Coterra Energy Inc (CTRA) 2014 Q3 法說會逐字稿

Good day and welcome to the Cabot Oil and Gas Third Quarter 2014 Earnings Conference Call and Webcast.

(Operator Instructions)

Please note, this call is being recorded. I would now like to turn the conference over to Mr. Dan Dinges, Chairman, CEO, President. Please, sir, go ahead.

Thank you, Zelda, and thank you all for joining this morning. With me today, I do have the members of our executive team. Also, the boilerplate language on the forward-looking statements, including press release, do apply all my comments today. I'd first like to briefly touch upon a few financial and operating highlights from the third quarter that were outlined in this morning's press release, before I do jump into the discussion on a few topics that I'm sure is on everyone's mind.

First off, the equivalent net production for the third quarter was 1.44 Bcf per day, an increase of 24% over the prior year's comparable quarter. Liquids production for the quarter increased 32% compared to the prior-year comparable quarter when you adjust for last year's Mid-Continent and West Texas asset sales. Net income excluding selected items for the quarter was $85 million, an increase of 14% over the prior year comparable quarter.

And lastly, cash flow from operations was $358 million, an increase of 29% over the prior-year comparable quarter. These numbers highlight that, even during a period when we experienced lower natural gas price realizations and some unplanned production downtime, we were still able to provide top-tier growth in production and cash flows, while generating top-tier returns which is a testament to the quality of our assets and our operations.

I've been clear and the general consensus is that 2015 will be another challenging year for natural gas and oil prices. However, we demonstrated this quarter and over the last year, Cabot's asset base continues to generate high growth, high returns and will certainly stand to benefit greatly as we start to see improvements in the price dynamics in the basin once new pipeline projects are in place, beginning in late 2015 and beyond. We'll have some more comments in regard to Constitution in a moment.

The remainder of my comments are going to be focused on addressing questions that I think are on the majority of your minds. First, the 2014/2015 guidance. Today, we did reaffirm our 2014 production range of 530 Bcfe to 555 Bcfe. Where we ultimately end up in this range will be dictated by the level of demand we see in November and December and certainly, the corresponding market conditions will also impact that range.

Today, we also reaffirmed our 2015 production growth guidance range of 20% to 30%. This production growth range is based on an average gross Marcellus production rate of 1.8 to 2 Bcf per day, which is essentially the same gross production expectations we have for November and December of this year. Once again, production rate will be dependent upon various factors throughout the year, including natural gas price realizations and to a lesser extent, field logistics around the infrastructure, including both planned, unplanned maintenance as well as maybe some line pressures.

The production growth range also assumes an average net liquids production rates of 18,000 to 20,000 barrels per day, of which 88% is crude oil, driven by the acceleration of our drilling program in the Eagle Ford. The addition of this high-margin production should help us offset some of the loss margins we are seeing from our natural gas sales in the current price environment.

The Company's capital program for 2015 is $1.53 billion to $1.6 billion, which includes drilling and completion capital of $1.25 billion to $1.32 billion. Approximately 52% of the drilling capital will be allocated to the Marcellus, 46% will be allocated to the Eagle Ford shale, and another 2% or so allocated to drilling in other areas. The capital budget assumes five operated rigs in the Marcellus. That's down from our current count of six rigs and four operated rigs in the Eagle Ford.

Let me emphasize that our 2015 capital program at the midpoint is up only 4% over our 2014 midpoint; however, we will be generating production growth of 20% to 30%, further highlighting the capital efficiency of our program. Based on this rig count, we expect to drill 180 to 190 net wells in 2015, which include 95 wells to 100 net wells in the Marcellus and 80 to 85 net wells in the Eagle Ford.

Our range and drilling and completion capital is ultimately dictated by how aggressive or conservative we choose to be on the completion side of our operations. If the market demand is favorable throughout the year, then we would likely accelerate completions resulting in higher production and certainly, the reverse is true if we see below average demand certain times of the year, winter or summer. We will likely decelerate our completion schedule and move with the market, resulting in lower production ranges. However, it is our intent to stay within our guided range of 20% to 30%.

As you might suspect, we have run a number of sensitivities for our 2015 programs, certainly in light of the dynamics on the macro market of the commodity pricing. We built one of our base case programs for the year off a realized natural gas price sensitivity of $2.80 per Mcf and a realized oil price of $88 per barrel.

While our crystal ball is no better than anyone else, we believe these are within the fairway as a reasonable assumptions. We will certainly provide quarterly updates, as we always do, regarding our price realizations and review our thoughts on the forward strip. However, I think the most important investment consideration to focus on is what the program generates throughout the year. We plan on generating robust growth and returns, even under these commodity price assumptions.

