Coterra Energy Inc (CTRA) 2002 Q2 法說會逐字稿

Please stand by. Good day, everyone and welcome to the Cabot Oil and Gas Corporation second quarter results conference call. Today's conference is being recorded. Today's presentation will be available for replay at 12:30 Eastern time through August 1st at midnight. You may ask us to replay by dialing 719-457-0820 and entering the pass code 754486. Again, 719-457-0820 and pass code is 754486. At this time for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Dan O. Dinges. Please go ahead, sir.

Thank you, [April]. Good morning. Thank you for joining us during the second quarter teleconference call. I am Dan Dinges, Chairman, President, and CEO of Cabot Oil and Gas. With me today are several members of our management team. We have Mike Walen, our Senior Vice President, Scott Schroeder, our CFO, Jeff Hutton, V.P., Marketing, [Chuck Smyth], V.P., Controller. Before we start, our attorneys have asked that I share with you the following [due] forward-looking statements. Statements regarding future financial performance and results and the other statements which are not historical facts contained in this release are forward-looking statements that involve risks and uncertainties including, but not limited to market factors and market price of natural gas and oil, results of future drilling and marketing inactivity, future production, and cost and other factors detailed in the company's Securities and Exchange Commission filing. Now, on to Cabot business. Have you read in yesterday's press release? The [INAUDIBLE] oil realized natural gas prices this year versus the last year have continued to hurt year-over-year comparisons resulting in net income of 2.1 million for the second quarter and discretionary cash flow of 40.8 million. This compares to 2001 second quarter net income of 13.6 million and discretionary cash flow of 56.8 million. I would suspect that similar year-over-year comparisons will be prevalent throughout our [second or] production. While comparisons I just mentioned on pricing and the results are somewhat disappointing, all of our references are extremely positive regarding production. We have increased production 29% between second quarters, 27% for comparable six-month periods, and had a 1% increase between first quarter and second quarter of this year. Primary source of this production increase has come from our expanded Gulf Coast region which includes the results and production of the Cody acquisition adding approximately 36 Mmcfe net per day and at Redfish Bay we had several recent drilling success, it is about 10 plus million a day which is 5 million equivalent per day net.

We [INAUDIBLE] and Redfish Bay complex is currently producing approximately 23 Mmcfe a day which is 8 plus million net to Cabot's interest. In addition, we recently, in fact the last week, we completed the Kacee No.18 well in South Texas, this is [INAUDIBLE] resulting in approximately 14 million per day gross or 6.5 million net to Cabot. This should not be overlooked also that along hill, the position in the East is having a very successful drilling program this year. And as a result, its production is up providing us with some significant free cash flow. In terms of pricing, the company's second quarter natural gas price realization was $2.99 per Mcf, which is 38% versus last year when two of our agents experienced prices north of $5.00, fairly dramatic change. The comparison for the six-month period is even more dramatic with the natural gas price realization being about 51%. We include in the natural gas price opportunity cost for our hedging program of $0.18 per Mcf in 2002 versus a gain of $0.23 per Mcf for the comparable quarter in 2001. The six-month results include a reduction in the 2002 results for hedging of $0.03 per Mcf versus a $0.15 per Mcf gain in 2001. To give an example that highlights the volatility that we experienced.

During June three of our operating areas had exceeded our collar ceiling prices while at the same time, Rocky Mountain's index price was below our floor price. So we were [right checked] in three areas and collecting a [check] in other. But you recall on a non [Mcf] equivalent basis, May to August cost of collars had a $2.54 per Mcf floor and a $3.17 per Mcf ceiling. Again, a pretty good [INAUDIBLE] and not having any gas in between our hedges, but certainly, seeing the volatility on both below our floor and above our ceiling. Regarding all hedges, we are 4000 barrels per day hedged through December 2002 and similar to the natural gas hedge position, we were a little bit premature when we lock in these positions. However, in any case, the oil price realization including the hedge position is a $1.65 per barrel reduction from this position during the second quarter. We will continue to evaluate the market on an ongoing basis to determine the effectiveness of estimating additional hedges and hopefully, our timing will be more similar to the successful hedges we placed last year than we had this year. Bottom-line, we think hedging is an important tool to help manage volatility and we will continue to take advantage of the market to protect: 1) the economics of our capital program and 2) to be able to maintain an element of consistency to our program.

