Coterra Energy Inc (CTRA) 2005 Q2 法說會逐字稿

Good morning. My name is Crystal, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cabot Oil & Gas second quarter 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 Mr. Dan Dinges, Chairman, President, and CEO.

Thank you, Crystal. Good morning. Welcome to Cabot’s earnings teleconference. With me today are Mike Walen, our Senior Vice President, Scott Schroeder, our CFO, and Jeff Hutton, our VP of Marketing. and Chuck Smyth, our VP Controller.

As usual, I need to read the following: Statements regarding future financial performance and results and the other statements which are not historical facts made during this 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 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 conference call have been posted to our website at www.cabotog.com along with reconciliations to the most directly comparable GAAP financial measures.

For the last several years, we have enjoyed progress both operationally and financially. The strength of the commodity market has allowed us to establish new milestones in our financial reporting, and we are pleased to be able to continue that trend as we indicated in our press release last night. All those numbers we reported, an 83% jump in quarterly earnings to $35.4 million or $0.72 per share, along with about $80 for discretionary cash flows, taking out the noise from derivative accounting the results for earnings were still $33 million or $0.67 per share, well above previous highs. At the same time, the 6-month earning and discretionary cash flow figures also reach new highs, passing the previous benchmark we established in 2001.

For the quarter, realized natural gas prices were 26% above last year’s first quarter with realized oil prices 41% greater. The impact of hedging on the quarter was a reduction of $0.61 per MCF for expired natural gas hedges and for crude the impact was A decrease from $6.98 per barrel.

Additionally, as the mark-to-market table and the press release highlights, our future hedge positions that require mark-to-market accounting treatment increased quarterly natural gas revenues by800,000 and increased our quarterly oil revenue by approximately $3 million. Had it remained about 40% hedged on its equivalent production for the remainder of 2005, the only changes to our hedge positions are 2 new wide collars we recently executed for a small portion of 2006 production. These are the first hedges we have placed on 2006 production. If you’d have told me a year ago that I could secure $7.00 by $11.00 costless collars for gas and $50.00 by $76.00 costless collars for oil, I would have said, “That’s off the charts”, but in fact that’s what we did execute. We will continue to monitor development and be poised to execute deals like these 2 hedges when they present themselves. However, we will not overextend our hedging position.

In terms of expenses, all categories fell within our guidance ranges except for expiration expense, which fell below the range due to lower dry-hole expense, and taxes and other income, which exceeded the range due to higher price realizations. The successful drilling program for the second quarter reflects the nature of our lower-risk development and exportation strategy for 2005, and it yielded a 98% success rate on the 97 gross wells completed in the quarter. That was driven primarily by 100% success in our East program. Company-wide today, we have 29 wells completing across our regions, along with 19 rigs drilling, 5 of those being outside-operated.

Moving to region-to-region operations, in our East operations, we continue to see year-over-year production advances. We are well on our way to completing our largest program of 200 wells with 86 wells at total depth so far this year; 7 rigs are currently drilling. In addition to that we have inline 149 well permits, so we expect a steady stream of activity and drilling through September, running between 7 to 9 rigs. More importantly our reserve realization continues to be strong on a per-well basis. The focus to increase our East program continues to make an impact on Cabot’s results. Looking ahead, we’re in the early stages of planning our 2006 program. It is certain that we will be looking for another expansion in our East drilling program for 2006.

Moving to the West, the West region has also made a good turnaround in its production profile. We’ve been focusing this year on lower risk development drilling opportunities, along with re-completion efforts in existing well bores. Both of these activities we’ve been able to see production advances in both the Rocky Mountains and the mid-Continent.

In the Rocky Mountains, the focus has been on expanded and accelerated development drilling in the Mox Larch, Lookout Larch and our Double-Eagle fields. We also plan to continue drilling in our Corral Creek and Wind Dancer projects subject to regulatory and partner issues.

In the second half drilling program in the Rockies, it’s well underway. We have 6 wells planned for the Paradox Basin, 20 wells are on the slate for the Mox Larch and Lookout Larch. We have 3 wells in our Wind Dancer field and one in our Corral Creek, and our mid-Continent area we continue to ramp up our activity levels in the Morrow and Chester trend in Western Oklahoma. Our strategy is to expand into new areas outside our traditional legacy asset areas we’ve focused on in the past. And this re-focus in the mid-Continent area is bearing fruit as we see the first production growth in this area in several years. Our efforts to date have identified over 70 new locations, and with that we do anticipate a fairly robust program in this area for 2006.

