SilverBow Resources Inc (SBOW) 2006 Q4 法說會逐字稿

Good morning, ladies and gentlemen. My name is Natasha, and I will be your conference operator today. At this time, I would like to welcome everyone to Swift Energy's fourth-quarter earnings release and full-year conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Thank you.

It is now my pleasure to turn the floor over to your host, Scott Espenshade. Sir, you may begin.

Good morning, everyone. I am Scott Espenshade, Director of Corporate Development and Investor Relations. I would like to welcome everyone to Swift Energy's fourth-quarter and full-year 2006 earnings conference call.

In today's call, Terry Swift, Chairman and CEO, will provide an overview. Alton Heckaman, Executive Vice President and CFO, will review the financial results for the fourth quarter. Then Bruce Vincent, President, will provide an operational update. Terry Swift will then summarize before we open up to questions. Also present on today's call are Joe D'Amico, Executive Vice President and COO, and Mike [Kitterman], Senior Vice President of our Operations.

We'd like to remind everyone that Swift Energy will host its annual investor day--investor analyst day here in Houston and on March 14. We welcome everyone to attend. Please see this morning's release for the details.

Before I turn it over to Terry, let me remind everyone that our presentation will contain forward-looking statements based on our current assumptions, estimates and projections about us, our industry and the current environment in which we operate. These statements involve risks and uncertainties detailed in our SEC reports, and our actual results could differ materially.

We expect our presentation to take approximately 25 to 30 minutes, and allow time for a question-and-answer period.

With that, I'd like to turn it over to Terry.

Thanks, Scott. Thank you again for joining this morning's conference call. We are proud to report that Swift Energy Company had another record year in 2006. Swift Energy was able to capitalize on the industry environment through our company's execution by delivering record production, which led to record income and record cash flows. More importantly, we are extremely excited as to the set of opportunities we have in our portfolio as we look forward. Swift Energy expects to perform on this expanded portfolio of properties, and the information that we have, relative to these strategic areas, to increase shareholder value.

Once again, it gives me great pleasure to report that Swift Energy Company had the best year, financially, in our 27-year history. Swift Energy had a 40% increase in net income to 161.1 million and a 49% increase in cash flow to 425 million for 2006.

This was not a year without challenges. Although we saw record commodity prices early in the third quarter, along with it came oilfield cost and services increases. We faced the lingering effects of the hurricanes, hurricanes Katrina and Rita, as we placed a South Louisiana production back on early in that year. Lastly, Swift Energy's Chairman and Founder, my father, passed away last year. But true to his form and our management team, we were prepared for this transition.

Last year's $70-plus oil prices led to further increases on the cost side.

Over the long-term, costs typically mirror the energy price decks. More recently, commodity prices have declined from their highs of last year, but oilfield equipment and services have been slow to follow. These costs may not fall as quickly as we would like, but they will decrease and be in line with overall realized prices over a longer time frame. Swift Energy will monitor the cost side and take the appropriate actions to keep our company healthy.

While we have excellent relationships with our contractors and service providers, we do expect them to keep their services in line with the general oil and gas commodity market prices. That being said, we have an enviable inventory of 3-D-based exploration projects. We have a set of exciting 2007 exploration wells that will be testing prospective horizons in our South Louisiana region this year. These prospects and others like them are being sourced from our regional 3-D seismic databases. We will have more information on these prospects and details hopefully in our first-quarter call.

Meanwhile, we have been delineating our Newport prospect in the Lake Washington Field, also in south Louisiana. Drilling to date has expanded our knowledge of these reservoirs. We believe we have additional high impact opportunities in the Lake Washington area, and these opportunities are nearing completion of their technical review to become drillable prospects in the near future.

Our 2007 plans call for production growth of 7 to 10% and reserve growth of 4 to 6%, both of which reflect lower capital spending and a budget for 2007 in the 350 to 400 million range. If oil prices rise back to the '70s, or if we have material exploration successes, we stand ready and prepared to increase our spending programs. We will again see the majority of our spending in the South Louisiana region with additional activities spread across our other strategic core areas.

The facility expansion at Lake Washington will be occurring throughout 2007 and should be fully commissioned during the first half of 2008. The fourth platform that's being added in the area will bring additional oil production and processing capacity to the field. This project is expected to cost approximately $50 million, which is nearly 15% of the 2007 expenditures.

We also plan on increasing our 3-D seismic data sets, doing additional processing in these areas. Very technically advanced analytical geophysics is being applied in these data sets, and we've set aside the dollars to do this in a high-quality way.

As you can see, Swift Energy is planning and spending for significant growth opportunities in the future. However, we still have our eyes on our spending metrics. Costs have been a burden for the whole industry, but that's never an excuse. Swift Energy will continue to focus on capital efficiency metrics. That, of course, includes finding and development cost. We saw improvement in these costs in 2006. It is with this in mind that Swift Energy Company begins the year focused on controlling our costs and delivering on our growth metrics.

Swift is not standing still after our 2006 successes. We continue to add highly qualified personnel to our talented staff, and give them the tools they need to perform for you as the shareholder. We also continue to pursue opportunities that will add value over the long-term for all Swift Energy stakeholders.

