雪佛龍 (CVX) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2007 Atlas America, Incorporated Earnings Conference Call.

My name is Clarissa and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS.) I would now like to turn the presentation over to your host for today's conference, Mr.

Ed Cohen, Chairman and Chief Executive Officer.

Please proceed.

Thank you, Clarissa, and hello, everyone.

First, I'd like to remind you that when used in this conference call the words believes, anticipates, expects, and similar expressions are intended to identify forward-looking statements.

These statements, of course, are subject to certain risks and uncertainties.

They could cause actual results to differ materially from those projected in the forward-looking statements.

Please refer to our quarterly report on Form 10-Q and our annual report also on Form 10-K for further discussion of those risks.

Furthermore, I'd like to caution you not to place undue reliance on these forward-looking statements.

They reflect Management's analysis only as of the date hereof.

The Company undertakes, of course, no obligations to publicly release the results of any revisions to forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Now, to get to business.

It's a pleasure once again to report highly positive results for Atlas America, this time for the third quarter ended December 31, 2007.

Adjusted EBITDA reached $132.4 million for the quarter, compared with only $37.6 million for the comparable prior year period.

That's an increase of $94.8 million.

Adjusted net income for the period reached $12.7 million, which compares with $10 million for the third quarter of 2006.

Adjusted net income per share was $0.45.

That compares with $0.33 for the comparable 2006 quarter.

Now, Matt Jones, our CFO, will discuss these numbers in detail a little bit later.

But I should note that the adjustment here relates primarily to a one-time nonrecurring, non-cash charge and that arises from the vesting of certain incentive compensation that's payable to executives in our Tulsa, Oklahoma Mid-Continent Pipeline Division.

Before adjustment, net income was $7.1 million for the quarter.

Total revenues reached $411.5 million for the third quarter of 2007, compared to only $190.6 million in the prior year comparable period.

That's an increase of $220.9 million.

Finally, for the record, the Company has declared a cash dividend of $0.05 per share of common stock, and that's payable on November 14, 2007 to holders of record on November 7, 2007.

Now, looking to an overview, the most significant and transformative events during the period were the acquisition and integration of two major assets.

First, the purchase of five processing plants of Anadarko Petroleum Corp.

located in Texas and Oklahoma.

This single acquisition more than doubled our total Company processing--gas processing capacity.

And the second transformative event was the addition of the Michigan gas operations of DTE Corporation.

And that also more than doubled our systemwide gas production.

The two transactions cost over $3 billion.

That's a hefty sum for our relatively small company.

But being conservative, we issued almost $2 billion in new equity immediately at our subsidiaries APL, AHD, and ATN, and we also obtained debt financing that we could live with if necessary far into the future.

As many of you know, we were heavily criticized for our caution at the time.

It's hard to believe how different circumstances were a mere three months ago.

One analyst suggested, for example, that the financing should have been done by a swing loan.

And then, it was suggested after we had successfully integrated the acquisition then we could have pursued long-term financing and the issuance of new equity in a public offering, avoiding the discount, it was argued, that we had to offer pipe investors.

Of course, you'll remember that we closed the second and last of these transactions only on July 29, just as Armageddon was about to strike world financial markets and the great paralysis was beginning to take hold.

Sounds a little bit like China under Mao - great paralysis, Armageddon and so forth.

But those people who have lived through the last three months know that I'm not exaggerating the impact of this period.

I don't think, therefore, that today many people would be suggesting the use of swing loans and the deferral of financing for the future.

But our CFO, Matt Jones, to his credit, and his colleagues, were so cautious that we even negotiated relatively long terms into 2012, 2013, and 2014 for our interim financing.

And so, we've been sleeping well, and we're now about to seek 10-year bond financing to provide permanent financing to buttress our large equity issuance.

But we're going to do so in markets, as you know, far less [frothy] than three months ago.

Yet as I indicated, we're seeking this bond financing without the gut wrenching, sleep depriving pressure that we would have been under had we been more gutsy three months ago or less prudent three months ago when we closed these acquisitions.

It's this combination of boldness and cowardice--boldness in doing the transactions to start with, cowardice in doing them in a careful and cautious way--that we promise more of for the future.

And I hope that we'll continue to retain the courage to withstand criticism for being overly cautious.

