Par Pacific Holdings Inc (PARR) 2008 Q2 法說會逐字稿

Welcome to the Delta Petroleum second quarter earnings conference and webcast. All participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation.

(OPERATOR INSTRUCTIONS.) Please note this conference is being recorded. Now I'd like to turn the conference over to Broc Richardson, Vice President of Corporate Development and Investor Relations. Mr. Richardson, you may now begin.

Thank you, good morning. Thank you for joining us today. On the conference call from Delta are Roger Parker, the Chairman and CEO, John Wallace, President and COO, Kevin Nanke, Treasurer and CFO and Ted Freedman, Executive Vice President and General Counsel.

Before we begin, I need to read the forward-looking statement disclosure. This conference call will include projections and other forward-looking statements within the meaning of the Federal Securities Laws and are intended to be covered by the Safe Harbors credited thereby. In that regard, you are referred to the cautionary statement displayed on the Delta's website which is incorporated by reference to the information provided on this call.

Further, the Securities and Exchange Commission permits oil and gas companies in their filings with the SEC to disclose only proved reserves that the Company has demonstrated by actual production or concludes their formation tests to be economically and legally producible under existing economic and operating conditions. Delta may use certain terms in this conference call that the SEC's guidelines strictly prohibit us from including in filings with the SEC.

Investors are urged to consider closely the oil and gas disclosures in Delta's Form 10-K for fiscal year-end December 31, 2007 as updated by subsequent periodic and current reports on Forms 10-Q and 8-K respectively. With that I'll turn the conference call over to Mr. Roger Parker.

Good morning. Thank you for joining us for our second quarter 2008 earnings conference call. We are pleased to provide you with very good results from the second quarter. We had a number of items that represent significant year-over-year growth and sequential growth quarter-to-quarter.

On a year-over-year basis presented for the quarter, revenue was up 81% to $69.5 million. Discretionary cash flow was up 127% to $40.7 million. EBITAX was up 101% to $39.5 million. And production from continuing operations was up 75%.

Importantly, second quarter production was up 16% over first quarter of 2008. And unaudited proved reserves were up 8% over the first quarter of 2008 as well. They now stand at approximately 649 Bcf equivalent which is also a 73% increase since year-end 2007.

Our larger scale activity, especially in the Piceance Basin is beginning to have a very positive effect on the cost side as well. As an example, DD&A was down $0.71 per Mcf equivalent from the prior year quarter. After adjusting for non-cash unrealized derivative losses, we had earnings of $4.7 million or $0.04 per diluted share. Operationally, I will make some general comments about our big impact areas and then open it up to questions and answers.

In the Piceance Basin, things are going well and as expected. Unaudited approved reserves are growing. Production is growing steadily,. Drilling time is getting much better. We've referenced in the press release that the average number of days to drill in the first quarter of '08 was 15 days. We referenced it in the average for the second quarter was 13 days. And I can tell you that the average for the month of July was 11 days.

We also have significant additional pipeline capacity that is underway to accommodate the larger growth that is expected out of our Vega area. In the Paradox Basin, we have somewhat of a detailed discussion in the press release. Obviously, we've been doing a lot of work during the first half of 2008. In a general sense, we have focussed efforts on the deepest horizons which are the Cane Creek interval and the O interval.

We believe the O interval will be the primary contributor at Greentown and it exhibits excellent shows and pressures across the project area. The Cane Creek appears to have no bottom seal in the wells that have penetrated the Cane Creek, due to subcrop on the western part of our acreage and therefore, may not be productive or may be productive only on the eastern half. We do have three wells that we should know results from the O interval very soon.

One of the wells, the 26-43D has been frustrating at best. We reached total depth on this well 45 days ago and fully expected to have production results at any time over the past month. But unfortunately we have--we have an obstruction inside our liner which has been challenging to deal with. Our casing integrity is not a problem at all. We are hopeful that we will be through this soon and able to communicate test results.

The well itself looks to be a very good well which makes it even more frustrating, but at the same time we're pleased with what we've seen so far. During this time we have -- during the time that we have been dealing with the 26-43D ,we have successfully finished drilling two more wells with longer laterals in the O zone. Both of these wells are rigging down and will be fracted within the next week. On a go-forward basis, two of the rigs will move immediately to additional locations. And the third rig, DHS rig number 11 will be moved to the overthrust to begin drilling within the next 10 to 14 days.

