Coterra Energy Inc (CTRA) 2003 Q4 法說會逐字稿

My name is Sharett and I will be your conference facilitator. At this time, I would like to welcome everyone to the Cabot Oil & Gas fourth-quarter year end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. [Operator Instructions]

I will now turn the conference over to Dan Dinges, Chairman, President, and CEO of Cabot. Please go ahead.

Thank you, Sharret. Good morning. Thank you for joining us during this earnings teleconference call. I'm Dan Dinges, Chairman, President, and CEO of Cabot Oil & Gas. Before we get started, I want to apologize in advance. I've had a cough and if I disrupt the conference call briefly I do apologize.

With me today are several members of the management team. Michael Walen, our Senior Vice President; Scott Schroeder, our VP and CFO; Jeff Hutton, our VP of marketing and Chuck Smyth, our VP Controller and Treasurer. Before we start, our attorneys have asked that I share with you the following statement.

Statements regarding future financial performance and results and the other statements which are not historical facts are forward-looking statements that involve risks and uncertainties including but not limited to market factors, market price, 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 filings. 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.

Let's begin.

As announced in yesterday's earnings press release, Cabot recognized a record fourth-quarter with net income of 19.2 million and discretionary cash flow of $71.7 million. For the year, Cabot also established a high watermark for discretionary cash flow, reporting $266.4 million. In terms of full year net income the Company reported 21.1 million or 66 cents per share on the strength of commodity prices that allowed Cabot to completely offset and overcome the first quarter 2003 impairment and the effects of required change in accounting policy related to plugging wells.

Press release also showed net income of nearly $78.5 million for the full year after removing certain select items. This normalized net income figure is significantly higher than any previous similarly reported results.

Strength of prices is highlighted by Cabot's realized natural gas price of $4.51 per Mcf for the year and $4.45 per Mcf for the fourth-quarter which were up 49 and 16 percent, respectively, vs. comparable periods. Oil realizations exceeded $29 per barrel for both the year and fourth-quarter periods. These prices include the effects of our hedging activity which had the impact of reducing our natural gas price realization for the year by 68 cents per Mcf and oil price for the year by $1.41 per barrel. In regards to our hedging program Cabot has continued to layer in natural gas and oil price hedges for both 2004 and 2005.

We continued adding to our position as the NYMEX strip rose past $5 per Mmbtu. Specifically, since the last call we have conducted the following trades.

45,000 Mmbtu per day for 2004. These are all swaps. 45 -- let me repeat -- 45,000 Mmbtu per day for 2004, 40,000 Mmbtu per day for 2005. We established collars of 50,000 per Mmbtu per day for the first quarter of 2004 only and we utilized range swaps for 1,000 barrels of oil per day in both 2004 and 2005.

The additions of the higher priced hedges improved Cabot's overall NYMEX referenced price to $5.24 per Mcf for 2004. Obviously these are region and basin (ph) differentials taken into account -- would allow us to recognize a basis adjusted NYMEX price of $5.05 per Mcf.

Details of these positions and those previously entered into in 2004 and 2005 are all listed on our web site under Investor Relations Financial Models.

If you use our 2003 production levels as a reference, Cabot is 75 percent hedged on gas for 2004 and 32 percent hedged for 2005 for oil. Our numbers are 69 percent hedged for 2004 and 17 percent for 2005.

Some might ask the question will we hedge anymore? The answer is yes. But the focus will be on 2005 and if successful on acquisitions volumes, we will also hedge those in 2004.

In terms of production, the major effect as the press release highlighted was declines on our CL&F properties in South Louisiana which accelerated in the latter half of 2004. CL&F properties include the Etouffee complex along with the [indiscernible] Augen fields. Today that production from the CL&F acreage is 30 million equivalent per day net, down from its peak of 65 million per day in April of 2002.

Consistent with our guidance this decline -- combined with slightly lower production in our West region offset by growing production in our East region -- resulted in full-year production down approximately 2 percent over last year. And a minor portion of the decline was due to asset sales in the East region and Southeast Texas.

