Coterra Energy Inc (CTRA) 2004 Q4 法說會逐字稿

At this time I would like to welcome everyone to the Cabot Oil & Gas Corporation year-end and fourth-quarter 2004 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Dan Dinges, Chairman, President and CEO. Please go ahead, sir.

Thank you. Good morning. Thank you for joining us during this 2004 year-end and fourth-quarter earnings teleconference call. I have with me today Mike Walen, our Senior Vice President, Scott Schroeder, our CFO, Jeff Hutton our VP of Marketing and Chuck Smyth, our VP Controller. As usual, I will read the statement our attorneys have asked to read.

The statements regarding future financial performance and results and the other statements which are not historical facts made during the teleconference are forward-looking statements that involve risks and uncertainties, including, but not limited to market factors, the market price of natural gas and oil, the results of future drilling, marketing activity, future production and costs, and 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 Website at www.cabotog.com, along with reconciliations to the most directly comparable GAAP financial measures.

I worked through that fairly quickly and I'm going to go through some portions of this teleconference quickly also, because we have quite a bit of detail in the conference call. But last night's press release highlighted Cabot posted record levels of net income of $88.4 million, cash flow from operations at $273 million, discretionary cash flow at 294.3 million, and proved reserves at 1.2 TCFE, along with its lowest capitalization ratio ever at 37 percent. Obviously, by far the best year Cabot has had.

Financially, the fourth quarter also saw records for net income, cash flow from operations and discretionary cash flow as well. Items contributing to these results were higher realized commodity prices, increased natural gas production from volumes for both reported periods, and the lack of impairments in 2004 reported periods.

For the year, realized natural gas prices were 15 percent above last year, with realized oil prices 7 percent greater than full year 2003. The impact of hedging on our full-year realizations was a reduction of 76 cents for gas and $8.98 per barrel. The fourth quarter experienced similar improvements, with natural gas realizations up 23 percent and oil price realizations up 9 percent. Hedging impact in the fourth quarter was $1.29 on gas and 15.16 per barrel on oil.

Additionally, as the mark-to-market table in the press release highlights, our future hedge positions that require mark-to-market accounting treatment increased quarterly natural gas revenue by nearly $1 million and increased our quarterly oil revenue by $10.3 million. The significant improvement in the oil revenue is the result of softness in the oil price in late December and the continued maturity of the Company's range swap position. For 2005 Cabot has only two range swaps, both covering oil.

Cabot's management has not added to its 2005 hedge position since our last teleconference, so the Company remains approximately 46 percent hedged on its equivalent production for 2005 with 54 percent being hedged in the first quarter dropping to 42 percent the second through fourth quarters, with no hedges covering our 2006 volumes.

Expenses for the year improved between comparable periods on the strength of a significant reduction in impairments, lower expiration expenses, and reduced brokered natural gas costs. If you remember, in 2003 we experienced the impairment of the (indiscernible) field in the first quarter. The elimination of any significant impairments provided $90 million improvement in expenses for 2004. Also contributing was the decline in expiration expense reflecting our wildcat drilling success where we realized only five dry holes out of the 20 attempts for the year -- an impressive 75 percent success ratio.

As was pointed out in the press release, our general administrative expenses increased in total in two categories -- Sarbanes-Oxley related cost and benefits costs. In terms of Sarbanes-Oxley, Cabot has completed its 404 attestation work, and I'm pleased to report that Cabot, together with its auditors, identified only minor deficiencies, all of which have been remediated.

In terms of benefits cost, Cabot is dealing with additional costs related to future benefits under its post-retirement medical program and the volatility associated with the performance share program. The retiree medical program annual expenses is roughly $1.5 million. But because of the recent required plant amendment, the total expense is now over 3 million annually.

This amendment dealt with whether or not to cap future benefits. We decided to increase the cap due to inflation; however, Cabot is assessing alternatives to reduce this cost while still maintaining future benefits. For the year, mark-to-market change for the performance shares was $3.2 million as the Company was the fourth-best performing stock for 2004 of its identified peers. This is roughly half the stock compensation expense for the year with the rest being the cost of restricted stock we used for retention purposes.

Moving to other financial stats. We have cash in the bank at year-end was $10 million. For the third consecutive year we generated free cash flow, even after our largest organic capital program, of $259 million. In 2002 and 2003, you may recall we used free cash to pay off our revolving credit facility. In 2004 we used a portion of the excess to repurchase 405,000 shares of Cabot stock.

