Coterra Energy Inc (CTRA) 2003 Q3 法說會逐字稿

Good day, everyone, and welcome to the Cabot Oil & Gas Corporation quarterly results conference call. Today's conference is being recorded. Today's presentation will be available for replay at 12:30 Eastern Time, through November 6th at midnight.

You may access the replay by dialing 719-457-0820. Or 888-203-1112 and entering the pass code 575063. Again, 719-457-0820, or 888-203-1112, and pass code 575063. At this time, for opening remarks and introductions I would like to turn the call over to the Chairman, Chief Executive Officer and President, Mr. Dan Dinges. Please go ahead, sir.

Thank you, Brenda. Good morning. Thank you for joining us during this third quarter earnings teleconference call. I'm Dan Dinges, the Chairman, President, and CEO of Cabot Oil & Gas. With me today, I have several members of our -- excuse me, our management team. I have Mike Walen, our Senior Vice President; Scott Schroeder, our VP and CFO; Kip Hutton, our VP of Marketing; and Chuck Smyth, our VP, Controller and Treasurer.

As usual, before we start, I do need to read the following statements. Statements regarding future financial performance and results and understatements which are not historical facts contained in this release are forward-looking statements that involve risk 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 Securities and Exchange Commission filing.

All non-GAAP financial measures discussed during this teleconference call have been posted to our web site, at www.cabotog.com, along with reconciliation to the most recently comparable GAAP financial measures. As we announced yesterday in the earnings press release, strong realized commodity prices continue to drive our financial performance, which we're pleased with.

And it certainly resulted in another record quarter for Cabot. The net income for the third quarter totaled $22.7 million, or 70 cents per share, while the discretionary cash flow for the quarter was $63.9 million. Realized natural gas prices of $4.53 cents per mcf and oil prices of $28.40 per barrel drove these exceptional results.

Year-over-year price comparisons for natural gas, which accounts for about 81% of our third quarter production, was up 64% compared to last year, while oil prices increased 14% year-over-year. These prices do include the effects of our existing hedges. The impact of our hedges for the quarter was a reduction of both natural gas and oil prices by about 42 cents and $1, respectively. If you recall, Cabot is about 69% hedged in gas and 45% hedged in oil for both the third and fourth quarters of 2003.

In terms of new hedging, Cabot recently entered into six hedge positions -- five for natural gas and one for oil, all of which cover our 2004 production. Natural gas swaps each cover 5,000 mmbtu per day of natural gas production, and the oil hedge, which is structured as a range swap, covers 1,000 barrels per day. Each transaction covers the full year of 2004.

In our earnings press release, and included specific -- it included specific price information about each transaction, so I won't go into the details of each, but I would add that these hedges were placed at an increasing NYMEX price level, which is consistent with our strategy of layering in additional hedges along the way. Our current position in 2004 position of hedges is 24% swaps, 23% costs with collars, with represents about 40% of our anticipated equivalent production in '04.

We'll discuss our production guidance for '04 a little bit later here in this discussion. Additionally, last week, Cabot placed hedges on 30,000 mmbtu per day for 2005. These hedges are spread evenly, 10,000 mmbtu each over production in the east, mid-continent and the Gulf Coast. The resulting prices were $5.05 per mmbtu for the east swap; 4.50 per mmbtu for the mid-continent swap; and a full price of $4.50 per mmbtu in a ceiling of $5 for the Gulf Coast [INAUDIBLE] color.

These hedges were completed with the 12-month NYMEX strip for calender year '05 at approximately $4.70 for mmbtu. Production in the third quarter was down slightly versus a year ago. But the trend is positive, and was up 2.7% for the years over and above the year's second quarter.

Driving an increase between the second and the third quarters was the successful drilling results in our east region, and -- and the Gulf Coast. In the east, which typically is not known as a growth basin, we're -- our 100-well program is nearly complete and we have successfully grown our production and reserves net of selling some of our non-core properties in Pennsylvania. We do anticipate this growth to continue in the east into 2004.