West region declined as a result of a consciously planned smaller capital program last year which we focused on better return opportunities not just simply drilling to add incremental production volumes. Likewise in the East, the focus has been on the best return projects.

We have had a very robust 98 well program in the East where we further developed our extensive acreage position as some of you are well aware is over 1 million acres. Bottom line -- across the Company, we had an excellent success with a drill bit, including 46 percent success on our exploration program. However some of the exploration's successes were of the smaller impact variety.

Last night, our operational update press release was very comprehensive. I would like to point out some highlights. Wind Dancer Field is progressing -- that's in our Rocky Mountains region -- is progressing even better than planned. If you recall, this is our initial exploration discovery in the Rocky Mountains. In addition to the discovery well we had three successful offset wells we drilled to date that continue to confirm our geologic model.

Due to the regulatory constraints up there, Cabot is prohibited from drilling between January and July but will resume in August with a 9 well program for 2004. Additionally, this -- which we just announced last night -- additionally, just to the northwest of our Wind Dancer field and this is consistent with our strategy of chasing Basin Center Place (ph), we announced a successful discovery in a prospect called Cyclone Rim. This discovery in Canada over 150 ft. of pay again in the Almond Lewis and [indiscernible] formations -- all those formations are present in the Wind Dancer wells.

In addition Pay (ph) has been identified in the Erickson formation. This discovery has the potential, I think, to develop into a field significantly and possibly the size of the Wind Dancer discovery.

In the Gulf Coast region, 2003 was our first real offshore effort and I am happy to report that we were successful in four of seven attempts. Our successes include [indiscernible] Island 280 about 81 ft. of pay with an additional 114 ft. of additional or possible pay in some thin bed sandstone. (indiscernible) discovery in Eugene Island 142 we encountered approximately 87 ft. of pay in there there [indiscernible] 41 and has continued to develop nicely, our number 4 well encountered, 1 19 ft. of net pay in the Tex W (ph) section and our recently drilled Retton Sound 41 No. 5 well encountered 200 ft. of pay in the Tex W section also.

These wells -- plus several of our Raymond (ph) field wells will come online during the second half of 2004 at an expected combined rate of 24 million cubic foot equivalent net per day. This has created although it's only the beginning some production visibility that Cabot has not had in the past. I am very pleased with our progress in this area and I do anticipate our 2000 program to add additional production visibility.

First part of 2004 the Gulf Coast region is drilling or will be drilling the following wells. This well is drilling Eugene Island 277, we drilled down, we've had some early indications of encouragement; however, we have had some mechanical difficulties that we're dealing with on that well at this time. Little Horn (ph) Bayou is a well we recently spud this last weekend. We had a 75 percent interest in that well in South Louisiana -- and Hannibal, that's a well that is a prospect under our large 3-D shoot down in the Red Fish Bay area. We have a 75 percent interest in that particular well. And we are going to initiate another offshore well -- West Cameron 424 in the near future.

If you look at the East in an area that we excel in [indiscernible] East, our report card for 2003 was fantastic. We had 3.3 percent production growth, we had great reserve replacement at 385 percent at an excellent finding cost. We're fortunate to have such solid development drilling inventory in our portfolio. The East had a 98 well program that was 97 percent successful.

Based on the success of our investment and compressure upgrades and acquisition in additional regional pipeline system we will continue the strategy we started in 2003 by increasing our program here to 179 wells, including one Trenton River Wildcat in New York.

This program is expected to deliver a second consecutive year of production and reserve growth along with a very competitive operating statistic.

In addition, we currently have two wells drilling in Canada with six more scheduled to spud in 2004. All of these wells are exploration wells focused on known high potential zones in the respective areas with additional room to run with initial successes on these wells.

Overall, our 2004 program has 276 wells included which includes 30 exploration wells that have a net un RISC (ph) potential to Cabot of 400 to 500 Bcfe. With our balanced portfolio we will continue to take upside exploration shots in an effort to grow our production and reserve base.

