EQT Corp (EQT) 2007 Q1 法說會逐字稿

Good morning.

My name is Henry, and I'll be your conference operator today.

At this time, I'd like to welcome everyone to the Equitable Resources first quarter 2007 earnings conference call.

All lines have been placed on mute to prevent background noise.

After the speaker's remarks there will be a Q&A period.

(OPERATOR INSTRUCTIONS)Thank you.

It is my pleasure to turn the floor over to your host Mr.

Pat Kane, Director of Investor Relations.

Sir, begin your conference.

Thanks, Henry.

Good morning, everyone, thank you for participating in Equitable's first quarter 2007 earnings conference call.

With me are Murry Gerber Chairman and Chief Executive Officer; David Porges President and Chief Operating Officer; and Phil Conti, Senior Vice President and Chief Financial Officer.

In just a moment, Phil will briefly review the first quarter financial results, and the recently announced deal with Range resources.

Then Murry will provide updates on the pending acquisition of Peoples and Hope Gas Company, CBN down spacing and our horizontal drilling program.

Following our prepared remarks, Mary, 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 our pending action of Peoples and Hope, our pending disposition of interest in the Nora Field and SG&A expenses, and results of our drilling programs, 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 company 2006 Form 10-K.

2007 first quarter 10-Q, that will be released today, as well on our website.

I'd now like to turn the call over to Philip Conti.

Thanks, Pat, and good morning, everyone.

As you saw in the Press Release this morning, Equitable announced first quarter 2007 earnings per diluted share $0.46, that compares with earnings of $0.59 in 2006.

This quarter's results were heavily impacted by reserve associated with the royalty disputes in the state of West Virginia as well as an incremental charge associated with our executive performance incentive program which may mask the fact we had a pretty good quarter from operating standpoint.

Financial results are detailed in this morning's release and 10-Q to be filed later today.

Rather than rehash those results, which are rather straight forward I'll discuss a few select items that were important to our results and then make mention of the recently announced transition with Range resources.

So, starting with Equitable Supply, the main operational story in the first quarter was the continued growth in sales volumes as a result of our expanded vertical drilling program in 2006.

As you saw, sales were up 5.5% in the first quarter versus last year.

In the first quarter, we did spot 104 gross vertical wells, which is ahead of last year, and ahead of our plans on wells that we operate.

We currently have 10 rigs running on our vertical program, and expect to ramp up to 18 or more rigs at the peak sometime this summer.

The progress and sales volumes was offset quarter over quarter comparisons by an 8% decline in wells ahead.

The average NYMEX price in current quarter decreased 25% from the first quarter of 2006.

Expenses were also higher in the quarter, although except for the increase in SG&A, the increase in expenses was expected and is consistent with the ramp-up in activity intended to deliver accelerated sales growth.

As I mentioned, SG&A was higher, about $13.4 million higher primarily from increase in expenses and reserves related to royalty disputes we previously discussed.

You may recall we took a charge in 2006 related to a lawsuit filed against the Company by certain royalty owners in the state of West Virginia, may have also noticed early in the first quarter of 2007, a West Virginia court disallowed the deductions from royalty payments for certain gathering and compression expenses, in the case of Tawney versus CNR.

Well, that defendant plans to appeal the verdict and a number of facts in the cases are different and we thought it appropriate to take an additional reserve this quarter.

Moving on quickly to Equitable Utilities , the utilities segment first quarter results were characterized by higher distribution revenues resulting from weather that was 12% colder than the first quarter of '06 and by higher marketing operating income.

Operating expenses were also a bit higher in the quarter, at utilities versus last year, but the increase was driven by almost $5 million in integration planning cost for Peoples and Hope Gas acquisition.

As I just mentioned, marketing reported a significant increase in net revenues and margin over last year, although we currently expect the full year 2007 marketing results will be basically in line with the full year 2006 results.

Significance source of Marketing's margin comes from the optimization of our owned contracted storage capacity and as an example we plan to take advantage of opportunities to buy gas and store it in lower price market and simultaneously enter into a contract to sell it later at a higher price.