In the Gulf Coast, we had success with several of our lower risk prospects in the last six months; that led to the turn around in production levels between the second and the third quarter. We have not yet been successful so far in our larger higher risk-type prospects. However, several are currently drilling, and we will reach TD prior to year end on those prospects.

The bottom line, though, on our production for the quarter, it falls within our guidance that we have provided.

On operating expense, overall, our operating expenses were in line with anticipated levels. The increase in exploration expense fell within our expected guideline and was driven by an increase in dry hole expense related to our Boudreaux prospect and our Sabre Tooth well.

Higher realized prices triggered the increase in production taxes. G&A was slightly better than expectations, and it was expected to range between $6 million and $7 million for the fourth quarter of 2003. Fourth quarter guidance for exploration expense totals approximately $13.5 to $15.5 million.

Moving to operations, last night's operational update, press release, was quite comprehensive, but I would like to discuss several of the highlights. First, in Rocky Mountains, our Wind Dancer well -- you might recall, we had some positive indications from this well at the time of our second quarter conference call, with the high bottom hole pressures that we encountered.

We had to specifically design a completion operations so as not to jeopardize the integrity of the pay relog [PHONETIC] and the Almond, Lewis and Lance formations [PHONETIC], but our attention to the details has certainly been rewarding with a recent test of 4.5 million cubic foot per day out of our discovery well out there. Additionally, we are looking at drilling two off-set wells between now and year-end, plus we are planning our development drilling, in this field for 2004.

We're excited about this -- this success we're having out there in this area. Of additional note, in the Rocky Mountains area, is our continued success in the Paradox basin. This area is producing 28 million cubic foot per day gross from a -- a zero start, just two years ago.

It's really on the heels and the strength of ten successful wells out of ten attempts in this -- in this basin. We're currently conducting operations in the basin, one exploration well, one development well drilling. Two -- two wells are completing and two additional wells are scheduled to be completed prior to year-end. Looking at some of the key wells to look forward to between now and year end, either drilling and/or scheduled for the fourth quarter: In the Gulf Coast, in offshore, we have our Eugene Island 280 prospect, which is Podo [PHONETIC] operating currently drilling. Eugene Island 336 is a Cabot-operated property that's currently drilling.

West Cameron 601 is Danbury operated, which we are currently moving in a rig; and out in the west, as far as an exploratory well, Hard Left, is Cabot-operated and it is also currently drilling. These four prospects exposed Cabot to about 90 to 150 bcfe of net [INAUDIBLE] potential between now and year end. They're quality prospects and we're looking forward to the results.

Also our Golden Nugget prospect, which we mentioned in the past in the Rocky Mountains, we've moved that to the beginning of 2004, as we really finalized preparation for the 17,000 foot Wildcat. The bottom line, in looking at our activity level, we still have 31 wells drilling and/or preparing to spud between year-end, and now. This level activity will carry into our 2004 as we anticipate our 2004 program to be equal to or slightly up from this year's $180 million program.

Spending level for 2004 is a very -- is a very conservative number, and within our cash flow figures. That really combined our hedge volumes that we have in place, that I've mentioned that are also on our web site. And we combined those with a -- our unrisked -- excuse me, our unhedged volumes at 350 per mmbtu and $22 oil to arrive at our cash flow figures. As our press release indicated, we have significantly changed our leverage position.

Even after funding our second largest capital program, excluding acquisitions, and after incurring a large impairment in the first quarter of this year. Unless the company is successful at closing one of a couple of current acquisition opportunities, our debt position should be $270 million at year end, which would mean that our company revolver would be completely paid off and providing substantial flexibility for us. We continue to be diligent and prudent on looking at reserves that are for sale; however, we want to make the right deal and not just -- not just any deal.

Getting back to production for 2004 and our guidance, which is posted on our web site, yesterday we presented our three-year strategic plan to our board. Part of that presentation was the 2004 preliminary spending plan, which resulted in -- and this depends on the risk factor used for drilling -- a flat production profile, which is reflected in our guidance.