Moving to the expense period, in the first quarter conference call, we highlighted how operation expense and DD&A had increased on a per unit basis as a result of the Cody acquisition. [And now] DD&A remains higher than we really [INAUDIBLE]. Operations expense actually had been reduced, as were exploration expenses and other tax expenses on a per unit basis during the quarter. DD&A expense did increase $3.9 million between 2002 and 2001. However, you recall that 3.6 million relates to Ray Seegmiller's retirement as CEO in May. This was previously disclosed. This item did have a $0.07 per share after tax impact on the quarter. Going forward for the remainder of the year, we expect operation expense to average about $0.54 per Mcfe, taxes other than income $0.34 per Mcfe, and interest expense $0.28 per Mcfe. Exploration expense for the total year is expected to be approximately $35 million. A lot of G&A expectation remains at $25 million excluding the costs associated with the second quarter CEO retirement. On our drilling update, our activity has remained consistent throughout this year. We continued to operate under our original capital budget of $104 million. This program remains on schedule to drill 109 wells, including at least 10 exploration wells with a drilling total of about $62 million.

Currently, we have $6.4 million target for seismic and $6.2 million for undeveloped leasehold which would affect future projects. I'm pleased with our [INAUDIBLE] results of our program. The program is on track and it will be completed in the fourth quarter. So far, we have achieved our expected results in terms of both well results and the expected capital outlook. As with most programs [INAUDIBLE], its success is often determined by the results of key exploration wells and a couple of key exploration wells are remaining in our program of [INAUDIBLE], it is in the Wind River Basin in Wyoming, we spud this well in the middle of June, to test the basement at about 10,700 feet. We are currently drilling below 7000 feet in the [INAUDIBLE]. We do anticipate reaching total depth in mid August. We look at this prospect as being a 50-150 Bcf gross risk of reserve potential and Cabot has a 66% working interest in the well. Another well we have on slate is our [INAUDIBLE] prospect. We plan to spud this in the fourth quarter. Cabot controls right now a 100% working interest. We do have a prospect put together and we plan on finding a 50% partner on this 16,000 foot well to test the [INAUDIBLE].

We believe the reserve potential on this prospect is between 50 and 100 Bcf gross. As mentioned in our press release, we were unsuccessful on our East [INAUDIBLE] 113 wildcat, reached our total depth at 12,000 plus feet. Unfortunately, we did not see the [objective] sands, and we plugged the well. But [INAUDIBLE], we have realized better than expected pricing, year-to-date and the speed in which we have completed our program. We are evaluating several opportunities in the Gulf Coast both on shore and off shore to expand our 2002 program while still accomplishing our goal at the yearend to reduce debt. As we have stated for and our [floppy] has not changed regarding the capital investment program, we plan on taking advantage of deals in the market place that have a finite term and not to pull prospects from our inventory simply to chase pricing. With this in mind, we are putting together another [shelf] opportunity in the Gulf of Mexico for late 2002 or early 2003. That will expose Cabot to 40-60 Bcfe. Regarding our production forecast, we can't and really don't feel comfortable to provide guidance for any deal that might potentially impact 2002. Therefore, our production guidance remains relatively unchanged. We all are looking at Gulf Coast; our guidance is going to be between 6500 barrels to 7000 barrels per day. The East is going to be between 95 and 100 barrels per day, obviously dominantly gas.

