Ranger Oil Corp (ROCC) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Penn Virginia Corporation second 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 conference, please press star 0 on your telephone keypad. 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 and good afternoon. I'm joined here in Radner by Baird Whitehead, who runs our Oil and Gas Business, by Frank Pici, who's our Chief Financial Officer, by Nancy Snyder who is our General Counsel, by Keith Horton who is in Kingsport, Tennessee, who is the President of PVR, our MLP. As far as I know, that's all of us that are on this call and we will endeavor to keep this business like and then answer any questions that you have. It's usually my preference to not read you a press release and I think I'm going to continue that tradition.

I will read some excerpts from it. The table, I think that leads to the press release is quite helpful. You can see that year over year for both the quarter and for the 6 months ended June 30, there's been a fairly significant gain in revenues income and various measures of cash. And I would say that the primary driver for these increases, particularly in the second quarter, was improved prices and we will touch on that. We also have a press release that went out July the 28 that has a more detailed description of our operations and again, I won't read that to you, but I'll draw some of what I'm going to say from each of those press releases.

Again, some numbers, hopefully not too many. Production on a Mcf equivalent basis was flat in the second quarter, up a little bit but not significant. It's up 6% roughly for the year. Part of the reason for the rather modest increases is that particularly in the East, we were have been impacted in this quarter by a curtailment on 2 of the pipeline systems that transport our gas in West Virginia. Interupptible transportation was restricted by what was formerly Columbia, now NY Source, as they do maintenance and upgrade capacity on a line that's critical to us getting our gas out. This situation, will persist, we're told, through the end of October.

Dominion, which also carries a fair amount of our gas has had some delays and issues and is right now in the middle of a 45 day maintenance program which will create again some curtailment. We estimated that the total effect for all of the year '04 of these curtailments is 1.7 Bs. That's built into our guidance and it's a situation over which we have very little control, however, it's a situation to we have tried to react and we've tried to react in 2 ways. 1, we bought a fair amount of firm transportation, I'm going to let Baird touch on that in a minute, that will kick in on November 1. We have some in place right now, but the preponderance of it kicks in November 1, which should alleviate this situation should it arise again in the future.

In addition, and this accounts for some of our increase in capital expenditures this year, we are completing a little bit ahead of schedule, a 15 mile, 12 inch line that fundamentally is a switch between Columbia and Dominion which will allow at least us to move gas more easily between those 2 systems. The July 28 release talked in a little more detail about some of the production issues or successes, I won't dwell on it a lot. In the second quarter in the Gulf Coast we drilled 7 gross 4.6 net wells, all of which were successful and we are quite pleased, in fact, very pleased in what's going on in what we call Bethany North Carthage Field. It's a joint venture we have with a company called GMX Resources. We've drilled 4 wells. These are Cotton Valley play in East Texas, backout zones, if you can say it that way in the Travis Peak and Pettit.

4 wells have been drilled and completed. We expect this year to drill total of between 10 and 15 wells and the first 4 wells we have an 80% working interest. In Kingsville we drilled a development well, we had 100% working interest, that well is in line, it's making about 1 million a day and 200 barrels of liquids. So, we're fairly well pleased with those 2 items. Again, there's more detail in the press release, it talks talks a little bit about what's going on in South Louisiana with our exploration. Where again, I think we're fairly pleased. In the East, we've drilled in the quarter 38 gross, 31 net wells. 37 were successful. 1 is being tested.

The 1 that's being tested is a horizontal CBM well that we drilled in Virginia, where there were some operational problems in drilling the well and we're still trying to interpret just exactly what we have there. We drilled 18 Selma Chalk wells, that's in Mississippi. This is significant because while they're not huge wells, we have a 97% to 100% working interest in those and a total of 30 have been drilled so far this year, in the first half of this year. In the horizontal CBM program we've completed 2 very complex sets of patterns. These are patterns where out of sets of - - same sets of vertical well boards, we're accessing 2 different coal seams. These wells take quite a long time to drill, maybe as much as 4 months, even out 6 but they're drilled. And if they're not online yet, they soon will be. And they certainly appear to be successful and we're now moving those rigs - - or we'll move those rigs when appropriate and go on with the program.