I would say, though, with our 31 wells remaining in our program this year, between now and year-end, there's definite upside, with success between now and year-end with this level of activity. We all understand and we're particularly cognizant of the -- of the difficulty in growing with economic success. We have renewed focus on our economics and we do, with our plan, plan on providing both growth and value creation.

Our plan remains no different, really, than we have put forth in our 2002 and 2003 program. You know, if you look at my 18 months at the helm, I think our program has made great progress in value creation, in several areas of our business. In particular, with the growth in our east region, and with our financial position and our balance sheet throughout the last year and a half.

In the West, our Wind Dancer is a success. I think it's the start of something good, up in that area. While our improving production profile and the second quarter to the third quarter in our Gulf Coast region also reflects a positive trend in our business.

Though we have not yet experienced the big upside of success we had hoped for in some of our higher risked prospects in the Gulf Coast, we have maintained and demonstrate that -- that our mid-risk prospect exposure will still deliver a -- a positive result.

In the balancing of our program, which is delivering value and maintains a slight increase in our production profile, also really allows us to continue looking at the upside exposure of putting together a prospect portfolio and inventory that will give Cabot and its shareholders that additional growth opportunity, which I'm optimistic will occur in the very near future. And with that, I'll be happy to answer any questions, Brenda.

Thank you. The question-and-answer session be conducted electronically. If you would like to ask a question, you may do by pressing the star key followed by the digit one. If you are on a speaker phone, please make sure the mute function is turned off to allow your signal to reach our equipment. Once again, if you have a question, press the star one now; and we'll pause for just a moment to assemble our roster. We'll take our first question from Ken Beer of Johnson Rice.

Hey, Dan. How are you doing?

I'm doing good.

Good. I just wanted to look out to your '04 thoughts. I know ya'll have posted guidance on '04. Gas looks like it will continue to creep up but oil seems like it's going to -- just ratchet down during the course of the year. Is that just, y'all have assumed virtually no exploration success or no exploitation kind of on the oil side? What's the thought? Because you go from about 75 -- you go from about 8,000 barrels a day to maybe under 5, and I was trying to get your thoughts there.

Yeah, a couple of things, Ken, one is the makeup of our portfolio. We -- we do concentrate on natural gas for the most part in our prospect exposure, but I think it's also -- if you look at the details and our production profile that we have experienced at the end of, really 2002, and through the beginning of this year and you look at our Etouffee [PHONETIC] discovery.

Right. That's ratcheted down.

The Etouffee discovery is the good news/bad news of a success story, and especially the magnitude of a success that Etouffee was for Cabot,. It was a major success in anybody's book, but for Cabot and the size of Cabot, when you have a 200, 250 bcf discovery that produces at the magnitude and the range that it did, it -- it -- that has been one of our challenges this year to overcome that production profile.

But it had a significant amount of liquids associating with that, and as we all know, that -- that -- that profile has turned down and it really turned down early in this year in the first quarter of peaking at the end of 2002 and turning down very steeply, at the beginning of the 2003. And that's what you're seeing in the slide of our -- of our liquids production. I guess credit to our program, we have replaced and maintained with the successful trend in our baseline program and recovered all of that significant decline that we've seen in Etouffee.

Okay.

That is the shift in our guidance -- prior guidance to -- to this next year.

Okay. So literally, it's just the decline curve and your success has been on the gas side, so you're not seeing the impact on the oil?

Yeah.

And that's pretty much all Etouffee?

Yes.

And any thoughts just in terms of budget for '04, kind of as it relates to cash flow? You may have highlighted this, but is the thought to continue to give yourself extra flexibility, so that -- would we look for or assume that cash flow -- I'm sorry, cap ex would be less than cash flow? Is that -- am I putting words in your mouth?

Well, no, you said it pretty well, Ken. We are going to live within our cash flow. In the beginning of our -- of the year, we are going to put together a modest capital program, and, yeah, I say modest, it's nevertheless -- I think our capital program in 2004 will -- will be equivalent or possibly exceed our 2003 program.