The financial impact of these types of transaction is recorded at the time the gas is sold, typically in the winter months or in the fourth and first quarters resulting in somewhat lumpy reported results.

On the executive performance incentive program, just briefly, Equitable stock rose $41.75 at year-end to $51.57 at yesterday's close, almost 24% appreciation year-to-date.

The increase in share price within the first quarter also improved our relative rank in the peer group of 29 companies that we compare ourselves to in 2005 EPIP program.

As a result of the change in share price in relative rank we change multiple and share price assumptions used to calculate ultimate plan expense.

Because we had to make up for accruing the plan for eight quarters at lower assumptions, the expense for this program in the first quarter of '07 was $25.5 million.

Borrowing another change in assumption the total projected expense for '07 for that program, will be approximately, $49 million.

Finally, a couple comments on the Nora Field divesture as you saw in the announcement last week, April 13, we did enter into purchase and sale agreement with Range to jointly develop the Nora Field the agreement resulted in the sale of 81BCF approved reserves of which over 91% were developed and producing.

You should note that Range already owned a 50% working interest in recently developed, as well as undeveloped reserves, this transaction served to equalize the interest in wells where Range did not already have a 50% interest.

Range also purchased 50% of the Nora Gathering System, as we formed a joint venture.

This transaction is important to Equitable in two ways, as we've mentioned from the beginning asset sales were one of possible sources of funds to finance the acquisition of Peoples and Hope Gas and this range transaction, which again primarily consisted of the sale of PDP reserves the type we had in mind.

The after-tax cash proceeds to Equitable form the reserve sale will be approximately $150 million and the cash contribution from range to the gathering system joint venture will reduce Equitable short term capital expenditure freeing up another, approximately $50 million in cash.

As a result, a portion of these total proceeds will be used to reduce the financing needed to complete the Utility acquisition.

Any additional acquisition financing as we've said from the beginning, will consist of a combination of debt, equity, and, possibly, hybrid securities.

But more importantly, this transaction aligns the two companies' interest as we attempt to aggressively developing this very promising Nora Field.

Sales from Nora are up almost 15% in the first quarter 2007 versus first quarter of '06 and even prior to this transaction, Equitable was planning to drill 247 coal bed methane wells and 21conventional wells in the Nora Field this year.

By taking advantage of range's expertise and resources together we expect to accelerate that development.

With Equitable's at least 18,000 drilling locations in Appalachia we need to stretch beyond our traditional approaches and partnerships like this one with Range are one possibility.

Murry will now discuss in some detail a couple of other avenues we're pursuing to accelerate the development of Equitable significant Appalachian resource base.

With that, I'll turn the call over to

Thanks, Phil, good morning, everybody.

I sort of sound like the Sopranos this morning, I'm sorry about that.

The team here at equitable is really hitting on all cylinders and we're breaking down a lot of barriers, transforming the Company and executing on the growth strategy and I'm grateful for the work everybody is doing.

Today I'm just going to describe a fraction of what's being accomplished here.

First, on the Dominion Hope and People's regulatory approval I did want to update you what's going on.

In Pennsylvania relating to the Peoples portion of the merger the Pennsylvania Public Utility Commission approved unanimously our deal on April 13th, no conditions were presented to us beyond what was offered in the administrative law judge order that had come out previously.

So that is going pretty well.

In West Virginia, relating to the Hope portion of the deal, there are just a few interveners there and the hearings are scheduled for May 7th-11th.

FTC process kind of goes like this, as you recall, March 14, FTC issued administrative complaint challenging acquisition of Dominion Peoples and we're complying with their requirements that they've laid out in that procedural case.

On April 13th, right after the Pennsylvania Public Utility Commission unanimously approved the transaction, the FTC filed for preliminary injunction in the U.S.

District Court here in Pittsburgh.

The District Court judge is aware of the acquisition agreement deadline and has set a schedule design to resolve the preliminary injunction question before June 30.

Any hearing will be held June 4th.

For your information the Pennsylvania Public Utility Commission filed an AMICUS brief with the District Court in support of the transaction this past Monday, the 23rd.