And remind me of this when stable markets return and excessive--that's what they call it--excessive prudence, again, is not valued.

Well, I hope you'll forgive me the philosophy in the macro overview.

Let me talk now about the excellent results that we've been getting in both our gas processing and transportation business, and also in our gas exploration and production division, those being essentially the two divisions of our Company.

And then, I'd like to share with you the exciting results of our initial efforts with the Marcellus Shale, another transformative development for our Company.

First, I'm going to speak about Atlas Pipeline, where in Appalachia, Appalachian operations continue to attain new highs.

Gas throughput during the third quarter 2007 averaged a record 71.9 million cubic feet of gas per day.

That's an increase of 12.5% over the similar period of 2006.

Our Elk City Sweetwater Division out in Oklahoma delivered almost 10,000 barrels of NGLs per day during the quarter, an increase of almost two-thirds over the third quarter of 2006.

Our NOARK pipeline volume was up sharply - 326 million cubic feet per day as against 227 million per day in the corresponding 2006 period.

So much for our legacy assets, that is those that we had before June 27.

Our new West Oklahoma system is operating at maximum processing capability.

As a result, we're working on placing back into service the Chaney Dell gas processing plant, which had been idled by prior ownership when the new Waynoka plant became operational.

Chaney Dell will add another 25 million cubic feet per day processing capability.

And there are other exciting new initiatives we're undertaking to exploit the synergies and opportunities engendered by the geographical proximity of our older Oklahoma plants and our new Oklahoma acquisitions.

As Bob Firth reported on the APL call last week, we continue to move ahead on our Sweetwater II expansion.

You may remember that the motivating factor for this project is the continued increase in processing volumes behind the system projected to come online in the next several quarters.

The new process will increase inlet volume processing capability from 120 to 180 million cubic feet per day.

Included in the project will be ancillary piping and compression to bring new gas into the Sweetwater plant.

The plant engineering has been completed, and the plant, along with compression--the plant itself along with compression has been placed on order.

Our commercial team is currently out contracting gas in anticipation of this startup.

Moreover, and very excitingly, we'll be constructing 120 million cubic feet per day new processing plant along a newly constructed 110-mile 16-inch pipeline.

This is our new Nine Mile plant.

This line will connect our Waynoka facility to our Sweetwater plant.

Again, I'm speaking in Oklahoma.

Construction of this plant will provide us with financial and operational flexibility, as well as increasing our processing capacity in a prolific area in Western Oklahoma.

Included in the project will be ancillary piping and compression to bring new gas into our new Nine Mile plant that I was speaking of, and that plant will lie between our legacy Oklahoma plants and our new Chaney Dell plants.

We're currently anticipating an in-service date for the pipeline of April 2008 and for the plant December 2008.

And for those who think that we have a dominant position in Western Oklahoma, just you wait until we have these new initiatives up and running.

It should just be great.

With these organic growth initiatives, the Oklahoma portion of our Anadarko acquisition, we hope, will become a textbook example of a truly strategic combination where two and two should equal a lot more than four.

Last, but not least, and this is a very significant last, and you'll understand why it's not least, our Midkiff/Benedum plants located near Midland, Texas in West Texas, continue to benefit from the greatly expanding drilling activity in the Permian Basin, especially the enormous and enormously successful efforts of Pioneer Resources, our minority partner in these processing facilities.

The E&P operations though are holding their own even against this exciting news on the processing and transportation front.

Good news at E&P has been bountiful.

Integration of our Michigan operations has proceeded smoothly and the average net daily production at almost 60 million cubic feet equivalent per day exceeds our pre-acquisition expectation.

In Appalachia, average net daily production of 32 million cubic feet gas equivalent to our account is up almost 13% over the immediately preceding quarter.

Well drilling revenues reached a record high of $103.3 million, and that's just for the single current quarter.

It was generated by 298 gross wells, that's almost 300 wells drilled this period, an increase of approximately 66% over third quarter 2006.

And I should note that we continue by our activity to rank among the 10 most prolific drillers in the United States.

In October, the Company's registration statement with the SEC, the statement for our Public #17 Drilling Program became effective.

This program is selling briskly.

We've already broken escrow.

With its proceeds presently estimated at $140 million added to our first 2007 program, total investor funds expected to be raised this year would come to at least $340 million.

