Ranger Oil Corp (ROCC) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Penn Virginia Corporation fourth quarter earnings conference call. At this time all participants are in a listen-only mode and a brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the teleconference, please press star zero on your telephone key pad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Jim Dearlove, Chief Executive Officer of Penn Virginia Corporation.

Thank you, operator. Good afternoon. It's a pleasure to be able to talk to you again today. I'm joined here in Radnor, Pennsylvania by Baird Whitehead, who is the President of our Oil and Gas Operations, Nancy Snyder, who is our Corporate Secretary and our General Counsel, and on the board of PVR by Keith Horton, who is the president of PVR. He is in Kingsport, Tennessee and although he is not on my screen we may be joined by Boris McNair who is the Controller of that organization. We also have Frank Pici who is our CFO, who is remote, traveling today but called into this conference and Dana Wright who is our Corporate Controller who is in Houston.

Let me just do as I normally do, which is to not read to you the press release but just try to summarize it and then hope that we can cover any concerns or issues you may have in questions. If I sort of refer to my comments that's attributed to me I must tell you I don't always write every word of these things, but nonetheless, we have had a pretty good year. I think by virtually by any measure and I speak for both the corporation and the MLP.

Revenues, cash flows, production of oil and gas, production of coal from our properties were all record highs for the company. We had a strong operating year in both companies. Our exploration program was fairly successful. We'll touch on that. We advanced the ball on power development program as well.

So I think just from a 50,000 feet ,I think this was a pretty good year for the company both strategically and financially. Getting a little more specific about that, again, not wanting to read to you, you see net income for the year up considerably 136%, revenues up considerably, cash flow up considerably. This was driven, this is equally true of the fourth quarter results, this was driven primarily, of course, by the price of gas which we tell you in the release was average for us 531 per MCF in '03 versus 335 in '02. That's a significant change, of course.

Production was up as well about 14% on a BCFE equivalent basis. MLP had a fairly good year as well. So I think prices were the driver and we'll take credit for them when they are high and we'll take beatings for them when they are low. Nonetheless, it produced a pretty good result. We put out an operating statement for you on the fifth of this month.

And again, I don't want to read that to you or read the summary of it that's in this press release. Again, I think what it shows here is that the oil and gas segment of this company had a pretty good year, much of it driven by prices. Of course there was higher cost associated with higher production. There was higher DD&A rates. There was a fairly higher lease operating expense on a per unit basis which is something we are going to focus on in 2004 and we already made some moves to deal with that.

It was our own choice to spend more money on exploration and we did. We think it came out pretty well. Reserves were up about 18% to 325, or 23 B's, pardon me, reserve additions, production replacement was about 310%, maybe more relevant, about 211% of that was through the drill bit. As I said, we've increased production moderately this year over last year.

Just looking I think -- another thing that I want to point out that I think is germane is that as of the end of January, 2004, the company was producing about 72 million a day contracting that with a year earlier when it was in the high 50's, so roughly a 25% increase in terms of daily average production year-over-year and the reason I dwell on that a little bit is on several of our exploratory efforts in South Louisiana, Stella certainly was an exploratory but it was a South Louisiana effort.

So Creole came on right at the end of the year so we didn't get a big boost in the annual production but on a daily basis I think we are running well ahead of last year. Reading perhaps a little bit, we drilled 180 gross wells, 132 net. It doesn't say that in there, with a very high success rate. We have ten CBM wells or conventional CBM wells in Kansas. We haven't counted them in the success or failure rate because we don't know. It will take two or three months before they are dewatered. We know there is gas there. We don't know if it's commercial or not.

We give you some details on our exploration. We were five for five in South Louisiana, there were a couple of dry holes, particularly in the Queen City, early shallow inexpensive wells in south Texas. We had a dry hole in -- exploratory dry hole in the east. And if I'm following at least format of the press release it then goes to the MLP, [inaudible] Resource Partners, again, looking on an annual basis, a very good year production from our properties was up 85% to 26.3 million tons, revenues were up year-over-year by about 44%.

