EQT Corp (EQT) 2008 Q1 法說會逐字稿

Good morning.

My name is Rose and I will be your conference operator today.

At this time I would like to welcome everyone to the Equitable Resources first quarter 2008 earnings conference call.

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

After the speakers' remarks there will be a question-and-answer period.

(OPERATOR INSTRUCTIONS) Thank you.

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

Pat Kane.

Thanks, Rose.

Good morning, everyone, and thank you for participating in Equitable's first quarter 2008 earnings conference call.

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

In just a moment Phil will briefly review a few topics related to the first quarter of financial results, which were released this morning, our hedging strategy and financing plans.

Then Murry will provide an update on our drilling program, corridor construction and other Midstream projects.

Following Murry's remarks we'll open the phone lines for questions.

First, I'd like to remind you that today's call may contain forward-looking statements related to such matters as our well drilling program, infrastructure development initiatives, reserves, tax position, financing plans, growth rate and other financial and operational matters, including the daily sales volumes.

Finally, 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 2007 form 10K, the first quarter 2008 10Q that will be released today, as well as on our website.

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

Thanks, Pat, and good morning, everyone.

This morning Equitable announced first quarter 2008 earnings per diluted share of $0.57, which compared with earnings per share of $0.46 last year.

The increase in earnings resulted from higher realized natural gas and natural gas liquids prices, as well as higher natural gas sales volumes, gathering rates and storage related margins.

In addition, during the first quarter of 2007 we incurred costs related to the royalty matter and legal issues and to the terminated LDC acquisition, the details of which we've provided in the past.

And of course those did not reoccur in the first quarter of 2008.

Those expenses from '07 were partially offset in the current quarter by higher operating and incentive compensations costs, which were detailed in this morning's press release.

In addition to higher earnings, operating cash flow was also up in the current quarter by about 84% due to higher sales volumes and realized prices.

And I'll go more into those in a moment.

But more importantly due to lower current taxes resulting from increased deductions associated with our ramped-up capital expenditure program.

As we mentioned on the fourth quarter call, those are primarily intangible drilling costs on the drilled wells and accelerated depreciation on our infrastructure investments.

Otherwise, I think the quarter was a pretty straightforward one and our view is that it was a very solid quarter for the Company both financially and operationally.

I will briefly hit a couple of important highlights for the quarter and then Murry will give a more comprehensive operational update.

Although we did issue an 8k on March 7th, presenting our annual results in the three segments format for the past three years, this is the first quarter that we are presenting our operational results in the three business segment format.

We will also issue another 8k later today showing the breakout by quarter in the three segment format for calendar year 2007.

You can refer to those documents for additional detail, but I thought I would point out a couple of items that may be of interest under the new three segment structure.

First, with regard to the Nora transaction last year, the sale of Nora assets to Range in the second quarter of 2007 impacts quarter-over-quarter comparisons for both the Production and Midstream segment.

For the Production segment we reported sales volume growth of approximately 2% over last year in the current quarter.

Normalizing for wells sold to Range, we think, provides a clearer picture of our sales volume growth, and after making that adjustment sales actually increased by 9% over the same quarter in 2007.

The sale to Range also impacted reported results at Midstream.

The revenues and O&M expenses related to the operation of the Nora gathering system, as well as the gathered volumes that were reported in last year's results, are no longer included in Equitable's operating and financial results.

Although there is a net negative variance in operating income as a result of the sale, the earnings associated with Equitable's remaining interest in Nora Gathering LLC are reported below the line, if you will, as equity and earnings and those totaled about $1.2 million this quarter.

A quick note on average well-head prices.

Average well-head price was 18% higher than last year's first quarter.

While the reported sales volumes are on a comparable basis in the release, bear in mind that prior to the shift to three segment reporting, the natural gas liquids price was included in the average well-head price at the Production unit.

Now Production contracts with Midstream to produce -- to process the gas and take the liquids price risk.

Midstream pays Production for its Btu's based on the natural gas price.

In the first quarter liquids prices were also very strong, up by 49% over the first quarter 2007.

