先鋒自然資源 (PXD) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to Pioneer Natural Resources fourth quarter earnings call. This call is being recorded.

Joining us today will be Scott Sheffield, Chairman and Chief Executive Officer, Timothy Dove, President and Chief Operating Officer; Rich Dealy, Executive Vice President and Chief Financial Officer; and Frank Hopkins, Vice President, Investor Relations. Pioneer has prepared PowerPoint slides to supplement their comments today. These slides can be accessed over the Internet at www.PioneerNRC.com. Again, the Internet site to access those slides related to today's call is www.PioneerNRC.com. At the website, select Investor then select Investor Presentations.

The Company's comments today will include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements and the business prospects of Pioneer are subject to a number of risks and uncertainties that may cause actual results in future periods to differ materially from the forward-looking statements. These risks and uncertainties are described in the last paragraph of Pioneer's news release on Page 2 of the slide presentation and in the most recent public filings on Forms 10-Q or 10-K made with the Securities and Exchange Commission.

At this time for opening remarks and introductions, I would like to turn the call over to Pioneer's Chairman and Chief Executive Officer, Scott Sheffield. Please go ahead, sir.

Thank you, and good morning to everyone. Thank you for taking the time and effort to listen to our fourth-quarter call. I'm going to go over the first two slides, starting on Slide No. 3, our highlights for the year and talk about recent developments.

We reported record production for the quarter of about 192,000 barrels of equivalent per day. Obviously everybody knows that Canyon Express was off for almost all of December. That is net of field fuel of about 6,000 barrels a day equivalent. We did buy more aggressively, about 1.7 million shares during the quarter, and 2.8 million shares for the full year for about $92 million. Continue to reduce debt, as we have stated all year long after the Evergreen transaction. Reduced debt another 79 million during the quarter. A total of about a little over 360 for the year.

If everything with Evergreen is going to plan, obviously, our Raton Basin program finished up the year, growing production about 10 percent. Obviously, we're still on track with permitting 500 wells during the year 2005. Very aggressive drilling program. Drilling and completing 300 wells for the year 2005.

We're still excited about the Piceance as we move into late '05 and early '06 with that program from Evergreen and also our CBM potential in Canada. For the year, we replaced 441 percent of production. A little over $10 per BOE.

Recent developments, we have already talked about our capital budget, but we didn't announce the capital budget of about 900, 950 million for 2005. Roughly about 25 percent of that earmarked for exploration.

We are stepping up the pace, as indicated in the recent conference calls of the last two weeks, on both the development front and also the exploration front. A lot more of our capital is going to high-impact wells, this year, as we have spent a lot of our capital on building inventory and seismic on the exploration front in 2003 and 2004.

We did announce a $593 million VPP, volumetric production payment. We did two of those. Selling roughly about 20 million BOEs for a net of about $23 a BOE in the ground at a discount rate of about 4.5 to 5 percent, reducing our debt to book to 39 percent. And what's more important, significantly improving our financial flexibility for the Company going forward.

With that, we announced a new $300 million share repurchase program. And really just over the last six days, we have bought back about 600,000 shares already. Obviously, we are committed to that program as we were last year, and especially fourth quarter on share repurchase.

Fully diluted has moved down from about 150 million, as we stated at the end of third quarter, to 148 million shares. The combination of the fourth-quarter purchase and the recent purchase as of the last six days.

Canyon Express, we'll be reinitiating production this week from all of our wells there, probably take about a week to ramp up to full capacity. Followed by Devils Tower, the rig is obviously starting much earlier; put back in service. We're completing the fifth of eight wells. We will be completing one well per month, as we move them forward, reaching -- moving towards capacity some time later this summer. Followed by Triton and Goldfinger coming on late this year.

On the exploration front, on Slide No. 4, it is important to note that we are drilling several high-impact wells during the year, about 20. Seven of those wells are being drilled during the first quarter. When Rich Dealy, our Chief Financial Officer, discusses the guidance, obviously, you'll notice that we have a high amount estimated for the first quarter of 2005. We will be spending about 40 percent of our exploration budget. And a lot of that is into drilling seven higher-impact wells.

