SilverBow Resources Inc (SBOW) 2003 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Swift Energy Company second quarter Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. If you do have a question, you may press 1 followed by 4 on your touch-tone phone and your question will be answered after the presentation.

It is now my pleasure to introduce Mr. Bruce Vincent, Executive Vice President of Corporate Development. Sir, the floor is yours.

Thank you, Jackie, and good morning, everybody. Welcome. Today's call will cover our second quarter results for 2003. Terry Swift, our President and Chief Executive Officer, will give an overview. Then Alton Heckaman, our Senior Vice President and Chief Financial Officer, will review the financial results for the quarter. Joe D'Amico, Executive Vice President and Chief Operating Officer, will cover our domestic operations. And then I'll give you an update on New Zealand activities. Terry Swift will then wrap it up before we open it up for questions. For those of you wondering where Scott Espenshade is this morning, our Director of Investor Relations, he's up in Denver and will be delivering Swift's presentation later this morning at the Intercom [ph] oil and gas conference.

Before we begin, let me remind everyone that our presentation will contain forward-looking statements based on our current assumptions, estimates and projections about us and about our industry. These statements involve risks and uncertainties detailed in our S.E.C. reports and our actual results could differ materially. We expect the presentation will probably take 20, 25 minutes. We've also allocated plenty of time for questions.

I'm going to turn it over to Mr. Swift.

Thank you, Bruce. And welcome again to our conference call here this morning. I'd like to begin by expressing a strong belief that we're on track to meet our goals for 2003. We'll go in again to those goals today, show you where we're at. And then we'll give you an update on all the other activity as to operations and finance.

I'd particularly like to point out a note that our capital expenditures have been increased for this year to the range of 130 to 150 million dollars this year. We plan to drill 10 additional wells in Lake Washington. We plan to improve and we are improving the facility's capabilities in Lake Washington. We also plan to initiate a 3D seismic shoot in Lake Washington. Lake Washington is just one of our areas that we're focused on. We also have set out some very strong goals for the fourth quarter and goals that will lead us into next year. Concerning our other areas, we'll be initiating activity in the south Texas again, we'll be initiating activity in the Brookeland area in the third quarter. We have success driven capital expenditures itemized for the remainder of this year, including activities in New Zealand that we'll discuss today.

In Lake Washington we are pleased to be able to report that production averaged about 8500 barrels a day on a gross basis and about 7,000 barrels a day on a net basis during July. We're on track to exceed our goals in Lake Washington. We had earlier established an end of the year goal of about 10,000 barrels a day gross production in Lake Washington, which would equate to about 8,000 barrels a day net in Lake Washington. We're definitely on track with that goal. A large component of that goal is the facility's build out in Lake Washington.

We've had some good success in Lake Washington with our geology, our last set of wells which Mr. Joe D'Amico will discuss in more detail was very, very successful. The facility's build out is designed to bring the facility's capacity in Lake Washington to about 20,000 barrels a day of gross capacity. That's a capacity number. Again, the actual goal on production is about 10,000 barrels a day gross at year-end. And we have allowed in that planning process, or I should say anticipated a certain amount of commencement time or downtime as we look in those various facilities as well as some storm or bad weather activity there, although we certainly hope that doesn't happen.

In New Zealand we also announced that this past quarter we signed a new contract with Genesis. We'll go for gas. We'll go into a little bit of detail there in this conference call on that. We also have put the Kauri- A4 well onto production into the Rimu production station. We also have begun the process of drilling delineation wells around the Kauri sand. Again, this is a structure south of the Rimu production station. One of the wells, the E1 has already been drilled and cased and is awaiting a frag job. The E2 we are drilling currently.

I want to reiterate that 2003 has started off very well. We set our goals for the year and we're on track. We have a goal this year on reserve and production growth in the 7 to 12% range. We're on track. Again we're focusing on improving our per unit margins, our finding and development cost goal is to have those finding and development costs come under $1.25 per NCF equivalent. We also are looking to lower our per unit cost. As we reported previously the first part of the year we had to get our momentum established in Lake Washington. We believe we've done that. As those volumes come up and as we get past some of the start-up costs or first-time costs in Lake Washington, we believe we will be lowering our per unit cost and be able to show that demonstrably in the second half of the year.