That's, of course, a record for the Company.

It's more than 50% above 2006's then record 218 million.

Now, I'd like to say a few words about probably the most exciting development in our exploration and production operations - our Marcellus Shale play.

Our sister company, sister to our E&P operations, Atlas Pipeline, has benefited enormously from the Barnett Shale and Fayetteville Shale plays, which have revolutionized production in the mid-continent.

And I think the people back east in the E&P division have been a little envious.

But now, our Eastern E&P operations seem likely to have their moment in the sun with the analogous Marcellus Shale development.

Let me report we've now drilled some 13 vertical Marcellus wells with very satisfying results.

And as a result of this satisfaction with our initial efforts, we've now announced our intention to drill an additional 120 vertical wells in the next 18 months.

And this is likely only the beginning.

As of September 30, 2007, the Company held oil and gas rights to approximately 240,000 acres.

That's up from only 105,000 acres at year-end 2006 and all these acres are believed prospective for the Marcellus Shale.

And of course, we're aggressively continuing to expand our Marcellus Shale acreage position.

We believe our present holdings alone, what we already have, are capable of providing over 2,000 Marcellus drilling locations.

This of course, is in addition to the 3,000 conventional locations that we've identified.

As of now, we estimate that our present Marcellus leasehold may contain between 1.5 trillion, that's 1.5 trillion, cubic feet equivalent and maybe up to 3 trillion cubic feet equivalent of natural gas.

I want to caution you--remember, we're a prudent and cautious company.

So I want to add the caution that this estimate is based only upon our own evaluation of the wells already drilled and completed to date.

They'll undoubtedly change, to some extent at least, as we obtain additional information from additional wells and as we receive evaluations from independent petroleum engineering consultants.

For the 13 vertical Marcellus Shale wells that Atlas Energy has drilled, 10 have been completed as commercial producers and the remaining three are scheduled to be fractured and completed in the next 30 days.

The last five wells completed, stabilized initial rates of production into a pipeline have ranged from 1 million cubic feet per day to 1.8 million cubic feet per day, as compared to an average of below 500,000 cubic feet per day for the first five wells completed.

We believe that the significant improvement in results for the later wells is due to the Company's adjustments to drilling completion and production techniques that we've been refining since we began our Marcellus drilling program approximately one year ago.

I should add that the Company's experience with its existing Marcellus Shale wells suggests that production from the wells generally settles at about 30 to 40% of the initial stabilized rate of production after approximately 45 to 60 days of flush production, and thereafter exhibits a shallow decline profile.

However, we've not yet determined the full decline curve or estimated productive life of a Marcellus Shale well.

And I should finally state that everything I've been speaking about relates to vertical wells.

We believe that there may be considerable economic enhancement from horizontal drilling and we're just undertaking with an industry partner our first horizontal well.

So more about the horizontal situation in our next report three months from now or so as we get further information.

Matt Jones is with us, our CFO.

And in addition to thanking him for his prudence, which has proven to be so wise under the current unsettled circumstances, I want to call on Matt to provide us with financial information.

We'll hear about the quarter now as seen from the financial perspective.

Matt?

Thanks, Ed, and thanks for those comments.

Of course, significant changes occurred at our Company since the third quarter of last year.

So when comparing our results to the third quarter of this year to last year's quarter, please keep in mind the following.

First, through the formation and the initial public offering of an equity interest in Atlas Energy in December of 2006, we sold roughly 20% of our oil and gas production in syndicated investment operations.

In return we received roughly $135 million in cash net of transaction costs, Management incentive interests or incentive distribution rates, and of course, retained the remaining equity interest in the enterprise.

Because of the growth in cash flow and following only three quarters as a public entity, Atlas Energy achieved the threshold level of distributions required to cause us to begin the first quarter of a 12-quarter period where incentive cash flows will be allocated to us and paid to us following the successful completion of the 12-quarter test period.

We're, of course, pleased with this development and we're very excited about Atlas Energy's future potential.

Secondly, through the formation and initial public offering of an equity interest in Atlas Pipeline Holdings during the third quarter of 2006, we sold roughly 17% of our interest in Atlas Pipeline Partners, including our general partner and limited partner interest in that enterprise.

In return, we received roughly $50 million in cash net of cost and taxes, 100% of the general partner interest in Atlas Pipeline Holdings, and again, of course, we retained the remaining equity interest in the enterprise.