With that, I'll go ahead to the overthrust. In the overthrust, we are pleased to have permit approval to move to the Beaver federal well which as mentioned, should spud within the next 10 to 14 days and should reach total depth within 30 to 40 days from spud. Again, this is a large target, approximately a 3,000-acre structure. The prospect itself is located half-way between the Covenant oil field and our Parowan prospect where we do have Mississippian oil, so we're very excited to drill this well.

We're also excited to be testing the Parowan federal 23-44 well. We finished drilling this well in January, and just received approval to move in and begin completion activity which will start next week. We will be testing a couple of intervals that exhibited good shows while drilling, and expect to have results sometime over the next month.

In the Columbia River Basin while drilling, we've referenced that we encountered a fire on the rig. Unfortunately, four workers were hurt. Fortunately, none of them are in life-threatening condition, but we do have well wishes for their recovery. The rig itself experienced some damage which has been repaired, and we will be back to drilling very shortly if not already so at this point in time.

In the Midway Loop area, our Austin Chalk project in South Texas, we have referenced a new well that was put on during the second quarter, the Baxter well. It had initial production of approximately 15 million cubic feet per day and a thousand barrels of oil per day. We are currently drilling the Carter location, which is next to to the Baxter well. We are also in the process of preparing data room for a probable sale of this asset sometime in the fourth quarter of 2008.

Moving on to production guidance. This quarter is a bit more challenging than it has been -- or than other quarters, primarily because of the previously disclosed Rockies Express Pipeline shut-in for testing that will occur during the month of September. It is hard to predict how long the testing will take, and also hard to predict, how much of our daily rate will be constrained related to that effort.

But in spite of that, we still expect to experience very good growth of 4% to 7% quarter-to-quarter. With that, lets go ahead and open it up to questions and answers. Operator?

Thank you, sir. (OPERATOR INSTRUCTIONS.) Our first question comes from Michael Bodino from Coker and Palmer.

Good morning, guys.

Morning, Michael.

A couple of follow-up questions. I know you had a reduction in drilling days couple in the Piceance Basin. How does that impact your allocation of rigs going forward? Are you still going to ramp up the rig count there as previously described?

We referenced in the press release that it is still our intention to go to eight rigs by early '09 -- first quarter of '09. What we're doing right at the moment is trying to appropriately manage the number of rigs in operation between now and when additional pipeline capacity will be available. That additional pipeline capacity, also referenced, will be in place and should be available essentially right after year-end. Without saying exactly when we will put additional rigs in operation, we still do intend on going to eight as we enter 2009.

Do you think given the reduction in drilling days on the additional rigs, that drilling 200 wells in the Piceance Basin next year is achievable?

Yes. I think it is very achievable.

Okay. On the overthrust, I know this is your last earning well on your three-well commitment there. What happens going forward if this is an unsuccessful well? Do you continue to prospect? Or is this the last one in the area, depending upon how Parowan tests?

No. We have a lot of hope for the entire area. One of the things I would point out is that the operation of Wolverine and Occidental Petroleum have going to the north of us which has recently experienced an additional discovery -- experienced a number of dry holes on separate structures after the Covenant field was discovered and before the Providence discovery was announced.

We think that we obtained a very key piece of information when we drilled the Parowan well. That piece of information was the existence of Mississippian oil all the way down on the very southern end of our lease-hold position. That gives us a significant amount of continuing hope and interest in all of the lease-hold that we have between the Parowan prospect and the Covenant oil field. Regardless of the outcome on this next structure that we will drill, we will still have significant amount of interest in the project itself.

On this Beaver prospect, are you targeting just the Navajo or are you going deeper in this well also?

Just the Navajo, Michael. It's John. That and the Twin Creek. The Twin Creek, as we've referenced in the past, where we did find Mississippian oil in the Parowan feature, it is also known that the Twin Creek is productive at the Covenant field. We will be looking at both of those formations.

And the Parowan is fractured limestone as it were, correct?

The Parowan or Twin Creek?

The Twin Creek. I'm sorry. Last question, I'll let somebody else jump on here. In here, you mentioned reserves at the Piceance Basin, 515 Bs. And I think you disclosed the unaudited reserves to be 6--whatever the number, 603.

649.

649. Write that number down. The incremental 134, can you give us a general breakdown of where those exist? How much are in Gulf Coast and how much are in the Rockies?

Yes. Hang on. I'll give it to you on essentially a percentage basis. Excuse me. Other Rockies is approximately -- okay. Other Rockies is approximately 60 Bcf, so a little bit less than half being of the incremental. And the balance of that would be in Gulf Coast Texas.