Cash flow whether you are looking at from operations or distributable cash flow basis was up about 36%. Net income was actually down about 8%. That was driven by the fact that DD&A rates were quite high relative year-over- year.

And I'd say all of these changes, whether it's higher DD&A rates or are higher revenues o or higher tons produced came about because of the transaction that we did, or virtually all of this change, came about as a result of the transaction we did at the end of 2002 with Peabody wherein we acquired some 120 million tons of reserves and that's what you are seeing driving these numbers.

Just for completeness sake, if we hadn't done the Peabody transaction and just back out what would the year have looked like for PVR, what it would have looked like is royalties would have been up about 14% as opposed to 44 percent, production would have been up about 10% as opposed to about 80%. So there was some organic growth. There was some improvement in operations. The Fort Creek mine came back online.

It had been off all of 2002 and it was it is now in production and that production is slowly increasing over time. So again, I think that on a 30,000-foot basis at least and on any other basis PVR had a strong tackle year, I wouldn't say it has a strong strategic year, if you say strategy means make acquisitions [inaudible] we are working hard to rectify that situation.

Looking for a moment at our capital resources, Penn Virginia Corporation, early load debt to cap ratios with respect to market cap or debt to book cap, we are sitting comfortably within our own guidelines which are between 35 and 40%. Again, you can read. We put in place a $300 million shelf registration both at PVR and PVA this year, this year meaning '03 that's not with an intent to go out rush out and use it, but now we have the capability to use it and there's plenty of dry powder at PVA and some at PVR. I won't dwell a lot on the numbers because I expect you will ask me if there's questions that you have so I will kind of skip through those. Aside from the highlights I gave you. I think what I might do, though, is point to the guidance.

You'll notice that looking at equivalent production on a BCFE basis, we were at 23.8 B.s this year, '03, we have a very modest forecast, I think, a conservative forecast, not an unduly low one but to be between 25.5 and 27.5 next year, meaning this year, '04, you will see we are forecasting or guidance we are given is for an improving in lease operating expense.

You see we are spending more on exploration, that's a conscious choice that we've made is to have a strong exploration program within the company. It's our intent to generate our own ideas rather than pay for somebody elses. There's different approaches but at this juncture that is our strategy and it has been for awhile. We try to articulate that. On the coal side, again, just looking at expected production, a modest increase, three to 4%. That's organic.

We have not budgeted acquisitions. You see an increase in coal royalties again. That's organic and it's driven by the fact we are expecting more production and prices are higher in '04 and we think they are going to stay that way throughout '04. We can't prove that, but we sure think it. Again, I don't want to read everything to you. You see a drop in corporate G&A from '03 to '04.

Part of that is some expenses we incurred in '03 that we thought were one-time expenses in terms of corporate defenses, et cetera. And we are trying to give you some detail on our capital budget at the bottom of the guidance page. I remind you that we put out a press release January that also detailed our Capex budget. I guess just a word on markets.

On coal markets which you may be a little less familiar with, several of you on this call, any way. A combination of factors from cold weather to high gas prices to the fact that a lot of coal, not a lot but certainly some coal ,that was being sold into the steam market to make electricity is now being sold back into the steel market to make Coke. Most of that is foreign or a lot of it is foreign. You can squeeze on the amount of Coking coals that are available right now.

The cheaper dollar and higher ocean freight rates have combined as well to be favorable to coal prices, the cheaper dollar because it's cheaper to export it. Higher freight rates make it a little higher to move it but they also have had the effect of closing out Columbia coal particularly, getting into the Gulf Coast of the United States because it costs more to get it there.

So that's maybe what's driving the demand side on coal markets, the economy is improving and demand is going up. On the supply side, the low hanging fruit has been picked and what we are seeing more and more is the, that coal is actually coming off the market. In 2003, the amount of coal produced in central Appalachia was down 6.8% or 17 million tons. That's fairly significant.