We also have focused in terms of our goals of increasing our proved developed reserves as a category of the reserve base. We seek to have that percentage at 60% or greater by year-end. And of course, we continue to pay close attention to our financial integrity, keep our balance sheet positioned well. We're actually very pleased with these results, the quality of the reserve base and the production base that continues to improve.

And with these improvements we look forward to 2004. In fact, we're very rigorously in the planning process on how we transition through '03 into 2004 and beyond. The price environment continues to look very strong. We have excellent supply and demand fundamentals both in oil and gas. All that to say we are on track for this year.

And at that statement, I'll turn it over to Alton Heckaman.

Thanks, Terry, and good morning. I'll hit the highlights of the detailed financial information that's included in our press release.

As Joe will discuss a little bit later, Swift's record-setting second quarter 2003 production volumes of 13.3 Bcfe increased 5% over the same quarter in '02 and 35 over 1Q '03. Domestic activities contributed 64% of the production for the quarter, and that's up from 60% in 1Q '03 as Lake Washington continues to increase. As domestic production exceeded recent guidance, New Zealand production continued to produce excellent results with the TAWN properties in line with our guidance.

As to pricing, Swift's average global composite realized Q2 '03 price per Mcf equivalent increased 27% over the prior year to $3.84. Domestic pricing actually rose 34% to $4.71 while New Zealand, which has its lower relative gas price component, increased 23% to $2.28.

Oil and gas revenues were therefore 33% above the 2002 quarter. Total revenues for the second quarter totaled 50.7 million, an increase of 31% from revenues of 38.6 million during the second quarter of '02. Swift thus realized 7.2 million in net income for the quarter, which is 26 cents both basic and diluted and exceeding first call estimates.

Cash flow before working capital changes for 2Q '03 came in at 26.7 million or about 98 cents per diluted share while EBITDA was 33.6 million for the quarter. As Terry mentioned in his intro, we still remain quite focused on reducing our controllable per unit cost. But as to second quarter '03 specifically, G&A came in at 25 cents per unit, which was on the upper side of our guidance, the result of some continued corporate governance costs, which everyone's incurring, imposed by recent legislation, such as record retention programs, internal audit, internal control reviews and much more, along with Swift's transition out of the public partnership business, which thus reduced the reimbursement we're receiving from such activities, and of course the significant administrative costs associated with the Lake Washington upgrade and enhancement projects which Terry mentioned.

DD & A for Swift per unit came in slightly above our guidance at $1.18. Domestic production costs came in slightly below guidance as economies of scale and cost control measures at Lake Washington do continue to kick in. New Zealand production costs came in above guidance related to isolated work over costs and higher scheduled shutdown costs for some plant maintenance that were incurred. Production taxes increased, of course, in tandem with price and production increases, very much in line with our guidance. And interest expense came in at 50 cents a unit, below our most recent guidance.

As to our liquidity, our bank line remains virtually unused and is available if the need should arise. We feel we're in strong financial shape to continue implementing our strategy toward a record-setting year.

The 2Q '03 pricing environmental loud us to continue the layering in of some strong hedges for '03 in the form of participating cashless collars and floors for both oil and natural gas. As we said before, our actual detailed price risk management position is posted and updated on our website. We remain committed to this method of hedging which we feel is in line with our historical strategy of protecting the downside without giving away the upside opportunity that exists.

Cap ex for the second quarter '03 was $36 million, basically staying in line with our cash flow for the quarter.

And finally, we've included additional significant financial and operational information in our press release. We've got a summary balance sheet as of June 30, '03, a summary of the three and six-month income statements with per unit metrics, consolidated statements of cash flow for six months June 30, '03 and '02, the required reconciliation of our GAAP to non-GAAP measures, quarterly operational and financial comparisons both sequentially and year to year, and finally we've updated our guidance for the third quarter of '03 and the full year of 2003.

And with that, I'll turn it over to Joe D'Amico who is going to give us an overview of our domestic operational.