Cabot experienced a strong production replacement of Eastman of 127 percent driven almost entirely from the drill bit that helped us overcome a fair portion of our strategic divestitures program. And to that end, last night, we reported total reserves at year-end of 1.14 Tcf which is a 2.5 percent decrease after the sale of 53 Bcfe BCS during 2003.

While it is not our intent to reduce our reserve base the properties we sold were non-strategic with two-thirds of the reserves focused on a non operated low margin waterflood property in South Texas. In light of some of the bad news that we're all aware of and that we've read about even most recently in this morning's paper regarding reserves, let me take this opportunity to reiterate that Cabot's reserves are 100 percent audited and have been for the last 14 years by an outside third party consulting firm.

Very confident in our asset base.

Regarding our [indiscernible] when the numbers are reported for the industry that our finding (ph) cost will be very competitive. However we will continued to remain focused on lowering the cost of that aspect of our business.

In 2003, (indiscernible) more financials in 2003. Cabot repaid 95 million of debt while still funding its second largest ever capital program, excluding acquisitions. With an expected $207 million program ahead of us and 73 percent of total production hedged at a NYMEX equivalent price of $5.23 per Mmcfe (ph). Company will again have free cash in 2004.

Because our remaining debt is fixed rate debt for long-term, additional deleveraging is going to be limited. Therefore, what we have been concentrating on upside drilling opportunities outside our inventory and we will also continue to look for value-added acquisitions of production reserves that fit well into our long-term strategy.

Our guide for production remains relatively unchanged with the levels provided in the end of October for the second quarter through the fourth quarter. First-quarter production is slightly lower to reflect the impact of the CL&F number 4 workover delay, which is now back online after starting in December. It just recently came back online and expected to have a target rate of 30 to 35 Mcfe (ph) a day, with Cabot's net being 7 to 8 1/2 percent -- excuse me, 7 to 8 1/2 million equivalent per day. Which should allow us to catch up some of the delay in volumes as a result of this work over.

Expense levels have changed somewhat in response to higher anticipated capital program, the higher cost of compliance or all the new accounting regulations. The impact of higher commodity prices and the impact of our year end reserve adjustment to reflect declines that we spoke about in the CL&F field.

Specifically Cabot now expects higher DD&A due to the sale [indiscernible] reserve revisions and the accelerated production declines on those properties. Our DD&A range that we anticipate is $1.35 to $1.40 for Mcfe.

2003. We accomplished accomplished many of our objectives. If you look at our program from a slot analysis, some of our strength or debt repayment had some initial successes and now two successes in the Rocky Mountains region. Long-term commodity play that we initiated last year in the East is exceeded our expectations. If you have to identify a weakness in our program I would point to production profile.

We decreased a little bit year-over-year but I feel confident that although our guidance is on the conservative range, I feel confident that we're going to be able to improve from that guidance. It is a focus for us this year. Look at some the opportunities in some of the areas that we have improved. It was our desire to get offshore and expand and to show early success out there which we've accomplished.

We have an organic program we are developing in the Canadian region. I've been very pleased with the quality of the prospects that we've looked at and also the ability to expand those prospects, if successful on our acreage. We have initiated the drilling of two wells up there already this year. We continue to look at the prospect reviews in each of the regions we continue to (indiscernible) our prospect inventory. Look at any of the (indiscernible) associated with our business I think we've mitigated some of the commodity threats because the leveraging we've done on our hedge program. I think the [indiscernible] would be -- we'd come up with goose eggs in our drilling program.

Again the balance of our program, however, I think positions us well for delivering a program that is successful.

Bottom-line, we are well-positioned. We have a solid well-balanced Company and with a 2004 program that I feel will allow us to continue on the path of value growth.

With that in mind and in closing I will be more than happy to open up the call for questions.

[Operator Instructions]. Bryan Singer with Goldman Sachs.

I was wondering if you could provide a little more color on where you see the net on risk reserve potential 400 to 500 Bcfe -- could you can go, break that down by region?