It was not made up for anywhere else in the country. There was a modest increase in western coal, my numbers say about 3 million tons. So that's kind of the coal market picture demand increasing, supply constricting, or static; from a gas side, I would assume we all read the storage figures every week and rig counts are up but the amount that any rig is producing is down. It's kind of a crap shoot.

I think there is some fears in the market on one hand about L&G. I don't think that happens for a few years. On the other hand Canadian exports are down. Imports from Canada, excuse me, well, same thing are down, exports to Mexico are up. So we are fairly sanguine, too, about the gas markets at least through 2004. If I might just sort of sum this all up, then, because I assume you can read and you are not listening to me recite numbers to you.

Basically we've got a strategy on the oil and gas side that says we want to focus on having a strong inventory of development opportunities. We spend worse than the bulk of our budget on that and in 2003 we added to that inventory significantly in Mississippi.

We have a program with a company called G.T.X. which we press released which you will start to see the fruits of that in 2004. East Texas Cotton Valley will drill maybe in eight locations this year and we hope to have 80 to 100 there over the next three to five years. The Kansas CBM is exploratory in '03 but if it works, gives us several hundred locations to drill up in the future. And Kingsville, which was an acquisition that we made in 2003, very early in the year, sustained us. It was a big part of our production in 2003.

It's pretty much run its course on one level. We've got a few development wells to drill there next year. But there is a look-alike to it that we are going to explore. It will be a wildcat but we may be able to replicate Kingville within that AMI.

So all those thing one way or another contributed to the development peace of the company. The explore piece I won't dwell on, but stepping out into South Louisiana, operationally difficult, five for five is a tough rate to beat. We had some dry holes in South Texas as I said, spending $8.7 million on seismic is significant. But we needed a library.

In '03 and '04 we'll have put that library together. We will have 8,000 square miles of fairly high quality seismic along the Gulf Coast. We are shooting some two D ourselves in some areas. With shot some 3 D last year. So you see there is an exploration element to the company.

The third element of the company versus the horizontal CBM in 2003 we doubled our production and we are not giving specific guidance on property by property, but we expect to see some fairly significant improvements in that this year as well. On the PVR side, and I will finally be quiet hear, on the PVR side, we are looking to make some acquisitions this year.

Technically, we cleaned up the house in '03. Now it's time to move that forward. So Megan, without any further to do, or ado, I will take questions.

Thank you, sir. Ladies and gentlemen, at this time we will be opening for the Q&A session. To allow everyone the opportunity to ask a question, please limit your time to one question and one follow-up. If you would like to ask a question, please press star 1 on your telephone keypad. To remove your question from the queue, please press star 2. A confirmation tone will indicate your line is in the question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Please hold while we poll for questions. Our first question is coming from as Sven Del Pozzo with John S. Herold.

Looking at historical reserve replacement costs and I see a they've been pretty steady over the past three years or so at about $10 they continue to be like that and I was wondering if I could get a better feel for a region by region kind of break down of just general indication of where they might be a little higher, where they might be a little lower and in addition the, with the direction that, with the direction of your exploratory spending in the future, to get an idea if they might go up or go down depending of course, on the exploratory success but just to know what regions you'll be focusing on?

This is Baird. Typically our mining costs are less in Appalachia and Mississippi versus the Gulf Coast and especially since we are a startup, brand new type company in the Gulf Coast it takes some data, it takes seismic, of course, and takes time to get up and running and get into the swing of things I guess is the best way to say it. In Appalachia we'll typically run $1.20 to $1.30 all inclusive, maybe a little bit higher than that depending on our lease acquisition activity which is a little bit higher in '03. Gulf Coast has been higher.

It's been north of two bucks here. This past year, anyway, but again I would attribute that to some of the start up costs we have. We would expect to drive that Gulf Coast mining cost down over time. I would expect to see routinely if I had to make a guess at this time probably $1.60 to $1.90 for a range.