Our typical Marcellus and Eagle Ford wells generates returns over 80% and 60%, respectively, based on those budgeted commodity price realizations we used in this sensitivity. Moving to some hot news that came out this morning regarding the Constitution pipeline, as many of you may or may not be aware, the FERC issued its final environmental impact statement this morning for Constitution.

As we are extremely excited to achieve this critical milestone, we have yet to fully assess this several thousand page document. That said, we remain cautiously optimistic that, assuming the timely receipt of all remaining necessary regulatory approvals, Constitution could begin construction as early as the first quarter of 2015 and bring the project into service in late 2015 or early mid-2016.

However, given the uncertainty that still surrounds the final approval process, we are assuming in our budgeting right now a July 2016 in-service date for our internal modeling purposes, but remain somewhat optimistic that there is still an opportunity to have Constitution in-service by the end of 2015. We will continue to keep you updated as we receive more information from the Constitution pipeline team, the FERC, and all the agencies in the process.

Moving down to South Texas and our Eagle Ford area, during the quarter, we announced the acquisition of 30,000 net acres in the Eagle Ford, of which 17,000 net acres are directly offset to our Buckhorn operating area. We closed this transaction this last week. Our Eagle Ford team has done an excellent job unlocking the value throughout our Buckhorn area and we believe that they will be able to generate similar results on this newly acquired adjacent acreage.

We are in the process of completing our first well on this acreage, which should be placed on production near the end of the year. As we highlighted in the press release, during the quarter, we placed 10 wells on production that have produced for at least 30 days. These wells achieved an average 30 day production rate of 751 barrels per day with a 91% oil cut, which is in line with our type curve.

As reminder, our typical Eagle Ford well generates a return of approximately 50% at the current strip of $80 per barrel. In the press release, we also provided an update on our 300 foot downspace pilot program, which we discussed last quarter. To date, these two wells have combined to produce over 230,000 barrels of oil in the first 180 days. It's fair to say that we're pleased with these results.

We plan test more 300 foot downspace wells this year and into next year and we'll certainly have more to say as we continue to get additional production history to analyze. Assuming 300 foot downspacing does work throughout our position in the Eagle Ford, we have a drilling inventory of over 1,000 gross locations remaining in our Buckhorn and Presidio position.

One quick note on the share repurchases during this quarter. Subsequent to our press release in late September, we repurchased an additional 1.6 million shares, bringing the year-to-date total to 4.3 million shares. Our total since the fourth quarter of last year is 9.1 million shares or approximately $300 million worth of share repurchase. We have 10.1 million shares remaining under our current authorization.

Given our current outlook for commodity prices, our capital program next year relative to our expected operating cash flow, and our desire to maintain our strong balance sheet, our pace of repurchases could be tempered through some parts of 2015; however, it certainly remains one of our objectives to effectively allocate our capital and share repurchases will remain a viable peace of that equation.

During the third quarter of 2014, we added 20 natural gas derivative contracts. For 2015, the Company now has approximately 200 million per day natural gas volumes hedged for 2015 at a weighted average floor of $3.99 per Mcf.

So with that comment, Zelda, I will be open for any questions for myself or the team.

(Operator Instructions)

Doug Leggate, Bank of America.

I've got a couple of questions, if I may. First of all, on the Eagle Ford, if you do end up with 1,000 locations, which you said in your press release this morning, four rigs just seems a little low in the context of the resource opportunity. So I'm just wondering, are the economics still competitive at the current oil price environment? If so, what would stop you looking to reallocate additional capital away from the Marcellus away toward the Eagle Ford? I've got a follow-up on Constitution, please.

Okay. We certainly like the returns in there, as I mentioned, with the typical well right now with our typical curve bit, we have a 50% at current commodity price is $80, we have a 50% return profile for our wells in Eagle Ford. As far as expectations in 2015 on our program, we have this new acreage. Some of the new acreage is going to require drilling to maintain that acreage.

On the near-term outlook, and certainly with the returns that we get, our group is gearing up to expand our operations, moving our operations around a little bit than what we had, say, a couple of months ago. Again, if we have oil prices that stay in the range they are today or better, we do not anticipate -- or even if they go a little bit lower there certainly, we do not anticipate pulling any capital from the Eagle Ford.

We expect to keep these rigs busy, keep a couple of frac crews busy throughout the year. I would say that we would probably ramp up our program as we move into the latter part of 2015 on into 2016.