As we stated in the press release, along with the rest of the industry, we continue to be challenged to organically grow production in the face of increasing service costs. We had equipment availability problems and we also have problems with outside operated properties. At the same time, Cabot is attempting to balance our production profile as we migrate our investment focus towards longer life, more predictable drilling programs from our shorter life producing areas. But even with our investment shift to longer-life areas such as our North Louisiana area, we saw gas production increase 1 percent in 2004, along -- although we continued to see liquids production decline due primarily with our South Louisiana properties. The overall production decline in a year-over-year comparison is magnified by the loss of 2.3 B's (ph) -- 2004 production as a result of asset sales we had in 2003.

At our last teleconference call, we stated that our Gulf production had been impacted by delays caused from getting some of our outside operated properties online, and to a lesser extent, the hurricane effects. At that time, we thought the delayed volumes would commence flowing during the early fourth quarter. However, some projects moved more slowly and took most of a quarter to commence production. We are, however, pleased to report that five of the six wells that we had focused on back then have finally been completed and are currently flowing.

Two critical wells -- Eugene Island 280 # 1, where we have 25 percent, was just tested at 13.8 million cubic foot a day and 1267 barrels of oil per day; and the second well, the Pelto Unit 19-4, where we also have 25 percent, is located in Lake Pelto just south of the coast of Louisiana. Having found over 100 foot of pay, was recently perforated with encouraging results. Unfortunately, the perforating gun was lost in the hole, and we are now fishing that gun out. These mechanical problems seem to occur more frequently with the stretched service industry.

Our Western operation continued to be impacted by governmental regulations to the extent we're having a difficult time getting our wells drilled and online. That, combined with rig availability and the quality of service we're seeing -- in fact, we ran one rig off due to the personnel issues we had on the rig -- that has slowed down our program in the fourth quarter. We are consequently drilling some of these wells that we had scheduled for the fourth quarter of 2004 in the first quarter of this year. Even with these delays, however, the West is still able to show a 1.7 percent increase in production between the third quarter and fourth quarters of 2004, and reflects an anticipated turnaround in the production trend in that region.

We finished our 2004 drilling program at Wind Dancer with 6 additional wells. At Crowd (ph) Creek, we were able to drill 2 of 3 extension wells. One was successful in extending the limits of that field; the other found the frontier sand at the location we penetrated it, but it was tight. We believe we have a sizable development opportunity here on this field and have scheduled additional wells derring (ph) in 2005. Our Gold Nugget prospect in the Wind Dancer, Wyoming was drilled and partially completed during December. We cannot say a whole lot about this as we have not finished our stimulation program due to governmental regulations that affect wildlife. We were forced to move off location until the spring. Once we get back on location, we will then be able to finish our fracture work. The well is currently shut in.

With good news and our efforts in our Paradox basin, we drilled our single Eagle Wildcat where we have 62 percent interest located about 2 miles northwest of a double Eagle field. This well tested at 2.4 million per day from the Honecker Trail sandstone. The well is currently flowing in the sales (ph). We have also identified multiple offset locations and with the successful drilling of these offsets, it could connect the entire area with the double Eagle field.

Secondly, our big Indian prospect, which is Bullhorn Unit 1, we have 27 percent working interest -- was drilled and completed in the fourth quarter. This is an in-Canada operated well and is producing sales at 2.1 million per day also from Honecker Trail sandstone. We have identified at least 6 offset locations and we're working hard to ramp up the activity on this discovery.

In our east region, our growth program is on track and rock solid I'm pleased to report. In 2004, we drilled and have online 171 wells. The program has resulted in a 5 percent production growth in 2004 with a reserve replacement of over 400 percent. We plan to drill about 200 wells in the East during 2005 and anticipate similar growth statistics if not better. This growth is due directly to the investment Cabot made over the last several years in pipeline capacity and compression. Those of you who follow the Appalachia area can appreciate the value this growth the profile yields. We should also commend the personnel up there in the East because we are pushing them pretty hard to continue growing this program.

Our one-ranked wildcat in the East was not successful. We drilled our trend Black River range prospect and unfortunately did not encounter the objective dolemite (ph) section. The well is temporarily abandoned, however, as we evaluate our next move. Cabot's Canadian operation really has exceeded our expectations for 2004. During our first full year of operations, Cabot participated in 6 wells, 5 of which were successful with 2 of the 5 wells on production at year-end. Our initial discovery at the Chicken prospect, which we call the mozroe (ph) area, was followed up with 2 successful offsets with a combined absolute open flow of 30 million cubic foot per day with 2 of the 3 currently making 9 million per day. Production is constrained at this time due to pipeline and plant restrictions but we anticipate the restrictions will be resolved in the second quarter. Active development of this property is planned as we have spud the first well of our 2005 program just last week. Cabot will continue exploiting this deep basin trend in the future.