The Rockies would be primarily in the DJ Basin. We have a pretty consistent drilling program and have had quite a bit of success.

All right, guys. I'll jump back on and let somebody else ask some questions. Thanks, guys.

Our next question comes from Tom Gardner from Simmons & Company.

Morning, guys.

Morning, John.

I'm referring to the Piceance. What strip price would cause you to re-think ramping up to eight rigs in the play next year?

I think if you had a strip price that approached $6 NYMEX, you would certainly have to consider accelerating or continuing to accelerate activity. We--that will also be a function of what the differential is. But obviously, the differential tightens, the lower NYMEX goes. The other part of it is I think many of us in the industry have the attitude of there is a little bit of a self-fulfilling situation here. And that is if you get below $7 NYMEX for any extended period of time, drilling activity absolutely goes lower and it does not take long for take more available supply to go lower as well. But if you get into an environment where you get $6 NYMEX and you expected it to occur for an extended period, you would definitely rethink the amount of acceleration that you would undertake.

Do you all feel you have sufficient off-take capacity to handle that incremental volume going forward?

Yes. This new pipeline project in the area will be more than sufficient for us to market our development plans for the Vega area.

I think it's very important to point out that this 600 million a day pipeline that is beginning to be constructed as we speak, is going to be servicing essentially only drilling activity in the Cobran Valley of the Piceance Basin. As we stand today, the primary operating activity in that particular area is being done by Delta Petroleum and Plains Exploration. 600 million a day of capacity is being created essentially and primarily for our properties and their properties. That should give an indication as to how much growth we expect out here.

Okay. Thank you. That's helpful. Jumping over to the Paradox, you mentioned the Greentown federal 26-43D, encountering some challenges there, drilling this O zone. What are some of the -- well, first of all, what do you think the issues are there with the obstruction and the casing? What are you doing to overcome those issues?

Let me make a quick comment before the discussion about the O zone. The one thing we did not have was any problem drilling the O zone. The drilling went very well and the shows were quite substantial. The problem that we have at the moment is inside the well bore which is unfortunate. But it essentially doesn't have anything to do with the play itself. Having said that, I'll let somebody try to explain what our problem is.

In order to cement off the salt section that makes up the curved portion of the well bore, we ran a packer assembly into the liner that effectively gets to the very top of the O zone, but not really into it. That packer assembly is made up of aluminum. Theoretically, it should be much easier to drill up with a mill than the steel casing surrounding this packer assembly. It normally takes just a few hours to drill up this aluminum assembly and you move on down the hole. And this liner is unperforated, just a liner and a hole -- cemented in the hole.

Unfortunately what has happened in this particular case and is very, very rare. But the coil tubing mill that was drilling up the aluminum assembly, at some point cut into -- or wore a hole into the liner and was diverted into the formation itself -- in the very top of the formation. Right now, our difficulty is getting back into that liner. Because every time we go in the hole, all the tools are diverted to this hole in the liner. Our plans are to continue to work through this and to finish building up the small amount of remaining aluminum that we need to in the packer assembly, because we retrieved most of it. And then, go down to the bottom of the liner and begin perforating the well bore.

The drilling portion has been easy. As you can see how far we've drilled these wells, whether it's Cane Creek or the O zone, they're long laterals. To put that in perspective, the laterals in the Cane Creek field in the south are much shorter. So we can -- our guys have done a very good job on the drilling side of achieving significant length in the O zone. We just have got to get past this problem which is abnormal, this packer assembly.

The other two wells that we drilled -- they were getting ready to frac, we elected not to build this packer assembly and not to submit that portion of the well bore. As such, we are not expecting any problems going forward.

One last question and I will hop off. In the Columbia River Basin, are you still actively seeking a partner?

We have ongoing discussions with a number of different companies on a number of fronts, but not really prepared to discuss anything.

Okay. Got you. Thanks, guys.

Thank you. Our next question comes from John Freeman of Raymond James.

Hi, guys.

Morning, John.

First question on the basis differentials. If I'm looking at the hedges that you all put on -- at least based on the fact that there was only one that was done at the the CIG. Would I read that to believe that you all think the basis differential contract quite a bit from where it is next year?

Than and John, I think we've told you in the past, especially once this new pipeline is up and operational, we would like to manage our gas, especially out of Piceance Basin by virtue of firm transportation. And where you pay a fixed rate to get to a market that theoretically sells for very close to NYMEX flat. That really is our goal.

