雪佛龍 (CVX) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2007 Atlas America Inc.

earnings conference call.

My name is Jackie and I will be your operator for today's conference.

At this time all participants are in the listen-only mode.

We will be facilitating a question and answer session towards the end of this conference (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to your host for today's call, Mr.

Brian Begley, Vice President of Investor Relations.

You may proceed, sir.

Thank you and good morning, everyone.

I'm Brian Begley of Investor Relations.

Joining us today to give highlights on our fourth quarter and full-year 2007 results for Atlas America are Ed Cohen, Chairman and Chief Executive Officer and Matt Jones, Chief Financial Officer.

Before we begin remarks today, I would like to remind everyone that when used in today's call, the words believes, anticipates, expects and similar expressions are intended to identify forward-looking statements.

These statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements.

We discuss these risks in our quarterly report on Form 10-Q and our annual report also on Form 10-K, particularly in Item 1.

I would like to caution you also not to place undue reliance on these forward-looking statements which reflect management's analysis only as of the day hereof.

The Company undertakes 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.

With that, I'm going to turn the call over to Ed.

Thanks, Brian, and hello everyone.

To those of you who have been following the results reported during the last week by our publicly held subsidiaries, it will be no surprise to hear that Atlas America too is announcing record financial results for the fourth quarter and for the full-year 2007.

In fact, 2007 adjusted EBITDA reached $456.2 million, an increase of $306.3 million or over 200% from the full-year 2006.

Adjusted diluted net income per share was $1.85 for full-year compared to $1.50 per share for 2006, an increase of $0.35 per share or 23%.

For the fourth quarter alone, adjusted at $220.1 million represented an increase of $179.0 million or almost 440% from the fourth quarter 2006.

Finally, adjusted diluted net income per share for that quarter was $0.39 compared with $0.41 per share for the fourth quarter 2006.

In a little while, our CFO Matt Jones will discuss these financial results in considerable detail.

But I would like now to speak about the outstanding accomplishments and enormously favorable prospects of our two principal divisions -- the E&P operation encompassed by our subsidiary, Atlas Energy Resources which trades under the symbol ATN, and our Pipeline Processing division, which operates as Atlas Pipeline Partners, APL.

At Atlas Energy in the last six months of 2007, we grew our proved reserves by almost 25% annualized to 897 billion cubic feet equivalent and we replaced 663% of ATN's record production and we did it all almost entirely through drilling activities.

ATN paid a distribution of $.0.57 per unit for the fourth quarter of 2007, and that was an increase of 36% in quarterly distributions in our very first year of operation as an LLC, limited liability company.

And while ATN was raising the dividend so sharply, it also was able to achieve our goal of increased coverage.

During the course of 2007, ATN raised dividend coverage from 1.1 times to 1.3 times.

All the world as you probably know seems to be excited now and with good reason over the emerging Marcellus Shale play in which Atlas has been at the forefront of successful development.

In past conference calls, I have reported on the great expansion of our land force that was intended to generate sharp increases in ATN's Marcellus acreage before the inevitable escalation in prices from Marcellus acreage which has now occurred.

Because of our colleagues' monumental efforts, we now control almost 0.5 million, precisely 483,000, Marcellus acres in Pennsylvania, New York and West Virginia accumulated at a small fraction of the price that is now being paid by others for similar acreage.

ATN is currently focused on its approximately 224,000 existing Marcellus acres in southwestern Pennsylvania where it has drilled all but one of its wells and where we have now through this drilling largely delineated our acreage.

It is an area with abundant infrastructure at our disposal and where Atlas Energy has access and more than ample pipeline capacity, controlled and developed by Atlas Pipeline Partners.

We have strongly boosted our technical capability to deal with this play.

We're working with service companies who have honed their shale capacity over many years in other basins.

Where appropriate, we are partnering with industry associates who have independent experience in shale exploitation.

We have been advancing sharply on the learning curve.

Let me give you an example.

Our initial five Marcellus wells employed an inferior fracking technique which we have now vastly improved.