Thanks, Alton. Good morning. Total quarterly production of 13.3 billion cubic feet equivalent including both domestic of 8.5 Bcfe and New Zealand, which was 4.8 Bcfe production combined to reach record levels. This is an increase of 5% from the 12.7 Bcfe reported in the second quarter of 2002. Of that 12.7 Bcfe, 8.9 Bcfe was domestic and 3.8 Bcfe equivalent was from New Zealand.

Production growth in the second quarter of 2003 resulted predominantly from additional production at Lake Washington and New Zealand. Total production in the second quarter of 2003 increased 3% from 12.9 Bcfe in the first quarter of 2003.

Let me start in Lake Washington where barging operations have eliminated any transportation constraints that were in the field. Production in the field has averaged over 8500 gross barrels per day, 7,000 barrels per day net for the past two months. Average production for the second quarter was approximately 6700 gross barrels per day or 5500 barrels per day net.

As Terry mentioned, we will be taking the facility gross capacity to 20,000 barrels per day in the fourth quarter, which should give swift plenty of room to grow production. We currently have about 50 wells producing in the field and 11 that are waiting on flow line connections. The increased capital expenditures that we added to this year's budget will allow Swift to add approximately 10 wells to our original 50 to 60 well program for the year, complete the aforementioned facility upgrades and begin working on a 3D shoot [ph] for the Lake Washington area.

During the second quarter lease operating expenses increased by 25% to 69 cents per MCF compared to 55 cents per MCF in the second quarter of 2002. This is also approximately 1 million in aggregate more than we spent in the first quarter. There are two main reasons for the increases in LOEs. The first is due to increased activity in the Lake Washington area. We have had several initial and in many cases one-time charges associated with the increase in the facility capacity that were G&A in nature. The second reason that we had some work over expenses in the second quarter, some of which will carry over into the third quarter. We are confident, however, that we will be reducing our lease operating expenses in the second half of the year declining on a per unit basis as production volumes increase and the elimination of these one-time expenses associated with the facility upgrades.

The company successfully drilled 19 of 19 wells in the second quarter. We successfully drilled 14 wells in Lake Washington and four in the AWC Olmos area and one non-operated well in the Garcia ranch area during the second quarter. Since the end of the second quarter we have also drilled four additional wells to bring our year to date domestic total to 34 successes out of 42 wells drilled for an 81% success ratio. Nearly half the wells currently planned to be drilled in the third quarter at Lake Washington are targeting our deeper sands with wells Tiding [ph] below 5,000 feet.

Our typical plan on these wells is to deviate the well board parallel to the south face to the targeted sand or until we encounter salt. This allows Swift to encounter the maximum number of sands with each well board and provides more information for our geologists who are doing an excellent job correlating the geological information. It was in this manner that we found the F sand, which is Swift's most productive sand in the field to date.

Currently the company has two rigs drilling in the Lake Washington area. During the third quarter we plan to drill up to 15 development wells in Lake Washington, also drill up to four entity per density development wells in the AWP Olmos. Entity per density is really drilling on 20-acre spacing. In south Texas we plan to drill two wells in the Garcia ranch area plus a well in the Wilcox trend. And we're putting a rig back to work in the Brookeland area in the Austin Chalk, which will move to Masters Creek when it completes the Brookeland well.

As part of the facility upgrades in Lake Washington, we have laid a new gathering line in the field and we'll be expanding the processing platforms and installing some new equipment this quarter which will increase our productive capacity in the field. We will have some production down days during the quarter while this takes place.

Lastly, I want to reiterate that Swift is keeping a keep eye on Eloise. We plan on reducing our lease operating expense on a per unit basis in the second half of the year as production volumes increase and facility upgrades in Lake Washington are completed.

And now I'll turn it over to Bruce Vincent for an overview of our New Zealand activity.

Thank you, Joe. I want to break my remarks into the core areas in New Zealand, talk a little bit about TAWN and talk about the renewed carrier area and touch quickly on the New Zealand markets themselves. Up at TAWN it continues to perform well, averaging slightly over 48 million cubic feet equivalent in the second quarter. We do see some market fluctuation in New Zealand currently, and so we expect this average to be down slightly in the third quarter.