This incremental revenue was recognized at Midstream as gathering and processing revenue.

One other quick note on Midstream, the other income line, which was $3.4 million in the current quarter.

This other income represents returns allowed on FERC projects that are still under construction, in our case the Big Sandy project, and this other income will be replaced by Midstream revenues and expenses associated with Big Sandy in future quarters.

I wanted to spend just a minute discussing our hedging strategy.

As you know, we plan to invest approximately $1.2 million in drilling and infrastructure in 2008.

The expected returns based on market prices are well in excess of our cost of capital.

That said, a significant portion of that CapEx is price sensitive, as returns can be impacted dramatically by wide swings in commodity prices.

As you know, this management team has been and continues to be committed to generating a return on capital investments that is greater than our cost of capital.

And consistent with that objective, we've recently added to our hedge position by entering into a series of cashless collars, and let me give you some volumes.

We did about 1.5 Bcf for the remainder of 2008, about 12 Bcf for 2009, around 10 Bcf in 2010, around 9 Bcf in each of the years 2011 and 2012, about 8 Bcf in 2013 and about 3.5 Bcf for the years 2014 and 2015.

Those transactions have floors that averaged approximately $7 in caps that were in excess of $15.

We did choose cashless collars -- by the way, those transactions that we put in place in the table that you saw this morning had the effect of lowering the average floor and slightly raising the average ceiling on the cost with collar section of the hedging section.

We chose cashless collars with a fairly wide spread, as our objective is not so much to reduce volatility but instead to secure our return commensurate with our cost of capital, while allowing for significant upside from there.

In addition to balancing our strategic and financial objectives, cashless collars have the added benefit, at least versus swaps, of somewhat reducing counter-party credit risk as well as reducing the need to post cash margins.

In conclusion, I'll give a quick update on financing.

In March, you probably saw we completed the first phase of our 2008 financing plans by issuing $500 million in 10-year senior notes with a coupon of 6.5%.

The proceeds from that transaction were used to paydown our short-term debt balance resulting from increased capital expenditures over the last several quarters.

In fact, you will see in the Q released later today that our short-term debt balance at 3/31/08 was $12 million, which is down from $450 million at year-end.

The remainder of our 2008 capital plans will require us to raise approximately $700 million in additional capital between now and year-end.

We have stated in the past, we think it's advantageous to remain an investment-grade credit rating, albeit at a significantly lower investment-grade rating than the Company had maintained in the past as a result of our changing business mix.

Therefore, we will most likely issue a mix of common equity in addition to more debt to meet the balance of our needs in 2008.

With that, I'll turn the call over to Murry.

Thanks, Phil, and good morning, everybody.

I wanted to give -- I intended to give a relatively short operating report because it's only been a month and a half since we had our analyst meeting, but it turns out there is quite a bit to talk about so this will be a little longer than I had planned.

First, I just wanted to give a sort of a up-to-date report on the drilling in total and the horizontal drilling beyond what was reported in the release for the quarter.

Total drilling year-to-date, Equitable has drilled 188 wells, of which 99 are horizontal.

For those that are counting, that would be me, particularly, we've drilled a total horizontal wells so far in the Appalachian Basin of 193.

We're well along in this horizontal drilling program.

As was noted in the release, based on the rate at which we are drilling wells this year, horizontal wells, we're raising our expectations of horizontals from the previous estimate of 250 to 300 to greater than 300.

Currently we have 17 rigs running in the Appalachian Basin, three are coalbed methane, two are deep vertical, that is Marcellus/Utica, which I'll get to in a minute, and 12 in the horizontal play.

We expect our rig count to increase to 22 rigs.

We'll be adding one coalbed methane rig and four more for the horizontal program.

Let's move on to the P3 reserve development portion of the presentation, the impact of horizontal drilling to that P3 reserve development.

Remember that more than 72% of our P3 reserves are classified as coming from Devonian shale.

At this point those shale reserves are entirely from low pressure shales, predominantly the lower Huron shale.

