Coterra Energy Inc (CTRA) 2005 Q4 法說會逐字稿

I would like to welcome everyone to the Cabot Oil & Gas fourth-quarter 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 session. (OPERATOR INSTRUCTIONS) Mr. Dinges, you may begin your conference.

Good morning. Thank you for joining us for this earnings conference 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. I need to read the following before I share my statements.

The segments 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 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 Security 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 reconciliation to the most directly comparable GAAP financial measures.

To begin the conference call I will first review our financials and year end results which I think you will be pleased to hear, and then I will go into our operations report where we have a number of impactful projects coming together. Last night's press release highlighted Cabot, like many of our peers reached new benchmarks in 2005 for many of the critical value drivers in this industry. Reported net income figure of 148.4 million surpassed last year's numbers by 68%, while the reported fourth-quarter comparison was 82% above 2004.

Also reported and most important to me is the Company's growing reserve base surpassing 1.3 Tcf for the first time ever. This was accomplished as a result of reserve growth from each of our core operating regions, virtually all from the drill bit. I will touch more on reserves later in the conference call.

Financial results obviously are a result of the record levels attributable to a breakout year the industry saw for prices. During 2005 the Company experienced a 30% increase in realized natural gas prices and a 40% increase in oil prices. The impact of hedging for the year suppressed our price realization for both gas and oil with a reduction of $1.33 per Mcf for expired natural gas hedges and a decrease of $9.93 per barrel for expired oil hedges. For the quarter the Company saw a similar percent increase for oil prices and a 50% increase for natural gas prices.

In 2006 we do not believe Cabot will realize any price suppression as a result of hedging due to the fact Cabot has approximately 34% of its anticipated production hedged, all in the form of wide collars. A detailed exhibit of our hedges is shown on our recently redesigned website under the investor relation section. Worth repeating is the weighted average for these collars that were reported in the press release, $8.25 to $12.74 for natural gas and $50 to $76 for oil.

Production for the year was virtually flat to our 84.8 Bcf last year which indicates to me how close Cabot is to overcoming its dependency on the big wells versus lower risk program drilling. Importantly the quarterly comparison showed improvements year-over-year for the entire Company. The West region grew its production for the first time in several years while the East region approached double-digit production growth for a second consecutive year.

Another area discussed in last night's release that captures Cabot's ability to increase value for the shareholder is evident in our capacity to grow the reserve base organically. Cabot's reserve base grew from 1.202 Bcf to 1.331 Bcf -- excuse me Tcf -- at a very competitive finding cost of $1.91 per Mcf. For the year Cabot's reserve replacement was 252% with the vast majority coming from our drilling program. Company found 188 Bcfe with the drill bit and acquired 20 Bcfe.

Another unique point about our portfolio of properties is that we with the size of our East program we will continue to add enough reserves each year at a low finding cost to replace more than Cabot's anticipated annual consolidated production. The East program represents approximately 30% of our capital budget.

In terms of our balance sheet we used a credit facility to fund an acquisition layer and repurchase shares during 2005. The acquisitions were to expand ownership in existing fields and totaled about $70 million. The stock repurchase activity, which occurred predominately in the fourth quarter, totaled just over $19 million. Even with the additional financing the Company's capitalization improved to 35.4% from 36.3% for the net debt to capital ratio.

As I review our operations portion of the teleconference your takeaways should first be the success of our 2005 program and secondly the creation of near-term and long-term opportunities. These opportunities are the new drilling locations Cabot has identified within our existing portfolio and the additional locations we have secured and are currently securing with our leasing programs. The success of our drilling program over the last two years reflects the nature of our low-risk development and exploration strategy, the program in 2005 has yielded a 95% success rate on 316 gross wells drilled with 100% success in the East. Today we have 27 wells completing across our region along with 13 rigs currently active plus 1 outside operated. Operationally we have many exciting programs out in front of us including the largest drilling program ever of 391 gross wells of which 240 of those are in the East.

Our active leasing program hit a number of new areas is yielding results with over 439,000 gross acres leased so far. This activity will yield opportunities for Cabot for years to come. I been asked numerous times about the location of the areas we are leasing, however, for competitive reasons really now is not the time to release that information. With the high level of new opportunities I believe Cabot has successfully transitioned from its dependency on high-risk steeper decline prospects in South Louisiana and offshore.

Another key observation is the fact each region was successful in 2005 at growing reserves and as mentioned the overall production profile was essentially flat. Combine this stabilization of our production with an expanding program and operationally you have the groundworks for a very successful 2006 program.