We have three in the North Slope, one with Kerr-McGee, two with Conoco Phillips. We have two in the Gulf of Mexico. One is drilling now with Murphy operating on Thunder Hawk and we will be starting a well late first quarter in our Falcon corridor area. That's followed in North Africa by one well getting ready to spud some time during the month of February on a Pioneer-operated block, followed by spudding some time in the next two or three weeks, a well with a large independent spudding in West Africa in deepwater Nigeria.

Obviously, we're excited about the exploration drilling during 2005 and 2006. Obviously, we're going after some very, very high-impact type wells in all of our key areas where we have building inventory. Let me turn it over to Rich Dealy, our Chief Financial Officer.

Thanks, Scott. Let's move to Slide No. 5. Pioneer was very pleased with how the fourth quarter came out. Earnings came in at 102 million or 69 cents per diluted share, an increase of 44 percent over the prior-year quarter, and at the high end of our earnings range that we put out on the 27th. Similarly, operating cash flow was up 60 percent over the prior-year quarter, totaling 347 million. For the year, earnings were 313 million or $2.46 per diluted share, resulting in a 14 percent return on equity. Operating cash flow for the year was a record 1.1 million, reflecting the substantial increase in production during 2004 and the higher overall commodity prices we received in 2004.

Moving to Slide 6, I'd like to first point out that on the next couple of slides, you'll see that we've adjusted for the quarter and for all periods presented. The bars exclude field fuel; so you'll see that as we go through here. Specifically, on this slide, oil and gas revenues were $519 million during the fourth quarter, representing a 17 percent increase from the third quarter. The increase is primarily due to the production added from the Evergreen transaction and the increase in commodity prices.

Moving to Slide No. 7. Production was 192,000 BOEs per day for the fourth quarter. As you can see, oil sales increased 8 percent or roughly 4,000 BOEs per day as compared to the third quarter. Primarily as the Company benefited from some additional cargo liftings from South Africa in Tunisia. Gas production was up 10 percent for the quarter as a result of the production added from the Evergreen margin. This was offset somewhat, however, by the previously mentioned downtime at Canyon Express and our intentional delay in the startup of the Harrier sidetrack well in the Falcon Corridor area while we fully depleted the Tomahawk field.

Also, just to update you on the Evergreen transaction, excluding field fuel, our exit rate in the Raton area was 143 million cubic feet a day, representing a 10 percent increase from the beginning of 2004.

As you can see, from the first quarter forecasted lower than the fourth quarter average; this reflects the 6700 BOEs per day, VPP volumes that we sold beginning February 1, 2005. The forecast also reflects the more days of downtime and a gradual ramp-up of the Canyon Express system, the timing of oil cargo shipments in Tunisia and South Africa, as well as the typical seasonal decline that we see in gas demand during Argentina's summer season.

For the year, Pioneer still expects total production to be 70 to 74 million BOEs for the year, and second quarter to increase substantially as the Gulf of Mexico production is on for a whole quarter; we see the ramp-up of Devils Tower, as Scott mentioned; Argentina's winter season kicks in; and we complete our Canadian gas drilling for the winter as well.

Turning to Slide 8, where production is shown on a geographical basis, Africa volumes were up 55 percent for the third quarter, reflecting the production growth in Tunisia and extra shipments and South Africa. In Canada, the increase was principally attributable to the added Evergreen volumes.

Looking at Argentina, fourth-quarter production is down 9 percent, reflecting the seasonal decline in gas demand there. And however, despite the decline, fourth-quarter production was a record quarter as compared to previous fourth quarters, highlighting the continued strong gas demand in Argentina, even during their summer season.

Moving to the U.S., production is up 9.5 percent for the third quarter, reflecting the addition of Evergreen volumes, offset by the downtime and delays and startup of the Gulf of Mexico project that we previously discussed.