We continue to work on exploitation activity in the fields in the TAWN area and are considering a development well in the Tariki field in the second half of the year as well as continuing to evaluate the deep potential in the area where prior production tests were conducted in the deeper Kapuni sands. We wouldn't expect to drills any wells testing that this year, but are looking at it for next year's budget.

Down at the Rimu/Kauri area, production during the Rimu production station averaged approximately 5 and a half million cubic feet equivalent per day during the second quarter. The RPFs was down for approximately 10 days during the second quarter for planned maintenance. The Kauri- A4 well which was drilled last year in fact in March, is now producing into the Rimu production station at a rate just above 3 million cubic feet per day plus 140 barrels of condensate. The Kauri-E1 well, the first of two delineation wells targeting the Kauri sand, was drilled in the second quarter and did encounter the Kauri sand. Pipe has been successfully set in the hole and is waiting on a fracture stimulation program that will take place later this quarter.

The Kauri- E2 well, which is the second delineation well also targeting the Kauri sand, is currently drilling and is expected to be completed this month. And assuming we encounter the Kauri sand, it also will be fracture stimulated along with the E1 well later this quarter.

A little bit further to the south in the shallow Manutahi sands, the Kauri-F1 well, which was drilled in March, continues to perform well producing naturally from the Manutahi sands without needing assistance from artificial lift. And we are currently evaluating further developed plans in the Manutahi sand that will probably be a part of next year's budget.

Activities planned in the second half of this year include the fracture stimulation program in the Rimu/Kauri area that will include the E1 well and the E2 well if it encounters the Kauri sand as we anticipate, as well as the Rimu A1 in the Tariki sand. We also will be drilling the [indiscernible] exploration well, which is a re-entry further to the north. That well should spud by the end of this quarter. And then following that well we are considering a development well in the TAWN area, which would be in the Tariki, field.

Some quick comments on the New Zealand market itself. Recent news earlier this year on the Maui field predetermination as well as the uncertainty of the [indiscernible] delineation drilling results have caused the natural gas markets to improve quite a bit. Swift Energy New Zealand, our New Zealand subsidiary, has entered into a new agreement with Genesis Power for the sale to Genesis of up to eight pedajules [ph] of natural gas, which is approximately 7.2 billion cubic feet per year over the three-year period beginning last month. Under this new agreement natural gas will be delivered to Genesis from production established through discoveries in the Swift's Rimu/Kauri area. In addition to the gas markets improving though, we're also seeing exchange rates continue to improve, moving closer to the 15-year average.

Thanks for your attention. I'm going to turn it back to Terry for the wrap-up.

Thank you, Bruce. In summary, we're on track with our goals for 2003. Our 2003 activity in conjunction with our 2004 plans should allow us to achieve organic growth in our production and reserves in the range of 7 to 12%. Our increased capital budget should allow us to continue our focus on developmental drilling, which is success-based and to allow us to continue to improve of the mix of reserves towards long life reserves, higher quality production associated with it.

In Lake Washington our exploitation, development and exploration activity is on track. As it relates to production, we are on track to meet our year-end goal of doubling the production to approximately 8,000 net barrels of oil per day, which we expect or we believe we should be able to achieve by the end of the third quarter.

In New Zealand our core areas are progressing well. And as the New Zealand gas market pricing continues to improve, we see more opportunities which we're continuing to evaluate as we go forward.

By monitoring our financial position and keeping it flexible, we believe we're positioned to take advantage of the various opportunities that are before us, whether they be drilling or acquisitions. [Begin Q-And-A] And with that at this time I'd like to turn it over to questions.

Thank you. Your first question is coming from Adam Light of Credit Suisse First Boston. Please state your question.

Good morning, guys.

Hey, Adam. How are you?

Good. Wish I was in Denver listening to Scott. On the capital program, can you just give us a sense, first of all it looks like it's a little more heavily loaded in the third quarter. Is that correct? And then, however how much of this south Texas/Toledo Bend Austin chalk stuff is price sensitive? And is there a threshold where that doesn't work? And on the Kauri-E wells, when will those be on production?