Moving to the regions in our East operation, we have seen the level of interest in our program escalate significantly. Our efforts to spearhead the value of horizontal drilling in the East are being monitored by many individuals and companies. With that being said we will be cautious regarding the release of information. In the East we presently have 5 rigs running including 2 that are drilling horizontal shale test, we have TD'd one of those wells; we are running pipe and preparing to frack and we are currently drilling on the other well. As soon as we have results we will share the data with you.

In regard to the current level of our operation the milder winter has helped accelerate our activity but beyond our traditional level of drilling at this time of year. In May we intend to have 12 rigs running focused on vertical wells in both our traditional and shale operations. In the event we are successful with the horizontal wells we are drilling the characteristic of some of our 2006 program will change. Right now it is just simply too early to tell.

Moving from the East to the West, the West region, made a good turnaround in 2005 driven by success in the Mid-Continent, the Moxa Arch area, Lookout Wash and the Paradox Basin. In our West program we have planned 84 wells in 2006; these are nearly all development wells spread across the region. Much of this activity will center on areas in the basin where Cabot has a large acreage position that allows for down spacing. As I previously mentioned we are recognizing new opportunities on our existing acreage and the Moxa Arch area is an excellent example of what I'm talking about.

Down spacing to 80 acres, Cabot has identified about 700 infill locations on our acreage in the Moxa Arch area. Others in the Basin have already begun down space drilling activity. Exploration wise in the West, the Nelson Creek Prospect which we have 5200 acres, which is in the Paradox Basin, will be drilled in the summer. Once drilling stipulations have passed. We have 100% working interest on this prospect. The Gulf Coast region continues to focus its effort on expanding its operations in East Texas, North Louisiana and South Texas. Of note, there are no wells budgeted in 2006 in either South Louisiana or offshore.

Presently we have 3 rigs drilling and 5 wells waiting on some form of completion in the Gulf region, strategically 4 new build rigs will be coming to Cabot under extended term contracts. The first should arrive in May with the second and third coming in June and July. The fourth rig will be ready at the end of the year. Three will be located in our East Texas, North Louisiana area to exploit our leasehold, while the fourth will be in South Texas.

In terms of production, the region has 5 wells that are expected to be turned in line by the end of this month including East Cameron 111, and our CL&F21-1 Shallowhorn discovery we had last year. Both of these have been delayed to this date due to the lack of equipment availability due to the hurricanes. Bretton Sound 41B2 Sidetrack 2, and 2 Vernon wells are also scheduled to be turned in line this month. Combined these wells should add roughly 12 to 16 million cubic foot net to our production.

Because of the timing to bring this new production online was delayed a little bit we have ratcheted down our first quarter Gulf Coast production guidance, but have not changed our full-year guidance as we believe we have enough exciting things to happen to make up the difference. Several of those exciting operations in the Gulf are in Minden where we have 4 wells that have been successfully completed, the Castor project in North Louisiana where we have roughly 9200 acres, we have spud that well yesterday. And the 3-D seismic covering Clear Branch which is being permitted with Anadarko and Devon will shoot by the end of the summer.

As we have previously discussed our goal has been to migrate our Gulf Coast portfolio to a more resource dedicated program in order to mitigate a portion of the region's steep decline knowing that this would create a near-term production challenge. With our 2006 program the Gulf Coast should return to production growth.

Cabot's Canadian region continues to have success and create additional opportunities in a number of areas. As we highlighted in our press release last night our Musreau field is drilling out well and we have more drilling scheduled in 2006. The Hinton Loghead discovery was a huge success for our effort. This well, as we indicated, will be a prolific producer; because of this we have moved up the Canadian production guidance slightly. The Narraway Wildcat along with the Bulltown Wildcat are apparent discoveries and both are waiting on completion. We have acreage to conduct follow-up drilling in each of these three Wildcat discoveries.

With this discussion of all the new opportunities Cabot has I hope you better understand our enthusiasm as we move into 2006 and beyond. Our industry has seen a high level of volatility since the day I entered the business in 1977. I feel the high degree of volatility will continue. I look at our job really to continue to create opportunities throughout the cycles. With that being said we have created a significant level of new opportunities and continue to create new opportunities for Cabot that should translate into new value recognition for our Cabot and its shareholders.

With that, I will turn it back over to you and be happy to answer any questions the audience might have.

(OPERATOR INSTRUCTIONS) Brian Singer, Goldman Sachs.

Two questions. First, with regards to Hinton. I think you mentioned that you will be drilling 2 wells later in the year. What would be the further drilling potential or how should we think about that if those wells are successful?

