Coterra Energy Inc (CTRA) 2003 Q2 法說會逐字稿

Good day, everyone, and welcome to the Cabot Oil and Gas Corporation quarterly results conference call. Today's conference is being recorded. Today's presentation will be available for replay at 12:30 eastern through August 6 at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112 and entering the passcode 472122. Again, 719-457-0820 or 888-203-1112 and passcode 472122.

At this time, for opening remarks and introductions, I'd like to turn the call over to the Chairman and Chief Executive Officer Mr. Dan Dinges. Go ahead, sir.

Thank you, Michelle.

Good morning and thanks for joining us this morning for our second quarter earnings teleconference. I'm Dan Dinges, Chairman, President and CEO of Cabot Oil and Gas. With me today, as usual, are several members of our management team ready to answer any follow-up questions. We have Mike Walen, Senior Vice President, Scott Schroeder, our VP, CFO, Jeff Hutton, our VP of Marketing and Chuck [INAUDIBLE], our VP, Controller, and Treasurer.

As usual, before we start this teleconference, our attorneys asked that I share with you the following. The statements regarding future financial performance and results, and other statements which are not historical facts contained in this discussion, are forward-looking statements that involve risks and uncertainties, including but not limited to market factors, the market price of natural gas and oil, results of future drilling and marketing activity, future production and cost, and other factors detailed in the company's Security and Exchange Commission filing.

All non-GAAP financial measures discussed during this conference call have been posted to our web site at www.cabotog.com along with reconciliation to the most directly comparable GAAP financial measures.

As most of you read in yesterday's press release, high realized commodity prices continue to boost our revenues, resulting in Cabot's best ever second quarter net income, which totaled $17.9 million, and our discretionary cash, which was $62.5 million. A realized natural gas prices of $4.50 per Mcf and oil prices of $29.27 for the quarter led to these unprecedented results. We're very pleased with the results of the second quarter.

In terms of pricing, the company's second quarter natural gas price realization was over 50% higher when you compare it to the same period last year. The second quarter also saw a 21% rise in oil prices compared to the corresponding quarter in 2002. These prices include the effects of our hedge positions that did have an overall lowering effect on realized prices, which I'm sure was the case with the majority of hedged volumes in our industry.

In terms of our hedging, we currently have 70% of our anticipated natural gas and 50% of our anticipated oil production for 2003 hedged at an average for price of $4.47 per Mcf and $27.35 per barrel. During the second quarter, the company layered in some additional hedge positions covering various times. Cabot added one hedge covering eastern volumes. 10 million Btu per day of gas for June of 2003 through March of 2004 at a $6.36 per Mmbtu.

For 2004, Cabot protected 10 million Btu per day of Rocky Mountain gas with a $4.00 floor and an average ceiling of $4.65 per Mmbtu, which includes the impact of basis. Also in 2004, Cabot has executed a range swap for 1,000 barrels of our oil production per day with a $28.50 price with a knock-out price of $22.00. All these updated hedge positions that I've just referred to can be found on our web site at this time.

Our future hedging -- we will continue to assess all our options for hedging opportunities and we'll consider hedging incremental volumes of both our gas and oil. Primary focus at this time is going to be looking ahead at 2004 volumes where we currently have approximately 38% of our anticipated gas production hedged and about 12% of our oil anticipated production hedged.

Our production -- our daily production was down slightly, approximately 2% between 2003 and 2002 second quarters. At 245.3 million equivalent per day versus 250.9 million equivalent per day for the respective quarters. Which is due primarily to last year's smaller drilling program as we addressed our debt position, covered that in some detail in the past, and also it was a result of the timing of some of our drilling and exploration success. However, our production in the second quarter compared to the first quarter of this year was up 1%. Now when -- we've produced in the first quarter 242.9 million equivalent per day versus our 245.3 million equivalent per day in the current quarter.

Our full year production guidance remains on track. We will adjust our timing and our guidance for the third and fourth quarter to reflect some of the timing differences, and besides the volumes that we backed out of with several of our exploration displays, which we released in our press release. The delays in other volumes -- the other volumes are really delays associated with timing issues.

One of the major adjustments is the timing of our recompletion in our #4 well at Etouffee. We had predicted, it's a good news/bad news story. We had predicted that the well would be recompleted early in the second quarter, however, it has held on, produced longer than we anticipated, though at reduced volumes from what we had forecast.

Good news is we have just recently embarked on that recompletion, that operation is currently under way and we anticipate that that well will be on stream in approximately a week, increasing the rate from a reduced volume that drug on for a while, though reduced a good volume of 20 to $25 million cubic foot equivalent per day to what we anticipate now will be approximately $60 million cubic foot equivalent today, beginning this next week.

