EQT Corp (EQT) 2005 Q1 法說會逐字稿

Good morning, and welcome to the Equitable Resources Inc. first-quarter 2005 earnings conference call.

At this time, all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation.

It is now my pleasure to turn the floor over to your host, Mr. Pat Kane, Director of Investor Relations.

Sir, you may begin.

Thanks, Nicole.

Good morning, everyone, and thank you for participating in Equitable's first-quarter 2005 earnings conference call.

With me today are Murry Gerber, Chairman, President and Chief Executive Officer, Dave Porges, Vice Chairman and Executive Vice President of Finance and Administration, and Phil Conti, Vice President and Chief Financial Officer and Treasurer.

In just a moment, Murry will briefly discuss progress in the supply segment and then Phil will review the first-quarter financial results that were released this morning.

Following Phil's remarks, Murry, Dave and Phil will be available to answer questions.

But first, I'd like to remind you that today's call may contain forward-looking statements related to such matters as the anticipated earnings per share, the forecasted drilling program, and sales volumes at the supply segment and other operational matters.

It should be noted that a variety of factors could cause the Company's actual results to differ materially from the anticipated results or other expectations expressed in these forward-looking statements.

These factors are listed in today's earnings release.

The MD&A section of the Company's 2004 Form 10-K, the 2005 first-quarter 10-Q that will be released today, as well as on our Web site.

I'd now like to turn the call over to Murry Gerber.

Good morning, everybody.

I'll make a few comments.

I'm mindful of time this morning.

A lot of people are reporting.

And then I'll turn it over to Phil.

First of all, I'd like to make sure that you understand we are reiterating our 2005 full-year EPS guidance of 3.45 to 3.50, excluding a gain from the sale of our portion of the Kerr-McGee stake and certain charges related to move of our new office building in the second quarter.

So we are reiterating at 3.45 to 3.50.

I wanted to give you a little update on supply.

Overall, my comment is we are making good progress at supply.

As you know, in December, we announced the increase in our drilling program.

We've got sufficient rigs contracted -- about 15 -- to complete the program.

We are on schedule to complete 440 wells this year.

Volumes from that program should show up in year-over-year comparisons later this year and then beginning in '06.

We are also reiterating sales forecasts of 73 Bcf.

On the drilling side, we've completed already 91 gross wells, 71 net, which is well ahead of our plan, basically due to good weather.

Normally, most of our drilling occurs in the summer.

We currently have seven rigs in motion, building to that 15 level during the summer.

As you know, we have about a comparable staff on board at this point in supply compared to the end of 2004.

At this point, we're holding firm with that staff count.

And I'm sure as you noticed the costs for this quarter are consistent with that staffing level, excluding the increases in property taxes that Phil will talk about.

The increase in cost is consistent with our strategy to maximize the production and sales of our existing assets at the same time that we ramp up our drilling program.

As you recall from our previous discussions, our functional operating model requires more people because we've segmented the operating activities, drilling compression pipeline, and so on, based on the thesis that we will extract more from the asset within this functionalized model.

And I'll say we are encouraged by the impact of this change on our value driver performance to this point.

But I want everybody to know this is truly transformational within our organization and it will take more time to continue to see the full benefits fall down to the bottom-line.

Just a few examples, consistent with what I've been talking about for the last year or so, in the area of reducing bottom hole pressure, we have now standard operating procedures for each well and well production type.

Linked to those procedures, we have production targets for each well and well operator and we're now able to benchmark inside the Company and against engineering estimates how we are doing.

Importantly, the incentive comp is also linked to well performance.

And so we feel pretty good about that piece.

On the compressor side, we've got preventive maintenance procedures, are in place for all of our units.

And standards and financial incentives are linked to availability and run-time measures and this is helping lower overall surface pressure.

We've pushed a lot more engineering and engineers into the field and they are sort of having to eat their own cooking, so to speak.

So when they make their engineering estimates, they now have to make sure that the sales and the production actually show up.

They are involved in a lot of training and that sort of thing.

So overall, as I've said previously, this is a significant cultural change for the Company and I think I'm very encouraged by what I see, somewhat by what we've accomplished so far, but also because of how much improvement we still have in the Company.

And I assure you the team is organized to make sure that that improvement falls down to the bottom line.

In summary, although I'm not going to talk about either NORESCO or the utility today, I really want to reaffirm with even more conviction to you all that I believe at this time, for this Company, and particularly in light of natural gas prices, asset valuations, the general euphoria around the energy business, I'm convinced that our focus -- Equitable's focus on organic and incremental growth is the right thing to do to maximize value for our shareholders.