But almost in all cases our Appalachia and Mississippi mining costs are going to be less than the Gulf Coast and it's just because typically the thing to do back east, of course, you don't need seismic so you don't have those kind of costs. But that will give you a ballpark range as far as where mining costs are by area.

Okay. For the coalbed methane in Appalachia, have you issued that in the past or do you have any better feel for what planning and development costs might be there? For the Appalachian coalbed?

We estimate $1, $1.50 -- $1.50 is something we expect to drive down over time as we continue to drill these laterals longer, longer distances. It's something our partner is working on and we expect to be able to drive those down. That's a range right there. I realize that's a big range but. Probably on the higher end of the range currently but as time goes on that will come down.

I hope I don't sound defensive, finding cost is a measure, we all use it. I think when you talk about horizontal CBM, in particular when you look at those production profiles it's really a net present value play, not a planning and development play and again, I'm not telling you how to do analysis. We kind of look and see what our rate of return is on those wells and in a $4 gas environment or $4.50 gas environment it's 100% or more. That's another part of the answer.

Thank you, sir. Our next question is coming from Ray Deacon of First Albany.

Hey, Jim, do you think that the trends you are seeing on the coal side of the business will continue into 2005? What would, what's the best guidance you could give there?

You mean in terms of price?

Exactly, and kind of the contribution from the PVR side.

Well, I think in terms of the market, I will give a part of an answer and then, Kate, please chime in if there's anything you want to add. Supply and demand. On the demand side, I think coal because it's a base load supplier of electricity, meaning it's not something that's generally using for peaking, it likes it when the economy improves and particularly likes it when the manufacturing part of the economy improves and it appears its improving.

Ray, you probably have a better feel for the economy than I do. The utilities have made a bet, and I'm generallizing, it certainly isn't true of each and every one of them, but in general the utilities have made a bet and the bet is they can let stockpiles get low and they have and they are lower than they traditionally are. In some cases significantly lower than they traditionally are. And they are going to pay for that bet if there's a constriction in supply.

On the supply side that constriction appears to be happening particularly in the east, in central Appalachia, as I said, the National Mining Association says 2003 production is estimated to be down 17 million tons, or 6.8%. That's a fairly significant number. North Appalachia, down about 1 million tons, or maybe half a percent. So it's flat, if you will. Wyoming, up about 3 million tons, a couple a percent, maybe.

So, and there's issues with transportation, you can't just turn on a switch in the Cotton River Basin. So all that said, I think we've got a situation where we've got increased supply and reduced. Excuse me. I said that exactly backwards. Increased demand and reduced supply. So unlike the 2001 spike in prices that we saw in coal, I think this thing will sustain itself for the next year, 18 months. Keith, do you have any wisdom there?

No, I think the only thing that I would add is that China remains a huge importer of Coke and some of the coal now that was destined for the steam market is headed into the [inaudible] market and even some coal is competitive into the Europe on the export steam market. So there's a little added pressure there on eastern supplies in particular. From that standpoint I think that adds just a little bit more pressure on at least the eastern utilities.

Thank you, gentlemen. Our next question is coming from Dan Morrison of Appearian Group.

I think you covered me pretty well on the coal outlook but could you give a little bit of an update on the Penn eight drilling status, kind of increase in activity expected for this year and will you be sneaking into any new areas with that technology this year?

I don't think we probably will sneak in.

You know what I meant, spill-over.

If we can go there at night I guess we would but seriously the, during 2003 I think it's fair to say that we averaged less than two rigs running all the time. Is that fair to say?

That's correct.

In 2004 we are expecting to average maybe an extra rig, somewhat less than three. We are running three right now to the best of my knowledge. We've love to run four and if we are talk our partner into it, we will surely do that. We really cannot force them to go to a fourth rig and so it's somewhat their call and sometimes our strategies and theirs don't exactly lineup.