At least what we envision today, with commodity prices, it will be within our cash flow. It will leave us a little bit of dry powder in our program, and with our revolver paid down, I think we're positioned well financially, and I think we'd be positioned well also if -- if Mike and his group find opportunities throughout the year to take advantage of, we have that flexibility to take advantage of tremendous upside opportunities.

Okay. Thank you, guys. I appreciate it.

Mm-hmm. Thanks for the questions.

We'll go next to Ray Deacon of First Albany.

Yeah, hey Dan, I was wondering if you could quantify, maybe elaborate a little bit more on what you've done in the east. I know you spent some money on gathering systems and kind of reinvigorated the trolling ram. Could you maybe talk about what that's done for your rates of return or production in that area?

Yeah, Ray, we have had a focus in the east that really started at the beginning of this year. We did a fairly intense evaluation of the operation up there, and looked at what opportunities were available, and the guys up there have done a tremendous job in evaluating the business, and seeking out and taking opportunities to us. We have taken some of those recommendations.

We spent approximately $8 to $9 million dollars, as I previously have mentioned, I think in our second quarter teleconference call,

on the infrastructure enhancement, which we continue today; and we are spreading those enhancements out in various regions in our -- in West Virginia, in our core area up in Appalachia, and with those enhancements, de-bottlenecking process, we have now designed our 2004 program, which is a larger program than our 2003 program, to drill behind these enhancements. And with the additional drilling and wells that we're drilling behind either the de-bottleneck of compressor upgrades or pipeline improvements, we have placed wells directly in association with that positive upgrade and incremental volumes we think we are going to be able to get through.

And with the incremental volumes now, and some of the success that we've been having, we do anticipate a growth profile in the east this next year and we do anticipate our returns to be better than we've seen in the past.

Okay. Okay. Great. And can you just -- I apologize, I don't have the operational release yet, but the -- the $4.5 million a day from the Wind Dancer well, is that all coming from the Lance and, you know -- what -- what would you say about the ultimate potential there?

That is, actually, coming from the Lewis and the Albany [PHONETIC].

Okay.

We have gone through the cracking and testing that we needed to do, and it was a process, Ray, as you say. It drug out a little bit longer than we anticipated but we're fairly diligent in looking at it because we felt it could be a significant discovery for us.

Right.

And as it turned out, we've been very pleased with the production so far, which just -- just recently came on -- and it is from the Omni and the Lewis. We still have Lance behind the pipe that we have not tested.

Okay. Great. And what would you consider to be the core -- core areas you would look at for acquisitions right now? I know you have a big growth in the Rockies, it seems like -- I mean, where would you look most actively, I guess?

Oh, actually, we have with every region being kind of an economist in that assessment. Every region is proactive in looking at a best fit for their -- for their own region.

Mm-hmm.

We have ideas right now about our -- that are on the table, I guess, Ray, in the east. We have ideas that are in the west. We have had ideas in the Gulf Coast, and we'd like to make an acquisition in the Gulf Coast also, but we haven't found one that we fell like we could get our arms around, that was a win/win deal.

Great. Great. Okay. All right, well thanks very much.

Mm-hmm. Thank you.

We'll go next to Frank Brarken of Jeffries & Company.

Could you elaborate? I heard you say you sold some properties in Pennsylvania. Could you give us a handle on the reserves and the production that you lost there? And then secondly, can you give us a handle on the extent to which there is development drilling contemplated at your Nickey Field in your 2004 guidance?

Yes.

Thanks, Frank, yeah, and this has been on the board for all of 2003 anticipated sale of non-core assets, and these properties were outliars in Pennsylvania with -- which as you're aware, our main core focus is in West Virginia. These were some of the old [INAUDIBLE] properties that we've had for a long time. Even with the sale of this 16 bcf and production loss of $2 million per day, the east, with their program, in 2003, has increased their -- both their production and their reserves that we anticipate to book by year end. So that was kind of the magnitude of that sale.