With the recent acquisition of the Midkiff/Benedum processing business in Texas, in partnership with Pioneer Natural Resources, and with the acquisition of the Chaney Dell system to significantly expand Atlas Pipeline's presence in Oklahoma and the substantial internal growth opportunities that Ed has laid out, we look forward to the high potential for cash flow growth from this enterprise.

These IPO transactions left us with an unlevered balance sheet and $80 million in cash after having made more than $10 million of investment in Lightfoot Capital Partners.

We have committed to invest a total of $20 million in Lightfoot, and as a result we'll own approximately 18% of the general partner interest of Lightfoot Capital.

Lightfoot intends to concentrate its investments in companies that control assets with vast or limited partnership qualified income in sectors that have been underutilized by the MLP structure.

We're in this solid balance sheet position after having repurchased earlier this year approximately 1.5 million shares for total consideration of about $81 million.

On a split adjusted basis we repurchased the shares for roughly $36 per share.

Of course, our shares today are trading at a level meaningfully above that level.

As a result of distribution declarations made by Atlas Energy and Atlas Pipeline Holdings for the third quarter, we'll receive approximately $22.4 million in cash distributions.

Based on our current holdings of Atlas Energy and Atlas Pipeline Holdings, we expect next year's distributions to increase to at least $25 million per quarter on average.

Of course, with the exciting growth potential that both companies have identified relative to the coming quarters, we're hopeful the cash distributions will grow beyond this level.

With our incentive distribution rates and substantial common unit interests in these enterprises, we remain perfectly positioned to maximize the potential benefit from this growth.

Moving quickly and briefly to our financial statements, please recall that we consolidated 100% of the operations and balance sheet accounts of Atlas Energy and Atlas Pipeline Holdings.

Minority interest accounts on our balance sheet and income statement reflect equity interest held by unrelated parties in Atlas Pipeline Partners, Atlas Pipeline Holdings, and Atlas Energy.

In order to reflect certain non-cash charges and cash benefits of our subsidiary operations during the quarter, we provided an adjusted net income reconciliation.

The adjustments include a nonrecurring non-cash stock compensation award to Atlas Pipeline's Mid-Continent Management Team who were instrumental in assisting with the identification and acquisition, integration and operation of over $2.5 billion of assets on a cost basis that have formed Atlas Pipeline's presence in the mid-continent region.

Secondly, we make an adjustment to reflect the cash flow associated with the acquisition of the Midkiff/Benedum and Chaney Dell systems that was unrecognized in Atlas Pipeline's income statement in the third quarter.

The effective date of the acquisition was July 1.

However, Atlas Pipeline closed the transaction on July 27.

Although Atlas Pipeline received the economic benefit of ownership of the assets as of July 1, accounting convention requires that we recognize revenues and expenses on the income statement only for the period beginning with the closing date and ending with the last day of the quarter.

Lastly, Atlas Pipeline and Atlas Energy made adjustments to reflect cash flow with proceeds from derivative positions associated with current quarter production, but not reflected on the income statement.

After giving effect to minority interest and the estimated tax effect of these adjustments, we've estimated adjusted net income of $0.47 per unit.

This compares to $0.34 in the third quarter of last year, a 28% increase.

Gross margins at Atlas Energy and Atlas Pipeline generally expanded this quarter, compared to recent quarters, reflective of the aforementioned acquisitions at these companies, as well as substantial internal growth.

Both companies hedged their respective commodity price exposure extensively and this strategy has proven to be an effective mitigant of the variability of those prices.

Relative to publicly stated guidance, Atlas Pipeline declared distributions at the higher end of its distribution guidance range with a coverage position that exceeded previous quarters and was consistent with expectations.

Atlas Energy declared a distribution 10% above stated guidance with a coverage position on that distribution in excess of 1.3 times, significantly exceeding previous quarters and well above stated guidance.

The operating success of these two companies led to growth in distributions paid to us this quarter of 21% compared to the June quarter of this year.

This growth does not reflect the Management incentive allocation associated with our incentive--interest in Atlas Energy, which will be paid to us upon the successful completion of certain hurdles over the coming quarters, and we're optimistic that these incentive distributions can grow meaningfully through time.