We'll see how that goes.

On the Big Sandy pipeline I'm not going to give too much today.

The project is on track with the targeted phase I start-up in September.

Things are going really well there.

I did want to turn to coal bed methane for just a moment overall the performance of the program is better than expected so far and we're moving forward to expand the drilling.

We're targeting to drill at least 50 coal bed methane infill wells this year and we'll drill as many as we have approval to drill.

Digging a little bit deeper from the initial pilot program, the 16 in-fill wells are producing better than expected.

On the other hand, the declines in the offsetting wells are a little worse than expected, but overall, net-net the program looks very good right now, and we're moving aggressively ahead, with that development.

On to horizontal drilling and spend most of my time this morning talking about horizontal drilling.

I am going to discuss well results in a second.

Before I do that, I want to emphasize to shareholders we're still very much in the research/learning/experimental phase of the program and projections made at this point should be risked accordingly.

Everybody is an adult out there I want to make sure I put the cautionary statement out there.

To put it in perspective when we're drilling only vertical wells our confidence of predicting outcome of a new well had the statistical backing by many thousands of wells that had been drilled in past.

This point, horizontal program we're dealing with a total set of 12 wells that we've drilled in six prospect areas, all in Kentucky.

Having said that, we're well ahead of the expectations and, therefore, are intending to accelerate this program.

As we announce this morning.

Before we get started with the details, I would like to make one comment at well results.

Here at Equitable we don't attribute much value to either reports we get or reports we see of the initial production rates or IPs from wells.

While IP rates are listed as daily rates, usually thousands of cubic feet per day there's actually no industry standard time frame associated with the rates.

Quote, unquote IP rate can be based on time frame of one minute or a fraction of a minute, an hour, several hours, who knows?

Therefore, around here, we like to use the first month's average production rate as our initial data point for referencing well performance.

So while I will report some IPs today, it is just so you can put the Equitable horizontal wells into context with well reports you may be hearing elsewhere.

After today we probably won't report IP values anymore.

Our general observations about our horizontal program, first, well production volumes are greater than expectations.

Number two, we're able to drill longer laterals than expected.

Our current well geometry, what we call our Phase II geometry is a 3,000 foot plus or minus lateral with no casing in the curve portion of the hole.

Our phase one geometry as you might recall was 1,800 foot ladder with the case curved.

Well costs are lower than our original expectations; on a per-foot and a per-well basis.

In fact, costs for our Phase II wells with longer laterals are coming in below what the phase I wells cost.

There has been a very steep learning curve here.

We have confirmed in our own minds the important impact of this new technology simultaneously we are recognizing that we've only scratched the surface in determining the full potential.

These are the specific observations: Of the six prospect areas, one prospect area is so far a little below our expectations.

The results in three prospect areas lead us to believe that they will be at or above our initial expectations, the results in two other prospect areas have, so far, greatly exceeded our expectations.

First, the Tip Top prospect.

This prospect area is the only one that is below our expectations so far, based on results from one of our so-called phase one wells.

But we have haven't given up.

Tip Top is an area and little economic propension for vertical drilling in shales.

The area does, however, have some very good potential in shallower zones, but the good wells in those zones are distributed sporadically and the play is unprofitable due to high failure rates.

Our current theory for Tip Top is to use our Phase II geometry to make profitable lower Huron shale wells so that we can afford to access the occasionally prolific Lee Max and sands that are shallower, when they work these sands produce wells reserves with a half to one BCF.

We just finished drilling a Phase II well in Tip Top and drilled 39,50 feet laterally in lower Huron and the well is currently being stimulated.

Moving to the Hazard area we have four wells in the Hazard prospect area representing largest data set so far.

First two wells in Hazard were drilled with phase I geometry and last two were drilled with Phase II geometry.

You may remember from the last call, that the first two wells drilled one above the other, to tap the lower Huron and Cleveland shales in separate well bothers.

Fracturing of both wells caused unanticipated communication between the both well bores are we currently both of those zones from one well.