In Nickey, we have, again, just recently completed the test, very pleased with the flow rates right now of that test. And we have two wells that we're going to offset -- we have two wells that we're going to offset, the discovery well with between now and year end and I would expect us to be plus or minus 10 wells or so in our Nickey prospect -- our Nickey field in -- in 2004. And as far as the timing of the offset drilling, Frank, we're moving a rig in today for the offset to our discovery.

Okay. When did the -- when did the Pennsylvania deal close?

September 30th, Frank.

September 30th?

But the effective date was August 1st for production purposes.

Okay. And then secondly, is that -- are those 10 wells -- are you risks waiting your production? I mean, your Rockies production looks pretty flat and that seems counterintuitive with success you've had in the Paradox lately, and then here drilling potential in the Nickey. Could you comment on how that might all work out and whether you may be ultra conservative here?

Well, Frank, we don't like to think that we're ultra conservative, but we have taken a good, hard look at our risk profile that we use in our sales forecast. We -- it is a long-term objective of ours to be able to reduce the level of impact, and therefore, be more accurate on our guidance, though I think we are -- we are fairly accurate about our guidance. We have a little bit less impact on our exploration and in future drilling, and its results on our -- and its impact on our sales forecasts.

But with that being said, what we have done is looked very hard at the piece that we use in our wells, and we looked hard at the rates that we apply to our future drilling and also the reserve size that we allocate to each well; and also, we're looking at the timing and its effect on each project. And coupled with all of that scrutiny that we've placed on that, it might be perceived as a conservative outlook. I guess Frank, to be fair, I would say that if we have a success rate greater than piece of basket we are assigning, it is my expectation that we will also show that same positive impact and upside in our sales forecast.

All righty. Thanks very much.

Mm-hmm.

And as a reminder, if you do have a question, please press star one now. We'll go next to John Kane of Bear Stearns.

Oh hi, Dan. I have a couple of questions just concerning guidance. I was looking at your guidance for first quarter of 2004 -- not to get too specific, but it looks like operating costs go down a little bit. I was just wondering if you have any color on that, and then they do jump back up in the second quarter.

Well, let me look at the specific first quarter, and --

Sure. I'm just wondering if there's anything going on.

John, I can't say -- I will let one of these that have -- that has that answer specifically on the changes.

I would say that we have in first quarter -- we've tried to balance the first quarter with our level of activity that we have in the 31 wells that we have drilled between now and -- and year end, and that can have a fairly significant impact in our first quarter guidance, depending on the results of that activity and the carryover effects. You might want to -- anybody want to --

Mostly maintenance impact. We're doing more maintenance on the -- on the properties that we have there and there's also somewhat of a weather -- a weather impact in this too.

Okay. Okay. All righty. And then also just looking out into 2004, again, it looks like exploration expenses there are somewhat front-end loaded, so I'm just wondering if you had any big projects that you're working on there?

Yeah, we have -- one thing that we're trying to do this year, and you're seeing it as a result, and you can see it in the results of the level of activity; between now and year-end, John, we have indicated to each region that we do not want to have a -- a lull in the first quarter because of the full-year impact it has on our results -- that we want to have a consistent level of activity going into the fourth quarter of 2004, and in coming out of 2003, in -- excuse me, in the last quarter of 2003, and coming out into the first quarter of 2004, we want to show consistency throughout that.

In the past what has happened, it seems to be we get a Christmas lull, if you will, and before we get geared up, and we get traction into the first quarter, and -- and that timing issue has -- has had a direct impact an our year -- full-year results, and so what we're trying to do this year is make sure that we are -- we come out of the chutes in the first quarter with a full slate of wells drilling.

Okay. So, obviously you can't go into any more detail on any specific key wells or exploration wells?

That's correct. No.

No. Okay.

Nice try, John.

We like to talk about what we have, though.