Adam, this is Terry. Let me give a quick answer to that and then kind of turn the specifics over to Joe and Bruce. First of all, as relates to the capital spending, yes, we do believe that it's more appropriate to say that it's allocated into the third quarter because I think a significant amount of that capital spending related to our facilities build out which is ongoing. And Joe's given more detail on that. But in addition to that, a good bit of that capital is gonna be also in G and G type activity, principally 3D seismic in Lake Washington, which we hope to begin pretty soon, as well as additional drilling both in Lake Washington as well as south Texas. And as I mentioned, Brookeland.

As to the actual economics around that and the pricing, we continue to work all of our projects based on the 350 gas price and the 2550 oil price that was in our budget. We don't believe those particular prices are necessary to justify the projects at hand. They certainly make those projects much better.

I would kind of be shooting from the hip to tell you how low prices could go to continue to justify those prices, but as you're well aware, the current price deck is significantly higher than that budget, anyway.

Joe, did you have anything to add to that?

The most sensitive area related to prices is AWP Olmos and we've drilled four wells there this year. And we've done something different. We've done a diesel frag instead of a water frag. These are in-fill wells and all four wells have come in better than expected. We're going to carefully watch these wells and see. We think hopefully these wells will improve our recovery, the recovery we had anticipated for each of these wells so that our economics will be even better than in the future.

That's a good observation. We're changing a few things around as we expand our activity, and we really believe that we're in a situation in particular in AWP where we don't have lease exploration issues. And so, we've got a very solid what we refer to as our rock of Gibraltar production base down there. We've got six more wells planned this year. And what we, of course shall want to do is use these other six to create momentum so we put a rig to work into 2004, and of course we'll be reporting to you later in the year as to how we plan that rig to keep working down there.

Adam, this is Bruce. With regard to your third question, which as I recall was when will the E-1 and E-2 if it encounters a sand be on production. E-2 will be finished drilling this month in fairly short order. We'll need to obviously log it and evaluate it. If it encounters a sand, we'll need to complete it and then we'll need to schedule a fracture stimulation which is already scheduled for later this quarter -- should take place before the end of September. We already have the gathering lines laid to the E-1 pad, so once these wells are fracture stimulated and cleaned up, they'll be able to be run right into the RPS. So, we would hope that those wells would be on production by the end of the third quarter.

Okay. Great. And then on pricing in New Zealand, it looks like you're expecting sort of a bigger increase than appears to be the impact of exchange rates. How of that is the new contract? How much of it's just tightened market? How much of it's exchange rate?

Good question. Obviously a little bit of everything is the answer. The -- we did sign a new contract with Genesis. And that contract suspends the old contract, which was, you know, really indicative of the prices that were in existence in New Zealand for some time. A key part of that contract, obviously, is confidentiality over that price. It's a competitive market over there, although there are only a couple of big players. It's still very competitive. And so, we're not in a position to tell you what that price is.

But obviously the new gas volumes coming into the Rimu production station over and above what were there, which are really going to be coming from the Kauri wells, are going to be getting this new price. And obviously as volumes increase, that new price will affect our average price realizations over there.

I think in terms of exchange rate estimates, you know, that exchange rate has improved substantially. I know we've shown many people, and probably including yourself, the trends of exchange rates in New Zealand, the kiwi dollar versus the U.S. dollar. And in fact, it's getting back to that average that it's been at for many, many years. We don't see a significant further improvement in that exchange rate, but obviously if you look at our guidance you'll see a little bit higher full year price which tells you the fourth quarter price is gonna be a little bit higher. So, the primary factor attributable to that is the higher volumes coming from the Kauri sand under the new contract.

Thanks very much.

Once again, if you do have a question, you may press 1 followed by 4 on your touch phone telephone at this time. Your next question is coming from Phil Pace of Credit Suisse First Boston. Please state your question.

Hey, guys. Nice quarter.

Thanks, Phil.

I guess a couple different things. If your cash flow, I don't know what it was, 60 million or so in the first half, it looks like you're willing to outspend your cash flow a little bit. Is the plan -- it looks like some of that might be funded with divestitures. And do you have preliminary guidance for what you think you might be spending in '04?

The answer to that question is yeah, we are willing to outspend our cash flow modestly. We've run a number of different sensitivities internally and we've also, of course built the budget to have some flexibility, some discretionary spending as we've also discussed. We don't think if we outspend it will be by much. And obviously to date we've been able to stay within cash flow. We're going through the '04 process now in terms of budgets. The guidance that we would provide out there for '04 is that we would anticipate spending our cash flow at this point in time.