We need to get enough volume to be able to effectively manage that firm transportation. But that is the rationale behind not hedging and to -- significantly into '09 with CIG and using NYMEX only, because we want to pay firm transportation to get to a NYMEX flat market. Firm transportation is anywhere from $1.10 to roughly -- some of these new projects as high as $1.40 or $1.45.

Moving on to Columbia River. I want to verify that the depth that was written in the couple of the articles up in Washington was right. What depth were you at when you had the fire?

It's roughly 2500 feet.

Okay. And then at least as far as you all are aware on the wells that were drilled previously in EnCana -- did any of those encounter natural gas in the Basalt?

No. And that is one of the things that sets up this prospect in the southern area of this basin. There are numerous gas seeps that are found in local water wells, used by farmers for irrigation purposes. There are farms and ranches in this part of the world that actually use the natural gas through gas seeps for domestic use. The only other area in the basin that had significant gas seeps like this is in and around the [acla] 133 which is probably the thickest gas column drilled to date in the Columbia River Basin. It is not necessarily indicative of a gas accumulation, but it does mean gas is in the system.

Okay. And then just as you were drilling through the Basalt, did you have any of the issues -- obviously in canned EnCana had a hold host of issues trying to drill through it and using two rigs and everything else. Did you all have any issues before this?

No, no. We're employing some technology that our DHS guys have used in geothermal drilling in California and Nevada. And that particular drilling procedure has -- was proven to be extremely effective and very fast in drilling through the Basalt section. Having said that, the fire has slowed us down and we'll be back to drilling in the next day or so.

Remember, too, John, in drilling these Columbia River Basin wells -- Wayne, what is the diameter of the surface hole? It is 30-plus inches, isn't it? The whole diameter is 30-plus inches until you set your surface casing. The upper portion of the well can actually be -- and is expected to be some of the slower drilling that you experience while you're drilling out here. We've certainly noted that once we got past surface casing, the penetration rate picked up quite a bit.

Okay. Just last question I have and I'll jump off. On the Paradox, just based on the fact that your initial vertical wells -- the vast majority, that flow rate was coming from the O interval. Just based on what you see at Cane Creek. I understand you're saying the Cane Creek is perspective on half the acreage, but at least on the near term on a development basis, is it safe to say you're going to bail on doing the dual laterals and look at maybe just doing a longer single lateral into the O?

Yes. We're going to focus on the O zone.

Okay. Thank you.

Our next question comes from David Tameron of Wachovia. Please go ahead.

Good morning.

Hey, David.

Couple of questions. Can you give me what your CapEx for the quarter? You might have mentioned it and I maybe I missed it.

CapEx for the quarter was $108 million.

Okay. And what is your outlook for the second half of the year?

Should be approximately $200 million. We should come in maybe slightly ahead of original guidance which was $350 million to $370 million. And by slightly ahead, I mean slightly over probably more on the order of $380 million.

All right.

That is, David, that is drilling CapEx.

Yes. Okay. When I look at the Peceance, when you start talking about -- assuming everything works out at as planned, [Abred] program in 2009. What type of production growth do you think you can put in the Piceance alone next year?

Pretty dramatic. What I would refer back to -- we haven't really guided toward numbers for 2009, so I'm going to stay away from that. But what I'll do is refer back to what's occurred over the last 12 months.

12 months ago, we only had two rigs running full-time in the Vega area. We didn't go to four rigs full-time until early in the first quarter of this year. Between mid-year '07 and mid-year '08, we grew production by close to almost 40 million a day. That would be with an average -- if you look at four rigs for half the year and two rigs for the half of the year, that would be an average of three rigs.

I think it's very reasonable to assume that you would have pretty substantial production growth in '09, especially with the available pipeline capacity and effectively more pipeline capacity than we'll need.

Okay. For the second half of the year, you're still going to stay around the same level right? Because there's 60 million -- is that gross?

Yes. We're going to be restricted on pipeline growth or production growth due to pipeline capacity between now and the end of the year.

Okay. All right. And then one more question. On the discontinued ops, what is in that line item? Is that still the midway -- ?

That is primarily that is your Austin Chalk property that we've held for sale.

Any progress on that front?

We have a data room that we'll be opening the second week of September and then expected closing during the fourth quarter.

All right. Thanks.

You bet. Thanks.

Thank you. Our next question comes from Larry Busnardo of Tristone Capital. Please go ahead.