Impact wells were drilled at Stoleberg (ph) and Soldier in our Canadian region; that's Stoberg (ph) A significant pay section was found in the Turner (ph) Valley. The commercial rates were not established at this time. We are evaluating a possible horizontal sidetrack to improve producibility. The Soldier prospect reached a total depth of 11,378 feet. In December 2004, we encountered the slave point reef (ph) section. The well was cased and we are cautiously optimistic about the completion operations currently underway.

Moving to 2005, our 2000 plan will build on our extensive inventory of low risk repeatable locations like we have in the East, Rockies and the mid-Continent area. Couple that, the program will undertake a focused exploration effort in the Gulf Coast, Gulf of Mexico, Canada, and to a lesser extent the Rockies. Near-term critical projects to keep your eye on are our North Louisiana Cotton Valley wells, our Slave Point retest at Simon Ed and Sutton in Canada and the deep-shelf test we have at Cadillac and Bristol in the Gulf of Mexico. These impact wells have the potential to expose Cabot to over 500 Bcfe of net unrisked resources.

In regard to North Louisiana, we have reached total depth of 16,600 feet on our first Cotton Valley test. That is the Womack #1 -- had a clear branch prospect. We have logged the Cotton Valley section and are currently designing our frac procedures to test the well. Concurrently, with as large as the clear branch structure is, we're drilling our second wildcat at the Knight #1, which is approximately 3 miles to the Southwest of the Womack (ph). This well should be down in about 40 days. Again, both these wells are testing the clear branch structure. Near the Vernon field in Jackson Parrish Louisiana, we are also drilling an outside operating Cotton Valley well and we will also be spudding a Cabot operated Cotton Valley test about 1 mile east of the Vernon Fruit field and our Arrows (ph) prospect.

Late last year, we participated in our first Cotton Valley well in the Vernon field. This well is currently producing about 3 million per day from the lower Cotton Valley sand. Cabot holds a 24 percent interest in this well. We're very pleased to see the success as a result of Cabot's effort in North Louisiana over the last 2 years. We anticipate that, with continued success, these wells will set Cabot up with years of high-value development locations which fit our strategy regarding capital allocation to more predictable areas.

However, we still plan on participating in significant projects. In the Gulf of Mexico, our impact deep shelf program started with the drilling of our Impala prospect on Biasca node (ph) 204. This well was flood back from the deep section. After reaching 19,696 feet, where we found a saturated section but it was tight. However, we did find a shallow miocene gas sand, which we will be completing.

We are currently drilling at 17,000 plus feet on the Cadillac prospect. This is in the Osca Knoll 251 (ph). It's a 25,000 foot Cotton Valley test scheduled to be down about June. This large four-way structure has a reserve potential in excess of 350 Bcfe. Cabot owns a 10 percent interest in this effort.

A third deep impact shelf test at our Bristol prospect will spud in the second half of the year. This 22,000 foot multi-objective well will expose us to 75 to 100 Bcfe of net unrisk potential.

Finally, Cabot continues to search for and develop impact prospects in Canada. Towards that goal, we recently spud our Simon at Slave Point well in Alberta. This test on a ridge between productive reef complexes will expose Cabot to anywhere from 20 to 40 Bcfe of net unrisked reserves for our 50 percent interest. Later in the year, we will drill our Sutton reef play, also in Canada in Northwest Alberta, where we will expose Cabot to 40 to 60 Bcfe of new unrisked reserves assigned to our 100 percent working interest in that well.

Although our 2005 budget was approved in October, we have gone back and it has been updated to reflect the current state of the industry. Some of the highlights and the effects in the budget on the number of wells -- we have in our 2005 program approximately 300 wells, 32 of those being exploration. Our total investment dollars in our 2005 program is $280 million, which is well within our cash flow. We have revamped our production guidance, which I briefly touched on and will touch on again in a minute. We look at the expense creep, some of that due to the level of industry activity and also benefits cost.

When you look at the capital cost creep, it is beginning to affect and impact the economics of some projects. That is not unique with Cabot. For example, some locations still cost -- we have seen -- have more than doubled in 12 months. Also other service and equipment have risen fairly significantly recently. We will continue to monitor this situation closely and evaluate on an ongoing basis the effect on our project economics.