Also as a delay, our Raymondville field, which underwent facility and pipeline upgrades, and that was due to demands by our gas transporter. It is recently come back on-line at 18.5 million per day, net 9 million per day to Cabot. And this is, with these upgrades, is now a record for this field.

On the other issues that we dealt with recently was the Stately 16705 #2 well in the Lake Pelto area. (phonetics) That well has been shut in since our satellite platform was damaged during tropical storm Bill. We have been able to make the repairs and resume production. This well recently came back online and we're currently producing approximately 5 million per day.

In looking at our production volumes and if you step back a little bit, in 2002, we had a reduced drilling program, as I previously mentioned, we had anticipated our production for 2003 to be relatively flat as we addressed our debt position. I'm happy and pleased at this stage that we have had reduced our debt since, really of June of last year, about $93 million. We've continued with the fairly aggressive capital program and as you will see as I go into some of the detail into the rest of this teleconference, we have -- we're not really at our halfway point because we have been addressing debt in our capital program. And we really have positioned ourselves well to set up for the second half of 2003 and going into 2004.

Again, for the year, we do expect our production to be in the range as our original guidance. And as I go through this, I'll point out where we are in our expiration program and development program as far as well count is concerned. Specifically, for the third quarter, our natural gas is expected to -- we're expected to produce 197 to 205 million cubic foot per day, and our oil production should range between 7600 barrels to 8050 barrels per day total.

Moving to expenses overall, our operating expenses were in line with anticipated levels. The 28% increase in benefits for employees, including costs associated with the company's pension and healthcare pension plan and our healthcare benefits, it impacted our numbers. Those impacts are certainly being felt in all industries and not just on Cabot and the oil and gas industry. Like others, we are trying to mitigate some of these increases that we're seeing in these areas.

Based on expenses recorded in the first two quarters this year, G&A is expected to range between 6 to $7 million per quarter for the remainder of 2003. In other expense categories, higher realized prices triggered the increase in our production taxes, while the increase in our overall expiration expense was certainly anticipated as a result of our significantly larger expiration program, which includes more investment in seismic and dry hole. Our third quarter guidance for our expiration expense is between $10 million and $15 million.

On our drilling update We had our board meeting yesterday, and at this board meeting the company did receive approval to increase our 2003 capital program about 20%. Operating under this new capital program of $183 million, we will now drill an estimated 192 wells this year, which is up from our original guidance of 180 wells. The $29 million incremental add to our program will be dominated by expanded development drilling efforts in the east and Gulf Coast, along with an infrastructure investment in the east, which I'll cover in more detail.

Let's see here, one second. I've just been advised that I misstated the capital increase. I said, 129. I meant $29 million increment. Thanks, Scott. Probably had a lot fall off the teleconference with that.

Okay, of our total, let's get to some of the details of where we are here to date. Of our total in 2003, we had anticipated 32 exploratory wells, compared to only 7 exploratory wells in 2002. So far, year to date, we have drilled 72 wells. That's year to date, for the first half we had 68 wells identified.

We have a 92% success rate which includes 9 wildcats, of which 5 have been completed successfully. Or we're in the phase of testing. And I'll cover a couple of those.

We currently have 11 wells waiting on completion or pipeline hook-up. We currently have 10 rigs operating, 8 which are operated by Cabot, of which two of those are exploratory. After we complete these two exploratory wells, that still leaves us with 21 more exploratory wells to drill this year. Again, an aggressive expiration program, a program that we feel very comfortable with and we're pleased with that -- with how it's coming together.

Last night's press release highlights some of Cabot's recent drilling successes, as well as a couple of the disappointments. The most exciting of these successes that we did mention is our Nickey prospect, which is our first apparent expiration success in the Rocky Mountains. And has a potential to deliver for us numerous development locations. We do have 11,000 acres under lease around this apparent discovery and we're optimistic with the upcoming test in the next couple of weeks of several zones.

Also positive was the exploration discovery at Ellis, a south Louisiana well. While in terms of reserves it was not a homerun like we had hoped for, it certainly will contribute to a significant production boost, and it also sets up a couple of offset locations for us. Cabot's first offshore success, the Breton Sound 41 #2 well. Once completed it should come on-line in the fourth quarter of this year.

Some of the current operations that we have ongoing and also remaining impact wells scheduled for the third and fourth quarter are as follows: In the Gulf Coast, we have Boudreaux which is currently drilling. It seems like it's been drilling for an extended period of time. We did have to redrill the shallow portion of that hole. In fact, we had to skid the rig and redrill because of mechanical problems. But that is currently drilling, we're getting near the top of the objective section in that well.