I look forward to our 2007 budget presentations, which will be available at the Swift Energy upcoming analyst investor day that we are hosting here in Houston, at the Woodlands, on March 14. It is here that we intend to present details of our 2007 plans.

Today, it is well known that a successful oil and gas company is much more than simple assets or net asset value. It takes a talented staff of oil and gas professionals equipped with proven technologies to deliver sustainable value-creation. We believe that Swift Energy Company as these important characteristics.

With that, I'd like Alton to present the fourth-quarter and 2006 financial results.

Thank you, Terry, and good morning, everyone.

I never get tired of being able to report that Swift Energy team had another successful quarter during the fourth quarter 2006, leading to another record-setting year. For the quarter, revenues were 158.6 million, up 30% over 4Q '05. Net income was 35.3 million, up 2%, and diluted EPS came in at $1.16, matching fourth quarter 2005, while cash flow before working capital changes increased 35% per diluted share to $3.83.

Global production increased 27% to 18.6 Bcf equivalent, while domestic production actually rose 42% compared to '05. Crude oil prices remain strong and with approximately 70% of Swift's current production coming from crude oil and liquids, the current oil-pricing environment continued to have a favorable effect on Swift's financial results.

Swift's global average composite realized for 4Q '06 actually decreased slightly to $7.98 per Mcfe versus 2005, while the domestic composite prices averaged $8.61 per Mcfe, down 12% from the prior year, due mainly to natural gas prices, as domestic crude oil average close to $58 per barrel for 4Q '06, which was flat when compared to 2005.

In spite of the overall drop in pricing, production increases allowed Swift to increase its quarterly oil and gas revenues 21% over last year.

As always, and as Terry highlighted in his intro, we continue to focus on our controllable per-unit costs and metrics. As to the fourth quarter 2006, G&A, which includes the 123R stock option expensing, came in at $0.43 per unit, which was below our guidance. DD&A per unit came in at $2.64, in line with guidance. Production costs came in at $0.89 per unit, slightly below our guidance. Production taxes decreased sequentially on an Mcfe basis, primarily due to lower prices, offset by changes in Swift's production mix. Interest expense came into below guidance at $0.33. We therefore realize net income for the quarter of 35.3 million, $1.19 basic and $1.16 diluted, again beating the First Call mean estimate.

I should note two non-recurring items during the quarter which had a combined favorable impact on diluted earnings per share of about $0.05. The first is a revenue items, whereby as we have previously disclosed, 7.7 million before-tax was recorded in other revenue, representing the business interruption portion of the hurricane insurance settlement proceeds we received in the fourth quarter of '06. The after-tax effect--with the after-tax effect, this item had a favorable impact on fully diluted earnings per shares of about $0.16.

The second non-recurring items increased Swift's tax provision in the fourth quarter 2006 by 3.2 million, the result of a valuation allowance with respect to a deferred tax asset related to our capital loss carryforward. It had an approximate impact on fully diluted earnings per share of $0.11.

Cash flow before working capital changes for 4Q '06 came in at 116.4 million or $3.83 per diluted share, while EBITDA was 118 million for the quarter.

The results for the full year 2006 were impressive, record-setting, and were mainly driven by higher production and higher commodity prices. Please see our earnings press release and of course our subsequently filed 10-K filing, which will be filed at the end of this month, for complete details.

CapEx for the fourth quarter of 266 million, which included our acquisition of properties in South Louisiana which were primarily funded with cash flows, did result in borrowings under our line of credit of 31 million at year-end 2006. Although we did access our bank line during the quarter to fund the acquisition activity, we still have plenty of dry powder for any additional value-adding strategic opportunities.

With respect to Swift energy's hedging activity, we have natural gas price floors in place through the second quarter of 2006, with an average strike price of approximately $6.64. Please see our website for more detailed and updated information.

As always, we've included additional financial and operational information in our press release, including initial guidance for the first quarter and full year 2007.

As Terry said, this year was the best ever in Swift's 27-plus-year history. 2006 was indeed an exciting year for Swift and our sector. But we are equally excited about what we see on the horizon for 2007 and beyond. And with more on that I will turn it over to Bruce Vincent for an overview of our operations.

Thanks, Alton. And good morning, everybody. Today, I want to discuss fourth quarter and 2006 domestic production, 2006 year-end reserves, the facility upgrades at Lake Washington, and our recent drilling results and current operations.

Swift Energy achieved record production in 2006, which increased approximately 18% to 70.2 billion cubic feet equivalent; with 56.7 Bcf equivalent produced domestically, and 13.5 Bcf equivalent produced in New Zealand. This level of production compares to 2005 production of 59.6 Bcf equivalent; 43 Bcf equivalent was produced domestically, and 16.5 billion cubic feet equivalent in New Zealand.

Production for the fourth quarter 2006 totaled 18.6 Bcf equivalent, an increase of 27% compared to the fourth quarter 2005. Domestic production increased 42% to 15.6 billion cubic feet equivalent, compared to the hurricane-affected fourth quarter of 2005, while New Zealand production of 3 Bcf equivalent declined 19% from the same quarter in 2005.