We drilled what appears to be a successful horizontal coalbed methane well outside of our AMI with CDX using a somewhat different technology and that as I say appears to be successful and we would expect to turn that in line shortly. We've also spudded a well in the Devonian Shale, this is not in the press release, this is fairly new, using our own horizontal ideas and this is in the northern part of - - in West Virginia. In 2003 we drilled and early '04, we drilled 10 CBM wells in Kansas. These were conventional vertical wells, 2 sets of 5 in 2 slightly different areas, into southeast Kansas and Cherokee Basin. One of those 5 well programs, 3 wells have turned out to be if not commercial, I don't think I can say that yet, but we're very, very pleased with the results, they're making gas. 1 of them is making a lot of water. We think we figured out how to correct that.

And the other 5 well program, the wells are still dewatering, which is a good sign. It's just going a little more slowly than we hoped and we will be taking additional leases, we think, in the Cherokee Basin. So, that's an attempt to summarize what's going on on the drilling side. Operating income for the quarter was 18 million. A 61% increase over '03 for the first half it was $33 million, a 25% increase over '03, for the same periods. And as I said, this is primarily driven by prices and prices are in the release, 613 (F) in '04 for the quarter, versus 533, 601 versus 571 for the half. And our release touched on exploration expense, taxes, DD&A and I think those things are fairly self-explanatory. If there's any questions, please ask. CapEx in '04 for again, the oil and gas part of our business was about $35 million. The vast preponderance of that was in development drilling.

We've adjusted our guidance a little bit to say we'll be 115, 120 million of 4%, 5% increase, as I said, a good bit of that is this gathering system and some of it is the increase in the drilling in the Cotton Valley. On the coal side, PVR, the MLP side of our business, we enjoyed a very, very successful quarter and what's turning out to be a very, very successful year. Revenue, operating income, I think what are more important are the various cash flow measures, all of which are detailed here, for both the quarter and the half, are up anywheres from 35% to 50%. Production by lessees operating on our property have produced about 20% more coal for the quarter in the half than they did a year ago and prices in terms of dollars per ton received are up roughly 19% or 20% for both the quarter and the half.

So, those 2 things taken together have driven, as I said, revenue income and these cash flow numbers up, basically and I'm doing some rounding here, 40% of the increase is due to the higher prices and 60% of the increases are due to higher production. And that varies a little bit depending on which measure you're looking at. Let me see here, revenues from our coal services business on a PVR side, while it's a modest piece of what we do, because over 90% of our revenues come from coal royalties at this point. It is important because we have said all along that we were going to try to increase the fee based component of that revenue stream and we've begun to do that. Some of the projects we invested in on our property in 2002 and 2003 have come online and are making a modest contribution.

In July of this year, which wouldn't be, of course, in these numbers yet, we set up a 50/50 joint venture with Massey Energy Company, which is a fairly large Eastern coal producer and the purpose of this joint venture is to own and operate end user coal handling facilities, ed. the facilities that might handle coal that's delivered to a power plant or a paper plant or a chemical plant of some sort. Penn Virginia Resources continued $28.5 million of its capital to this joint venture and Massey for their part contributed 50% of 3 existing coal handling facilities. These projects will be, and projects like them are things we're going to pursue, I won't say aggressively, but we're going to be quite proactive here.

We have several ideas in mind and we would hope starting in '05 this will begin to make a contribution to PVR. Also relevant to PVA, PVR announced that effective the 13 of August with that distribution, the MLP will increase its quarter payout by 2 cents a unit. Which would increase the annualized payout to 2.16 per year, per unit. Which means we're starting to get fairly close to that first split, where the general partner of which Penn Virginia Corporation is the general partner, gets a disproportionate amount of the cash flow that comes off of the MLP. We're fairly close to that point now. I think really that's all I am going to say. Our - - I'll be more happy to answer questions.

Our guidance, as we said, is not radically changed. We racheted down slightly the top range on the gas number. We've increased our guidance on coal royalties from 27 to 29 million tons for the year to 29 to 30. We've increased our royalty - - coal royalty revenue number from 55 to 59 roughly to 64 to 66, reflecting both the increase in prices and the increase in production. I touch on the increases in CapEx so I think that kind of summarizes that again, I'd rather answer questions than talk around it. You know, I think what's going on in the markets that we serve is important. And I'd ask Baird, that if you have any comments on what you see in the gas market and then Keith will ask you about coal. Baird, prices, rig counts that sort of thing?