I'll let Mike break it down by region and I'll do the kind of the 30,000 ft. flyover. Our program is fairly well-balanced. We have 30 exploration wells and, obviously, our regions that we've targeted for growth have been and will continue to be our Gulf Coast region and our Rocky Mountains region.

We have -- included in those regions we include the offshore and Canada. The large potential no higher higher success numbers -- excuse me, the higher potential and lower success numbers are going to be our six exploration wells in the Rockies. But we have also a larger exploration number of wells in the Gulf Coast but I think the risk profile associated with those numbers are slightly higher than the higher risk programs -- higher risk prospects in the Rocky Mountains region.

Typically you'll see the risks in the Rocky Mountains -- we will say 10 to 20 percent chance of success. In the Gulf Coast, we will look at more of a 20 to 30 to 40 percent chance of success on our exploration wells. I think that point does highlight how excited we are about the two recent Basin Center discoveries we've had in the Rocky Mountains. Those were, again, going into them, our chance of success was in the range of 10 to 20 percent on those two prospects and looks like we are developing two fields that could have the capacity of 20 to 30 or more locations in each field. I'll turn it over to Mike for any color.

Yes, Dan, just giving you a flavor for the type of wildcat prospect we are drilling. Dan mentioned the West is where we're saying a lot of our large potential projects. We have six wells scheduled for the year. Our net on risk reserve potential on those six wells ranges from between about 20 Bcfe to as much as 100 Bcfe that's net on risk reserve and these prospects will fall within that range.

In the Canadian area, we are drilling some large impact prospects in our Wildcats up there but the net on risk potentially Cabot is more [indiscernible] because of the working interest that we are keeping or trying to manage our risk exposure and those numbers run between about 10 Bcf to 20, 25 Bcf for prospects on the net risk but to give you an idea of the size of the prospects that we're talking about on the unrisked (ph) prospect basis growth those prospects range between about 25 B's to about 115 B. So these are good-sized prospects -- we just chose not to take large interest in the initial wells.

In the Gulf as Dan mentioned with the exception of our initial Wildcat on our [indiscernible] play on North Louisiana where we have very large potential looking at the [indiscernible] there is just south and East of the Verden (ph) Field complex, but most of our Wildcats in the Gulf I think are a moderate potential on the order of net to Cabot anywhere from 5 to 20 Bcfe on a gross [indiscernible] looking at ranges there between 15 to 35 or something like that Bcfe gross unrisked (ph) . So we are looking -- we haven't found very large impact prospects in the Gulf but we are still looking for that right now.

That is really helpful and then, Dan, if we look a year from now and we look at kind of where your inventory might be a year from now or that same number number do you want to see more of that or a greater proportion of that from any region that it is today or how do you see those proportions changing over time?

We like the balance that we have. WE have a capital program this year that has 42 percent that's heading towards the Gulf. I think 28 percent heading towards the East and 23 percent to the Rocky Mountains region and 6 or 7 percent to Canada. We like the balance.

We do like our diversity in that regard. We do plan on looking, though, in the Gulf Coast and, again, the Rocky Mountains for our bigger potential opportunities. I don't envision us in at least in the near-term this next year to look elsewhere though I have to admit that sometimes Mike brings in projects and throws them across my desk that are outside of our core areas, if you will, that look attractive and at some point in time I think Cabot will expand into areas that might be different than the core areas we live in today. But what we wanted to do was get our balance sheet in shape. I wanted the opportunity to understand the capacity and talents of this Company and also see what our programs would be able to deliver it in the areas we are today and quite frankly I've been very pleased this last year. We took a look at our overall resource base and some of it being in either seismic technology, some of it being in personnel. We changed some personnel makeup in several of our regions and with that change I am again pleased with the results that we have seen with those recent changes.

Frank Bracken with Jefferies & Co.

Two questions. First, could you give us a little more detail on the timing of this waterflood property sale and the production decrement that was associated with it? And, secondly, could you give us a handle on what the critter is that's preventing you from drilling more quickly in this Wind Dancer area and give us a handle on the extent to which you think these wells are going to contribute to your second half production?