We have a vast inventory of drilling locations.

And between our developed and our undeveloped position in the Appalachian Mountains, we have the potential to continue to provide attractive fundamental returns for some time without having to rely on an asset or a Company acquisition.

And I think that's a great thing for us.

And we're really happy about it and we're going to continue to pound away at the fundamentals.

With that, I'll turn it over to Phil Conti, who will provide details on the quarter.

Phil?

Thanks, Murry.

Earlier today, Equitable Resources announced record first-quarter 2005 earnings of $1.23 per diluted share.

This represents a 12% increase over the $1.10 of earnings per share reported in the first quarter of 2004.

Later today, we will release our first-quarter 10-Q, as Pat mentioned, which will provide all of the details.

But in the meantime, I will briefly review the performance in the quarter for each of the three business units, as well as discuss some events that occurred subsequent to the quarter end and other items that may be of interest to you.

First, Equitable Utilities.

Our regulated distribution and transmission segment achieved operating income of $62.4 million in the first quarter compared to $56 million in the same period last year.

This increase was despite weather that was 3% warmer than normal and 3% warmer than the first quarter of last year.

We estimate that the warmer weather reduced operating income in the quarter by about $2.1 million.

The largest single factor explaining the quarter-over-quarter improvement at Utilities was a $5.6 million increase in operating income from our storage and commercial activities.

This increase was due to opportunities provided by the highly volatile natural gas price environment in the first quarter and future performance will continue to be a function of our ability to capitalize on market conditions.

Utilities' results in the quarter were also helped by lower bad debt expense, lower insurance costs, and the continuation of the previously discussed lower DD&A expense associated with the determination in late 2004 that some of our pipes have longer lives than previously estimated.

These Utilities expense reductions were partially offset by increased fringe benefit and outside contractor and staffing costs.

It is worth noting that while higher gas prices have a positive impact on the storage and commercial side of Equitable Utilities, as well as on Equitable Supply's revenues, which I'll get to in a minute, they also have a negative impact on expenses at both Utilities and Supply.

At utilities, higher and more volatile gas prices also lead to higher bad debt expense and more conservation, both of which have the effect of suppressing earnings.

Warmer weather, which typically would lead to lower bad debt expense in and of itself, was offset in the first quarter by the negative effect of higher gas prices.

Having said that, we did see a net reduction in bad debt expense of almost $1 million in the quarter as a result of a funding mechanism approved by the Pennsylvania PUC last April.

Collections, which as you know, is a key value driver for utilities, are improving somewhat on the heels of legislation last year in Pennsylvania which allows winter terminations for customers above a certain income level, basically 2.5 times the poverty level, coupled with our new customer information systems that allows us to more easily determine who is eligible for energy assistance programs or for termination and automatically sends out determination notices if appropriate.

Our experience this winter (technical difficulty) 11,000 termination notices, and as a result, collected 95% of the eligible overdue dollars from those customers.

But the dollar amounts are not large at this point, but we are encouraged.

The shutoff period for the larger group of customers that cannot be terminated in the winter began April 1st.

We are in the process of sending out termination notices and expect that we will experience an improvement in collecting overdue balances from that group as well.

I should remind you, though, that there is a lag between improvements in our collection process and income statement impact and we will keep you posted on the progress that we are making here.

Onto Equitable Supply.

Equitable Supply generated $65.4 million of operating income in the first quarter versus 61.5 million in the first quarter of 2004.

Higher sales volumes and higher realized natural gas prices were the primary drivers behind this quarter-over-quarter improvement.

The higher sales volumes are a result of the acquisition early in the first quarter of the remaining 99% interest in Eastern Seven Partners LP, or ESP, as we refer to it.

Sales volumes were up in the quarter by 8% over the first quarter of last year and 18% over the first quarter of 2003.

While these volumes were consistent with our expectations, the slowdown in drilling last year to approximately our maintenance level while we focused on infrastructure and operational improvements, continues to be a bit of a drag on sales volumes in the early part of '05.

We define maintenance level as the number of wells required to offset the natural decline rate of our existing production.

And as you can appreciate, this amount increases as our total production increases.

As I indicated, we also realized an increase in the average wellhead natural gas price to $4.74 per Mcfe in the quarter, which was about $0.24 higher than last year.