Well, prices, of course, are strong. You know, overall there are still concerns about domestic supply for apparent reasons. Quarter over quarter the major companies have made announcements where they're losing a sizeable part of their domestic production and the independents are having an impossible time to make up the difference. So, I think it's a problem that's here to stay. Our rig counts are way up, around 25% as compared to last year and 50% as compared to 2 years ago. In spite of that, we can't make up the supply, the supply decrease.

So, service costs are going up, as you would expect, with these 1,200 to 1,300 rig count situation right now. Since the beginning of the year, we're seeing overall service costs go up to 15% to 20%, probably the largest single item that's been impacted since the beginning of the year is tubulars, which almost doubled in price. But again, in spite of that, just kind of gas prices and oil prices, of course, the economics are still very very attractive.

Is there anything I didn't touch on in operations that you think I should have?

I don't think so. I think you've got it covered.

Okay, Keith, do you any observations that I might have missed on operations or comments on the market? No, no comments on operations but certainly the coal market is also quite strong at this point in time. The spot market is right around $60 a ton for the types of coal principally they come from our properties. We're seeing long-term orders and by that I mean orders of a year or longer in duration that are settling in for 2005, in the $45 to $55 range. So, the next 18 months looks very strong on the coal side of the business. Okay. And Frank, I know a lot of the people who are listening om are trying to build models and maybe I should have been more complete in some of the things I said or do you have anything you want to add?

No, Jim, I think we've got it covered, I think the accounting for that joint venture with Massey, we covered in the PVR call, but it's relatively insignificant when it gets rolled into PVA, so it's going to be a comp course in equity investment, but it will probably show up for a good period of time next several quarters at least as just in other income under PVA.

All right well operator then I think the best thing to do ist just see if anybody has any questions.

Thank you, sir. Ladies and gentlemen, at this time we will be conducting the question and answer sessions. To allow everyone an opportunity to ask a question, please limit your time to 1 question and 1 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 keys. Please hold while we poll for questions. Our first question will be coming from Joseph Allman of RBC Capital Markets.

Hi, everybody.

Hey, Joe.

Hi, Joe.

I'm wondering what is left to do at Kingsville and just remind us what your plans for this year? And then if you just talk about what's left beyond this year?

Joe, this is Baird. Besides the side track we did in the second quarter, we have 1 remaining development well to drill this year. Subsequent years we have, if memory serves me correct, we have another 5 to 7 development wells to drill. From an expiration standpoint, Kingsville has adjacent fault blocks down from fault blocks, where we have a 3-D survey where we can see some structures that look very similar to Kingsville. I mean the risk of them, of course, is sand quality. But we are going to try to get a [rockhet] drill sometime next year, based a conversation we have had with El Paso. You know it would be, if it worked, it would be equal in size with Kingsville Whiz and Kingsville Propers, about a 70 or 80 Bcf field this time. So, it's a field that even though it has been a little disappointing early on, we still think it has a number of things to do going forward.

All righty. Thank you.

Thank you, Joe.

Our next question will be coming from Ray Deacon of Harris Nesbitt.

Yeah, hi. I guess as for Jim, the - - if you were to look at where coal prices are right now and I know all the contracts don't reprice according to the spot price or long term prices, basically I'm just trying to get a sense of, you know, where could the distribution go on PVR if coal prices were to stay at current levels?

Well, Ray thank you for your question. And Keith, I will hand this off to you here in a second. I would remind you, all of you that roughly 70% of our royalty tonnage this year, at least, would be subject to leases that are price sensitive. About 30% is not. Those 30% are basically the Peabody leases which go up every year but are not tied to the realization of the operators getting on coal. Number 1. Number 2, Ray, we're seeing prices, Keith just said it and he can correct it here, but spot prices in the $60 to $65 range, contract prices, $40 to $45 range, typically you would expect or we would expect history has told us that at 80% of the coal that's on our property is sold under contracts of 1 to 3 years in duration. However, that mix is changing. Keith reported earlier in the PVR conference that it is more like maybe 2/3 of our coal that we own is now being sold under contract because the operators are trying to play the spot market a little bit and that's unfortunately or fortunately the way the coal business often goes. You try to make hay when the sun shines of course, you make too much hay you put the Sun out. But nonetheless, those things are rolling off. But I can tell you we've still got coal coming off our property in the low 20s because of [unfrags] that exist. I don't want to speculate with you what future distribution increases would be. We certainly intend to continue to try to increase distributions if we certainly expect, as Keith said, that the coal prices will remain robust. I hate that word, but at least through 2005. And I'm not going to tell you they're going to stay at 45 and 65 because that - - the economy turns down, we get a prolonged mild winter, all kinds of things, as you know, just as well or better than me, I, affect energy prices. But we would surely expect that the kinds of prices we're seeing will justify future distributions but I'm really loath to predict how much or when. Keith, you have any color? Not really, Jim, I think you pretty well covered it. Ray, did I answer your question?