Now the West, 500 to 600 barrels per day and on the natural gas side our guidance in the Gulf Coast is 77-80 Mmcf per day and East 46-48 Mmcf per day and in the West, 67-70 Mmcf per day. With that, just to comment, I'm enjoying being part of implementing Cabot's strategy and am particularly pleased to see that Cabot has been able to demonstrate that it is a growing exploration company. We have a substantial growth potential that is reflected in the increased production generated from this program so far. Additionally, we have a significant development inventory and a strong foundation not only in assets, but people built on expertise, the staff, which is both geologically balanced and geographically diverse. We are looking forward to continuing the success. We have realized so far in our Gulf Coast region. We have enjoyed success in our East as I previously mentioned and we are looking forward to our Rocky Mountain region to continue developing impact prospects on our leasehold. With that comment, [April], I will turn this over for questions.

Thank you. The question and answer session will be conducted electronically today. If you would like to ask a question, simply press the * key followed by the digit 1 on your touchtone telephone. We will proceed in the order that [are received and] take as many questions as time permits. Once again, if you would like to ask a question, press *1 at this time. And we will first hear from Ken Beer with Johnson Rice

Good morning guys, good morning, Dan.

Good morning, Ken. How are you?

Just fine. Let me just ask first a little bit more on kind of, the lot of things you talked about and that is, may be expanding your capital expenditure program to include another [shelf] prospect, but just in general as you have thought that with incremental capital, is that where you think you will be shifting dollars to as part of deal that you are merging Gulf of Mexico shelf program, that kind of get that incremental dollar?

Ken, let me just kind of restate what our strategies have been from day 1. We do want to end the year with less debt than we began. We are comfortable where the product price has been year-to-date. We haven't reduced our debt yet, but we think we are on our way. We started the year with $393 million of debt. We are currently at $397 million, so we feel comfortable in looking at assuming the [INAUDIBLE] is too bad that we are going to have some surplus cash. We are not changing our guidance right now for our capital program. However, we are being fairly diligent on evaluating any opportunities that we see predominantly in the Gulf Coast both onshore and offshore, Ken, but we are also looking in the Rocky Mountain area for opportunities that might expose us to an impact type project. The one I referenced is one we feel fairly comfortable about geologically and economically and meeting our threshold and it looks like we are getting pretty close to being able to secure position in that particular deal.

So, that is not Cabot generated, that is someone else generated, but you are looking at getting a working interest?

That is correct.

Okay, also just a, what the [INAUDIBLE] expected for [INAUDIBLE], drill what did you say, 78,9?

10, 7 and we are drilling below Ken, 7000 feet at this time.

Okay, and let me push a little bit more on the debt side. Is the [INAUDIBLE] you come up with the [shelf], for instance the [shelf] prospect, if this looks good and feels good, do you then back out something that you already have in your programs, or maybe some drilling in the Rockies or some other drilling that you had planned gets backed out or is it just a tightrope where you just need to figure out how much excess cash you have and still be able to have some sort of reduction so that Scott doesn't break your arm?

Scott might definitely end wrestling over the money, but it is more the latter. Even though, our program does afford us the flexibility to shift capital, right now again with the confident level we are at date year-to-date, I think it would be more at an appropriate time, we might change our guidance, but I think it is going to be more an additional exposure as opposed to replacing a new deal at the sacrifice of something we currently have scheduled.

Okay. That makes sense, I mean we got at least to have cash flow well over the 103 ... I will stop there. Thank you guys.

Thanks, Ken.

Our next question comes from John Herrlin of Merrill Lynch.

Dan, you mentioned that you are thinking about format deals organic drilling, and acquisitions. What kind of dollar exposure are you looking at if you made acquisitions and also what are you seeing in the marketplace regarding properties in the regions you are targeting?