Thanks for the questions, Frank. On the sale of -- it was our Kurtin (ph) field and we sold it in February, I believe. December -- excuse me December of '03 and it was -- let me get the exact number here.

Frank, the impact production wise was phenomenal for '03, for '04 it is going to be about 1.4 Bcfe impact because of '04's production.

That's all oil? (MULTIPLE SPEAKERS)

It was -- Frank, out of the 53 Bcfe, two-thirds of that was the Kurtin field which was, essentially, 90 percent oil. The remainder of that 53 Bcf was 16 [indiscernible] in the East which were up in our old Oriskany area.

Okay.

In regard to Wind Dancer and the delays up there, their environmental delays, it is in an environmentally sensitive are which a lot of the federal acreage up there is. And I don't know if it's the sage grouse or what -- (MULTIPLE SPEAKERS)

Range issues with deer and antelope and elk. And Dan mentioned the nesting for the unusual birds up there so is they won't give access to the land for those reasons, Frank.

Got you. [indiscernible] hawks and all that. So if I do my math right sounds like 600 barrels a day that you're not going have in the first quarter that's a result of this asset sale?

That's about right.

Okay and kind of lastly how quickly can you knock out these nine wells that you're going to drill at Wind Dancer and I don't know that you disclosed it but what are your plans in terms of appraising this second discovery you have here? And can you get all those wells on by third-quarter? By the end of the year? Just give us a little color on how these discoveries might ramp up over the course of 2004.

Okay. We are planning on Wind Dancer to moving in two rigs in August. We will -- the wells are 20 to 25 day type of wells. They require the [indiscernible] typically as almost every well in the Rocky Mountains does. And so we will go back back -- not going to do the math for you, but we will go back to back to back with those two rigs drilling those nine wells. The infrastructure is there to hook them up. We don't have any length to lay lines. We will do some of that contemporaneous with our drilling activity.

The Cyclone Rim field is a just hot off the press -- it's a very very new discovery. We are still in the process of designing our fracs (ph) -- our test procedures. We've just been excited with the drilling process the Blair, the gas we've seen while drilling through all these zones -- we are just excited about right now.

We can't start another operation in this particular area because of the restrictions. We can't (ph) finish this operation. We have directed the group which we did not have necessarily in our program a full development program for our Cyclone Rim but utilization of some of our discretionary cash over or above our $207 million program, we're hoping to leverage some of that into successes. And this is going to be a case that Mike has directed the crew to try and start immediately to prepare offset locations.

Terrific -- I don't mean to monopolize the call. Let me ask you one more question. Based on what you've got in your thought processes as far as stimulation on these wells. Might you be able to recover more of the reserves than, say, prior operators have done and [indiscernible] reservoir in an analogous field nearby -- can you get more underground from fewer wells potentially?

We are optimistic that technology is going to enhance our results in not only reserves but also production in Wind Dancer.

Frank, if I can just make (indiscernible) a little bit. The level of activity in the Green River Basin is such that we have noticed that to get service companies out there to our fracking and stuff we are looking at several weeks of delays -- more than we have anticipated. We have two wells sitting right now waiting on completion at Wind Dancer because we just can't get the [indiscernible] groups in there as fast as we would like. I anticipate that kind of delay to continue.

Richard Priory with Delphi Management.

I don't have your last release in front of me and I think you mentioned you had given some guidance there and it's just not coming to mind right now. But end of the year your production was down slightly, the reserves were down and I know you sold some properties and all but going forward what are you really think on a percentage basis you can grow from the drill bit -- you can grow production from drill bit?

Well what we've done in our last conference call I think I addressed some of what we have been adjusting in our guidance. We went through a process of looking at our program, assigning a risk profile to not only successes but also a risk profile to the timing of bringing on new production and that modified our guidance to -- I think -- a range that might fall in the conservative end but I would rather overdeliver if you will.