On a go-forward basis in the Gulf Coast, we have three offshore wells we've identified that we have scheduled, West Cameron 601, the Eugene Island 280. Eugene Island 336. We have a working interest from 27% to 50% in those three wells. We plan on spudding those wells between August and October.

In the west, we have three additional impact wells that we have scheduled. Our Sabertooth, Hard Left, and Gold Nugget. We have between 50 and 63% working interest in those wells. We anticipate spudding those between mid-August and sometime in the mid-fourth quarter.

But, as you can see by these wells, Cabot does continue to position ourselves for the future. Given the current and anticipated commodity price environment, we do expect to end the year with a profit. This year's drilling program was put together with the goal of having a consistent, robust resource exposure throughout the year. I think we're delivering that.

Our near-term program highlights a continuation of this trend. And with the three impact projects, one currently drilling, Boudreaux, the other Sabertooth, the other Hard Left, just with those three projects, we have an unrisked exposure, net exposure, between 80 and 235 Bcfe.

In terms of acquisitions, we have continued to make efforts there. The market is tough. We do remain open and active in attempting to secure an acquisition in our established core areas. With our revolver, that's 85% available now. We feel like we have now got to the point where we've positioned ourself with plenty of dry powder. We have -- we turned over a lot of rocks and we've made several offers, but obviously nothing has been closed at this time.

With that overview, I will be happy to answer any questions. Michelle.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit 1 on your touch-tone phone. Additionally, if you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us and take as many questions as time permits. Once again, if you would like to ask a question, please press star 1. We will pause for just a moment to give everyone an opportunity to signal.

Brian Singer with Goldman Sachs has our first question.

Good morning. I wondered if you could give us a few more details on the Nickey prospect in terms of what the potential is in the area in reserves? And if you've had any initial flow rates?

Along those lines, as well, does the success there make the west increasingly core or make an acquisition there any more possible than before?

And finally, given the exploration successes in the quarter and the greater cap ex for the second half, what are your expectations for exit 2003 production and any initial thoughts on 2004?

Okay. Thank you, Brian. Good questions. We are excited about the Nickey prospect. Right now, really all we have is the analysis of the log. We've taken some sample, sidewalk core samples. We're having those evaluated. We're currently in the process of evaluating -- getting it set up to evaluate the wells. We do have on our cursory evaluation, Brian, a number of zones that we will look at in the Almond, in the Lewis, and the Lance.

We had gone into this prospect anticipated kind of mainly a Lewis objective. We're pleased that we see we have some additional zones to look at. It does -- it is a little bit early to predict any kind of volumes rates. It does set us up, though, with a successful test year, and we have a market that's about 2 1/2 miles away. So, that's not an issue. It does set us up quite well for future offset locations with our acreage positions surrounding this prospect.

We have about 11,000 acres surrounding this prospect and with a successful test, we're going to be, I guess, extremely excited, we're just -- right now we're cautiously optimistic in the Rockies with the reservoir qualities up there, you really have to have a test before you can say a whole lot. One of the indicators we did have in drilling this well, we did get up through a couple of zones, we did get up to having a 30-foot flare as we were drilling, which in the Rockies, is always a very positive sign.

As far as acquisitions in the west, we will -- one discovery is not going to deter us from pursuing acquisitions. Does it make it more of a core area? I think it does add credibility to our exploration effort with the success up there. It will allow us to continue putting capital into our strategy of the base and center gas play that we're working on. The other prospects we've identified are of similar concept as we worked on this Nickey prospect. So, we're optimistic, again, we're one for two right now, so far. We have for more exploratory wells to drill in the Rockies and we have our fingers crossed there.

As far as exit volumes, certainly dependent upon, because at this stage, though we're trying to wean ourselves in some ways from a great deal of forecasting with our exploration success and/or failures in our production volumes and forecasts, and it's dependent upon the success of our remaining program.

We do anticipate, though, to be moving up and to the right on our exit volumes, I think we've set ourselves up well for that. If I had to hip shoot on a rate, I would anticipate between 255 and 260 million cubic foot equivalent a day as exit rates.

Thank you.

Thanks for your questions, Brian.

Thank you very much.

Kenneth Beer with Johnson Rice has our next question.

Hi, guys. I had two questions, one with radar, that didn't work, and yet does that pretty much condemn that whole play? Or is that something where you -- because it was noncommercial it sounds like it was not a total failure, that you found something, or are you walking away from radar, that whole play, or maybe do we see you coming back to that?