The results speak for themselves.

[Riding] Company, ATN's independent petroleum engineering consultants, has evaluated Atlas energy use first 14 southwestern Pennsylvania Marcellus wells and has assigned proved reserves that in the event averaged 961 million cubic feet per well.

These wells included five initial efforts where the Company utilized the first generation completion techniques which I just mentioned.

For the nine subsequent wells where Atlas Energy employed its newly developed advanced drilling completion and production techniques, Riding Company has signed reserves that averaged 1.3 billion cubic feet per well and were as high as 1.8 billion cubic feet equivalent.

These results imply astonishingly low finding and development costs of approximately $1 per 1000 cubic feet.

That is $1 per 1000 cubic feet, and I'm not misspeaking.

Since implementing these advanced drilling completion and production techniques, Atlas Energy's initial daily rates for 24 hours into a pipeline have averaged 1.3 million cubic feet per day and have been as high as 2.6 million cubic feet per day in southwestern Pennsylvania.

Based on published reports and on recent conference call reports by other Marcellus operators, these appear to be the best initial daily production rates of any vertical wells in the Marcellus play and in response to these results, Atlas Energy plans to drill and complete at least 150 vertical Marcellus Shale wells over the next 18 months.

Our potential reserves and their financial significance for ATN are enormous.

After reviewing the effective lengths of its fracs, ATN believes that it will be able to develop its southwestern Pennsylvania Marcellus acreage through vertical drilling on approximately 40 acres spacing.

As a result, the Company believes now that it has between 4000 and 6000 potential vertical drilling locations in southwestern Pennsylvania, which after factoring in the average results of its Marcellus drilling to date represents between 4 trillion cubic feet and 6 trillion cubic feet of potential natural gas reserves.

Horizontal drilling offers the possibility of even greater success.

Atlas Energy has now drilled but not yet completed one horizontal well in southwestern Pennsylvania and that was done with an industry partner and plans to drill at least four additional horizontal wells during the remainder of 2008.

While the finding and development costs of our vertical drilling program compares favorably with the reported results from horizontal drilling by other shale operators in the Appalachian Basin and elsewhere, we believe that our horizontal drilling program has the potential to even further enhance our economic returns from the Marcellus Shale.

Now let me turn to the very satisfying results we've been achieving in our pipeline and processing division, Atlas Pipeline Partners and its general partner, Atlas Pipeline Holdings.

In our releases and conference calls for these companies earlier this week, we've reported already on their record fourth quarter and full-year results, but one set of figures probably best illustrates the progress we have been making.

System-wide volumes were approximately 1.2 billion cubic feet per day for the fourth 2007 quarter compared with 700 million cubic feet per day for the prior-year quarter, an increase of approximately 72%, and every single division posted increases in volumes.

I know that some people were concerned and I might say with good reason with the risks involved in our successfully integrating the Anadarko acquisitions of mid 2007.

But in the event we were able without mishap to meld together field [and] operations and financial reporting which has allowed us now to concentrate on the synergistic expansions that excited us originally about this transformative acquisitions.

Here is what has been taking place and will take place in the near future.

Business at Chaney Dell, the Oklahoma asset acquired from Anadarko, is so strong that as of February 7 we have restarted the long idled prior to our ownership, the long idled legacy Chaney Dell gas processing plant and that adds approximately 22 million cubic feet per day of processing capacity, the Chaney Dell system, which previously had been operating at full processing capability.

This new addition however should itself reach full utilization within a few weeks.

But immediately thereafter, an additional 60 million cubic feet per day of Oklahoma processing capacity will come on through our latest expansion of the Sweetwater plant, and that is scheduled, this expansion, to be operational in mid 2008.

While this expansion will provide relief for the Elk City/Sweetwater processing division, which as you would probably guess, is presently operating at capacity, it will also provide relief or Chaney Dell because -- another increase -- because by mid 2008 we will be able to move excess Chaney Dell gas south through our new 110-mile long 16-inch connector pipe which will link Chaney Dell and our Elk City/Sweetwater components, both in our West Oklahoma division.