As most of you know, we have hedged a significant portion of our expected sales volumes in 2005, which greatly limited our participation in the run-up in NYMEX prices in the first quarter.

On the expense side of supply, total operating expenses were $10.2 million in the first quarter versus the first quarter of last year and $2.1 million higher than the last quarter of last year.

Operating expenses associated with ESP account for about $3.4 million of the increase in each of those comparisons.

Natural gas prices, which as I mentioned, had a positive impact on Supply's revenues in the quarter, also had certain negative effects on operating expenses.

In addition to general oilfield inflation that everyone seems to be experiencing, higher natural gas prices also resulted in higher severance taxes, which move with NYMEX and are independent of our hedge position, and higher property taxes, which are a function of prior-year revenues on an unhedged basis and therefore also moved up with higher gas prices.

You probably noticed in the earnings release this morning that we have replaced the severance tax line item with a line item called production taxes, which includes both severance taxes and production taxes.

We did this so that going forward, you will be more easily able to separate these price-related taxes from our more controllable expenses.

To help in the transition of your models, I should point out that severance taxes represent $4.7 million of the $7.9 million in production taxes in the quarter.

DD&A expense unrelated to ESP was also higher in the quarter as a result of a $0.04 higher unit depletion rate associated with our net development additions in '04 over a relatively constant proved reserve base.

Obviously, development costs and the resulting impact on the depletion rate have also experienced upward pressure from general oilfield inflation.

The balance of the expense increase reflects our strategic decision late in 2004 to focus on improving well surveillance, gather and compression and metering effectiveness as we ramp up our drilling program and shift from a cost minimization strategy as the path toward profit maximization.

Finally, NORESCO.

NORESCO's operating income was basically flat in the quarter at $3.7 million versus 3.8 million last year.

NORESCO did also record a $1.2 million of income from its international power portfolio in the first quarter.

Perhaps more relevant is NORESCO's backlog, which is a leading indicator of near and intermediate financial results.

NORESCO's current backlog of $83 million continues to lag a bit due to delays in completing any significant federal sales since the reauthorization of the Federal Energy Service's performance contract legislation last fall.

We've experienced a slower than expected remobilization of the government's ESPC resource after the reauthorization.

Now onto some other items of interest.

Early in the second quarter of 2005, Equitable sold 1,027,859 shares of Kerr-McGee stock.

These shares represented the last remaining shares that we owned that were not covered by the previously discussed collar transaction.

The sale resulted in pretax cash proceeds of $78 million and a pretax capital gain of $26.7 million.

Proceeds from this sale will be used in the short run to reduce commercial paper outstanding.

Equitable's only remaining stake in Kerr-McGee is the 6 million shares that are covered by collars with an average floor of approximately $53 and an average ceiling of approximately $100 per share and which expire in 2012.

Also in the second quarter, Equitable will complete the consolidation of our Pittsburgh-based office workers into a single building.

We expect that all moves will be completed in May and that we will take a charge in the second quarter associated with early termination of several current operating leases and the early retirement of assets and leasehold improvements at several of those locations.

At this point, we expect that that charge will be in the 6 to $8 million range on a pretax basis.

As previously discussed, we are in the process of selling some non-core Equitable Supply properties located in Ohio and Pennsylvania.

We have a sign, purchase and sale agreement with a prospective buyer and expect to close this asset sale in the second quarter.

This sale will not result in a gain on sale, but instead will lower net property, plant and equipment, resulting in a lower DD&A rate going forward.

We will provide an update with many more details once the transaction closes.

As you recall, the decision to sell these non-core properties was more of a strategic one than a financial one, as we want to focus our efforts on areas where we have more concentrated activities with potentially greater impact to our shareholders.

Having said that, we have seen a significant level of interest in these properties and we will take that beta point as well as beta points from an auction we participated in late 2004 and rumors of multiple Appalachian MLPs hitting the market in the near future all into consideration as we continue to look for ways to high grade the supply asset base.

Moving onto dividends, it is old news by now, so I'm sure all of you are aware that on April 13th, the Board of Directors of Equitable Resources declared a dividend increase from $0.38 per quarter to $0.42 per quarter, representing an 11% increase.

That increase is consistent with our approach of increasing dividends per share going forward at approximately the same rate as our earnings per share growth rate.

I also want to give a brief update on our balance sheet.

When our 10-Q is released later today, you will see a short-term loan balance of $392 million.

Of that amount, $167 million, that is $167 million, represented cash and margin accounts associated with our natural gas hedging program.

