Ranger Oil Corp (ROCC) 2006 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Penn Virginia Resource Partners LP second quarter results 2006 conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to introduce your host, Mr. Jim Dearlove, Chief Executive Officer of Penn Virginia Resource Partners. Thank you. Mr. Dearlove, you may begin.

Thank you, operator, and good afternoon to all of you who are on this call. I want to just point out I'm joined here today in Radnor, outside of Philadelphia, by Frank Pici, who's our CFO, and by Pete Hartman, who is our Treasurer. We also have in Kingsport, Tennessee, both Keith Horton, who runs our coal group, and Forrest McNair, who's Controller of both PVR and PVA. Got to get my notes straightened out here. Penn Virginia Resource Partners had a very good quarter in the second quarter of 2006, both operationally and strategically. We've tried to, obviously, give you the highlights and a little detail behind them in the press release. And I won't read it all to you but I will point out that distributable cash flow was a record in the quarter at a little over $27 million, up over about 22% over the corresponding quarter in 2005. Operating income was up to $29 million, again a record. Net income was down a little bit due to some issues with mark-to-market derivatives, which we'll touch on here in a few minutes. For the half -- for first half of the year, results were equally strong. We are having a very good year. And the increases in, particularly the cash numbers and the operating income number are related to improved or increased processing margins at our Midstream business, as well as higher inlet volumes. And, of course, volumes of coal sold are up year over year, quarter over quarter, because -- primarily because of the acquisitions that we made in 2005 beginning to ramp up a little bit. And also because we are getting a higher realization per ton than we did a years ago.

And in recognition of these improved results and the associated cash flows, the board of directors of Penn Virginia Resource Partners raised the quarterly distribution, as we point out in our release, to $0.375 per unit per quarter which, if you analyze that, gets to $1.50. And remembering that we split the units earlier in the year, on a presplit basis that's $3 and we came out at $2. So we've increased our distributions by 50% over the life of the partnership. We've increased them about 15% this year, and that distribution will be effective for units paid out on a second quarter of this year.

Just to touch on operations for a minute -- and I may ask Keith Horton to elaborate a little bit, particularly on the coal side where there's been some real volatility -- but the coal segment had a record operating income for the quarter of a little over $19 million. That compares with 16, a little over 16 in the second quarter of last year and a little over 17 in the first quarter of this year, so a very strong quarter, again, due to higher realizations. Our realization per ton on average -- and there's quite a spread here -- but on average is $3.04 versus $2.78 about a year ago. That's about a 9% increase. Production was eight million tons, up from 7.3 in '05 and that's another 9% increase. Similar things could be said again about the first half of the year, the year-to-date numbers, where tonnage is up about 12% and realizations are up about nine. And again, this was in large part driven by our -- the success of our acquisition program last year, 2005.

And on that subject of acquisitions, one of the reasons I said that I think we are having a good quarter strategically as well as operationally is that, in the second quarter of this year we announced the acquisition of something we call [Huff] Creek -- which, if Mr. Horton gets on the phone he'll call by several other names, as well, just to make sure there's the maximum amount of confusion -- but none the less, 69 million tons of coal, a very high quality coal, a little bit of it targeted for the met market. There is an operating surface mine there right now that's producing about two million tons a year. We expect that three or four -- more likely four deep mines will get put in in a load-out facility and a preparation plant over the course of the next few years, and we might expect that production off of that property would peak out at about three million tons a year.

It's been a pretty active half year in the coal industry, Keith, and would you mind bringing the listeners up to date a little bit?

Yes. We completed the Huff Creek acquisition I guess in May of -- during the second quarter this year. There is quite a bit of development ongoing there as we speak, and expect to ramp up over the next three or so years, up in excess of three million tons a year. Part of that will be metalurgical coal, high [vol]. There's a certain distinction among the high vol, low vol markets, and this market is very robust as we speak in terms of pricing. The overall market for coal, while we've seen some short-term softness in the spot price, I'd remind everybody that the spot price only recognizes about 12% of the total production, so -- in the U.S., and for our lessees during the course of the year much less than that. Most of our lessees for '07, we are sold about 90%, 92% is the latest number I have and 84% for '07. So we have long-term contracts in place and approximately 45% is sold in '08. So those contracts probably mitigate most of any short-term softness that we saw in the spot price. Certainly, the weather over the last couple of weeks in the eastern part of the country, which is primarily our market has been very, very good for coal and consumption. Consumption this year appears to be-- as electrical generation is up about 3% year over year, central [lat] production is up about a similar amount. So, right now we see real strong, long-term fundamentals for coal, and expect this market to continue at least through '07 as far as we can see.