In late 2008, the new Nine Mile plant which is located midway between Chaney Dell and Elk City/Sweetwater is scheduled to be operational.

At that point, we will have increased our capacity in Oklahoma in a little more than four years -- actually a little less than four years -- from 100 million cubic feet per day to about 1 billion cubic feet per day of processing and treatment capacity and will have made an increase from the single Velma plant, which we acquired in July 2004, to our present facilities at Elk City, Prentiss, Sweetwater, Nine Mile, Waynoka, Custer and Chaney Dell, as well as Velma itself, all in our Western Oklahoma area.

Exciting organic growth projects are likewise being pursued at our other processing and pipeline divisions.

On our Ozark trunk line running from southeastern Oklahoma through Arkansas, volume has risen in the less than three years of our ownership from 190 million cubic feet per day to almost 400 million, our newly certificated capacity, and we're now seeking to increase capacity to 500 million cubic feet per day.

West Texas targets completion by mid 2009 of a new 150 million cubic feet per day processing facility that will replace the current inefficient plants at Midkiff and our resurgent Appalachian division, enhanced by the oncoming Marcellus surge, has seen volumes leap to 74.2 million cubic feet per day for the fourth quarter 2007 compared with 63.1 million cubic feet per day for the fourth quarter 2006.

Last Friday -- we're really right up to date here -- last Friday, ATL expanded into Tennessee where ATN is already the leading producer of natural gas and where we are hopeful in due time to build a system fully comparable with the system that we have previously built in northern Appalachia.

And now for the financial implications and explanations of all of this success, Matt Jones, our CFO.

Thanks, Ed.

Of course our company has experienced significant and very positive change since the fourth quarter of 2006, so when comparing our financial results year-over-year and quarter-over-quarter, please keep in mind the following meaningful events.

First through the formation and initial public offering of an equity interest in Atlas Energy in December 2006, we sold roughly 20% of our oil and gas operations, including our direct investments [indication] programs.

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

The fourth quarter of 2007 represents the fourth consecutive quarter since its initial public offering that Atlas Energy has reported increased adjusted EBITDA because of impacting cash flow growth.

Following only four quarters as a public entity for the second consecutive quarter, Atlas Energy achieved the threshold level of distributions required to cause it to satisfy the first two quarters of the 12-quarter period test where cash flows will be allocated to us and ultimately paid to us upon the unsuccessful completion of that 12-quarter test.

We have been allocated roughly $1.75 million cumulatively with respect to our incentive interests for the third and fourth quarters of 2007.

Based on the midpoint of Atlas Energy's guidance for 2008, we estimate that more than $4 million will be allocated to us next year with respect to these interests.

Also, again, based on the midpoint of Atlas Energy's guidance for this year, we estimate that we will receive approximately $70 million of cash distributions from our common and Class A unit ownership.

This represents a 19% increase compared to 2007.

We are of course pleased with these developments and we remain very excited about Atlas Energy's future and the visible opportunity for substantial and potentially accelerating growth that lies ahead.

Secondly, through the formation and initial public offering of our 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 $15 million of 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.

For the full year 2007, we received roughly $20.5 million in cash distributions from Atlas Holdings from our common unit ownership.

Based on the midpoint of Atlas Holdings' guidance for 2008, we expect to receive nearly $30 billion in cash distributions this year, a 50% growth rate.

In total then, we expect to receive cash distributions of at least $100 million during 2008 from our ownership interest in Atlas Energy and Atlas Pipeline Holdings, a 25% increase compared to 2007.

This excludes, does not include, the $4 million of incentive allocations that we expect to receive from incentive interests in Atlas Energy for the year.

Atlas Energy and Atlas Pipeline fund their growth, internal growth and growth through acquisitions, with cash flow that they generate and from their respective balance sheets.

This has allowed our Company to maintain an unlevered balance sheet with $108 million in cash at the end of the fourth quarter after having repurchased more than $80 million in stock earlier this year and invested $10 million in Lightfoot Capital Partners over the course of the year.