Let me answer that first, I will let Mike ad lib a little bit, Ken. We did find certain noncommercial quantities. It is still being evaluated and I know that, at least Mike has indicated, we're not walking away from the play. I will let him comment on it.

Yeah, Ken, we did plug the well, we did have pay in the wells, unfortunately, the sands that we found were relatively widely spaced. It didn't make economic sense to complete it. We are not walking away from that area.

We still have great expectations for a basin center gas play in the Wind River. As you probably will recall, we have a prospect called Gold Nugget west of Raider, that we plan to drill this year and we are continuing to look at other opportunities in that trend. There may be even more work to be done in the vicinity of Raider, we just have to maybe fine-tune our interpretations of where the sands are.

Okay. Second question was more in Appalachia, which had a nice production increase. Did that come from just more wells being drilled or better performance per well?

Ken, the east is an area that, as mentioned, that we have increased our capital exposure to enhance by debottlenecking our infrastructure up there. That entails pipelines, new compression, enhancement to compression, we did not gain rate by additional drilling, necessarily. We're right on track.

We were ahead of schedule on our drilling until the record rainfalls in May up there slowed us down, and we're kind of right back on schedule right now, not ahead of schedule. But the debottlenecking process that we've embarked on is now allowing some of our base volumes to flow a little bit more, but also, we are seeing some pretty decent wells that we're drilling up there.

Okay. Okay. Thank you, guys, appreciate it.

Thanks, Ken.

And John Herrlin with Merrill Lynch has the next question.

John Herrlin, Jr.: Yeah, I was going to ask about the east coast and what you had planned. Regarding Gulf of Mexico, any of those plays operated yet?

Yes. The Gulf Coast -- are you talking about mainly offshore, John?

John Herrlin, Jr.: Offshore, Dan.

Yeah, offshore we have the Eugene Island 336 is an operated prospect. On our Eugene Island 280, that is a Pogo-operated project, however, the way we got into that was exchanging our interest with another operated block that Cabot was successful in acquiring at the central Gulf of Mexico lease sale. It was a block that Pogo was second bidder on.

So, we're pursuing our strategy of spreading our risk out there with having 75% interest in 12 operated blocks that we acquired offshore. We are going to spread our risk a little bit in that nature.

John Herrlin, Jr.: And one last thing from me on the east, are you doing any wildcatting or was the bulk of the increase in cap ex just related to your infrastructure changes?

The bulk of the infrastructure is related to infrastructure improvements and/or additions. We also, though, have a 20-well program in what we call our Wilson coal area, because of the infrastructure enhancements has allowed to us move into that particular area in a focused area, to increase drilling there. But the -- a great deal of it is focused on the infrastructure improvement that -- really Cabot has not done in a long, long time.

Some of what we're replacing up there, one of them was a 1940 vintage compressor. And not only do we have an uptick in the volumes that we can run through it, we have a line reduction on the suction pressure and we have savings on our fuel use. So, each of these projects has its own built-in return. Really excluding the advantage of incremental production that we can put through.

As far as the exploration in the east, we have -- are just now starting this next week, the first of six exploration wells that we have planned in the east.

John Herrlin, Jr.: Okay, thank you.

You bet.

We will now go to Ellen Hannan with Bear, Stearns.

Thank you. Just a couple of questions, one, Dan, you didn't mention anything about your Canadian program. Any progress on that in the quarter?

Yes, appreciate that, Ellen. We have made quite a bit of improvement. We've won on our joint venture up there with Double Star. We have our staff in place. We have -- we're on the ground, looking at several different focus areas as far as leads. We have identified several that we were far enough long on where we've nominated acreage, crown acreage. We went to a lease sale. We did not, though, have success at that lease sale.

We have also entered into an arrangement where we are going to expose ourselves to several exploration -- large exploration prospects, with another company. They are, again, in our focus area, this is in addition to our Double Star joint venture. We think the exposure and the type of prospects that we're looking at with this joint -- with this other company are right in line and consistent with the type of exposure that we wanted Canada to bring to us.

It's more long-term in nature. However, we do have scheduled at least completion, or statusing of one well this year. Before year-end we will spud, I think, another well in 2003, probably drilling over the beginning of the year. And we have another well that's already on the books to begin in the first quarter of 2004. And that is outside of our Double Star joint venture.

So, we are making progress, we're getting the exposure we want. The capital commitment for our guidance for 2003 remains relatively unchanged from our previous guidance of plus or minus $5 million. So, it's come along well.

So, do you plan to drill anything in the Double Star joint venture this year?