That's about got me covered, Jim.

Okay. Thanks, Keith. On the Midstream side of the Company, another -- an acquisition was also made and announced this quarter. And that was of 115 miles of 12 to 16-inch pipe that we bought from a company called Transwestern. The significance here is that this overlaps and is contiguous with our -- the gathering system that supports our largest natural gas liquids plant, which we call the Beaver plant. This will allow and it has allowed that plant now to be filled to capacity and we are now anticipating an expansion there. I'm not exactly sure of the timing of it, but I know we are pushing numbers around right now. So that's strategically, I think, an important thing because it really expands our footprint in our most important area. And we are developing relationships with people who are drilling there and we're well ahead of where we thought we would be a year and four months ago when we acquired these assets to begin with.

As the release points out to you, the operating income for the Midstream was a record of $10 million for the quarter, up from $4 million -- a little over $4 million a quarter -- the same quarter in '05. Inlet volumes were at 140 million, which is basically capped out for all plants, and that's an 11% increase over where we were a year ago. Gross processing margins are through the roof. Gross processing margin being the revenue received minus the cost of gas. So basically the spread between oil prices, which are tied directly -- or natural gas liquids price is tied directly to oil prices, which are going up, or at least high, and gas prices, which are relative to a year ago or six months ago, anyway, low, has caused that frac spread to be virtually at an all time high. So that confluence of events is caused the performance at Midstream to be very, very strong.

Normally I would ask Ron Page to give you a little flavor for what's going on, as Keith did. Ron, unfortunately, is traveling today and we were hoping he could call in, but it looks as though he's been ambushed by the airlines or by somebody, so I apologize for that. But Steve Hartman is prepared if we get into any questions to talk the best we can about operations, so don't be afraid to ask. One of the things that we've done in the quarter was to switch from hedge accounting to go mark-to-market accounting, which we told you we were going to do in the last one of these calls. And we thought it would be appropriate for Frank Pici to give you an update on where that all stands.

Well, thanks, Jim. As I think most of you know by now, we use derivatives to hedge our commodity price risk in our Midstream Gas Processing business. The largest part of those hedges were entered into around the time we first acquired our Midstream business in early 2005. Those hedges locked in our processing margins at levels above our acquisition economics, really to a larger degree for 2005 and 2006, and then to a lesser degree in 2007 and eight. Of course, since we placed the hedges oil and gas -- oil and NGL prices have gone up significantly since we made the acquisition, meaning that we paid some of those gains back to our financial counter party, some of those cash market gains. But as we said in the press release, net income was reduced by $11.9 million in the second quarter, by our derivatives-related activity, and out of which of which $5.1 million was actually paid, with the rest being a non-cash change in the unrealized mark-to-market value of the open hedging positions at the end of June. So when we adjust for the cash payments made during the quarter, our Midstream processing margin, at which Jim alluded to earlier, is reduced from $19.7 million to $15.2, which is still a 40%, 42% increase over the second quarter of 2005 on the same basis. So you can see that even after giving some of the commodity price gains back to our hedging counters parties, our Midstream segment still had a very strong quarter.

Thanks. Very, very quickly and then I will talk about PVG, but in terms of guidance you'll notice that our guidance has changed little bit from the guidance that we put out at the end of the quarter -- last quarter, the first quarter. No change on the coal side in tons -- tons guidance. A slight uptick as in realization we were $2.75 to $2.85, now $2.90 to $3. Some other fairly minor changes in direct expenses, in DD&A, but this is as much a tightening of ranges as it is in anything else. Obviously, a big change in CapEx because we do not budget nor give guidance on expected acquisitions. And so, last quarter you saw coal expenditures at $16 to $18 million now they're at $82 to $84 million, and that is a couple of things, but the main one is the Huff creek thing. The other is some infrastructure activity that's picked up a little bit. Likewise, not much change in the Midstream that's significant. A little lowering of expenses and I think that's a refining of our understanding of things as much as anything else, and the CapEx there going from $11 to $14 million, and the old release to $34 to $36, and that's driven by primarily by the Transwestern action acquisition, which, as I said, was $15 million as well as some other activities to [lupo] line and some other things that have gone on. So, the guidance is fairly consistent with what we gave you in the first quarter. There's no negative surprises in it. It's simply reflecting some of the acquisition activity.