Atlas Energy's core business continues to expand.

Acquisition opportunities appear abundant.

And the Marcellus Shale provides unusual upside potential.

We, of course, again, remain perfectly positioned to fully benefit from these outstanding and visible potential cash flow growth drivers.

A couple of additional points related to our income statement.

Interest expense that we generated from investable cash balances this quarter totaled roughly $1.2 million and is included in other income on our income statement.

General and administrative costs attributable to our Company this quarter totaled approximately $1 million.

And the remainder of G&A appearing on the income statement is attributable to Atlas Energy and Atlas Pipeline.

Our estimated effective tax rate in the quarter came in at roughly 30% as we continue to benefit from and adjust for an over accrual of estimated taxes at December 31, 2006.

Our estimated effective tax rate in future periods will likely range in the 35% area.

Finally, moving to our capital structure, total debt of approximately 1.9 million is attributable primarily to Atlas Pipeline's $830 million term loan and $294 million senior unsecured notes, and Atlas Energy's $735 million advance against its revolving credit facility.

At Atlas Pipeline, no debt obligation matures before 2013, and at Atlas Energy, 2012.

None of the aforementioned debt represents an obligation of our Company and we had no outstanding debt at the end of the quarter.

Again, as Ed has mentioned, we declared a cash distribution during the quarter of $0.05 per share payable on November 14, to shareholders of record on November 7.

That concludes my remarks, and I'll turn the call back to our Chairman, Ed Cohen.

Thank you very much, Matt.

We have a number of other Senior Officers with us.

And so, as we move to the question and answer session we may be able to call on them for their expertise.

Clarissa, I think we're now ready for questions.

(OPERATOR INSTRUCTIONS.) And your first question comes from the line of Wayne Cooperman of Cobalt Capital.

Please proceed.

Hey, Ed, again.

How are you?

Fine, Wayne.

How are you?

All of your operating subsidiaries are doing really well, which is obviously great for Atlas America.

So I guess my question is two-fold.

First, just on Lightbridge (sic), if you could give us an update on what you spent and where you see that going.

And secondly, just talk about the strategy for Atlas America and the use of cash and all the money that's coming in.

Maybe we ought to be just buying back stock or paying out a much bigger dividend.

Wayne, we should have with us--and I'll call on him in a little while--the Chairman of Lightfoot, our own Vice Chairman, Jonathan Cohen.

Jon, are you on the call?

Yes, I'm here.

Okay.

So maybe I'll ask you in a few seconds to bring us up to date on the exciting developments at Lightfoot, which of course is an entity that we have invested in along with Lehman and Goldman Sachs and Magnetar and others.

As for the cash situation, I guess we're in a very happy situation having conserved our cash and being in a position to consider possible substantial increases in dividend or possible substantial buybacks of stock.

The opportunities, of course, go beyond that.

And Wayne, we continue to monitor carefully what we're going to do with it.

And we have in the past bought back large amounts of stock.

We have a stock repurchase program available.

The stock price certainly seems extremely attractive given the fact that while we've been having this fantastic quarter and everything's been going so well with the Company and expectations are so positive for the future, our stock price has lagged for reasons that maybe had to do with the fact that cautious successful transformational activities may not be getting quite the attention that they should be getting.

So our stock price seems very favorable to us.

But you--what would you do with the cash at the parent company since most of the growth at the subsidiary level seems to be financed by their own cash flows and balance sheets?

Well, don't forget, the parent company has been the incubator, if I could use that word, for other opportunities and Lightfoot is one such opportunity.

Sure.

And Jon, do you want to tell us about Lightfoot?

Sure.

I mean, as it's a private company with many partners, we're cautious about what we say.

But basically, we have invested about half the cash--a little less than half the cash of what we raised in our private offering.

And we've purchased numerous businesses in the coal space as well as in the storage space, and we continue to grow those businesses.

They're very small at this point and we're looking to take the next step and start another vertical in the next 60 to 90 days.

But after that, we'll be working on these three verticals and building them up substantially until they're able to access capital in the public markets, the MLP markets.

So all is going well there, but there's not really that much to report at this point.

(Inaudible.)

Thank you.

We're ready for our next question.

(OPERATOR INSTRUCTIONS.) And you have no further questions at this time.

We thank you all for your participation and we look forward to our next call.

Bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.