Flipping to Slide 9, the Company continued to benefit from strong commodity prices with oil prices increasing 8 percent, NGL prices increasing 14 percent, and gas prices increasing 8 percent as compared to the third quarter. Specifically, if you look at North American realized prices, we are $5.24 per Mcf for the quarter, a 3 percent increase over the third quarter.

In Argentina, we're happy to report that gas prices have increased about 20 percent due to the government price increase for large consumers and industrials being effective as expected on October 1. So we've seen basically a 10 to 12-cent per Mcf increase in gas prices in Argentina, with further increases scheduled for 2005.

Turning to Slide 10, fourth-quarter production costs per BOE were $5.72 per BOE. Due to the number of moving parts here, I'd like to address each of these components separately. First, starting with lease operating expenses. As we discussed in our third-quarter earnings call, the increase in lease operating expenses, a combination of 1, slightly higher lease operating costs associated with the production added from the Evergreen merger; 2, the decrease in the Gulf of Mexico production during the quarter, which is generally our lower-cost production; and 3, the increase in production from South Africa, which is at the higher end of our cost structure.

Turning to ad valorem taxes, the decline there was the result of our actual tax bills coming in during the fourth quarter being lower than what we estimated previous in the year. So we have adjusted our accrual downward there. The increase in production taxes is primarily due to one, the overall higher commodity prices. Two, the decrease in Gulf of Mexico production, which is not subject to production taxes. And three, the addition of the Evergreen assets that are subject to production taxes.

As we look forward to the first quarter 2005, our estimated range of $6 to $6.50 is higher than the fourth quarter because it takes into account the retention of the operating costs associated with the VPP volumes we sold. It also takes into account increases in production and an ad valorem taxes given the higher commodity price environment we're experiencing. And the additional workover schedule during the Canadian winter access season.

As we move to the second quarter, however, we do expect production costs to decline as lower cost volumes resume in the Gulf of Mexico and workovers return to more normal levels.

Moving to slide 11, G&A costs were slightly higher than anticipated in the fourth quarter due to the additional staff and integration costs associated with our Denver office and the higher year-end information technology costs. We do expect first-quarter costs to be similar to the fourth quarter or slightly lower, and that's why we have the range of 24 to $26 million.

Interest costs for the fourth quarter of 35 million includes the interest costs associated with the merger, cash consideration of the merger and the bonds assumed in the merger. Looking at first quarter 2005, it's estimated to be 33 million to 36 million. But given the Company's significant cash flow during 2005, we do anticipate that interest costs will come down during the year as we reduce debt.

Before I move to the neck slide, a couple of other cost components I wanted to draw your attention to. DD&A costs for the quarter were $8.84 per BOE. We expect to first-quarter 2005 costs to be around 8.75 to $9.25 per BOE. Cash income taxes for the fourth quarter were $6 million. And deferred income taxes were $45 million. Since the Company continues to benefit from net operating losses in the U.S. and Canada, cash taxes for the first quarter are only anticipated to be between -- once again -- to be between 5 to $10 million. And the Company's overall effective tax rate is expected to be around 36 to 39 percent.

Moving to Slide 12. Exploration and management (ph) costs during the fourth quarter were 29 million. As you can see in the geological and geophysical section there, about 60 percent of the fourth-quarter expenditures were related to seismic purchases, better investment for our future. As Scott mentioned earlier, the first-quarter exploration program is front-end loaded with seven impact wells, high-impact wells, being drilled and a meaningful investment of seismic being planned. This leads to an estimated exploration abandonment exposure of about 80 million to 110 million for the quarter.

On Slide 13, costs incurred for the fourth quarter were 166 million and it was heavily weighted toward PUD drilling in our core areas. Including Evergreen, total capital expenditures were 3.1 billion for the year. And we replaced 441 percent of 2004 production, as Scott mentioned, at just over $10 per BOE.

Turning to Slide 14, the Company reduced pro forma debt 364 million during 2004. And with the closing of the VPP transaction in January, we further reduced debt to about 1.8 billion on a pro forma basis as of year-end. As Scott mentioned, this transaction achieved the Company's goal of reducing its debt to book ratio to below 40 percent.