And finally, it's germane to both PVR and to PVA, I suppose, that on July 11, Penn Virginia Corporation announced that Penn Virginia GP Holdings LP -- which if we do, in fact, complete this offering and go on to the New York Stock Exchange we would call PVG, and PVG holds all of Penn Virginia Corporation GP and LP interests in PVR -- anyway, that entity filed a registration statement with the SEC for an initial public offering of six million of its common units -- the offering size could increase by 900,000 units if the underwriters exercise their rights in a thirty-day period called a shoe, if you want to use the jargon, the thirty-day period following the purchase -- the offering, if it's completed and subject to negotiations with the PVR board, PVG would expect to use the proceeds from the offering to purchase some newly-issued class B units from PVR. PVR, in turn, we would expect would use the proceeds it receives from PVG to pay down its credit facility debt. Our hope, of course, is that by valuing its holdings in PVR, PVA will become more transparent to the public, easier to understand and get further recognition of the value of what it owns. And we think beyond that, PVR would benefit from this simply by the fact that it would strengthen -- further strengthen its balance sheet and, thereby, allow it to continue its acquisition program.

So with that, I will turn the conference over to questions, operator, if you wouldn't mind.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Scott Hanold with RBC Capital Markets. Please proceed with your question.

Good afternoon.

Hi, Scott.

A question regarding sort of the some of the softness we've seen in some of the coal markets. It does appear to be somewhat seasonal, but looking at your current asset base and the operators that are running on there, are any of those would you consider them quote, unquote marginal lines, where if prices did stay in sort of that 50 or even slightly sub-50 level that they may shut down?

Keith. I'll let you field that, if you don't mind,

I think we would have virtually no production in the near 50 market that would shut down. I think to get much of an impact you have to get to 46 or less in terms of the market. I think that almost all our lessees have a fair amount of their business on long-term contracts locked up through at least '07, and many have a portion of their production locked up through '08 at prices, $49 higher. So that's sort of the picture we've got right now.

Okay. And going to the point that it does look like a lot of its locked up, at least especially into the next two years, of the volumes that are not locked up right now, are any of those subject to sort of caps?

What do you mean by a cap?

When they get repriced, say they get a certain amount -- price that can only move higher by a certain amount?

Again, Keith, I don't think we are privy to --

I don't have --

All that detail.

I don't have that kind of data.

Okay. Fair enough. Maybe talk a little bit about what you are seeing in the acquisition market, both on the coal side and on the Midstream side? Are prices looking pretty favorable at these levels?

No. [LAUGHTER]

I think it's -- we've clearly had some success in the acquisition market. We made four acquisitions in the coal business last year and, of course, last year we bought Cantera, so we've been active on both front. We've done some things this year that I just touched on. So clearly there's the ability to do transactions and we are actively pursuing them. But I wouldn't -- I think it would be disingenuous of me to say it's an easy market. There is a lot of MLPs out there. They bid up prices. Where you might have expected seven and eight times EBITDA, you are seeing ten and 11, so you've got to be careful. It puts a premium on negotiated deals, if you can do them. It puts a premium on creativity and puts a premium on buying assets that have some organic growth characteristics. And we're looking for all three of those things and I think we managed to demonstrate in the last year or two that we can be successful. But it's a struggle. It's a struggle.

Is it a little bit tougher in the Midstream side versus the coal side or are they equally difficult?

They are different, but equally difficult. What I might elaborate one sentence on that. On the coal side, what you're finding, particularly where we are trying to grow in the Illinois Basin, but regardless is that you're paying for the future and MLPs have a little trouble doing that because they want to make accretive acquisitions. But generally speaking, you're buying reserves that are connected to a mining plant as opposed to buying an all up and running operation. For example, the one we just bought. It's running a little surface mine now. It's enough to make it accretive, but we're really looking for those four deep mines to go in that preparation plant and load up to be built. So on the coal side it's a little harder to find things that are truly accretive. On the Midstream side, it's not as much that, it's that there's just a lot of competition out there. There's a lot of MLPs out there. There's a lot of private money that's hoping to become pregnant by buying assets that they can MLP, so it makes for some stiff competition.

One last question, more of a housekeeping thing. Frank, in the guidance on the natural gas Midstream segment, I guess maintenance -- I guess CapEx, could be clarify something for me? I think year to date you're at 4.3 and I guess the guidance for '06 is $2 to $3 million. What should we expect as far as maintenance cap from the Midstream business over the second half of the year, and then sort of what's the sort of normalized quarterly rate we can expect into '07 and beyond?