In light of our concern regarding increasing project costs and potential project delays, we did revise our production guidance to reflect production to be anywhere from flat to plus 7 percent. Our guidance is posted by region on our Web site. That being said though, I am extremely pleased with our 2004 financial and operational results. Also looking at our 2005, I am extremely pleased with how well we are positioned. One disappointing area, as I touched on, is production. As I had expressed, I am optimistic though we are going to see our production increase in 2005. However, even in this difficult operating environment we find ourself (sic) in, if we do have the success that we anticipate and expanding our development program and some of the success that we anticipate from our exploration program, I am really looking forward to our 2005 results.

Overall, our future strength lies in Cabot's diverse portfolio of assets, which provide us a stable, long life, balanced program with impact exposure on the upside, as I have discussed in this teleconference call.

With that, I will be happy to answer any questions the group might have.

(OPERATOR INSTRUCTIONS). Brian Singer of Goldman Sachs.

Good morning. Just a couple of questions with regards to clear branch -- you made 2 comments on -- one on the significant size of the structure, 2 on the years of high-value development locations in the future. I'm just wondering if you could add any more to those statements in terms of what the size of the clear branch structure is and how you go about looking at the potential locations in terms of spacing as well as potential reserves per location?

Brian, clear branch certainly is the focus of a lot of people, including ourselves, and we are anxious to continue gathering the information on that prospect. We have again logged our Womack well. We have logged high-pressure gas formations. We still need to evaluate what we found through fracing the wells. That is not unlike North Louisiana and Cotton Valley well that has been drilled up there.

When you look at the size of the structure and compare, Vernon field and Anadarko continues to expand Vernon field and it's an expanding out onto some of our acreage around Vernon field (sic) as illustrated by the Kaiser Francis well we participated in on the Northwest side of Vernon field and now also the wells we are drilling on the east side of Vernon field with Anadarko but the size of that field is anywhere from internally -- I mean, publicly they have that has a 1.4 Tcf type or 1. 2, 1.4 Tcf-type field. It covers anywhere from 14, 15, 16,000 acres. You look at the clear branch structure and we leased on a nose structure out there. It certainly has stratigraphic implications within the structure but we leased on a nose and we think our position is very good. What we have seen in Womack is confirming what we had hoped to see and that was again risk going in. Do we have sands? And yes we have sands. Do we have gas? Yes we have gas. Are we in a high-pressured environment? Yes we are in a high-pressured environment. Now we need to test the quality of the sands that we have found. In looking at the structure, we had to 20,000 acres that covered this structure. We are drilling the spacing of our 2 wells right now. The Womack and the Knight well -- again about 3 miles apart -- are just looking at some of the complexities that we have mapped within the structure. But when you boil it down to development locations, the only analog we have right now we have to revert back to the Vernon field, which is 8 miles to the north. When we look at the Vernon field, some of that is being drilled. It started out several years ago on 640, gone down to 320, it's down to 160s, down to 80 acre spacing in a lot of the field. In fact, some of the field is going down to 40 acre spacing. We don't know, at this stage, because we don't yet have enough information to say what spacing will be in our area but when you're looking at a -- it's a similar strategic or stratigraphic section, it's the Cotton Valley. We hope to frac (ph) this, again, high-pressured Cotton Valley section. We hope to get rates that we have seen in our wells up in the Vernon field and at Anadarko we've seen and others have seen in the Vernon field that's anywhere from 2 million a day to 25 million a day. The range is speculative at this stage on what we will get out of our wells. Again going in at this stage, it was a wildcat well. We have been very pleased with finding the gas and sands at high-pressure and now we need to test. We do expect, as we go through this learning process, to continue to see variabilities as they have seen section by section in the Anadarko field, where you can have some very good wells right next to wells that are not as productive.

All in all, when you package up what we hope to see long term, we are continuing forward. The development location is yet to be seen but again we've not seen anything to defer us or deter our enthusiasm in the clear branch drilling.

That's great. Just a quick question with regards to that West region -- you mentioned the potential connection between a single eagle and double Eagle field with your success in big Indian, is there a potential connection between double Eagle and big Indian and do you own the acreage in between?

No, that's about a 25 mile distance in between there. We don't own the acreage in between. We do have area though in acreage around the big Indian prospect and we feel like there is good offset drilling development locations there. We also feel like, in the single eagle discovery, we do feel like there is offset drilling, which will hook up we think or we are optimistic it will hook up the double eagle field with where we have drilled this wildcat on single eagle.

Ken Beer of Johnson Rice.