Moving to the Gulf Coast area, if you recall we discussed in our first quarter conference call the successful completion of our first well at our Eros prospect, that was the Weyerhauser 8-1 well where we have a 43.75% working interest. Again, this is in our North Louisiana area. As we announced last night, our second well Weyerhauser 9-1 where Cabot has an 84.4% interest was successfully completed with an extension of about a mile to the east of the original well, the 8-1. The new well tested a 5.8 million cubic feet of gas per day. As the press release also highlighted a further offset, the 15-1 also appears productive on our log analysis. We have reached TD and log this well.

We plan on stimulating the 15-1 within this beginning within this next week. Because of that success, we have continued our development in the area and are drilling our fourth well in the field, the logging Bayou 9-1; that’s different than the Weyerhauser 9-1. And right now we believe with the information we have in hand that we could have anywhere between 15 to 20 additional locations. Upon completion of a 37 square mile 3-D we’re going to shoot over Eros, which is scheduled within this next month, we could prove up even more locations on our acreage.

Moving south of Eros to our Clear Branch area, we have planned 113 square mile seismic survey for the Clear Branch area that will be shot this year. This will provide ample time for us to evaluate that data looking at the Cotton Valley Hoft [ph] and James Lime.

In other news related to our Cotton Valley effort in the North Louisiana area, with our success in Eros and establishing multiple off-set locations, and in consideration of the tight rig market we’ve elected to push the drilling of our Caster prospect located west and southwest of the Vernon prospect into the early part of 2006. We felt it would be prudent to develop more of the what we think are now development locations in our Eros as opposed to pulling the rigs off of those development wells for this Caster prospect. You may recall the Caster prospect is approximately 7,.500 acres and will expose Cabot to a substantial resource play in the Cotton Valley and Hosston.

The press release also highlighted a recent transaction with the addition of 3,000 net acres located in East Texas on Cotton Valley objectives. This deal was [inaudible] with the major who felt like the project was too small for them. However, these are the type of projects that fall within the sweet spot for companies like Cabot. Right now we plan on drilling our initial well on this acreage in the fourth quarter of this year.

Also in the Gulf Coast offshore, Cabot reported a wildcat discovery at our East Cameron 111 number 1 well where Cabot owns a 50% working interest. We’ll create some production overhang which we hope that production will be online during the fourth quarter of this year. Also offshore, we are approaching the total depth of our VK-251 number 1 Cotton Valley prospect. That’s our Cadillac prospect operated by Chevron Texaco, and it covers approximately 50,000 acres. Cabot is participating with a 10% working interest.

As far as the production profile in the Gulf Coast, we have several distinct areas; our onshore Texas, North Louisiana are areas where we’re increasing our focus with anticipated production in creases with this additional focus. With less focus on South Louisiana, we have experienced nearly all our production decline in South Louisiana, which is if you look at the 2 area, it’s not atypical of each of the basins. The North Louisiana, East Texas area being lower decline basins where we’re transferring our interest and South Louisiana typically being a steeper decline area. Our goal is to migrate our offshore portfolio to a more resource-dedicated play in order to mitigate the steep declines Cabot, along with industry experiences from the South Louisiana and offshore production, however, knowing that this transition would create short-term production challenges, which we see in our production profile right now.

To this end, and as mentioned our Gulf Coast program is focused and will continue to be focused on North Louisiana, East Texas, and some of our South Texas and West Texas fields. I’m please to report our progress and additional exposure in these areas.

Cabot’s Canadian operation is finally kicking off its program this year after a lengthy delay in the wet spring we had up there. Plans call for drilling 5 development wells in our Musro [ph] area and evaluation of 4 wildcat projects. Two of these are testing resource play concepts similar to our efforts along the Gulf Coast and in the Rockies, which could result in significant follow-up drilling.

Key wells to flag in this upcoming quarter, we anticipate spudding our Hinton prospect in Canada and also our Cypress prospect in Canada. We are currently drilling in South Texas, a Wilcox prospect which is our project called Price. And we also anticipated spudding probably the latter part though of the third quarter our Nelson Creek prospect in the Paradox.

With the success of our leasehold acquisition program and the general industry conditions, Cabot has moved its capital program up to $330 million. Assuming a continued level of success that we’ve seen in the first half of the year, we see about 100% of our reserve replacement coming from the East program along. Saying it another way that Cabot does expect to replace 100% of its forecast corporate production in 2005 with our anticipated reserve bookings from the East, which by the way represents only about 24% of our capital program.