That's helpful. Thank you. The news, obviously, this morning on Constitution, like you, we have not had a chance to fully absorb all the details, but I just want to try get some color around the implications for takeaway capacity in your mind. Constitution's obviously a big deal, but in your mind, is it enough to resolve the ongoing issues given the strength of the wells and not in particular, Northeast then of course, the continued improvement efficiencies and so on.

If I may sneak a final follow-up, I wonder if you could also give us the exit rate for production in the third quarter to give us some idea how we did in Q4? Thank you.

All right. First off, the Constitution is just one component to several infrastructure projects that will be implemented up in the Northeast. I'll let Jeff discuss these in one moment, but certainly, the Constitution is the most impactful near-term inflection point and we think we are going to be able to get half a Bcf of our gas to a different price point and that price point, certainly currently and historically, has been a better price point than a general market.

So that is attractive to us and we think with the projects as they unfold, down into 2016, 2017, 2018, we think the market will rationalize the supply side. Certainly, demand is going to be enhanced and we think that we will be able to get gas to a broader index, if you will, on a weighted average basis, that from today, we think we will improve significantly from what we are seeing today.

I think if you look out and you look at 2015, I think everybody is kind of on the same page, at least the people that I've discussed this with, that 2015 is probably going to be the most challenging year. Cabot's weathered this period, if you will, for the last six months to a year. We do expect that realizations would go down for all of the players out there, probably in gas and in oil price for 2015.

But we're in a position with our program to deliver decent returns through the period and come out the other side, which we think is going to be a better market. I'll come back to the third quarter exit volumes once I let Jeff discuss a little bit on the other projects that are out there.

Okay, Doug. I think, as Dan alluded to, Constitution is certainly one step for us, specifically. I think your question had to do a little bit to do with the micro market, as well.

There are several projects that out there, Leidy Southeast and others, Rose Run, and Columbia East Side. There's numerous projects that affect as directly and numerous projects that affect us directly from Southwest Pennsylvania that will certainly expand this takeaway during 2015, 2016, and 2017.

But for us, specifically, Leidy Southeast is a big project. We have some additional [frond] coming on the next few years that's going to impact us on the existing pipeline.

Of course, Atlantic Sunrise is the next big step in 2017 with 850,000 a day of takeaway on that pipe. So all in all, it's shaping up. Were thrilled about Constitution's step forward, but there's always additional capacity that's on the horizon. We're always looking to get it.

Thank you, Jeff. In regard to the most recent exit volumes, on the gross Marcellus, we're about 1.6 Bcf, 1.625 Bcf, somewhere around there. We did slide a little bit of maintenance from what we had anticipated to do in December into October, so we would be able to take full advantage of what we expect will be a little bit better pricing in December.

Great. Thanks for the answers, guys. I appreciate it.

Charles Meade, Johnson Rice.

Good morning, Dan, and to the rest of your team there. If I could pick up on the Marcellus volume question a bit, you said in your prepared comments that in November and December, it's just going to be a demand-driven picture for you guys as far as what you produce. But you also, I think, had mentioned in the press release, you've got a number of wells scheduled for completion up there.

So can you talk about the interplay of those two? What kind of hurdles you guys are clearing day to day on deciding what your volumes are going to be?

We're balancing our rhetoric in regard to the market. The early forecast, right now, for early winter is that it might be a little bit warmer than normal, so we just picked up on that in couching expectations to say that if it is a little bit warmer and you don't have the demand that would be expected, then we could balance our production in light of that market.

However, with your point about the number of wells that we're bringing on, we will be bringing on a list of wells that is probably greater than 1,000 frac stages. It is greater than 1,000 frac stages and you can do some quick back of the envelope math on that and the rates from those wells would be significant. In fact, if you did just back of the envelope, you could almost get to the rate that we're producing today on an instantaneous basis.

But again, with that said, we're just trying to temper expectations a little bit. But we do expect, most likely, that we are going to fall in the range that we discussed and that's in November and December, 1.8 Bcf to 2 Bcf a day.

Got it. That was a frac [change], that is a lot of potential there. One other thing, if I could be directed to the Eagle Ford, it looks like a big step up in your emphasis there and that make sense, both with what you've had in the Marcellus and your recent acquisitions there. But I wonder if you could talk more broadly about what your goals are for 2015 in the Eagle Ford?

Whether it's to delineate some of the new acreage that you've recently acquired, whether it's to test more long laterals or more emphasis on this downspacing. Just what are your overall goals that you'd like to deliver on in 2015?

That's a good question, Charles. We are excited about what we've been able to do.

The South region has done a great job implementing some new processes in our completion and I'll let Steve Lindeman give some color on that after I make a comment on the acreage. It is our plan to delineate, if you will, the acreage position that we recently acquired. We're still in the game of putting together additional acreage and we're doing so because of the returns that we expect and that we are realizing out there in this program.