As we look into -- out to the future with the 4 to 500 million of projected excess cash flow in 2005, the expected proceeds from our Canadian divestitures that are planned and taking into account the VPP proceeds, we expect to reduce our debt to book ratio to below 35 percent by year-end.

Before I flip back over to Scott, just as we have normally done in our earnings calls, we have attached supplemental schedules in the back of this presentation that show the quarterly amortization of our deferred revenue associated with the VPP transaction. It shows our current commodity hedge position, our price differentials for oil and gas by area, and a detail of income taxes. With that, I'll turn it back over to Scott.

Thank you, Rich. On slide No. 15, our summary. Again, I think with our recent actions utilizing the VPP structure in addition to our Canadian asset sales and excess cash flow, we feel like that we're adding about $1 billion of free cash flow in 2005 at current strip prices, starting with that VPP, followed by the Canadian asset divestitures in the second quarter.

In addition, we're starting out aggressive on our $300 million share repurchase program. We will continue to do that as we move forward. Obviously, we're stepping up the pace of development and exploration drilling. Obviously, our budget is only up about 10 to 12 percent pro forma from both companies from 2004. But a lot more of the capital is going to drilling wells really in all of our key growth areas.

We'll continue to evaluate monetization alternatives that are net asset value accretive, such as the VPP. Looking at royalty trusts or other MLP structures. Obviously, continued disciplined capital investment in regard to all of our projects that we invest capital to. And obviously, continue to maintain a strong balance sheet as we move forward in Pioneer. Let me go ahead and stop there and turn it over for any questions that you all may have. Again, thank you for participating.

(Operator Instructions). Sven Del Pozzo, John S. Herold, Inc.

It appears as though some things have happened in the Falcon area in terms of the depletion of Tomahawk. And I would just like to have a general idea of how things are progressing there, if you could kind of give me a picture of what is happening there and what is planned to happen in the near-term and for 2005?

Yes. You know, starting back from our incidents last year in August and September, we had Harrier, the first Harrier well, water out earlier than expected. We redrilled the sidetrack. The sidetrack, obviously, is going much better than expected. And it is producing like the original well did, at around 110 to 120 million a day. Followed by, in September of last year Hurricane Ivan ended up snapping the rig off with Devils Tower and basically delayed completing the remaining wells in Devils Tower by at least six months. That rig was put on service. So Devils Tower will be ramping up. Our two Falcon wells are still the bread and butter of that Area. They are still producing as expected and will continue to produce through the end of 2007.

Our shorter-lived wells, Tomahawk was depleted in December. Raptor is still producing; in fact it is producing much longer than expected. So we still forecast it's a great project, added about $1 billion in NAV. And obviously, we're still excited about it.

We are planning on drilling two wells, exploratory wells in the Falcon Corridor this year. We've got plenty of capacity if we do hit on those wells. In addition, we have probably two or three sidetracks that we'll be drilling off and on during 2005 and 2006 in that area.

Okay. And just finally, you know with Falcon performing better than expected and also Raptor better than expected, I'm just wondering what's -- could you give me a general reason of why they are performing better than expected?

I hope it is because we have conservative reservoir engineers and geologists. So that's why -- that's what I attribute it to.

Joe Allman, RBC Capital Markets.

Just a quick question on your -- you mentioned in the press release the Canadian CBM play. Could you just give us an update what you've done so far there? I know Evergreen started working there. And then what the plan is for '05 and what kind of results have you seen?

Yes, Evergreen had picked up a lot of acreage, and then Horseshoe Canyon area, where EnCana Quicksilver and Apache have been drilling. And we followed up with an acquisition before we closed. We feel like we have a potential of about 600 locations. We're getting ready to start drilling in the second quarter. We only did some recompletions last year. They were very positive. So we won't have any results from this year's drilling program until toward the end of the year.

Got you. And then do you have anything prospective for the Menzel coals as well, or is it just Horseshoe Canyon?