In terms of new area, we won't probably do much with that technology outside of the, of course outside of the AMI. Within the AMI that includes about 16,000 square miles and is basically central Appalachia, we've done I think all of the drilling has been done in southern and West Virginia.

We permitted at least one well and I think it's up to five wells in the western part of the state of Virginia on property that we own. We will try this technology there. Beyond that outside the AMI we've got some other ideas but they are a little more embryonic.

Okay. Thanks.

Our next question is coming from Dick Feldman of Monarch Capital.

In the horizontal coalbed methane program, roughly what percentage of your prospective acreage have you drilled so far and what type of reserve booking relative to the potential have you booked?

I can take that or you can take a shot.

Dick, we set a fairly part of our acreage so far. Almost all of out activity has been on our legacy properties as we refer to as Fort Creek and the [inaudible] that is because we have a number of conventional wells there. We have a lot of information on the coals. We actually drilled some vertical wells there approximately five years ago up until two or three years ago.

So it's where most of our activity has been focused just because in addition we have a pipeline in construction there. But in total probably maybe 25% of our perspective acreage is acreage as Jim was talking about in West Virginia is another sizeable piece of acreage, it's 100,000-acre lease we have down there. I think some substantial part of it will be, will be perspective in a seam of coal we refer to as War Creek.

So stay fairly small through 2004, probably will have maybe 40% of acreage tested but we are continuing to pick acreage up adjacent to the property as we already have.

We have a fairly aggressive coring program, almost $2 million in coring dollars going to be spent in 2004 to get information on coal, not only on our acreage but this new acreage we have picked up. So it's a big part of our spending going forward.

Would it be fair to say, then, that this program is still in its infancy?

Yes.

Yes, absolutely.

To address your reserve bookings to fairly small at this time, I can't remember exactly the number but it's probably only seven or eight BCF associated with CBM, horizontal CBM, so it's a small number compared to what we think the potential of our acreage is.

Thank you, gentlemen. Our next question is coming from Scott Hannold with RBC Capital Markets.

Hi, guys. I was wondering if you could talk about your budget for next year. Have you budgeted any increase in cost dealing with service or rig activity?

I'm sorry, I didn't hear the last phrase or so of your question.

That's fine. On your budget next year, could you elaborate on if you have any estimate for increase in service costs in your budget next year?

We've got, we anticipate about a 10% cost increase with services, Scott. We expect service cost to go up probably the biggest component is going up proportionately is tubulars. In fact I just saw a recent release by a major mill saying they were going to initiate a raw material surcharge because scrap iron, those kind of things, alloys, are getting very, very difficult to find and there could be a shortage of tubulars at least that is the word on the street. So China is eating a lot of raw material stuff up and that's probably the single most item that is going to increase considerably in '04, but we expect to see a slight increase in service cost in '04.

You mentioned availability. Have you seen availability issues or do you anticipate there being availability issues?

We try to plan our business far enough ahead whereas we get to pipe on at the beginning of the year especially our Appalachia program we know exactly what we are going to go to do going into the year and so the guys do a good job of going out and getting that stuff bid and get it so we don't have problems. You have to plan better and make sure you get your orders in on time.

And Penn Virginia benefits from that fact that it pays its bills and I'm not being flip. That helps.

Next question coming from Mark Levin of Davenport and Company.

Forgive me if you already addressed this, but I'm curious as to what factors would lead you to the high-end of production guidance in 2004 versus what might lead you to the low end?

Well, if you notice how much money we are spending in exploration I think that's the answer. Exploration by definition is not development. So there's a higher degree of uncertainty. We've tried to use a tool, a linear programming tool, a portfolio model for lack of a better term, where we tried our best to assess the probabilities of success of the various projects that we have available to us.

We ask that model to construct a portfolio for us that is -- maximizes present value and then there's a number of other constraints we put on it. We want certain amounts of production increases we can get, et cetera, et cetera. So the variability in our forecast is the variability in the success of our exploration program. It was successful in 2003 but that's no promise that we will be successful in 2004.

