncash charge of $485.5 million due to the impairment of the Company's oil and gas properties under full cost accounting rules. In 2008, the book value of the Company's oil and gas properties exceeded the full cost ceiling due primarily to lower oil and natural gas prices at year end 2008 and the announced suspension of operations at our deep water Entrada field during the fourth quarter 2008.

For the quarter ended December 31, 2009, the Company reported net income of $53.9 million or $2.27 per share compared to a net loss of $457.5 million or $21.19 per share the previous year. Highlights for the period are as follows: our results continued to benefit from hedging positions we put in place in 2008. For the fourth quarter 2009, our realized oil price was $86.75 per barrel of oil before basis differential and transportation. This realized price was $10.56 per barrel higher than the average NINEX price of $76.19 for the quarter. For the full year 2009, we received $17.4 million from our crude oil hedging settlements and $1.9 million from our natural gas settlements.

We continue to monitor available hedging positions in 2010 and as been our practice in the past, we expect to hedge approximately 50% of our 2010 Legacy production. Depreciation, depletion and amortization in the fourth quarter up $8.7 million is $13.6 million less then DD&A in the fourth quarter of 2008. This decline in the fourth quarter of 2009 was due to a lower DD&A rate for 2009 versus 2008 and was partially offset by higher production volumes in 2009. The lower rate is the result of the previously discussed full cost ceiling write down we recorded at year end 2008 and a downward revision in the third quarter of 2009 of plugging and abandonment cost for the Entrada field.

Depreciation, depletion and amortization declined to $33.4 million for the full year 2009 and were recorded at a rate of $2.83 per MCFE compared to a rate of $5.57 for 2008. DD&A for 2009 was slightly outside the guidance range of $33 million due to higher fourth quarter production volumes. I will not discuss our LOE expense as Steve has discussed LOE previously as part of his comments.

We incurred approximately $1 million in expenses associated with the restructuring of our 2010 senior notes which we expensed in the fourth quarter of 2009. This was not included in our previously issued guidance. General and administrative expense in the fourth quarter 2009, was $3.1 million as compared to $2.5 million in the fourth quarter of 2008. The increase and reported G&A expense in this quarter compared to the same quarter last year is primarily a result of not receiving fees as operators of the Entrada fields in 2009. In the fourth quarter of 2008, $626,000 of overhead fees were recorded as a reduction and general administrative expense. For the full year 2009, general and administrative expense before staffing reduction and retirement costs was $11.2 million and within our guidance range. Interest expense excluding interest on our previously discussed nonrecourse debt was $4.5 million for the fourth quarter of 2009 and $19.1 million for the full year and was within our published guidance range. Please review our earnings release for further results of operations detail for the quarter ended December 31, and the full year 2009.

Now I'd like to discuss briefly guidance for the full year of 2010. As Steve mentioned earlier, daily production rate guidance for the first quarter of 2010, is projected to be 27 to 29 MCFE per day and 27 to 31 MCFE per day for the full year 2010. Oil accounts for approximately 52% of the projected production in the first quarter and approximately 47% for the full year. As previously discussed, we have added hedges for part of our legacy production for 2010. Please refer to our press release for more details on hedges.

As mentioned earlier, we will continue to monitor the markets and add hedges as appropriate. We are projecting general administrative expense to be in a range of $3 million to $3.4 million for the first quarter and $12 million to $14 million for the full year 2010. Interest expense is forecast to be $3.2 million to $3.5 million for the first quarter and $13 million to $14 million for the year.

Earlier, I discussed the deferred credit related to the restructuring of our senior notes. The $31.2 million deferred credit on our balance sheet will be amortized over the term of the 2016 senior notes. This amortization will be recorded as a reduction to interest expense each period. In 2010, the amortization will be $3.7 million. Please reference our guidance press release for the amount of this noncash amortization.

We are projected DD& A rate of approximately $2.90 per MCFE of production for the first quarter and for the full year of 2010. I would ask you to please refer to our guidance press release which provides additional guidance for the full year 2010.

Now, I'll turn the call back over to Fred for his final comments.

Thank you Bob and once again, we do appreciate everyone taking time to call in this morning and with that, we'll open the call for questions.

(Operator Instructions) And our first question comes from the line of Richard Tullis from Capital One South Coast. Please proceed with your question.

Thank you. Good morning.

Good morning.

Looking at the share count going forward. I guess this question is mainly for Bob. What is the total diluted share count at this point, Bob?

For the year?

No, at this point going forward.

Let me see. 20 -- I think the shares outstanding were 28 million, six.

Okay. All right. And that includes the common that was issued along with the debt exchange?

Yes, sir.

Okay, good.

As you know, as you'll remember, at December 31, we had a interim preferred issue, but we exchanged that and so that means we don't have -- we didn't have that at year end and we were fully exchanged for common at year end. 6,928,000,000.

Okay. I guess the 2010 production guidance includes the former MMS royalty at Medusa; is that correct?