So our goal is to be able to provide a consistent level of operations and results in the form of returns and have a fairway that is going to be something that we can plan in our capital allocation for a number of years out in front of us. I'm going to let Steve talk a little bit about maybe what we're doing in our efficiency efforts out there.

Charles, in terms of what our goals would be, we're migrating to more pad development and really looking at every phase of the drilling and completion operations to try and enhance our efficiencies. Earlier in the year, in the beginning of 2014, with just two rigs running in the fields, we couldn't maintain a steady frac crew. Now with the four rigs, we've got a steady frac crew and even a second crew that's coming in from time to time.

That's really helped us significantly in terms of efficiencies, drilling out plugs, packers, all of the ancillary type things. Secondly, we've been trying to, with this acreage acquisition, it helps us work to extend our lateral links and that's what we're working to incorporate this acreage, extend some of the units, and try and work up, increase what our average lateral length is.

That's great, gentlemen. Thank you for the detail.

Pearce Hammond, Simmons & Company.

Dan, I may have missed this and I apologize, but in your prepared remarks, did you provide any color on expectations for Company-wide gas differentials for Q4 or what you've experienced Q4 to-date?

No, we have not.

Any color you want to provide there now?

No. We'll have all of our fourth quarter realizations on our call in February, but just in a general sense, Pearce, we're seeing similar, so far, in this early stage of fourth quarter, we're seeing similar realizations as we have seen in the third quarter.

Okay. Thank you. My follow-up question, in response to Doug's question earlier, you had mentioned that your capital program in the Eagle Ford, the number of rigs you're running specifically, the four rigs, that you're fairly locked down on that and that even if prices were a little bit below $80 a barrel for 2015 on NYMEX oil that you would probably stay still with the four rigs. Given the rates of return that you are earning there, is there a threshold price at which you would adjust those rigs? Is it $75? Is it $70? Is there a number?

No, I think you would have to get below $70 for us to even consider adjusting that program at this stage. We certainly have the balance sheet to be able to capture this acreage. We see the value in the acreage with the return profile we can get at a reasonable price, Pearce. In the near term, we're going to capture that acreage and we're going to stay at it. So it would have to fall off quite a bit for us to deflect from our program.

Thank you very much, Dan.

Brian Singer, Goldman Sachs.

Could you guys remind us what your pricing outlook is for markets that Constitution serves and how much additional gas you think is possible to send to those markets beyond Constitution, before Constitution, like pipeline expansions, are no longer accretive?

I'll let Jeff answer the marketing question, Brian.

Sure, Brian. I think, at this point, I just want to remind everyone that we are in numerous contract negotiations with buyers at the tailgate of Constitution pipeline, at a station called Wright. So Constitution will deliver at Wright into both Iroquois going North and Iroquois going south and a Tennessee 200 line that feeds the Boston area or the Tennessee Zone 5 is the pricing point.

That said, I'm going to dodge the specifics, but if you just look at the historic prices at Iroquois Zone 2 and Tennessee and the impact of additional 500,000 day of gas, which is not really incremental, we think it will be backing off the Canadian supplies that are coming from [ATCO]. So we don't think it's enough gas there to saturate the market, necessarily. We're easing into it with a number of different buyers, sending gas north to Canada, we'll be sending gas out to Long Island, and we'll be introducing some gas to Boston from that point.

So it looks very favorable. Obviously, I'll say it's above NYMEX pipe pricing, but there's just a lot of negotiations going on at this point. I think you had a follow-up question with regard to expansion. Constitution, obviously, as a 30-inch pipeline, has some room for expansion. We are not concentrating at all on expansion right now. We are looking at the project as it is proposed and planned and obviously, we're, again, happy with the final EIS as a 30-inch pipeline and that's what was sticking to at this point.

Thanks. Then my follow-up is also with regards to Constitution. I guess it's maybe understandable that you haven't read 3,000 pages in an hour or two hours, but I wonder whether you've had or engaged at all any of the state regulatory agencies that are going to be looked to here with the SEIS now out there or if you have any update from what you're hearing from Williams or others?

Okay, you're correct. The executive summary looks fine, looks exactly what we expected. There's a lot of devil in the detail on a document of this size. Remember, too, that the final EIS does a number of different things. Probably the most important thing is it sets the stage to receive the certificate and that's, of course, what we're all going to be looking forward to next.