Okay. That's all I've got. Thanks, Bruce.

There are no further questions at this time. Excuse me. We just had a question come up from Michael Scialla of A. G. Edwards. Please state your question.

Good morning, guys.

Good morning.

This is a question on New Zealand. We've seen that Shell has decided to suspend oil and gas exploration in the country. I'm wondering what your thoughts are on that as far as any opportunities that might present for natural gas markets as well as maybe acquisition opportunity.

This is Terry. I'll handle that. First of all, we saw that about the same time you've seen it. We haven't had a lot of time to talk with the people in New Zealand to see how that might actually impact us.

But generally speaking, we have an excellent relationship with Shell. So, to the extent that they might be changing their strategy, we would hope that there would be opportunities that would be available to us. We clearly are positioned in terms of facilities and infrastructure. We have an ongoing operation there. So, I think we're certainly one of the companies that could be a beneficiary of any opportunities there that they might not want to continue with.

On the other side of it, again we expect Shell to remain very involved in New Zealand. We have different ventures with them, particularly on the oil storage purchasing side. And I think they're very committed to being in New Zealand. So, my opinion is that while this may have a lot of splash initially, it's probably more indicative of more global things going on with Shell right now and that you really ought to anticipate that Shell's gonna be there for quite some time. That would be my opinion.

Okay. Thanks.

Sure.

Thank you. Your next question is coming from Matthew Chira of PNP Paribas. Please state your question.

Hi, guys.

Hi, Matt. How are you doing?

Excellent. Thank you. Three quick questions for you. Are you still barging products out of Lake Washington?

That answer is yes.

And do you expect to continue doing that?

Yeah. I'll let Joe go into that in a little more detail.

Yes. We're in the process of reconnecting to the Emco pipeline, but we will also continue to have a barging operation in Lake Washington. So, we'll have later this quarter, beginning of fourth quarter, we'll have two outlets, the barging outlet and also the outlet to the Emco pipeline. And we're looking at a third outlet right now.

Joe, is that third outlet that pipeline to the south of you?

Yes, it is.

Okay. And then perhaps, Joe, you can answer this, too. That 3D seismic that you're shooting, is that kind of in the neighborhood of where you're drilling now or where is that being shot?

It will be shot over the complete dome. What we're targeting is we have a lot of well control down to about 5,000 feet. And as you know, we've been drilling deeper and deeper and finding more and more pay sands. And what we think we can do with the 3D, better image targets from 5 to 15,000 feet. So, instead of having to drill kind of rank wildcats or drilling blindly to drill a deep well, we'll have some pretty good control and really good leads using the 3D.

And just to be clear, Matt, we're really in the process of developing a plan and designing the seismic. We're not shooting it yet. It probably wouldn't be shot till at the earliest late this year and probably into next year.

Okay. And the rig rates there are still rather steady?

Yeah. The -- you know, the barge rig market actually is your softest market in terms of rigs out there. And because of the activity level that we have in Lake Washington, we've been able to negotiate good agreements with our vendors to help keep our costs down.

Great. One more quick question, if I can. Could you estimate how many well locations or drilling locations that you have kind of at that 5,000-foot range in Lake Washington?

I think we ought to be a little cautious there. We believe we've got a year to three-year drill out going on there. In answering that, we'd have to be adding discussing not only the proved undeveloped locations, but we'd have to be discussing the probables and possibilities. And right now we've had so much activity that that's a growing number, and I just would not be comfortable putting a specific number out there right now. But I do believe we've got at much as a three-year drill out there.

We've got, I think, specified actual locations of over a year. Yeah, we have specified locations, more than enough to keep two rigs busy for over another year.

Great. That's understood. Thank you, guys. I appreciate it. Nice quarter.

Thanks, Matt.

Gentlemen, there are no further questions at this time. I'd like to turn the floor back to you for any further or closing comments.

Well, we'd like to thank everyone for joining us today. And we'll close this out by saying we look forward to meeting with you again next quarter and bringing you some good results. So, thank you again.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. And have a wonderful day.