We do have a potential pilot program we may put in place for the Menzel II (ph).

Got you. And then with the Raton Basin, I know you haven't had it for a whole long time, but anything positive or negative in the Raton?

No. We are just making sure that all the permits -- we're way ahead of schedule on the permitting and that we're on track for drilling 300 wells. I am working with El Paso on additional compression in the capacity, which is supposed to come on in fourth quarter of 2005 as we continue to ramp up. So really things are going fine.

Scott Burke, Bear Stearns.

Listen, I'm wondering what the -- the prospects you are going to be drilling specifically in the first quarter, what kind of size range are those prospects? You mentioned a couple in the Gulf of Mexico.

Yes, Scott, if you look at our slide, the 500 million barrels of unrisked, we're probably drilling about 60 percent of that in the first quarter. So there are several -- obviously the highest-impact wells are in the North Slope and West Africa.

Okay. And do you have -- are you still looking at volumetric production EnCana (ph)? That obviously was big news a couple weeks ago. But what other areas might you be looking at for that kind of a deal?

We're continuing to look it structures as long as other entities such as royalty trust MLPs are trading in the $18 to $24 a BOE enterprise value. We will continue to look at other structures to figure out ways to utilize those structures in addition to VPPs. Because all three mechanisms are obviously capturing a lot higher value, enterprise value, per BOE than we are currently trading or other independents are trading at. Because of the low prices that people are using in discounting E&P companies.

Phil Pace, CFSB.

The position you picked up in the Piceance -- and didn't you also have maybe a little bit of leasehold out in the Uintah? What are the plans to move that forward in '05?

The first step was really to put together -- we sent a lot of people from Dallas to Denver. We have hired a lot of people in the local market. Mark was just starting to staff up at Evergreen. So we've aggressively staffed up. And we're basically, like we always do, we're going to just take six months to aggressively study what we have. But so far what we have seen is that we're pretty excited about. And so I wouldn't see much ramp-up, Phil, until '06. In both of those areas.

And how big are the acreage positions there?

A couple of hundred thousand acres.

Jeff Hayden, Pickering Energy Partners.

Just a little more color on what you guys are doing in West Africa. I mean without giving any more information on the block. Can you kind of tell us what type of structure you're looking at drilling? And then are you planning on drilling Block H? Or is all the drilling planned in West Africa kind of in Nigeria?

For the year, probably one well in Block H. Two wells, at least two wells in deepwater Nigeria with one well starting in February. The other two wells won't be drilled until third or fourth quarter. Obviously, we're over there. We're going after 200 million to 750 million barrel targets. 3D seismic, fairly good, in some cases DHIs. And we haven't -- on two of our blocks we have signed up; we haven't received government approval. Once we receive government approval, we will press release those awards.

Also, in blocks we bid on, that's public knowledge -- Blocks 2 and 3 -- with Devon in the JDZ between Sao Tome and deepwater Nigeria. Block 1 was just awarded to Exxon and Chevron, just recently. So obviously, we're hoping for positive news here over the next few weeks on that.

Brian Dierghy (ph), Allstate.

Actually just a quick question on the VPPs in relation to the rating agencies. It doesn't seem like they have given you too much credit as far as the debt reduction that will come out of those transactions. Have they given you any specific goals or any methodology about how much credit they are giving you for the VPPs?

The only thing that I will watch on the market is their bonds tightened significantly after we announced the transaction. Our debt statistics have improved significantly. That is going to take -- there's only been about $2 billion of VPPs done in the last two years. And most of them were done by large utilities or some majors. And so it's just going to take an education process. So we think one of the agencies is a little bit more positive than the other; but it will just take time.

And at this time, there are no further questions. I'll turn the conference back over to our speakers for any additional or closing remarks.

Again, thanks. We look forward to seeing everybody on the next quarter. We think it will be an exciting year in 2005. We're starting off great, so we'll look forward to seeing you all on the road or in conferences or next quarter. Again, thanks. Please call me and if you have any questions.

That does conclude today's conference. We would like to thank you all for your participation and have a great day.