The stock we purchased included 1.5 million shares that we bought back at a split adjusted price of approximately $36 per share.

As of the close of trading yesterday, our shares now trade above $62.

With respect to Lightfoot, we've committed to invest a total of $20 million, and as a result we'll own approximately 18% of the general partner interest of Lightfoot Capital Partners.

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

Moving quickly 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 interests held by unrelated partners' parties in Atlas Pipeline Partners, Atlas Pipeline Holdings and Atlas Energy companies.

In order to reflect certain non-cash or nonrecurring events through our subsidiary operations during the year, we've provided adjusted net income and adjusted EBITDA reconciliations in our press release.

The adjustments primarily include a non-cash mark-to-market derivative expense largely related to natural gas liquids hedge positions of Atlas Pipeline and non-cash stock compensation expense across the companies, including a nonrecurring, non-cash award to Atlas Pipeline's midcontinent management team in the third quarter.

The midcontinent managers 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 midcontinent region.

As for the mark-to-market derivative expense in the fourth quarter, Atlas Pipeline has an ongoing program to manage commodity price exposure to natural gas liquids and natural gas.

The vast majority of the non-cash mark-to-market in the fourth quarter relates to the spike in crude oil prices in the fourth quarter.

[For less] than Atlas Pipeline's exposure to the movement in natural gas liquids prices, the pipeline company put in place collar -- crude -- oil collar position at various prices effective over the next several years.

Using crude oil as a proxy to hedge natural gas liquids exposure is an efficient way to hedge these exposures over longer periods of time.

Because crude oil price movement isn't perfectly correlated with natural gas liquids price movements, Atlas Pipeline will mark-to-market a significant portion of their crude collar positions.

After recognition of these adjustments, our adjusted net income for 2007 was $50.3 million, or $1.85 per share, as Ed had mentioned, a 23% increase compared to 2006.

Fourth-quarter adjusted net income per share was $0.39 versus $0.41 in the fourth quarter of '06.

The fourth quarter 2007 number was impacted by depletion adjustments made at Atlas Energy to effectively true up depletion expense for this year based on that company's receipt of its year end reserve report, higher depreciation and amortization in Atlas Pipeline and Atlas Energy associated with the acquisitions that were completed this year and incentive compensation payments made in the fourth quarter of this year associated with the significant achievements of the Company, especially in the back half of the year.

The operating results at Atlas Pipeline and Atlas Energy continued to exceed expectations relative to cash flow guidance that has been provided by those companies.

Atlas Pipeline Holdings paid $0.34 per unit for the fourth quarter.

In combination with a third quarter distribution of $0.32, Holdings paid total distributions of $0.66 per unit for the second half of the year which exceeded the previously stated guidance range of $0.58 to $0.65 per unit for this period.

Atlas Pipeline Partners paid total distributions in the second half of the year of $1.84, which was at the high end of its previously stated guidance range of $1.78 to $1.85 for this period.

The pipeline company covered the second half distribution with a 1.2 coverage position.

Atlas Energy declared total distributions for the second half of the year of $1.12 compared to previously stated guidance of $1.00 for this period.

Also, the Company incensed its coverage ratio to 1.3 times compared to its guidance of 1.2 times.

The core businesses of Atlas Energy and Atlas Pipeline continue to expand as both of these companies benefit from their primary operating locations in some of the fastest-growing geological plays in the country, including the Marcellus Shale in Appalachia, the Woodford Shale and Fayetteville Shales in Oklahoma and Arkansas, and the Sprayberry region of the West Texas.

We believe that as these business expand in these core areas, we are well positioned to fully benefit from their growth as a result of our common unit interest and incentive payment interest in these enterprises.

A couple of quick points related to our income statement.

Interest expense generated during the year totaled approximately $4.4 million.

Because of our cautious nature and related to certain realized and potential dislocations in the global financial markets, we have moved our cash instruments and investments to U.S.

Treasury money market funds.