The second thing it does is confirms the routes and that's always been on the back of everyone's minds is when will we have the route fully confirmed and the EIS does that. The third thing it does is there's a number of agencies, both state and federal, that are waiting on information that's contained within this document. New York, Pennsylvania, all kinds of federal agencies, all the permits and there's hundreds and hundreds of permits and permits inside permits that are waiting on data from this document.

So we're thrilled it's finally out there. Everyone can proceed now with finalizing the permits and we're looking forward to getting the certificate.

Thanks.

Matt Portillo, TPH.

Just a quick follow-up question, as we look into 2015, you guys mentioned, your guidance implies relatively flat production from the current exit that you're looking at in December of this year. Could you provide us a little bit of color in terms of how many wells you think you actually need to complete to hold your production profile flat?

A second follow-up question alongside that, as you kind of highlighted the productivity of these wells, with your current drilling plans, are you planning on building a backlog of inventory going into 2016, which you'll start to blow down once you have some of the Constitution capacity coming on?

We have, one, the ability with our results and the type of wells and curves that we have in the Marcellus, we have the ability to tweak our production profile fairly quickly. Looking at your first question, what does it take to hold our production flat? I'll be a little bit bold, but I don't know if I'll raise an eye from some of the guys around the table, but with the tranche of wells that we're going to be completing between now and the end of the year, I think it would be safe to say that we would probably not have to drill another well or complete another well in 2015 to maintain our production flat, because of the backlog of production that we had coming from those wells.

So that would be kind of a little bit of a bold statement maybe, but nevertheless, I believe it to be true. When you look at the backlog of wells that we might have, as we go through the approval process with Constitution, we're going to manage how we complete wells and how we bring wells on and how we handle the field allocation and logistics of moving our gas based on the expected turn-in dateline for Constitution.

But if you go to our budget, as we've set it out right now, with a mid-2016 Constitution commissioning date, we should have, going into the end of the year, almost 1,400 or so stages in the queue, if you will, at the end of 2015.

Great. A second follow-up question alongside that, as we think about the next year or so, really going into 2016, with that in mind, the drilling program you guys are setting in 2015 sets you up for effectively just using some of that backlog inventory to grow your production in the 2016 timeframe. Is that the right way to think about it? So as you guys continue to build this inventory, your 2016 capital program probably doesn't need to change all that much in terms of your drilling CapEx to achieve that growth rate you kind of lay out with Constitution?

We haven't put together our guidance for 2016, but I would not expect a large increase in our capital program in 2016.

Thank you very much.

Mark Hanson, Morningstar.

If you could, maybe, just some more color on what your expectations are for operating cash flow for 2015, given the budget? Do expect to live within cash flow or will there be some borrowing to bridge the gap there?

Mark, with the prices that we laid out in the guidance last night, we're looking at a small deficit sub-$100 million in our base 2015 plan.

Okay. Then, maybe can you just help me bridge the gap there in terms of drilling and completion and the ongoing equity investment there in Constitution and Central Penn. It looks like there's maybe $200 million or so give or take beyond those buckets and I was just wondering maybe if you could give some more color where that spending is directed?

It's lease acquisition, it's going to be some production equipment and facilities, exploration capital dollars in there, as well.

Okay. Great. Thank you.

Marshall Carver, Heikkinen Energy Advisors.

You addressed my question around completions activity in the Marcellus, but you outlined the drilling program in the Eagle Ford in 2015. How many wells do you plan on completing and putting online in the Eagle Ford in 2015?

We're going to be drilling between 80, 85. As far as the number of when you look at the 2014 wells that are being drilled now that roll over into 2015 and then you look at the carryout wells that are drilled in 2015 that will be completed in 2016, I'm guessing it's going to be close to 70 to 75 wells.

Thank you. One other question, you give the liquids production guidance for 2015. Is that all crude and condensate or is there an NGL component and how large would that be if there's any NGLs?

The majority of it is crude of the 18,000 to 20,000 barrels and I think we have -- it's less than 15%, probably 10% NGLs in that.

Okay. Thank you very much.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Dan Dinges for any closing remarks. Please go ahead.

Thanks, Zelda. Again, I appreciate everybody's questions. As we've mentioned, we're excited to get the FERC Constitution pipeline EIS and we'll have more color on that as it unfolds.

But one thing that I think it's safe to say is that this macro market certainly has created a little anxiety for a lot of investors. But when you step back and you evaluate a Company like Cabot, a company that can provide really strong growth, excellent returns, maintain investment-grade balance sheet, it's a Company that is going to be here for the long-term.

I think we are weathering the worst of the storm as we speak and there's going to be better opportunities to enrich shareholders as we roll forward from this date. So I'm in it for the long haul and again, I appreciate all your support. Thanks, again.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.