You mean a further drilling potential on the additional acreage we have around that prospect, Brian?

That is right, that is right.

We have 12 sections of land around there where we have in 2 of the sections I think I mentioned 75% interest and in the residual sections we have a 60% working interest. We will be drilling these two wells; with success of those we are currently expanding the infrastructure. And if we have success similar to this Hinton discovery on the follow-up wells the capacity that we have available as far as takeaway is going to be fairly well utilized. However, that's not to say though we will not be scheduling additional drilling.

Is there something where you drill an additional 10 wells in 2007 if these two are successful, an additional 20 or? Can you give us a sense for the size of the scope?

Okay. No we wouldn't be able to generate that level of activity in 2006. I think the 2 wells in 2006 are a good representation of what we like to do right now. And we would continue to try to enlarge that program. But we do have -- be able to secure the rigs and the equipment and all that is necessary. And as you are well aware some of that is pretty tight.

Along those lines switching to Appalachia. Have you seen any changes in the competitive landscape there whether it relates to drilling costs, ability to get rigs, et cetera?

Well, the ability to get rigs we have secured our rigs for our 2006 program. So that is not impacted our and will not impact our operation. But we certainly have seen it in Appalachia as we do across the landscape some competitive pressures associated with the service crews and the location crews; there's no question we've seen some of that in Appalachia also.

What about the midstream side, have there been any pressures in terms of tying in some of the wells or are things kind of steady-state basis?

No, Brian, fortunately we have the luxury of tying into our own cranberry pipeline system. And typically what we have been able to do with the high level of success of that program up there, we are and do move forward in laying a line to our location in advance of drilling. So we are able to move fairly rapidly to get our wells on stream and we have not seen any delays in that regard.

Great, thank you.

Ray Deacon, Harris Nesbitt.

I had a question about the reserve replacement number. You know how would have looked or really the finding cost number if you took out the East? Just trying to get a feel for were you happy outside the East with the reserve additions you had?

Yes. The East obviously brings the cost to find number down. And with our level of program in the East, that is going to create a long-term good cost to find number versus the industry I think, which is I think every positive for our Cabot shareholders. But when you look at all the regions we were pleased in the range that each region fell in. The Gulf Coast region I think if you look across the board what I've seen on the releases, the Gulf Coast regions and or companies that have a large presence in the Gulf Coast and offshore, the cost to find numbers are very high. High relative to the past. And ours was no exception. I would like to see our Gulf Coast finding cost come down some. With the transition of our program I do envision that to happen.

And two other quick ones. If you talk about being able to replace your entire company production with 30% of your cash flow from Appalachia, I mean from Appalachia. What kind of gas price are you assuming there? Is it 7, 8, 9, kind of where the strip is right now?

In our budget we have used a $7 and $45 number in our budgeting process. We are entirely comfortable with that number and in fact, it could certainly go south of that. And would still feel comfortable with that statement.

That is great. Okay, good deal. What would the reserves associated with the Moxa Arch locations be, what is the 2P,3P kind of case there?

I will let Mike answer that. I think it's going to fall into 1, 2, 1.5 Bcf range per location.

That is right, Dan.

Thank you.

All right, thanks, guys.

Ken Carroll with Johnson Rice.

On the 400 plus thousand acres you talked about leasing up this year (inaudible) so I understand you not wanting to identify areas because of competitive reasons. But can you talk about drilling plans on that? Are you going to start drilling some wells here in '06 to test up some of those ideas? When might we look for some more information on that?

Yes we are. Kan, we are drilling on offset acreage in one particular area which we already are aware of the geologic properties on where we're leasing. And in another area we have actually TD'd a well on some of the new acreage that we have acquired. We have control points in another area that we are securing acreage. Yes, we are gathering information right now. But it's really and I am sure you appreciate it's really a little bit early to lay out the entire story at this stage.

I just wanted to get a feel if you were actually moving ahead on it or just purely gathering acreage position?

We have the information in the areas that we're leasing and nothing has deterred our enthusiasm at this stage.

Appreciate it, thanks.

Jack Aydin, KeyBanc Capital Markets.

Related to the acreage what kind of money did you spend acquiring that acreage in total terms?

We're probably plus or minus $10 million.

That is pretty cheap.

We are pretty thrifty.

Good for you. Thanks.

At this time there are no further questions.

I appreciate everybody's interest in Cabot and I think our 2006 program is going to be another record year for us. We look forward to delivering that to our shareholders. Thank you very much.

Thank you. This concludes today's Cabot Oil & Gas fourth-quarter conference call. You may now disconnect.