Possibly. We have not changed that. But what we had going in to this year was a half a well in the Double Star joint venture. We had anticipated that we would be drilling a prospect out of that joint venture over the first of the year.

Back in the lower 48, on the successes you had at Nickey and the Ellis, you had mentioned last quarter that the Nickey, you thought had a 40 to 120 Bcf potential, would you describe the well as coming within that range or at the low end or the high end or -- ?

That -- right now we are, with a successful test out there, optimistic that we're certainly going to be within this range.

Great, thank you very much.

And Frank Bracken with Jefferies and Company has the next question.

Hi. Wanted to focus a little more on this Nickey discovery. Could you give us a timetable during which you expect to complete the testing process?

Could you also discuss for us the available takeaway capacity by any of the major lines out of the area?

Okay, let me address the first part and I will let Mike, again, comment on the testing. We are, at this point in time, Frank, we are doing everything necessary to look at the reservoir quality, doing some sensitivity analysis, fluid compatibilities, all of the things that you need to do so that we will be able to assure ourselves of a clean test out there in each of these zones. The good news is we have a lot of work on the front end because we do have multiple zones to look at in the three sections.

Mike, timing wise --

Like two weeks.

Two weeks. Frank, looks like that we -- and that two weeks will somewhat be dependent upon how we -- how the -- obviously, starting at the bottom of the well and how the zones test as we come up the zone. We might not have confirmation on all the zones because if we have successful tests in the deeper section, we will probably move to completion of those and then move to have the offset -- [ LOSS OF AUDIO]

Please stand by, we will resume momentarily.

Are we on or off.

You're on again.

Okay. We'll continue -- go ahead.

I don't have the exact capacity that's available, we are very close, as Dan mentioned, to a large gathering system by prominent gather in the area. They do have a large processing plant nearby. This plant does have interconnections with at least two different interstate pipelines.

We've worked with them in the past. They have always been very capable of adding compression necessary to expanding lines, looping, that sort of thing. I just don't anticipate a capacity issue area, but again, I don't have the exact figures. We can certainly get back to you with that.

Okay, thanks.

As a reminder, if you'd like to ask a question or have a comment, please press star 1. Sunil Swanson with Delphi Management has the next question.

Hi, Dan. Could you give a rough ballpark number as to where you expect your debt to be at the end of the year?

Well, why don't I turn that over to Scott, he's sitting here raising his hand, go ahead, Scott.

We expect debt to be in kind of between 285 and 290 at the end of the year. And that includes the expansion of the capital program.

Great. And the one -- and then the other question I had was for next year's production. Assuming you don't make acquisitions, what's your target for drill from the drill bed? You gave the exit production for '03, where do you see '04?

We have not put our '04 production guidance out. We're working on that at this time. We certainly anticipate it's going up, though, from where we are to date. We're in the mid single digit target right now, and, certainly, that includes a risk portion of our drilling and exploration.

Thanks.

Uh-huh.

And there are no further questions at this time. Mr. Dinges, I'd like to turn it back to you for additional or closing remarks.

Thank you, Michelle. I appreciate y'all's questions and interest in Cabot.

As you can see, we have a very busy drilling report between now and the end of the year. We've positioned ourselves extremely well, I think, to have success in our year-end numbers for 2003. I think we've also set ourselves up for a great start to 2004. I think we will have some follow-on projects that we don't have on our 2004 tentative drilling program right now, with continued success, particularly in Nickey.

Nickey is an example of what we have been working towards and putting our staff and effort and strategy together in the Rockies for the last couple of years. Again, we hadn't had the prior exposure with just a less than a handful of exploratory wells out there in the last couple of years. We knew this year was going to be a little bit more exposure with the drill bit. So, right now we're optimistic about that.

We are also optimistic about our exposure in the Gulf of Mexico. Again, I -- a few wells left -- right about a handful of wells in the Gulf that's going to compliment our program from not only a reserve growth perspective, but as you're well aware, the Gulf of Mexico would also be able to provide us with a production overhang that we're looking for as far as our strategy is concerned.

Again, positioned well, feel comfortable with the numbers where we are year-to-date. We've controlled our costs. We've managed our debt position and our balance sheet. So, with commodity prices remaining where they are between now and the end of the year and into 2004, I think we are well on our way to the program that we've set out to deliver.

Again, I appreciate your support and thank you for all your questions.

As a reminder, today's presentation will be available at 12:30 Eastern Time through August 6 at midnight. You may access the replay by dialing 719-457-0820 or 888-203-1112, and entering the passcode 472122. That now concludes today's conference. Thank you for your participation.

Thank you.