The Hazard number three well was drilled with Phase II 2,856 feet laterally in the lower Huron and was stimulated with the nine stage frac with a Packer's Plus System.

The well cost $1 million to drill and complete.

I feel the well was 1.4 million cubic feet per day and first month's average is expected to be 425,000 cubic feet per day.

The Hazard number four well also a Phase II well, was drilled 2,434 laterally in the lower Huron and is awaiting stimulation.

It was flowing 480,000 cubic feet per day while drilling.

So it, also, looks very good.

For reference, vertical wells in the Hazard area typically have first month average production rates of 80,000 cubic feet per day and cost $350,000.

I'm going to take a drink of water.

Hang on for a second.

Okay.

In the Jenkins and Tilford areas we have drilled four wells all with the phase I geometry.

We experimented with stimulation mechanisms in this area including straight nitrogen fracs and the use of the Cobber Max Completion System.

IPs and first month production rates in the two prospect areas are consistent with the Hazard phase I wells and we're in the process now of developing some locations to apply the Phase II geometries and are anticipating improvements similar in these areas to what we saw in Hazard.

That's a positive.

Now I'd like to talk to you about a couple of surprises.

First well in what we call mates one prospect was drilled with Phase II geometry 3,425 laterally in the lower Huron.

During drilling we encountered very high natural gas flows.

Based on these high natural flow rates, we decided not to fracture the well as we'd normally do instead decided to turn it in line to pipeline system as unstimulated open hole completion.

The well had an initial production rate of 1.5 million cubic feet per day.

First month production averaged 823,000 cubic feet per day.

The well cost $700,000 to drill.

Obviously, the lack of need for initial stimulation on this well was a very pleasant surprise.

Another surprise came in our Republic Steel prospect area and in this area we made our first attempt at re-entering existing an vertical shale well to see if we could beef up production by extending the well horizontally.

At the time of the re-entry, lower Huron vertical well was producing about 5,000 cubic feet per day.

The well had never in its life shown a monthly production rate above 30,000 cubic feet per day.

We re-entered the hole and plugged the old-producing zone and kicked off and drilled 3,761 laterally.

Surprisingly, the natural flows from this well were very high.

So high, in fact, we decided to complete the well, again, as an unstimulated open hope completion.

The IP of this well was 880,000 cubic feet per day.

We don't have enough data to project the first month yet.

The well cost was $578,000.

Obviously, at this cost, and with production increasing more than two orders of magnitude, the well is shaping up to be a great success.

Those are the specific observations so far.

Just some sort of learnings here, I -- we've -- we've drilled wells in Kentucky and six of 11 prospect areas, as I said five of the six are successful.

We have not yet tried drilling horizontally in West Virginia or Pennsylvania but we intend to do so this year.

We have not tried horizontal drilling in other geological formations yet.

We intend to do that, too.

We've made progress but we have not yet optimized our drilling or completion techniques.

We're considering, for example, monthly lateral wells, particularly in areas where well stimulation seems not to be required.

We've not yet added a up-hole completion in the vertical portions of wells.

These completions could be significant volumetric add-ons in some areas.

Obviously, we need to get more data to understand the extent of the opportunity for re-entry of existing wells.

That's, obviously, could be very exciting.

We also need more data to assess the extent of the region in which wells might be able to be completed with out stimulation and we also need to test how much better the wells can be -- can perform if we do stimulate them anyway.

On the decline curve, as I said, I think, early indications are quite encouraging.

But more time is necessary to verify the statistical variance in decline curves we just don't have a lot of data, obviously we need the data.

At this time, we don't feel any need to alter the curve we've previously distributed.

So we're going to work with this as our working hypothesis right now.

While the results from these initial horizontal wells are quite interesting our biggest job now is to understand the speed with which this technology can be used to grow gas production and sales.

But this involves more than a plan to wrap up horizontal drilling.

For example, we're currently analyzing the mid stream implications of success in the horizontal drilling program.

Implications are wide ranging and will likely lead to more investment opportunities for Equitable in this part of our business.

Overall, as I said, we're encouraged about this horizontal opportunity.

I think the voice is just about run out.