These funds invest solely in Treasury bills and notes and provide us with overnight liquidity.

Interest income is included in the category labeled 'Other Income' on our income statements.

Of total general and administrative expenses for our Company in 2007 of roughly $113 million, approximately $8.5 million was attributable to our Company, importantly including $2.7 million of non-cash stock compensation expense or stock option expense and the remainder to Atlas Energy and Atlas Pipeline.

Our effective income tax rate for the year came in at 29% compared to 39% in 2006.

In '07, relative to '06, we've benefited from a variety of items, including the generation of tax advantaged interest income, a previous over-accrual of state income tax and higher oil and gas production in Atlas Energy, allowing for increased depletion deductions.

We expect our effective tax rate to range between 30% and 35% in future periods.

However, on a cash basis we anticipate that we may not be a taxpayer in 2008 because of events associated with equity offerings at Atlas Energy and Atlas Pipeline in 2007.

Finally, moving to our capital structure, total debt of approximately $2 billion at the end of the fourth quarter was attributable entirely to Atlas Energy and Atlas Pipeline.

Atlas Energy has no debt that matures before 2012 and Atlas Pipeline before 2013.

None of the debt represents an obligation of our company.

We had no outstanding debt at the end of the quarter, and as I had mentioned previously, we had about $108 million of cash at the close of the quarter, December 31.

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

Thanks very much, Matt.

We also have available to us on the line a number of our officers from the various divisions.

So I think we are ready to have you fire away whatever questions that you have, and we will try to have the appropriate person give the initial answer.

Operator, are we ready?

(OPERATOR INSTRUCTIONS) Lee Cooperman, Omega Advisors.

Good morning and nice report.

John D.

Rockefeller would be very proud of you guys.

Just really just a constructive suggestion.

It's hard to -- nothing negative at all, but you guys are sitting on I guess about $108 million in cash, no debt, cash flowing about $100 million a year to the parent, and you've created these three subsidiaries that publicly trade.

And what is happening is Mr.

[Market] seems to be giving you guys an opportunity periodically to buy a dollar bill for $0.50, $0.60 or $0.70.

This comment may be a little bit less relevant today than it was two weeks ago, but I couldn't help but notice that ATN was trading like at $24 a share.

And I was marveling, it went public in December of '06 at $21, you were paying a $0.06 quarterly dividend, so $0.24 a year run rate.

Now you are going to probably be at a run rate at the end of this year about [240] dividend.

The Marcellus Shale did not exist, you now have 500,000 acres in the Marcellus Shale.

And it would seem to me that stock never belonged at $24.

One of the ways of creating incremental value for all of the shareholders at Atlas basically is, if [Mr.

Market misprices] some of our subsidiaries as you take some of this $100 million in cash growing at $100 million a year, probably on the way to earning 2 or 3% a year into buying some of these MLPs in the marketplace that are yielding anywhere between 7, 8, 9% and are selling at a discount to asset value.

So just a suggestion, I would be curious what your reaction is.

Thank you.

Even I can answer that question.

The logic is inexorable and we feel strongly that although ATN has increased in its stock market price and our other two divisions have been outperforming for the last -- since the beginning of the year other MLPs, we do feel that they are severely undervalued.

You heard Matt report on the success we had in buying back 1.5 million shares of Atlas America itself at $36 not too long ago.

And over the many years that we have been involved with this company and more recently with the subsidiary companies, we have never gone wrong in buying back stock.

Of course with the stock performance we have had, it doesn't take genius to know that buying back stock in our case has proven to be wise.

Of course the past is never an absolute guide to the future, but we are a company that is strongly committed to exploiting these opportunities, and the rest of what you pointed out, that we are cash rich without obligations, is certainly true.

So we are not [dense], and our past record I think suggests what our likely course of action would be once our executives and our Board have had a chance to consider all these things.

But I want to point out that buying back stock involves considerations other than the logic that you put forth so convincingly.

And I don't mean to denigrate it by saying it's like everything else, it takes a wise man like you to see it as clearly.