Right. There's some E&P companies that think they can grow double digits from the drill bit. Doesn't sound as though you're one of them.

I think if you look, historically, I think there was a study done by J.S. Harrold (ph) recently. Took 200 companies. They stripped out the acquisitions associated with those 200 companies. And they looked at the organic growth of those 200 companies and it was -4 percent. So I think there are opportunities out there that would be neat, that companies will grow organically with a drill bit. I think our program which delivered a -- over 120 percent organic growth with the drill bit is a number that I think is attractive. I think and look forward to our number being equal to or exceeding that this next year. If you look at the development programs now that the Wind Dancer is going to create for us, the Cyclone Rim prospects going to create for us, we do plan on building that into our future guidance as soon as we get our arms around it. I will state that Cabot's five year average reserve replacement is 163 percent at a finding cost of $1.38.

What sort of finding costs are you seeing right now as we speak?

We announced our finding costs of $1.46.

Ellen Hannan with Bear Stearns.

Just a couple of questions. Dan, on your wildcat opportunities in the (indiscernible) what kind of running room do you have there? Do you have much acreage? Etc.

Thank you, Ellen. we have entered into and we did this a year ago -- entered into a option agreement with Warehouser where we had the option to lease 100,000 acres of Warehouser acreage. And that might be 85,000 to 100,000 acres. We have been evaluating that area and acreage up there for this past year. Part of the focus has been on the activity around the Vernon (ph) Complex. We have found a -- what we think is a fairly significant prospect that we will drill this year and we do have acreage to run on that particular prospect.

Second question. Switching to the Rockies for a minute. The comments a minute ago about you're facing some delays on some frack jobs and getting crews in there. Is that a capacity utilization issue or what is causing those delays?

Well, we'll leave the drilling contractor's name out, but we had on three different occasions and this Cyclone Rim is in a fairly remote area and it was right in the middle of winter, had fairly significant snow. It is cold and windy and we had, in fact, three different occasions, the entire drilling crew walking off location. And maybe the driller would stay on the rig and rotate. As we were at the bottom of the hole. And it was a disappointment to us and it certainly did cost us not only time but cost us money also.

Sounds like an isolated instance. It's not that every frack crew is busy out there. It's just you had some [indiscernible] (MULTIPLE SPEAKERS)

Absolutely -- absolutely.

Larry Benedetto with Howard, Weil.

Question on your operational report and the successes you had. Are those wells included in your 2003 research?

You talking about the...?

The discoveries.

Yes. They are.

And then the No. 5 well at Breton Sound seems to be a fairly good well of 200 feet of pay.

Yes.

How has that affected the reserves and [indiscernible]?

We have not fully incorporated those numbers yet. We are still looking at that. We've only included the 4 well in our numbers peered we have not included the 5 well in our numbers and we are continuing to evaluate that, Larry. We were excited about the wells. Each of those wells out there and that was the fourth in this complex, we looked at as kind of separate ideas, but it looks like that we could have some encouragement that it's maybe more connected than we anticipate. Very pleased with that well.

Good. And seems like acquisitions and exploration opportunities will compete for your free cash flow. So I take it that your Cap X budget could be on the explorations side could be moving up if you find some additional opportunities?

I have -- as you can appreciate, Larry, Scott is over here shaking his head 'No' and Mike is shaking his head 'Yes'. But we have a focus with our additional capital that would be available to us. We are looking outside our inventory for those unique opportunities that would taste that would deliver us upside exposure. We also anticipate that we could use some of that capital to expedite explorations successes which we had not built into our capital program. And we continue to look for the opportunities in the acquisition market that would fit into our long-term strategy.

At this time, there are no further questions.

Are there any further questions?

No, sir. Not at this time.

Well, I do appreciate the interest. I do appreciate the questions. Thank you for your interest in Cabot. I do look forward to our 2000 program delivering a significant positive result and adding to to our asset base in a very conscientious value adding method. Again, I appreciate it and we will look forward to our next conference call. Thank you.

Thank you for participating in today's conference call. You may now disconnect.