So I'm going to turn the --actually, already run out.

I'm going to turn the call back over to Pat Kane and we'll take questions from you all.

Thank you, Murry.

That concludes the comments portion of the call.

Henry, could we please open up for questions?

Thank you.

At this time, I'd like to remind everyone --(OPERATOR INSTRUCTIONS) Your first question is coming from Shneur Gershuni.

UBS.

Please go ahead.

Hi, good morning, guys.

Murry, you gave out a lot of great detail on the horizontal drilling program.

I sort of just wanted to stitch it together a little bit.

Given the results that other operators in Appalachia have been experiencing, I guess, seen similar rates that you've seen or at least the encouraging rates, combined with the rate, with your recent successes, could we expect that the, you know, after tax PB-10 that you are initially modeling would probably increase based on some of your most recent results?

Or is it too early to make that call?

I -- if -- what we have seen so far continues, then, yes.

Do you -- would you be able to comment on the magnitude?

I'd rather not do that at this point.

We only have 12 wells.

But, but we'll talk more about that at the next call.

Or the one after.

Okay.

And if I can just clarify some of Phil's earlier comments.

With respect to -- he said that on a go-forward basis, that you would do a mix of debt-equity and hybrid securities for acquisitions.

Given the transactions that have most recently occurred and so forth, do you expect that you would need to still issue equity to complete The Peoples transaction assuming it is approved?

Like I said in the comments, certainly the proceeds we'll get from the Range transaction will reduce the total amount of financing that will be required, external financing, if you will.

But at this time, we're not going to say much more than that.

Great.

Thank you very much.

Thank you.

Your next question is coming from Sam Brothwell of Wachovia.

Please go ahead.

Hi, good morning.

Hey, Sam.

Murry, I hope your key man life is paid up.

I think this is temporary.

We hope it is.

I wanted to see if you could, maybe, just remind us a little bit on how this EPIP works and how we should think about anticipating it.

I'm looking at my screen right now and imagine you're probably having to recalculate it.

If you could give us a little bit more on that?

The other question, royalty dispute, probably minor, that at all likely to impact the margins on go-forward basis.

I'll take the second part and give a l- give a little philosophy on EPIP and then Phil will give some of the details on the EPIP thing.

Sam, it could to some extent.

These are post-production costs.

Not to put too fine a point on it, but these costs have always and have traditionally been subtracted from the royalties.

This is a case of a rule change -- change in the rules along the way.

Exactly what it is.

It will put a little bit of -- could put a little bit of a change in margins assuming this thing doesn't win out on appeal.

It could have that impact.

But I think, as I've said a lot of times, in the past, it -- and, you know, going back to my Shell days, even, not so much that we might see in our industry high prices, the question always comes up, how much of that margin will we actually retain in earnings?

And I think the Tawney case is a call back that occur on occasion when the margins get to be as high as they are.

I don't think I'm prepared to calculate a number for you on that right now.

It is not that significant.

But it is certainly a disappointment that they can change the rules along the way.

We'll keep you informed a little bit more about that.

On the EPIP, generally speaking, you know, we've had a program here for a number of years to incent a pretty large number of top executives.

Based on relative share price performance, over a period of time, as well as on absolute return on total capital, which have been the two guiding lights, at least for me, while I've been here running the program.

You know we've done it through performance-restricted shares.

Those shares can pay out at zero; assuming we don't meet certain benchmarks and relative performance ROTC and range zero up to maximum two and a half at this point in time times par value of award when we gave it to the executives.

That's the general state.

I don't know, Sam, anything more than that?

Because, Phil can give you more details on the -- on the amounts.

Yes.

You know what I'll do, I'll follow-up offline and not take a lot of time.

Okay.

Thanks.

Thank you.

Thank you.

Your next question coming from Carl Kirst of Credit Suisse.

Please go ahead.

Good morning.

Hey Carl.

Murry, first off the horizontal program here going forward, next 44 wells the next three quarters, is the idea to continue looking at the remainder of the 11 prospect, other five we haven't looked at yet?