But even those who are slower can see it after they have enough chance.

But we always have to be concerned that when we do make a repurchase that we have made full disclosure and we are not in a situation where we have knowledge that others don't have.

And we also have such tremendous opportunities at these companies.

Those expansion projects for example at APL that we were speaking about and equally great but cash demanding opportunities at ATN with the Marcellus situations all require that we give really full and complete thought.

I know some people feel that we are overly cautious and that we are overly conservative, but it has worked very well for us to pursue that.

So while I agree completely with the suggested and the analysis that you have made and I feel really strongly that Atlas America stock itself, even at its present higher levels, is still vastly underpriced and undervalued, we will be proceeding cautiously and in full compliance with all of the relevant considerations.

But we're not blind to what you said.

I'm sorry that's so long, Lee.

That's okay.

Thanks for the rest, good luck, and thanks for doing such a fine job for us.

[Steve Errico], [Locustwood] Capital.

Congratulations on a great quarter.

I was one of your competitors' conference calls yesterday, they're a major player in the Marcellus Shale and they were mentioning about the infrastructure buildout in the area and that they were talking to existing gathering system and midstream companies there.

I was wondering if you could expand a little bit on the opportunity for APL in the Marcellus area as it relates to perhaps non-Atlas operators in that area?

Thank you.

If this business were as logical as the proceeding question and I hope answer there would be great opportunity for APL.

But there is an extremely strong bias on the part of companies in the E&P business to control, regardless of whether it makes economic sense, their own gathering system and pipeline facilities.

And we been battling that and I have always been amazed at how you can have a situation where a pipeline that we control might be available to someone else and without regard to negotiating that with us, or when we have tried very often we have been unsuccessful in negotiating it.

They will build the other side, the other company will build a pipeline running directly competitive with us.

So that's a negative.

The other negative to APL's opportunity is the enormous upsurge that we anticipate, because don't forget, we're looking at building -- at developing 150 wells in an 18-month period.

Now for us, as one of year-in, year-out, one of the dozen most active drillers of natural gas wells in the entire United States, those figures are not daunting, but for many companies they would be, and that is not taking into consideration the horizontal drilling.

So we think that APL will have its hands very full in expanding our existing capacity because although it's more than ample at the present time and will be able to handle the next surge, it's obvious that APL will be called on to contribute mightily just for our assets.

If logic prevails and others turn to APL as I think in many cases they should, especially in those areas where there's presently no infrastructure and where companies from thousands of miles away with no experience in our area are coming, if logic prevails there should be great additional opportunity for APL.

But having watched this for many years, I don't feel that I should suggest you that I'm strongly confident that other companies will do what to me seems to be logical.

Thanks for your answer.

Ed, may I give a comment on the infrastructure?

Please.

This is Rich Weber at Atlas Energy.

When we speak of our acreage in southwestern Pennsylvania, we have four major pipelines moving through that acreage, including Texas Eastern, which is part of Spectra, Dominion Transmission, Columbia Transmission and Equitrans.

And there is tremendous takeaway capacity out of our acreage on those interstate lines.

In particular, we deliver a lot of gas right now into Texas Eastern which has ample capacity, and our system, our gathering system, is largely in place with all of the trunk lines, etc.

That is why we feel strongly that from an infrastructure standpoint, we are in excellent shape.

What is also interesting is our gas is pipeline-quality gas that we're producing out of the Marcellus Shale, BTU contents in the 1030 range.

I know that others who may not be exactly in our area are producing gas that has much higher BTU contents and probably are going to have to strip that has.

I don't know, but I would suspect that they are and may have to build processing facilities.

That is just not something that Atlas Energy is going to have to do.

Great, thank you very much.

(OPERATOR INSTRUCTIONS).

At this time, gentlemen you have no further questions.

I would like to turn the call back over to Ed Cohen for closing remarks.

Thank you all very much for listening and we look forward to speaking with you again in the near future.

Good bye.

Thank you, ladies and gentlemen, for your participation in today's presentation.

You may now disconnect and have a wonderful day.