As I said before and upon which I'll elaborate later, there are several other prominent zones we're testing, but the reserve potential for all these other zones are currently included in our emerging play categories.

Certainly there's more to learn about how to drill and complete the lower Huron shale, particularly as we apply new well geometries and improve our completion effectiveness.

But all that being said, you should know that we now consider the lower Huron play to be bread and butter in the sense that numerous wells have been drilled, they're hooked up to a pipeline system, they are producing and we're selling the gas.

Now the infrastructure system is not in the greatest shape, but I'll talk more about that later and we've mentioned that on previous calls.

Drilling to date in the lower Huron continues to confirm both the economics of our horizontal drilling play and the decline curve we had previously published.

As a side note perhaps to our tight curve, the economic assumptions that we've included for gathering rate in those models are about $2 per Mcfe, which is a conservative assumption given the number of wells we're drilling and intending to drill, and the fact that this gathering rate assumption presumes no gathered volumes from third parties.

We believe the ultimate gathering rate will be lower than we are currently assuming and we are working on quantifying that and we'll be talking about that more this year.

As another note, but highly relevant to how we think about our P3 reserves, of the wells we drilled in the first quarter, 63% were drilled on locations classified in our most recent reserve report as unproved.

In short, we continue to be encouraged by our bread and butter play in the lower Huron from a reserve standpoint, from a technical standpoint and from an economic standpoint.

Let's move on to the emerging plays.

To remind everyone again, EQT has not booked any reserves into our 3P inventory for any of the plays I'm now going to discuss, other than minor amounts that may have come from the few completed wells drilled last year in these plays.

Let's take the extension and reentry category first.

I want to talk about the Berea first.

We had quite a surprising and pleasing result from our first three Berea wells.

The Berea is a Devonian sandstone, usually a pretty tight sandstone.

After a little rocky start on the first well, where we had difficult drilling in the upper Berea, we changed drilling geometry and moved down in the formation to drill our second and third wells.

The flow rates from these next two wells are impressive.

30-day production rates for the second well -- 30-day average production rates, which we consider IP around here, by the way.

Our 30-day IP was 1.9 million cubic feet per day and flow rates from the third well 30-day IP was 2 million cubic feet per day on average.

Obviously that's a significantly larger than most of the other wells that we've drilled.

The first well, by the way which we had the trouble in, was about 0.12 million cubic feet per day.

It's too early to estimate reserves for these wells, as the decline curve for the Berea is expected to differ from the shale type we have given you.

We'll need a few more months of production to make an informed decision on the reserves.

The completed costs for these wells, these Berea wells, were a little higher than for our shale development wells, about $1.4 million to $1.5 million.

The Berea drills a bit slower, it is a sandstone.

The formation where we are drilling is a little deeper than normal, normally where we have drilled our shales, and the well requires a slightly deeper casing point, casing set point before we kick off for the horizontal.

Anyhow, the results from the Berea stimulated us to begin testing other collateral unconventional targets in zones that you have not yet heard about.

Among those zones are a couple of other Devonian siltstones and fine grain sandstones called the Benson and Gordon, as well as some other Mississippian sandstones, siltstones and one limestone, the Weir, Big Line, Maxed In and Raven Cliff.

We'll be drilling up to 30 more Berea wells this year and we'll drill a number of wells into these other collateral zones.

That's pretty interesting.

On the multilateral we drilled our first multilateral.

We drilled it in the lower Huron in Kentucky.

It's both successful and profitable.

The well cost was $1 million, a little higher than we thought but we had a pretty expensive pipeline to put in at this location.

First month IP was a little less than 300,000 a day, obviously this was a naturally flowing well.

The first multilateral was drilled in the Hazard area of Kentucky, where we've had good success with fractured single leg laterals, but few naturally flowing horizontal wells, so the result from this first try are encouraging.

We're going to be drilling a number of multilaterals in other areas of Kentucky this year.

In particular, we're going to drill some more in areas where we have previously had a higher percentage of naturally flowing lower Huron wells from our single leg laterals.