I think the normalized quarterly rate is going to be in that $2 to $3 million range and that's -- by the way, that's actually a typo in the '06 guidance for the maintenance and capital expenditures. That ought to be more in the range of $7 to $8 million for the full guidance there. But on a normal run rate, I'd say $2 to $3 million for the Midstream is sort of normal, and that's for your basic well tie-ins out of the Midstream business, more tying new wells into our existing systems.

Okay. Thanks, guys, good quarter.

Thank you. You sort of broke the one question rule there but -- and we'll try to be flexible -- but I'd remind you of that.

Our next question comes from the line of Michael Blum with Wachovia Securities. Please proceed with your question.

Hi, good afternoon, everybody.

Good afternoon.

First question, Jim, just around your comments in terms of raising the distribution this quarter, you listed a number of reasons and the business is doing well on a number of fronts, but I guess I want get your thoughts more in terms of the processing margins. How do you think about those longer term? Clearly they're very, very strong in the second quarter. And how that relates to how you think about setting the distribution on a long-term basis?

Well, I don't know that we sat down and said per se what will the processing margins be in the first quarter of '07 and try to make a guess at what to set distributions at right now. We're trying to be sensitive to the fact that people bought PVR because it's a yielding security, so we want to have a consistency to raising our distributions when we think we can afford it. But to your question, we're very sensitive to the fact that we're in a commodity business on. On the coal side we have depleting assets and on the MLP side they're -- excuse me, on the Midstream side they are depleting as well, as very price sensitive. So we try to keep in mind that things change. We don't know exactly how they'are going to change. We'll be sure that they will and keep adequate coverage. So we've got very healthy coverage right now. And part of the reason for maintaining that is the uncertainty that you are pointing to, but there's not a formula that's somewhere that says processing margin equals X, distribution equals Y.

Okay.

And Michael, one other thing to point out -- this is Frank on the -- yes, the processing margins are at pretty close to all time highs at the moment, because of that swing between oil and NGL prices as compared to natural gas prices. We have begun to implement an ongoing price risk management program on that side, and will look at locking in some of those margins as those opportunities present themselves. We've done a little bit of that so far, not a huge amount, but we're looking at doing that as a way to take some of the commodity price risk and sort of lock in some of that superior margin when we can. And that, of course, would serve as some support for making -- helping us make distribution increase decisions down the road.

That's a good point, Frank, thank you.

Thank you. And the other question is just around the latest Midstream acquisition you made. Can you just give a little more color in terms of, did this sort of -- does this extend your system to new fields? Are you getting access to different reserves or producers? And what does that mean for future growth?

Steve, you want to take a shot -- I can go ahead.

Sure, Michael. This -- what this did for the Midstream company is that it is diverts gas that was processable but going into Northern Natural's line and going downstream unprocessed and put it into our Beaver plant. So we're able to take the net liquid upgrade on those volumes, in addition to extend the footprint of our system. And there is a lot of drilling activity around Transwestern's pipe as there is around our Beaverton system and -- our Beaver system and [Perryton] system. So it fits in well with our existing system and extracts more value out of that pipeline system.

Some of it was actually our gas, but it had to go through this piece of line to get to its delivery point. And as a result of that, we weren't getting some of the processing margins that we can get today. So I think it improves our ability to get some processing margin on gas we were gathering previously.

There's about 20 million of incremental gas that was flowing into the Beaver plant now that wasn't flowing into it before.

Okay, great. Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of Michael Blum with Wachovia Securities. Please proceed with your question.

I was trying to stay in that two questions limit but, anyway.

Go ahead.

These other questions are just around the guidance. I guess the first thing is you maintained -- on the Midstream side you maintained the volume guidance -- I'm sorry -- yes, but I guess you made this acquisition and you're adding 20 million per day so I was trying to just figure out what I was missing there.

Well, one thing we need to look at there -- I think what you're pointing to is the MI volume number there that hasn't really changed much in the guidance. We can currently gather that additional gas and we're looking at -- we're fully capped, as Jim mentioned, at around 140 million feet or so a day now of processing capacity. What we are looking at doing, which hasn't really been reflected in the inlet volume number in the guidance, is expand the plant capacity, I think that's part of what's going into the capital expenditure number down below. But that's going to probably increase this inlet volume number from what we show in the guidance, Michael. We just haven't completely gotten around to updating everything on that yet.

Okay, thanks.

[OPERATOR INSTRUCTIONS] Gentlemen, there are no further questions at this time. Do you have any closing comments?

No, operator. Thank you very much to you and all the folks who are on this call. We hope to have you on again next quarter. Thank you.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.