Hey, good morning.

Morning, Larry.

Just in the Piceance, first. Just on the production. The 46 million a day, that is a net number. Correct?

That is correct, yes. It should say net number in the press release.

Then you gross up by, what 80%? Is that the NRI?

Yes, approximately. It's -- well it varies, but I think it is 80.5%.

Effective -- you're maxed out at that rate or fairly close to it, correct?

We have some growth that we might be able to achieve over the next 60 days, but it's not going to be significant.

The new pipeline that you're talking about or the new one that is going to be coming out early next year, does that have access to regional take-away or what pipeline is that going to tie into?

That will get us to the White River hub and there is numerous pipelines -- interstate pipelines from there that you can sell into.

East, west?

You go east, west, southwest -- yes, you can go east or west.

Okay. Do you have firm take-away capacity coming out of the region?

We're negotiating that right now.

We do have some and we also will have some related to our transaction within Canada that we announced earlier this year.

Okay. And then a couple of follow-ups on Greentown. Just looking at the Cane Creek, I know you're going to focus on the O zone here going forward. What are your thoughts on the Cane Creek and when that may be tested again on the eastern part of the acreage?

Right now, Larry, we're only going to focus on the O zone. I would say we don't have any immediate plans to test the Cane Creek. But I will tell you that what gives us confidence to know that we think that it will work is if you look at the Big Flats/Bartlett Flats fields which are Cane Creek fields to the southeast. In those fields, the eastern side is where you find the big wells and the western side is -- they're very marginal wells. And so that is why we think the eastern side is going to be more appealing.

But we won't get to that until we've slipped off the top of the incline in our O zone development. Then we'll look at the Cane Creek. It will be a little while. I will remind -- that in the 32-42 that we completed above the O zone in several intervals and found very significant oil rates. That is something that we also will focus somewhere down the road. But you could -- for the next time being -- for the next 12 to 18 months, we will focus on O zone almost exclusively.

Larry, the other positive here is that we do have an operational pipeline now. As a result, we will be focusing our attention on getting production up from this area as best and as quick as we can. And we think the best way -- excuse me -- the best way to do that is to focus our attention on the O zone.

I know you've done quite a bit of science today on these wells that you've drilled. Has your thoughts at all changed from a geologic standpoint? Or do you view it more as being a mechanical error or more completion issues than anything else?

Larry, it is more mechanical than completion. The job really hasn't changed. Everywhere we drill in the O zone we see that overpressured gas which gives us a lot of comfort in believing that this will be a large field at least in the O zone.

It's more on the completion -- not really the completion side, because I think our -- the genesis that we've experienced with our frac design has proven at least on 20-11 that we're very effective with this new frac design. What we need do is perfect the drilling and running of the pipe in these wells. And again, the major challenges is Basalt. That is what we're after.

Do you have 3D over this area?

No. There is not 3D over the area. Basalt is very hard to see geophysically.

Okay. Is it 2D or what type of data do you go off of?

There is 2D in the area.

Okay. All right. Okay. I think that's it for me. Thanks.

Thanks, Larry.

Thank you, our next question comes from Greg Brody of J.P. Morgan. Please go ahead.

Morning, guys.

Morning, Greg.

Couple of follow-up questions. With respect to CapEx for the year. How much is non-drilling CapEx? How much additional CapEx will there be for the full- year?

The non-drilling CapEx that we'll have for the year is essentially already been experienced. And the largest items were in the form of the acquisition that we did with EnCana. Then also the cost of building and completing the Paradox pipeline. The combination between those two is approximately $425 million, but those costs have already been incurred. That will be the lion's share of CapEx for the year, non-drilling CapEx for the year.

That's helpful. Do you mind providing an update on the sale process of the Midway Loop assets?

Sure. We engaged Tristone to represent us in the sale of that asset. They are currently preparing for the opening of a data room the second week of September. We expect that we would probably end up with a closing sometime in the fourth quarter.

Fourth quarter. And final question. Are you seeing any opportunities for additional acreage acquisitions in your core areas?

Yes. In a general sense, the answer is we're always looking at that. We do see some other opportunities. We will be paying attention to it. When meaningful situations come about we will try and react.

Okay. Thank you very much.

You bet. Thank you.

Thank you. We show no further questions at this time. I would like to turn the conference back over to Mr. Parker for any closing remarks.

Okay. Thank you very much. We appreciate you joining us today for our conference call and we look forward to the next one. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.