Or are we doing more well control in kind of the, perhaps, areas of hazards and like giving great results now?

Carl, the answer is both.

Obviously, as the results come in we're sort of modifying a little bit.

I think it is fair to say the next batch of wells, you know, this whole program this year, fifty, plus a bunch more are still going to be wells that are tested new geologies probably testing some different completion techniques.

We've made a lot of progress on drilling geometry and do more there as well.

I think you're going to hear quarter to quarter, hear us discussing new experiments and simultaneously branching out into other geologies and also refining techniques to try to get the most out of these wells we're not, although the wells' results are very interesting, I wouldn't say we're committed to specific standard operating procedure yet.

We are far from that.

But, boy, I tell you, got a lot to work with.

Great.

You know, with respect to the rundown that you kind of gave us of the wells already, gave us good estimates of, you know, what the initial production is, what the costs are, understand kind of jumps the gun a little bit, because, you know, we don't really know with a the long term decline curves here are.

But you know here to fore we were looking at .5 to 1.0 on average EURs, for horizontal wells.

Can you update us on what your current thinking is?

Recognizing we really don't know the term of the decline curves are here yet?

I think what I do at this point, Carl, is to just say, you know, we're for the really changing that curve that we included in the investor package most recently.

And which I think is the document that you're looking at this point in time.

We decided today we're not going to update that right now.

We'll update as we get a few more wells behind us.

Okay?

Fair?

No, no, no just fine, just writing.

And -- no, okay.

That's fine.

That's my questions.

Thank you.

Good, thank you.

Thank you.

Your next question from Raymond Deacon of BMO Capital Markets.

Please go ahead.

Murry, I had a question about, you know, you show the Marcel shale and said you haven't tested any well there yet in Pennsylvania.

But I guess, do you have a feel, based on other's activity how much of the Marcel acreage could be perspective for Marcel's?

We have 115,000 acres in the Marcel's trend.

I don't know how much of that is going to actually turn out to be perspective yet.

Going to try to test that this year.

Okay.

About 115,000 acres in that trend.

Right.

Okay.

Got it.

And, I guess, as far as just a numbers question on the realized gas price, was there anything unusual in the quarter that impacted your realizations negatively and recurring, I guess?

I don't think so.

Really, mostly driven by lower NYMEX and slightly lower basis versus last year.

Got it.

Okay.

Thanks very much.

Thank you.

Your next Shneur Gershuni of UBS.

Please go ahead.

Hi, one follow-up question.

I missed some of your comments earlier about the schedule for the judge with respect to the FTC comment, and so forth, that they're aware of deadline.

If you could repeat them?

Hearing would be June 4, if there is a -- if there is a hearing.

If there is one it would be June 4?

Yes.

Basically the judge is aware that there is a merger agreement deadline and we'll try to work accordingly?

It is fair to say from the -- I wasn't in the room, the people that were there said that the judge was very cognizant of this deadline and trying to work with that deadline.

It -- I wasn't there, that's what they told me.

Okay.

Great.

Thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question from Carl Kirst of Credit Suisse go ahead.

Quick follow-up, guys, as if not enough going on, Murry, do you have any updated thoughts on how Equitable wants to attack the Trenton Black River.

I really haven't.

I am watching what Aubrey is doing and hopefully he will be real successful on that.

I know they've done a bunch of 3-D.

At some point, depending on what he finds, I think we're going to have to get into that play.

Somehow or another.

As you know in the past we've been trying to think of ways to get into that we don't really have the seismic expertise at Equitable.

Beyond that I really don't have anything to say.

I hope he's real successful.

Fair enough.

Thanks, guys.

Thank you.

There appears to be no further questions at this time.

I'll turn the floor back over to your host for any closing statements.

That concludes today's call.

The call -- concludes today's call the call will be replayed seven days beginning 1:30 p.m.

Eastern time today.

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

You will need a confirmation code, which is: 8104542.

The call will also be available for replay on a website for seven days.

Thank you, everyone, for participating.

Operator?

Thank you.

This ends today's teleconference.

You may now disconnect your lines at it time.

Have a wonderful day.