The West, we see enhanced production growth and reserve adds. We’ll also exceed production in this region. As the Gulf Coast region continues to transition, it’s making good progress as we’ve outlined in our press release in establishing resource plays in East Texas and North Louisiana. And finally Canada will continue to be an area that we expose Cabot to both upside opportunities and impactful resource plays which we feel like with the acreage positions that we are exposed to us there will lead into substantial follow-up drilling locations.

Crystal, with that information I will turn it back over to you to request any question if there are any.

[OPERATOR INSTRUCTIONS]. Brian Singer, Goldman Sachs.

Good morning; a couple of questions on Eros, really data points, what was the well cost that you saw on the 9-1 well, and maybe an estimated cost for the 15-1 well. And then secondly could you break down your acreage position at Eros into the adjoining 3-D seismic acreage versus the acreage that you’ve established these 15 to 20 locations?

Okay Brian, the well at, the 9-1 well at Eros and the 15-1 well we have [inaudible] approximately $4 million, and the area that we have surrounding those discoveries is 2,200 acres. We have a working interest in that area around there between -- well first off I’ll take the 9-1, the section 9 we have the 84% plus working interest, and in the section 15 where we’re drilling 15-1 well, we also have 84% working interest, and in the other couple of sections around there we between 30% and 43.75% working interest, excuse me, up to 50% working interest. And the surrounding area we don’t have an acreage position with the size of the 3-D that we’re shooting up there.

Okay great; secondly on the Gulf of Mexico where are you in terms of declines and decline rates? Should we expect the normal Gulf of Mexico decline rates or something greater or less?

Keep in mind -- and I’m going to change the area a little bit. The Gulf of Mexico, we don’t have a great deal of production in the Gulf of Mexico. What we do have out in front of us is the Ace Cameron 111, which is a, we anticipate to be a fairly robust initial production rate of 20 plus or minus million equivalent a day out there, and we have a 50% interest.

Let me [inaudible] our production profile both -- since we don’t have a great percentage in the Gulf of Mexico but also say South Louisiana which encompasses our Etouffee projects. But we do see a steep decline 50% or so in that region. The good news is that it is representing a much smaller percentage of our overall corporation production, and it is our intent as I indicated Brian that we are transferring not only our capital resources but we’re also transferring our intellectual capital to the areas, if you will north of I-10 and focusing on the basins that traditionally do not have the steep declines that the Gulf Coast has. So in doing that, we knew we were going to have to balance the production profile and knew we would maybe challenge maintaining our production profile, and so far we’ve been able to do that. As we transfer up there and lay off drilling, the high-rate wells that, or as many of the high-rate wells as we have drilled in the past.

So looking at our strategy, we’re on track; again, I’m please that we’ve been able to maintain our production as we have because we haven’t focused on drilling a one-off type prospects that the Gulf Coast and offshore present, and we still have been able to do that. So, and we’ll continue that strategy.

Thank you.

Larry Pasado, Petri Parkman.

Good morning, on the Eros prospect, can you just talk about the size that you have, the resource size given the 2,000 acre position that you have there?

Well Larry, we have in looking at the Vernon complex and there’s lot of wells out there in the Vernon complex, it’s still early in the game. W have not -- on the 9-1 well as an example we have just now started testing that well, cleaning it up, and in fact today we are still capturing the completion fluids. So it’s a little bit premature to say exactly what our resource potential out there is. However, I will say that we do not think it’s unlike what has been experienced in the Vernon field complex.

Could you give a number of 30 BCF on the last call. Was that on a per-well basis? Or do you think that’s -- obviously, I think the site of the prospect would be much bigger than that.

The size of the prospect we feel on our acreage is going to be larger than that; however, 30 BCF per well I think is too large also.

Okay, what’s the timing or production? How soon once the second well you get that on, and then the third is cleaned up, how soon can you get in online?

Well the good news is that the first well was where we had a 43.75% interest; Anna Darka [ph] was the operator. And with our proximity to the Vernon field infrastructure, we are producing that well as we speak. And also with the 9-1 well, with the success we saw in the logging and the early indications we saw through our stimulation we move forward to hook that well up and in fact, we are, as we’re cleaning the well up, we are also flowing into sales.

How many of the offsets do you think you can have drilled this year?