That figure fluctuates with gas prices going higher when the forward NYMEX curve goes higher and vice versa.

There is an offsetting asset in our accounts receivable balance, which we net against short-term loans when we think about our "net short debt position."

This view is supported by the fact that we receive interest income on the margin balances, so that the costs of carry of these balances is negligible.

Given that gas prices have fallen a bit since quarter end and taking into account cash proceeds from the sale of approximately 1 million Kerr-McGee shares, our short-term loan balances as of last night was $300 million, of which $140 million was associated with margining.

Finally, we repurchased 290,000 shares of Equitable stock in the quarter, bringing the total number of shares we purchased since October 1998 to 19.3 million out of 21.8 million shares currently authorized for repurchase.

I'll now turn the call back over to Pat Kane.

Thank you, Phil.

That concludes the prepared comments portion of the call.

Nicole, can we please now open the call up for questions?

(OPERATOR INSTRUCTIONS).

Yves Siegel, Wachovia Securities.

Two quick ones.

The first is in terms of the sale of Kerr-McGee stock, can you perhaps just discuss the thought process there and the thought process as it relates to minimizing the tax bite?

And then the second question is Phil, could you just repeat or elaborate on the comments about the Appalachia gathering and MLPs?

I sort of got lost in what you were trying to say there.

Thank you.

Yves, this is Dave Porges.

I'll take the Kerr-McGee part of it and then flip it over to Phil.

The reason for selling the million shares as opposed to collaring it, frankly, was compared to all of the analysis that we had been previously, even as we worked through tax management approaches, suggested that there was -- it looked so much more attractive than what we anticipated, frankly, even less than a year ago when Kerr-McGee acquired Westport in that stock-for-stock deal.

So we just decided it was within the shareholders' best interests to take some of that off the table via sale and turning it into cash.

So that's -- we continue to look at ways to -- further ways -- to manage the tax issue even through the deferral, which is what's going on with the other 6 million shares.

But we can't ignore the fact that the current situation at Kerr-McGee has caused a run-up in the share price and, therefore, we have been in the process of evaluating our alternatives.

And so we're still evaluating the alternatives with regard to the 6 million shares that are in the structured transaction.

We reached the decision about the other million.

But that's the answer, was just to take the cash now.

Dave, how quickly could you convert the other 6 million to cash?

Well, if we needed to convert it to cash, the quickest way to do it would be just to borrow onto the existing facility because that's the way it was set up.

So I don't know, Phil, what would it take?

Probably 36 hours or 48 hours or something?

It's about (ph) 24.

Now, if you mean to tear it up, if that's what we had chosen to do at some point, that's probably more about a multiple day but less than a weeklong process.

But there's other alternatives out there.

It's just that when we talk about what we're looking at, with a price run-up, it's conceivable that one could restructure that transaction.

And that's one of the things that we're winning.

The only time line we've given ourselves is we think -- we obviously need to make -- if we're going to make any decisions, we should be making these conscious decisions before that current tender offer closes, which is in mid-May.

And we're cognizant of that as we look at our alternatives.

And on the Appalachian side, Yves, the only point I was trying to make was late in '04, we do participate in a smallish auction related to properties -- basically the working interest of wells that we already operate.

If we take that data point plus the sort of significant interest in the properties that we're in the process of attempting to sell, as well as some of these rumors that are being thrown around about MLPs in Appalachia -- it leads us to believe that there's a lot of excitement about Appalachian reserves right now.

Okay.

And related to that, where do you stand in terms of optimizing -- if that's the right word -- your gathering fees?

Are they where they should be at this point in time?

Or is there still an opportunity to push the profitability from that segment?

That's a great question, Yves.

Just to back up just a bit, our strategy currently, which differed from the past, is to treat all of these midstream assets, if you will -- pipes, pumps, valves, compressor stations, as a utility, and charge ourselves and other third-party providers an appropriate cost plus return on those facilities.

And in some cases, Yves, that requires some regulatory action and in some cases, these are nonregulated assets.

So as a general strategy, those assets and that business line -- that's why we've got it separated -- has got to earn a return.

And as you can see from the results, it does not do so.

And so what we are -- we are in the process, but not nearly close to being finished with the process, of moving those rates up.

Now, given that there's regulatory issues and complaints of producers and all this stuff, I can't give you a firm timeline on when we will be finished with that.

But it is a high-priority item for the Company.

And obviously, if you look at where we are now and where we might be with reasonable returns, there's some considerable amount of upside in that.

We'll get there.