Good morning, guys. Actually a few real quick ones just on clear branch just on kind of your planned frac. Is there any reason to have this frac approach these different from what Anadarko is doing in the Vernon field or are you looking at maybe fracing this differently for some reason?

We have not evaluated all of Anadarko's fracs up there but we certainly think that they've had a learning curve and we hope that the frac procedures that we implement on this well can -- will mimic the success procedures that Anadarko has seen up in the Vernon field. They have 150, 200 wells of experience up there and certainly we would hope to be able to benefit.

That is what I was getting at. You're not trying to reinvent a new wheel; you will just try to mimic what they've done. That what I was looking for. Second and this is real quick -- with Bristol -- what is your working interest there?

Mike, what is our working interest there?

30 percent I believe it is.

We will look it up real quick, Ken, but I think, in Bristol, it's going to be 45 percent.

Last, in the East, one of the things you all did great job in '04 was to boost your compression, basically get your infrastructure able to handle more volumes, which you were able to do. As you look ahead at '05 and you look at a 200 plus well program, is the infrastructure available to kind of accept incremental volumes or are you going to have to do another kind of almost step increase on the compression or gathering facility?

Ken, you really hit right on the head the impact that our infrastructure investment is making in the East. That, in fact, is, along with the effort of the personnel up in the East, is really what has afforded us the opportunity to exploit our acreage up there. We have made investment in 2004 in not only helping out our current production up there but we also made the investment to assist us in our 2005 drilling program. So, we have set up this 200 approximate well program in the East behind the infrastructure enhancements that we have made in 2004. 2004, we did spend about $10.7 million on those improvements. We added about 3,000-plus horsepower of compression. We put about 74 miles of pipeline in the ground up there in anticipation of building into this program. We do anticipate, in 2005, again looking forward into 2006, also we do anticipate in 2005 to make another 7 to $10 million investment in the infrastructure enhancements also.

So we have been pleased with what we have been able to do. We have been pleased with the change-out of existing compressions and older equipment we have up there and also identifying areas to debottleneck and install new compression in the East. We hope to be able to continue to grow that.

Richard Wolf (ph) of (indiscernible).

Hello. Could you elaborate a little bit on the compression technology that you did just install in the East?

I'm sorry, Richard. Speak up just a tad.

Sure thing. Can you elaborate a little bit on the compression technology that you're installing in the East?

Well, some of the technology is nothing new today, Richard, but what we have been able to do is replace very old compression that is not near as efficient from an operational perspective and a fuel utilization perspective. For example, I know, early last year, we replaced a 1937 model compressor with a 2000 plus model compressor. So, just the efficiency gains on the fuel, we were able to justify that, not including the uptick we saw in compression and the overall efficiencies we saw in new equipment. So it's not anything magic in the compression technology; it's just, frankly, newer equipment that we are being able to install and identifying new areas to install that compression and also enlarging some of our pipe in some of the areas that has afforded us to be able to deliver more gas into the system.

It's all high compression then?

Well, what it is it is low pressure into the pipelines where the compression is reducing the line pressure to allow us to produce more end gas into the lines. On the discharge side of the compression, it is higher pressure on the discharge side. Up to 2000 pounds -- excuse me, 1000 pounds Mike was indicating to me here.

(OPERATOR INSTRUCTIONS). Alan Chey (ph) of IM Bridge (ph).

Hello. I have a few questions about the current assets. Could you provide a breakout for inventories and receivables and also the cash level?

Alan, one second. Let me put my hands on those. In fact, I'm going to let Scott Schroeder, our CFO, kind of walk you through the current assets and cash on hand numbers.

Quickly, cash is roughly $10 million. Accounts Receivable is about $125 million. Inventory is $24 million. The other 2 components are just in an other category of 13 and a deferred income tax asset of 20 million.

At this time, there are no further questions.

Okay, Sheila (ph), I appreciate it. I want to thank every one of you for joining us.

In summary, I am pleased with our 2004 results. I think we have some projects now on the slate for 2005 that will help us focus on our production profile. I'm also optimistic about the start we have on our program early this year. Our expanded program in the East I'm excited about. The guys up there in the East are excited about the contribution they have been able to make to our overall program. Certainly, the Gulf Coast is excited about now an area up in North Louisiana that we have our fingers crossed on making a significant impact for our future. So with that, we will remain focused on our successful execution of our 2005 program and I appreciate the recognition that some of you all are giving Cabot in what we're bringing to the table. Thanks again. Bye.

Thank you. This concludes today's conference call. You may now disconnect.