The [size], John, is just dependent upon the assets that we evaluate. We have in fact on deals that are small in nature which we have either an operated or non-operated interest in a particular field and we have also gone all the way up to several $100 million type deals that had assets that we might like but we have not been able to assess value to those assets to meet the sellers' expectation. That is something we have seen and I think what the industry is seeing overall is that the number of deals that are being closed is quite limited as is you are aware. We would hope that and we will continue to be diligent on evaluating the opportunities, but that is one reason why we are managing our capital program the way we are. We want to have flexibility. We want to continue to get our balance sheet in shape to take advantage of in fact the times of, we could see ahead if prices soften a little bit more, but at the same time, we want to stay consistent with our capital program and we are comfortable at this time continuing to look at drilling deals if we can't find the acquisitions to meet our goals and expectations.

Okay. That is good. Regarding basis, if prices improve again in the Rockies, would you try to hedge more?

Yeah. We were [INAUDIBLE] hindsight, we were awfully close in January of this last year to putting our basis hedge in the Rockies. I think we were [about] fast in some part from where we had targeted our number versus where it was and again hindsight, but we would definitely consider a basis hedge in the Rockies. Absolutely.

Okay, thank you.

Good day.

Our next question comes from [Michael Philoreal] of CIBC World Market.

[MICHAEL PHILOREAL]: Good morning gentlemen.

Hi Michael. How are you doing?

[MICHAEL PHILOREAL]: Good. I wanted to find out, out of the 62 million drawing budget, do you have a breakdown by region of that 60 million of the 109 you plan to drill?

Let me shift that to Mike Walen, our Senior V.P. of exploration.

Okay, Mike. We are looking right now at in about in Appalachia, our drilling drive and dry hole costs is about $10 million, just drilling and dry hole, okay? And in Anadarko in the Rockies, it is about $17 million and the remainder is going to be $35 million in the Gulf Coast.

[MICHAEL PHILOREAL]: Okay, and given that the more money going towards the Gulf Coast now and historically, your finding costs, drilling costs have been below, but last year was pretty high, just in general, given the conditions of the markets, what do you see this year? I know it is still early, but are you hoping to get that closer to a buck in your going costs?

That is our goal, is about a dollar. To date, just on drilling, Mike, just drilling costs only, what we added $1.03 for the company. We are running about $1.30 for the Gulf Coast; we are hoping that that will come down with somebody's larger [scale lock] that we have to drill for the remainder of the year. The West is running about $.0.81 and the East about $0.57. Mike, I might add that is one of the things that we were doing or maintaining our capital program, which is based on 250 gas and $20 oil. We are continuing to be fairly vigilant on using those parameters for our project hurdles that we continue to evaluate.

[MICHAEL PHILOREAL]: Okay, thank you gentlemen.

As a reminder, if you would like to ask a question, press *1 at this time. We will now hear from [Shawn Reynolds] of [INAUDIBLE].

[SHAWN REYNOLDS]: Good morning, guys.

Good morning, [Shawn].

[SHAWN REYNOLDS]: Just to get back to your priorities in terms of the excess cash flow, we are very clear, our first parties have paid on debt. What would be your debt target, your debt to capital target?

We would hope that we would end the year between 50 and 51% debt to total capital.

[SHAWN REYNOLDS]: Okay, and as of now, while I guess I could run the numbers quite [a bit], what would that leave in terms of excess cash after paying down the debt?

We [forecast INAUDIBLE], but we think it is going to be only between $15 and $20 million.

[SHAWN REYNOLDS]: Okay, great. That is all I wanted. Thanks.

Thanks, [Shawn].

And it appears there are no further questions. Again, I would like to remind everyone that you may listen to the rebroadcast of this conference at 12:30 Eastern time today through August 1st at midnight by dialing 719-457-0820 and enter the pass code 754486 on your telephone. Mr. Dinges, I will turn the conference back over to you for any additional or closing remarks.

Thank you, [April]. Just want to thank everybody for joining us today. I know we will continue to assess all the opportunities that come before the company. That includes acquisitions. We are looking at cost savings, any drilling [additions] and even new ventures. We will continue to evaluate with the motivation of further enhancing our value. So again, thanks for your support and if you need any follow-up questions, we will be happy to answer the phones. Thank you.

That concludes today's conference call. Thank you for your participation.