Yes, I guess the 1 other issue you continue to see is that railcar shipments, you know, are in some cases down and it's affecting the coal industry, but - - are your lessees not having issues?

Well, I'm sure we've got lessees who have missed trains. Keith. Yes, we've had more difficulty on the CSX, Ray, than we have on the NS. The NS has been fairly consistent, but we have had some delays due to car shortages. CSX, of course, is working to resolve those issues, but most of the issues really amount to delays. The coal ultimately gets shipped but it is having some effects on some of the operators and their movements. Ray, I'd say that over the more immediate term, the real issue that might face central Appalachia coal is a diminishing supply of easily accessible reserves, a fairly acute labor shortage. It's just hard to get skilled people to go underground. You know, and the industry has been down for so long that basically anybody who could has gotten out. And those are real problems and of course, the never ending issues with the environmental community and the delays in permitting are the real drags in the intermediate term in the coal business. On the other hand, coal has such a large advantage in terms of BTU delivered price to utility to make electricity that it's, you know, demand is still staying very high. Next.

Our next question will be coming from David Snow of Energy Equities.

Yeah, I was a little confused about the coalbed horizontal drilling. You said there was 1 well that you're not certain about. What was that - - you weren't sure how it was coming about. Can you give us some help on that?

Baird, do you want to? I can or you can.

David, it's - - we had some operational issues in getting this thing drilled. The well that we're talking about is in Virginia, it's on our Rolling Fork lease. The coals are deeper, the name of the coal seam, specifically, is a worker seam, roughly 2500 feet deep, which is twice as deep as where we have done this routinely up in Wyoming Canyon, West Virginia. We have some whole caving issues. We're not exactly sure at this period of time, we're trying to get that figured out. But we will make another attempt to either go back into this well and drill it differently. And maybe not quite as much underbalanced drilling we had drilled the initial well. There may be some operational issues, i.e. not having enough air on the hole itself for circulating reasons. So, that is where we had the problem, but our intent is to go ahead and try to get this thing figured out and resolved and reinitiate drilling sometime at the end of this year.

And you had indicated that you are doing your own type of horizontal drilling with a new technology. Could you give us some handle on what you're doing?

Well, it's drilling laterals, long laterals, laterals look different and when we do the CDX, we don't utilize the parallel well technology or process that CDX utilizes. But all said and done, you end up with something that's looks very similar as far as results go. We just completed that well probably a month or so ago, that well was just turned in line last week, at this point in time, we are encouraged. In fact, we have resumed lease acquisitions in the area. But all said and done, you know, there is a number of different ways to skin a cat and it is just a different way.

You're not using the formation, but you're drilling -- just drilling long laterals?

It's not pinnate, that's correct, but it is long laterals.

And then do you go off to the side at all or not?

In a nonpinnate way, yes. There are side laterals.

Okay. And you're starting another one in the Devonian Shale or have you finished that 1?

No, we are just starting as we speak.

And that will use the same technology?

We'll use the same technology we used up in northern West Virginia except the laterals will look different, they will not be as complex.

Okay, thank you very much.

You're welcome.

Once again, ladies and gentlemen, if you would like to ask a question at this time, you may press star 1 on your telephone keypad. Please keep in mind if you're using speaker equipment, pick up the handset before pressing the star keys. Gentlemen it appears there are no further questions at this time.

Well, I - - good, I guess. I hope that means that we were fairly complete in trying to describe what's going on. Rather than we put you all to sleep or something like that, but I - - it's - - I appreciate the time people take and the interest they show in the Company. You know, we're certainly having a - - in both Companies, a solid a very good first half. I think we're all confident that prices on both sides are going to hold up and we're just doing our best to take advantage of them. So, thank you very much.

Thank you, ladies and gentlemen. This does conclude today's teleconference, you may disconnect your lines at this time and have a wonderful day.