Well, with our, we juggling the rigs as we indicated taking the Caster well off the slate and pushing it to early 2006, we do anticipate keeping a rig running consistently up in that area, and we think we can at least get drilled and stimulated an additional 3 to 5 wells.

Okay, great thanks.

Ray Deacon, Bank of Montreal.

Hey, good morning. I was wondering if on the East Cameron 111 well, was that a 1-well prospect, or do you see any follow-ups coming out of that?

Yes, it covers a pretty good area but it’s a clean structure. There’s no internal faulting that we see within the structure. Our penetration point was we felt in a very effective area, and as you know as clean as those fans are out there Ray, that we think that this well will come on extremely well, and we think that we’re going to be able to capture the reserves from this well.

Okay great, and what was the dollar amount attached to the acquisitions you announced, the 2 properties?

We had approximately $33 million.

Okay, got it. And is -- on the Cadillac wells you said you’re getting close to TD. I mean, were there intermediate pays there or was it just, it’s all at the bottom of the hole?

No, just to refresh your memory Ray, we had years ago Chevron and its partners had drilled, attempted to drill this prospect deep, and lost the hole when they were trying to set some expandable casing and was unable to test the prospect deep. They did log it, but they were unable to test it. In drill that well, there was a James Lime completion over this area. So we knew we were drilling mainly scenery if you will down to the top of the perspective Cotton Valley section on this attempt to go back down and test it.

Okay got it, got it. And just one last one; it looks like -- it may by around here, but it looks like the guidance is going down a little bit for the third and fourth quarters, about $10 million a day. Does that sound right?

I don’t know if it’s about $10 million a day, but we lowered the upper range -- we kept the floor, but we lowered the upper range a little bit, and the reason we did that is not a unique problem to Cabot but we are scrambling to get all the equipment necessary we need to do. We think we’ll be able to implement our program by year end, but the timing of some of our projects are sliding a little bit because of the juggling of equipment.

Okay, gotcha, and actually just one more; you talked about the Eastern region and focusing more on shales versus sands I guess, how do the economics look on these wells versus what you’ve drilled in the past? Are they as good or a little more marginal?

No, not at all; we are again, we have several different programs going on in our different areas. The North area, we have some different projects that we’ve done in the past; for example, deepening some of the very, very shallow wells we had drilled to sections we hadn’t seen in our old, old fields. And we’re completing those wells. And down in the South, we are seeing still extremely good results in meeting and in some cases exceeding our expectations.

That’s great, good, and actually -- sorry to ask one more but it sounds like with the success you’re having in the Gulf Coast you might be able to start moving in a positive direction on Gulf Coast production. Is that true?

Yes, absolute. That was a challenge and we’ve kind of been battling this a couple of years on our strategy. We knew we had a very, very steep decline in our Etouffee fields in South Louisiana fields and there was a balance on how much capital you spend down there on high-rte opportunities and one-off drilling opportunities down there to help stem that decline versus transferring the capital and attention to these lower decline basins and we knew that couldn’t, with drilling a resource well -- every one resource well will not replace an Etouffee well. It takes a multiple drilling location to be able to replace production that runs out from under you in the South. So we knew we were going to have a balance in here; we knew keeping production basically level was going to be a challenge for us. But I’m glad to say we’ve been able to do it. But I would have loved to reported an organic growth profile of 5% or 10% on our production, but when you’re looking at what we’re doing and the progress we’ve made I think was are close to soloing [ph] out on the South Louisiana offshore production now representing a smaller percentage of our overall production base that will e able to turn the corner.

Great, thanks a lot.

[OPERATOR INSTRUCTIONS]. Monroe Helm, CM Energy Partners.

Thanks a lot. I jumped in a little bit late so you may have already covered this I don’t know, but I was just wondering what you said about the timing is you’re going back in on the third branch of prospect?

Well what we talked about first was the Eros prospect that we announced last conference, a row of the 8-1 discovery on that. WE have completed our 9-1 well on Eros and we are now producing that, tested it at 5.8 million a day. We have, and that is flowing into cells. We have completed our TD, our 15-1 well and our Eros prospect, that the log looks similar to our 9-1 well. We’re moving to stimulate that next week. We are moving the rig and have drilled, now start our fourth well in Eros. Just South of that is Clear Branch and we have initiated 113 square mile 3-D over our Clear Branch prospect which we anticipate having in our hands right at year end for interpretations, and we’ll be moving towards additional, picking additional locations in we hope the Cotton Valley; we know the Hosston and James Lime.

So you can be drilling during the first quarter?