It just might take a little while.

Not years, but a year or two.

Is that helpful?

Now I got to go back and figure out how much upside we're talking about.

I'm going to leave that to you at this point, because I -- first of all, I can't predict exactly what those rates will be at this time.

For a lot of different reasons.

How much is going to third party right now?

Is that a third or --?

You mean from the standpoint of -- I'm sorry.

From the gathering, how much is your own production versus third party, I guess?

Yes, two-thirds is ours.

One-third is theirs; and I think the total gathered volume last year was about 125 or 130 Bcf, something like that.

But there's room in here.

We're on it.

Wayne Suke (ph), Banc of America Securities.

Good morning, everyone.

It's actually Anatol Feygin.

Murry, can you give us kind of an update as you ramp up the drilling process, I think your guys' goal was about 440 wells this year.

Are you still comfortable with that?

Is there room to do better?

Or should we see organic volume growth really pick up in the second half of the year?

Several questions, Anatol.

One is, in my view, we are ahead of schedule so far.

And you can't -- and because for weather considerations, most of the drilling occurs normally in the second, third, and early part of the fourth quarter; so I'm very pleased with the pace.

As I mentioned to shareholders and I'll reiterate, our notional goal of ramping up to 600 wells is only based on our understanding at this moment of what is possible given the logistics of the system as we know it.

To the extent that we are able to drill more wells, we will do so and we're not putting a capital barrier in place to stop doing that.

So I think this is going to kind of be a little bit of a wait and see on that.

As far as the volumes, as I said in my remarks, I think that the latter quarter, probably most significantly, the fourth-quarter comparisons should be reflecting at least most of this new drilling activity.

And certainly by the time we get into '06, we'll be seeing the impact of these wells on the quarter-to-quarter comparisons.

I think those are the two questions you asked.

Great.

Yes.

Can you guys give us a sense for the properties that -- the magnitude of the noncore properties in Ohio and Pennsylvania, whether that's kind of a production number or reserves or acreage, anything just to give us a sense for size of that?

We're hesitating just a moment because we can't remember exactly what we've said.

I don't believe we have divulged that information to this point, Anatol.

Well the production -- this is Pat Kane.

The production numbers are factored into our guidance of annual sales volumes forecast, which Murray reiterated today.

So that's all baked in.

Yes, if that's what you're getting at, yes, we've anticipated it.

But we have not given a specific -- but we will do so on the data well when this closes.

As Phil said, we'll get more details out to you.

We just can't compromise that at this time.

No problem.

But did Phil say that there has been an agreement entered into or --?

A definitive agreement has been entering into.

We're working toward closing.

We expect it to close in the second quarter.

Thanks, Phil.

And the one just little quick clarification.

You guys have not borrowed anything against the collar floor at this point, right?

Correct.

And it doesn't make sense to do that in order to pay down some of that short-term indebtedness?

We would look at it versus terming -- other forms of terming out.

But I don't think it's a good alternative versus this level of short-term indebtedness we have right now.

Okay.

Thank you very much.

Maybe more broadly -- I don't know if you were asking this question or not, but Phil referenced in his remarks the apparent attractiveness of the Appalachian properties at this point and the number of different kinds of let's say financing alternatives that are sort of being bantered about.

And he did mention that we are taking a serious look at that stuff, but we don't have anything to talk about right now.

But it's been pretty interesting.

That, especially as it relates to MLP formations?

I'm a little bit --

Well, I think it just -- I'm not trying to open a can of worms here.

But these are very, very interesting times for the Appalachian Basin.

And the question is, what is -- we want to drill all of these wells.

We're committed to drill all these wells.

I think Dave and I, Phil, are thinking about well, what is the value to the shareholders of a PDP anyway?

You know?

If we can't add a lot of value to it, what should we do with it?

And so we're just kicking around a whole bunch of ideas given the frothiness of this market.

And much more to come on that.

Thanks, Murry.

Jason Belcht (ph) with Wagner Asset Management.

My question has been already answered.

Thank you.

(OPERATOR INSTRUCTIONS).

Gentlemen, there appear to be no further questions at this time.

That concludes today's call.

This call will be replayed for a seven-day period beginning at approximately 1:30 PM today.

The phone number for the replay is 973-341-3080.

You will need a confirmation code, which is 561-1157.

The call will also be replayed for seven days on our Web site.

Thanks, everyone, for participating.

Thank you.

This does conclude today's teleconference.

You may all disconnect your lines at this time and have a wonderful day.