Actually, let me ask one more question. This quarter it seemed like DD&A, LOE, a bunch of expenses were a little bit lower than guidance. I was just wondering if anything was going on there.

Well, we've been -- we've been scrutinizing our costs. We've been looking at our -- across the board, the balancing of our activity, in the east, with the Gulf Coast, with the myth continent and the Rockies, and I think you are seeing the results of some of our cost control efforts in our numbers.

Okay. Great. All right. Thank you.

And as a final reminder, if you do have a question, please press star one now. We'll go to Michael Schmidt of Banc of America.

Yes, two questions. One, can you jut give some additional color on the upcoming exploration program in Canada; and then two, on Etouffee, where did that peak, where are you today and what sort of rates are you expecting for '04?

Michael, I will let Mike Walen kind of handle the Canadian question and also the Etouffee question, because the production in Etouffee was a significant field of ours. Let me just get exactly what it was. Current -- let me, see, current production in Etouffee net equivalent to us is right at 32 million cubic foot per day. If -- and reflecting back on what that had gotten to earlier in the year, it was about 60 million cubic foot equivalent when we opened up 2003.

And one of the things that we have had to do recently is -- is scale back the rate even more as Anadarka [PHONETIC] goes out there and attempts to control the water production that we have in several wells, because it's -- it's exceeding our handling capacity out there. So we're going to go off and try to shut off some of the lower zones that water is coming in, and we're going to -- and then -- and then see what kind of rate we can recapture, but we've had to do that also.

You know, it's on the down side of a field. Well, it was $60 million net to us, Michael, and we have 37% of the field, so it was a -- it was a horse. It's produced over -- over 16 million barrels of oil, and right at 200 -- no, what is the oil? The gas is -- 65 b's of the gas. Right at 200 million equivalent is what that field is right now.

So that -- again, we enjoy the success of that field and we're just dealing with the -- dealing with the downturn. You know, I guess the good part is that the majority of the steep downturn, I hope, is we've handled well with our program and maintaining our production, and now the influence of a single field on Cabot is going to be mitigated as we go forward. That's -- and that's, I think very positive, and -- and hopefully, we'll be able to see really the baseline results of our program shine through.

In regard to our Canadian program, I'm going to let Mike Walen discuss a little bit of that.

Yeah, we had planned to get our first well started here in the fourth quarter, and we're on track with that. We're finalizing the land work on our first prospect, and hopefully to be moving in and spuding out in December or thereabouts.

And on top of that, we have four other prospects that we are also finalizing, and in a couple of cases, the land work is done. And the both prospects we'll be anticipating moving in and drilling in the first quarter of '04. So hopefully by the next conference call, we may have some information to report.

And on the first well, what working interest will you have and what type of potential are you looking at?

We're going to have about a 40% working interest on this first well, and it's a large stratographic trap, maybe about 6 bcf per well.

And then the last question, back in the east, you've had good success lately. You ramped up the program this year. Any guesstimate of how many you you might drill, compared to the 100 years this year, next year?

Yes, we anticipate our east program to be plus or minus 170 wells.

Great. Thank you.

Mm-hmm.

I would like to remind everyone that you may listen to a rebroadcast of this conference at 12:30 eastern time today, through November 6th at midnight by dialing 719-457-0820 and enter pass code 575063 on your telephone. Mr. Dinges, I will turn the conference back over to you for any additional or closing remarks.

Thank you, Brenda, and I appreciate all the questions we received. Again, in looking at the questions, and looking at our program, I -- I think some are recognizing out there that our program is gaining momentum, and we're -- we're certainly optimistic about our 2004 program, and projects that we have on the table.

I would just say between the level of activity between now and year-end, and what we have on slate, between the -- the end of this year and our first quarter of 2004, and the projects that we're going to be able to expose our shareholders to, I think we're all going to be pleased with the results. I'm optimistic about where we are. Do appreciate y'all's interest and all the questions. Thank you.

And that concludes today's conference. We thank you all for your participation. You may now disconnect your phones.