Also, we do expect to spot our first stacked multilateral this summer.

On the Cleveland, year-to-date we've spud nine Cleveland shale horizontal wells and a total of 17 since the beginning of the program.

The Cleveland was interesting because 45% of the wells that we had previously drilled have been natural completions.

While profitable, the aggregate of the Cleveland wells are declining somewhat faster than the lower Huron.

We believe this is because we're draining the natural fractures but are not accessing the matrix porosity effectively.

We plan to reenter the natural flowing Cleveland wells to frac them and expect to drill up to another additional 50 horizontal wells in the Cleveland this year.

On reentry, I just want to reiterate what we mean by reentry.

The reentry play encompasses approximately 4700 existing 80-acre units that have been previously penetrated by a vertical well.

The new activity that we may carryout at one of these reentry locations could be real reentry of an old vertical well with the additional drilling of a new horizontal leg or it could be drilling of an entirely new horizontal well or wells drilled from the same location.

In any event, as I mentioned previously, the opportunity in the reentry play comes from reserve additions due to increased recovery efficiency from horizontal drilling and not so much from the efficiency of reentering an old vertical well.

We have spud 17 wells in the reentry play to date, two last year, 15 more this year, including one of the two highly productive Berea wells that I just mentioned.

That was actually on a reentry site.

As a matter of fact, in that particular location where we drilled the Berea well, we now have stacked single leg horizontal wells, one in the Huron and one in the Berea.

In summary, we are working the extension and reentry category of our emerging play inventory very hard and hope this report gives you a sense of where we are headed and what we've done so far.

To reiterate, horizontal drilling on our extensive acreage position in Appalachia applies to multiple zones.

At this point, as you can tell from my comments, the inventory of possibilities continues to increase.

Moving on to the Marcellus and Utica, we have TD'd our first high pressure horizontal Marcellus well in Green County, TVD of 7700 feet, measured depth of 10,665 feet.

This well is currently awaiting stimulation, which is scheduled later this month.

As we have said previously, we're building a pipeline to this Green County location in order to have the ability not only to test this well, but also to hook it up to a market so we can gather much-needed production data.

You may also recall our intention to drill a second horizontal well in the Marcellus from this very same Green County location.

And it is still our intention to do this, but we've called a bit of an audible along the way.

As a result of work we're doing on the Utica shale, we believe the Green County drilling location, where we drilled that first horizontal Marcellus, is also well suited to test the Utica in addition to the Marcellus.

We decided to go ahead and deepen our second Marcellus test well and take it all the way to the Utica.

The well is now targeted for 13,600 feet.

The Utica is anticipated to be about 350 feet thick here.

Current status of the well is that we're drilling ahead at 10,800 feet.

After we've finished this vertical Utica well, we will complete, test and hopefully produce both the horizontal Marcellus well and the vertical Utica well at the same time.

If the Marcellus and Utica both work, which we hope they will, we'll go ahead and drill at least one more horizontal Marcellus well from this same location.

Our intention is to drill at least one more Utica well this year at a different location.

We are currently drilling a vertical Marcellus test in Wetzel County, West Virginia.

We expect to frac that well later this month.

We anticipate drilling at least eight to ten horizontals and six vertical Marcellus wells in 2008.

These will be spread across our Marcellus acreage in order to identify the best areas for development.

That's really all I wanted to say about the emerging play categories at this time.

I wanted to move on just briefly to the Midstream and really just a very brief report here.

The May King has approximately 25 of the 36 miles of phase I pipe constructed, that's good.

We're expecting a third quarter turn-in-line.

That's not news.

On Langley we're still on track for a third quarter turn-in-line.

That is not news.

And Big Sandy is commissioning.

As side note, you'll recall that we've had very good growth rates from our Virginia operations in the past few years.

This growth is facilitated by Equitable's having constructed sufficient infrastructure in Virginia to carry our increased gas production from those coalbed methane wells to the market.

Growth rate for Virginia was about 18% this first quarter versus the first quarter of 2007.