We’re going to be pushing for that.

Okay, is someone else participating with you in this 3-D shoot?

Yes.

Can you say who it is?

It’s some of the players in the immediate area.

Okay, just back on Eros at one point in time you talked about the net well reserves being 1.47 BCF equivalent to wells. Is that still a good range?

I would say the upper end of that range is a better number.

Okay; 2 other quick questions. I heard you mention something about Cadillac; I didn’t quite catch, you said as far as the depth they’re drilling at this point in time. I think as far as you could get was 25,000 feet. But some idea of where that is. And is the Bristol product still going to be drilled with the same rig after you complete the Cadillac prospect?

Yes, Monroe on the VK-251 we are approaching TD; we might TD just because of the mechanical considerations at approximately 24,000 feet. There is still confirmation going on amongst partners as we speak. But nevertheless, that one is getting close to being able to log and evaluate. On the Bristol project there are just discussions on what is, the timing of the Bristol project.

Okay so no time table for drilling that well?

That’s correct.

Okay thank you.

John Selzer. Mapleleaf Partners.

Good morning, you mentioned that you were delaying some drilling and you also mentioned there were some rig considerations. Can you -- I didn’t quite catch the explanation. Could you explain it a little bit?

Yes, we committed to a rig up on our North Louisiana effort, and prior to establishing a multi-location drilling program, that’s the rig we had up there. Now that we have established that in this immediate area, we are, we elected instead of moving that rig to the Caster prospect, we’ve elected to continue because we can hook up these wells fairly quickly. We’ve continued to do the in-field drilling now that we’ve established in the Eros prospect with this equipment.

And so it’s an election by us to say, “Let’s get some of this production online and drill these wells; look for additional drilling equipment”, which we are by the way in negotiations attempting to secure additional drilling equipment, but at this stage, without securing additional equipment at this time, we’re more comfortable suggesting that we’ll side it to the first quarter because we had indicated it would be nearer term than that.

So the success and the tight rig market is the only reason we are moving Caster. Nothing has changed in our valuation or the way we feel about the prospect.

I understand, thank you very much.

Ray Deacon, Bank of Montreal.

Hey Scott, I just had a question on -- could you give me some guidance on production taxes and LOE going forward?

That’s I the back of the guidance Ray. We raised the range for production taxes to $0.50 to $0.60 because of the higher realized prices. And LOE because of the fact that the costs that we’re incurring and the expense work-overs of our production, we have LOE flat for the whole year instead of the pickup we saw in the second half of the year so it’s a low of $0.63 and a high of $0.69.

Okay, got it. And what are the -- sorry I missed that page in the guidance, but the $14 million to $20 million of exploration and expense in 3Q is Cadillac the big swing item in there?

Yes that will be.

Okay all right, thanks a lot.

Monroe Helm, CM Energy Partners.

I was just wondering if you have a feel yet for what the reserve replacement looks like this year and what the funding cost range might be?

We, as I mentioned Monroe we have on our reserve replacement just with our East program, and again that’s only 24% of our capital program, we anticipate replacing all of our forecast 2005 corporate production with just that East program. So we anticipate a fairly robust reserve replacement, 150% to 200% organically.

Okay thank you.

At this time we have no further questions. Gentlemen are there any closing remarks?

No I just appreciate the interest and I appreciate all of the questions, and looking at some of the questions, I’m glad to see the interest in some of the areas we’re moving towards. The North Louisiana area is an exciting area for us, not only North Louisiana but East Texas where we’ve established some what we think are going to be fairly extensive drilling opportunities up there also and be repetitive in nature. We’re just pleased to see that some of our followers have equally high interest in those areas. So we’re pleased to continue our efforts and look forward to implementing the rest of our 2005 programs.

The only other thing I’ll add and that I have had questions on concern about equipment and implementing our program, there are several areas that we’ve had delays in getting equipment. We do have the equipment secured to implement the program we have outlined out in front of us.

So with that, thank you for your interest, and we look forward to our next conference call. Thank you.

Thank you for participating in today’s Cabot Oil & Gas Second Quarter Conference Call. This call will be available for reply beginning at 12:30 p.m. EST today through 11:59 EST on Friday, August 5, 2005. The conference ID number for the replay is 8037259. Again the conference ID number for the replay is 8037259. The number to dial for the replay is 108000642-1687 or 706-645-9291. Again those numbers are 1-800-642-1687 or 706-645-9291.

You may now disconnect.