We certainly have exposed ourselves to some opportunities where it would make a significant difference to this company in terms of reserves if in fact they were, for example, Esperanza. So that's I think the best answer I can give you.

Is it fair to say that you are at the low ends of your production guidance for 2004 assumes very little if any success from your exploration program?

Yes, limited success. I don't want to put a percentage on it, but, yes.

Thank you, gentlemen. We do have a follow-up question coming from Sven Del Pozzo from John S. Herold.

Just for the Creole, Broussard and Stella discoveries, were those booked at year-end 2003?

Yes, they were.

Last question, aside from the South Texas acquisition earlier on in the year, where were your reserve additions in 2003?

I'm not sure I follow the question, I'm sorry. Try that again.

Just one moment, sir.

He was wondering where reserve additions came from other than Kingsville.

Mr. Del Pozzo, your line is live.

Yes, reserves went up 18% and I know that you guys made the acquisition early on in 2003 in Kingsville so I was wondering where your own reserves came from.

They came from the drill bit, the stuff you just mentioned earlier as far as South Louisiana, we added quite a bit in Appalachia like we routinely do. We added quite a bit in Mississippi with our Mississippi program. Kingsville was the only major acquisition we did in '03.

Thank you, gentlemen.

Our next question is coming from Dick Feldman of Monarch Capital.

Given your guidance for the master limited partnership, what are you assuming about pricing? I saw the [inaudible] guidance?

Keith, let me put that down to you.

Okay. Our pricing varies substantially from property to property; lessee to lessee, and both transportation to market mode. But we are looking next year at a weighted average price around 33 bucks.

And I say that because a certain amount of our lessees production generally ranges 70, 75% ranges committed under long-term contracts, some of which were signed prior to the current market conditions. So you don't see the full impact of spot pricing you see today and I think spot pricing is a little bit high compared to contract pricing going forward.

As a point of reference what would a similar number be for 2003? The weighted-average?

That would be down about between $29 and $30 for 2003.

Thank you, sir. Our next question is coming from Ray Deacon of First Albany.

Baird, could you just detail some of the upcoming exploration that could make a difference? I know Esperanza is drilling, South Creole, are those the key wells near term?

Near term?

Yes, as far as first quarter stuff, yes.

Throughout the year we know we have the [inaudible] component that if it works, could be big. The Kingsville, we got a Kingsville wildcat to drill that's adjacent to our Kingsville property that is if it works it could be a look-alike of Kingville, which is about a 70 DCF ultimate as the way everybody sees it now. We have Finesse. Finesse is 3 D, we just completed here in late '02; that's in the process and early stages of interpretation in '03. So we get that kicked off this year. The South Creole, of course, we have a number of wells and a number of new ideas in South Creole and South Louisiana that could be significant to us.

So we have a few things doing in Appalachia. We have a new CVM project it's sort of north central Appalachia that's of size. If it works it could be of impact to us. We have a devone shale idea that we are going to try, also in West Virginia utilizing some horizontal-type ideas.

So in total if all this stuff worked, we are exposing ourselves to significant upside is probably the best way to say it in '04.

Okay. On average, do you have a higher working interest in exploration this year than last? It seems like exploration expense guidance is a lot higher.

It is, not only because of the amount of stuff we are doing because our interests are higher. We are still doing some Stella wells which we are a lower interest in but Creole and the area, Creole specific and adjacent to Creole we'll have some higher interests, [inaudible] is a third, that's a high interest. There's stuff that we are going to have in Appalachia with shale and coal is 100%, CMB is 50% so I would say in general, yes, our working interests are higher across the board in the exploration program in '04.

83, there are no further questions at this time. Do you have any closing comments?

Only to say, again, the operator told me that there are 26 or so of you on the line so we appreciate the interest and we appreciate the time. We look forward to doing this again next quarter. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.