Yes. We're -- for 2010 on a go-forward basis, we are not paying any royalty on Medusa.

How much do you estimate that adds per day, roughly $1 million a day, something like that?

I think that's about right, yes.

Okay. And what's the -- I may have missed this. Excuse me if I did. The $10 million listed on the balance sheet for senior secured revolving credit facility?

That was a balance we had on the previous credit facility at year end and in January when we executed our new facilities, we paid off that and so we have nothing outstanding now on credit facility.

Okay. And your cash position is how much right now?

Cash position at year end was $3.6 million and now it's approximately $40 million.

Okay. All right. That's all I have. I'll jump back in the queue if I have anything else. Thanks so much.

Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four on your telephone. And our next question comes from the line of Don Crist from Johnson Rice, please proceed with your question.

Hey, guys, it's Ron.

Hey, Ron.

Couple of questions on the interest that you expect to get from the MMS, when do you hope to receive those incremental $7.5 million proceeds?

Ron, we've gotten no timing on that. I think our anticipation is is that -- that we'll proceed at some time the first half of the year, but -- and I say that only because we've not been notified of any timing for that.

Okay. From a -- you all cut out a little bit. Your current cash position, Bob, did you say the low $40's?

Yes.

Okay. And then in terms of your cap ex budget which I want to say is $60 million, $60 million, $62 million, between your cash flow generation and your cash on hand, you obviously have some incremental liquidity and that liquidity should grow with your -- once that interest payment is received.

You know, what do you expect to do with those proceeds in terms of are you looking at more acreage in the Haynesville acquisitions and Permian and elsewhere or potentially ramping activities especially in the Permian sooner -- sooner than later?

Don, I think that what we -- I think we're comfortable with our level in activity in the Permian for this year. We would expect the Permian to increase to a second rig in 2011, but primarily we'll be looking to expand our ownership and acreage in the derisk area of the Haynesville and looking to make a like acquisition in the Permian that we made in 2009.

And on that -- on that point, what is that Permian A&D market look like now? You know, obviously you got a great deal, I think, in October, but what does that market look like today in terms of level of buyers and sellers

You know, I think the actual level of opportunities are out there are up a little bit, but I think the market evaluations were also up because of the higher oil price and the confidence that people are having. So I think it's going to be a bit more costly to make an acquisition in the Permian, but there are sufficient opportunities out there to cause one to happen.

And then lastly, to go -- I don't think you spoke much about Medusa and Habanero, what's on the docket, I assume Medusa and Habanero are declining a little bit at this point, but, you know, what's the timing of future recompletions and/or new drills at either of those areas?

As I've mentioned before, you know, Medusa is producing out of its primary completions today. Some of them are approaching their economic limit. We would expect to do a recompletion on the A-6 well later this year, at least that's our forecast. It is late in the year, so it doesn't have any material impact on production in 2010, but really through 2011 out through 2012, '13, we'll see a lot more recompletions occurring in the Medusa which will tend to flatten its decline out beginning in 2012.

Habanero, Habanero has one well right now that is producing at high water cuts and could reach its economic limit at any time. The plan that -- for Habanero is once both wells reach their economic limit, that they would be side tracked to proven reserves of dip. There's probably nearly a million barrels net equivalent of reserves up there, updip, BCF of gas updip of us. There's a potential that that could be accelerated, but the partnership has not finalized that plan. So right now, two wells updip, once both wells water out.

Okay. And then lastly, I think you talked about in the Permian current production about 350 barrels a day, you expect that to double by -- by year end and you provided an exit rate of, I think, 35 million a day. Is beyond the Permian -- are the two remaining drivers the impact from East Cameron 2 and when do you expect to start up or the real impact from the Haynesville?

Yes. The East Cam 2, we expect to come on sometime in the second quarter. And, of course, that has 2.5 million a day net to Callon and so that will give us a little bit of bump in the second and third quarter as that comes in. But the big bump in terms of the exit rate of 35 million is that's when we'll have both wells that we plan to drill in the Haynesville up and on production. And should both of those come on early in the quarter if you started drilling in the mid-part of the year, just judging from --

One well, we expect one well, Ron, will come on sometime probably very early in the fourth quarter and the other well will come on around middle of the fourth quarter, so obviously we're -- our rig contract right now has got -- is finishing up a lateral in a Haynesville Shale well now. It's going to drill another Haynesville Shale well and then a vertical Cotton Valley well and then it will come to us. So the timing is a bit dependent upon if those wells go better, then the whole thing could be accelerated and we're ready for that to happen. If it takes a little longer, then it could go the other way on us. So there's just some uncertainty on when we get started when -- based on when the rig is available to us.

Great. I appreciate the comments.

And there appear to be no further questions at this time. I'll turn the call back to you. Please continue with your presentation or closing remarks.

Well, once again, we do appreciate everyone taking time to call in. As always, if you have any questions, please do not hesitate to give us a call. Thank you.

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