Obviously, as we've said many times, infrastructure matters.

But this kind of growth from Virginia is an encouraging sign that will hopefully translate to increased sales growth in Kentucky and West Virginia as new construction comes online this year.

Lastly, given the continued success of the drilling and the progress made on the Midstream build, we're becoming more confident that the sales growth rate in our Production segment for the next five years will easily exceed our 12% forecast.

As we continue to demonstrate sales growth progress this year, we will be providing you with a more specific growth rate forecast.

And that really concludes my remarks.

And I think, Pat, we'll turn it back to you and then open it up for questions.

That concludes the comments portion of the call.

Rose, can we please now open the call up for questions.

(OPERATOR INSTRUCTIONS) Gentlemen, your first question comes from the line of Scott Hanold of RBC Capital Market.

That was a lot of operational update.

I just want to kind of hit a couple points just to kind of clarify some information on the Marcellus wells.

What is your total high pressure Marcellus drilling program look like this year?

We're hoping to drill eight to ten horizontals and another at least six, at least, verticals this year.

Those are all high pressure.

Yes, right.

Are you -- when you kind of talk about some of the West Virginia wells, are those still in the high pressure zone or did some of those get to more of the lower pressure?

The ones I mentioned -- right, we're drilling a well in Wetzel.

That's a high pressure Marcellus well.

To answer your question, the northern portion of West Virginia, as best we understand all the data, a significant portion of that -- well, our acreage in that northern West Virginia segment is in the high pressure Marcellus which -- so the answer to your question is yes, because wells are being drilled in high pressure Marcellus.

Okay.

Got it.

When you -- so the first horizontal Marcellus well that you're going to be stimulating next month, was that the one that ended up being drilled in the Hamilton and you will frac down in the Marcellus?

Yes.

Yes.

Right, that's the same one.

We're still -- again, the delay there is just waiting to get on pipeline -- getting a pipeline there.

Of course, we took this -- as I said, we called this audible to drill that second well deeper to test the Utica at the same time.

And when you talk about potentially producing both the Marcellus and the Utica, considering the difference in depth, do you perceive there be potential like pressure issues?

There are going to be two separate wells.

They're two separate wells.

Got it.

Okay.

So the second well would be another horizontal into the Marcellus.

No.

Just to review, the first well is a horizontal into the Marcellus.

The second well at this point is a vertical into the Utica.

That's where we're headed.

We'll frac and complete both of those wells.

So, one will be horizontal, one will be vertical, see how it goes, and produce them, if they work, we'll produce them into the pipeline at that point.

Beyond that though, if the Utica doesn't work, we'll just back off inside of that current vertical well and then drill out a horizontal Marcellus well through that same exact hole.

That's one of the reasons we did this here is we sort of get a relatively cheap look at the Utica with this well.

If Utica works, we'll produce it.

If it doesn't work, we'll back off and drill a horizontal Marcellus.

If the Utica does work, we'll go ahead and drill a third well here.

The third well will be a horizontal Marcellus well.

Hope that clears that up.

Yep.

Nope.

Understood.

If the Utica does work, would that move up sort of the timeframe of drilling that second one, the second Utica or that'd still be more -- ?

No, we're going to drill the second one anyhow.

We are just getting permits and going to drill -- a number of wells need to be drilled in that place.

One well's not going to tell a story one way or the other.

Okay, fair enough.

And then going to those multilateral wells, I guess you got that 300-day type of rate without a frac.

Can you kind of give us a sense of what do you all think of the plan on sort of the multilateral would be at this point?

How do you sort of position them relative to your portfolio?

Where would you still want to try to focus this?

Or is that still something that's in testing mode at this point in time?

I think it's still -- I would consider it still in testing mode.

I mean, the fact that the first one's profitable is a good thing.

But we don't know whether that technology is going to be best applied to areas where we previously had no natural flow so that we could actually reduce the cost of accessing gas from where we would have otherwise drilled a single leg fractured multilateral.

We don't know if that's going to be the biggest benefit of multilateral or whether the biggest benefit will come from drilling in areas where we have had naturally flowing single leg horizontals.

And by drilling a multilateral, we would be able to increase the flow rate substantially.

I think there's a lot of experimentation to do here.

And sort of like the space program, Mercury, Mercury through Apollo.

We're sort of on the Mercury side of that right now.

Okay.

One last question, I'll let somebody else ask a question.

Obviously you maintained your year-end production target and I guess officially move your sort of long range, although you did indicate there's upside to that.

It's drilling a little bit more than 300 wells this year.

Do you anticipate sort of some a little bit more uplift here by year-end or are you still sticking kind of with that 235 number?

Well, yes, again, the 235 -- we're not changing the 235 number.

So let me be clear about that first.

But I think Dave and I have always said that both the 12% long-term growth rate and the 235 short-term rate are milestones.

I don't want to move those goalposts until we start to see real results coming from increased production in sales that will come when, we believe, when the infrastructure is in place.

So I'd rather not move those goalposts yet until we see a bit more.

The reason I've said that I felt we could go beyond 12% is because we're seeing just so much more opportunity here.

And we had a pretty good first quarter.

The 9% is a pretty darned good growth rate.

We're feeling a little better.

But I did not give you a new long-term growth rate.

I'm not going to change that 235 today.

All right.

Fair enough.

Thank you, guys.

Your next question comes from Shneur Gershuni from UBS.

Morning, guys.

Just a couple of questions here.

Just with respect to the Marcellus well that you've drilled, have you been able to figure out the thickness of the pay for that well and is there plans to shoot and sort of seismic and so forth?

Well, we know how thick it is.

I just don't know the exact number right off the top of my head because we -- we cored the second well, by the way, which is right next door.

I just don't have the number off the top of my head.

But you hit more than 100 feet or -- ?

Yes, it's about 100 feet I think.

A little bit more.

I just don't know the exact number.

Okay.

And then just to follow-up on the previous caller's questions about the drilling program and so forth.

Can we assume that you're going to want to maintain the type of pace that you're moving at, give or take how fast you can drill, but sort of the same rig program for next year and so forth?

And so I guess my question would be that I'm assuming that you'd have a similar capital need.

or maybe not as much as this year, but you'd have similar capital needs for next year and would you anticipate coming back to the market for more capital to fund next year's program or are you planning on expanding the program even further and so forth?

Those are two separate questions.

I'll take the first one first.

We're not satisfied with the pace of our drilling program yet.

We think we're doing a great job ramping it up.

But Dave and I both want to increase it as much as we possibly can.

I think we've been pretty clear about that.

So at least on the drilling development side of the capital equation, we're hopeful that we'll have enough -- more permits and places to drill so that will go up next year.

Absolutely.

As far as funding, I think Phil's kind of given you the party line on that.

We don't really have much more to say on financing at this point.

Okay.

If I can just turn over to one just operational question.

You recorded $42.5 million for this quarter.

Clearly that had to do with the outperformance of the stock and so forth and the changes in the assumption.

Can you quantify how much relates specifically to this quarter and how much relates to the previous years and so forth?

Yes.

Out of the $42.5 million, this is Phil, by the way, $31 million was associated with the prior quarters.

So you can expect about $11.5 million per quarter, assuming we don't change the assumptions again in 2008.

They're currently at a multiplier of 2.5 times and a stock price of $70.

The appropriate amount for this quarter is about $11 million and 30 -- .

$11.5 million.

$11.5 million and $31 million is for previous years.

That's right.

Thank you, guys.

Thank you for answering my questions.

There appear to be no questions at this tine.

I would now like to turn the floor back to Mr.

Kane for any closing remarks.

Thank you, Rose.

That concludes today's call.

I would like to remind everybody that it will be available for a seven-day replay period beginning at approximately 1:30 p.m.

today.

The phone number for the replay is (706) 645-9291.

The confirmation code for the replay is 29614313.

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

Thank you, everyone, for participating.

This concludes today's Equitable Resources conference call.

You may now disconnect.