Comparative fourth-quarter domestic production benefited slightly from the recent acquisitions of 5 fields in South Louisiana, and despite reductions due to production downtime resulting from an amine unit disruption, and previously reported third-party pipeline maintenance in the Lake Washington field.

In the fourth quarter, Swift Energy completed three acquisitions that totaled approximately $200 million. The largest transaction of course was the acquisition from BP for approximately $170 million. We also had two smaller acquisitions of additional interest in our Lake Washington field and in South Bearhead Creek.

The BP acquisition consists of five, primarily onshore, South Louisiana properties -- Bayou Sale, Horseshoe Bayou, and Jeanerette Fields all located in St. Mary Parish; and then further to the West, High Island field in Cameron Parish, and then Bayou Penchant field in Terrebonne Parish just to the east. These fields are in close proximity to our current operations and will be a significant part of our continued growth story in South Louisiana.

Swift Energy drilled and completed 45 of 63 wells, for a 71% overall success rate in 2006. Domestically, Swift Energy completed 42 of 49 development wells and was successful on five shallow exploration wells, and was unsuccessful on five shallow exploration wells in the AWP Olmos area. These were five wells that we drilled earlier in the year, about $20,000 apiece, going after an idea that didn't work out.

In New Zealand, the Company completed three of four development wells and was unsuccessful on five exploration wells in 2006.

For the fourth quarter 2006, Swift Energy successfully completed 10 of 15 wells. Of these wells, 13 were drilled domestically, of which three of the four development wells drilled in the Lake Washington area were completed and two of the four development wells drilled in the Bay de Chene area were completed. Additionally, three development wells were completed in the AWP Olmos area in the South Texas region; and in the South Bearhead Creek area located in our Toledo Bend region, 2 development wells were also completed.

In New Zealand, the Company was unsuccessful on two exploration wells in the fourth quarter of last year.

Our 2006 program yielded total proved reserves of approximately 817 billion cubic feet equivalent, an increase of 7% from the 762 billion cubic feet equivalent at year end 2005. Year-end 2006 reserves were 50% crude oil, 40% natural gas, and 10% natural gas liquids. This reserves base yielded a PV-10 value of $2.7 billion.

Crude oil prices remained very similar to year end 2005. However, natural gas prices were down considerably.

Proved developed reserves were 44% of total reserves at year end 2006. All of the Company's reserve estimates are audited annually by [HA Green Associates], independent petroleum consultants.

Domestic reserves increased by 10% to 710 billion cubic feet equivalent, compared with 644 billion cubic feet equivalent of domestic reserves at year end 2005. Domestic [proved] reserves were 87% of total proved reserves at year end 2006.

Of our two largest core properties and long-lived fields, the AW -- or the Lake Washington area contains approximately 30% of our proved reserves, and the AWP Olmos area has 18% of the proved reserves.

In New Zealand, year end 2006 proved reserves declined by 10% to 106 billion cubic feet equivalent from 118 billion cubic feet equivalent at year end 2005. This region was unable to replace production, because the 2006 New Zealand drilling campaign focused primarily on exploration activities, which was unsuccessful, and the development drilling during the year was for the conversion of proved undeveloped locations.

Swift Energy will be slowing our drilling activity in New Zealand in 2007, and we will focus primarily on geological and geophysical work this year, consisting of field studies, additional 3-D seismic in the TAWN area, and value-adding infrastructure projects. Based on the results of this work, we may begin picking the drilling back up by year end. Not surprisingly, we expect to see natural declines across our properties in New Zealand in 2007. We will be looking for additional ways to add value to our facilities and infrastructure, which is ideally situated in the Taranaki Basin.

Swift Energy currently has five large drilling rigs operating, with three located in the Lake Washington area and 2 in Bay de Chene. I would note that our drilling contracts are up for renewal in late spring, and we will have the benefit of hindsight in regard to the winter before making decisions on future commitments. At this time, we will have a better projection of the remainder of the year with respect to both prices and cost.

Additionally, a land-drilling rig is also operating in Swift Energy's South Bearhead Creek field in central Louisiana.

I appreciate all of you listening in and thanks for your attention, and I am going to turn it back to Terry for a recap.

Thanks, Bruce. To conclude before we open it up for questions, Swift Energy is pursuing opportunities and strategies to increase our reserve base and our value. To reiterate our 2006 results, Swift Energy had impressive financial results in 2006. Our revenues increased by 45% over 600 million, earnings increased 49% to 162 million, and cash flow increased 50% to 432 million. These all lead directly to increased shareholder value. These results further solidified our strong balance sheet. For 2006, we had record production of 70.2 Bcf equivalent, an 18% increase. We expect to increase production by 7% to 10% in 2007 over our 2006 levels.

Also in 2006, we replaced 171% of our reserves for a 7% increase, to an 817 Bcf equivalent value. We are developing a portfolio of high-impact, high-quality 3-D-based opportunities in our South Louisiana exploration programs. We are drilling deeper. These prospects, again, I want to reiterate, are based on our 3-D strategies; especially in Lake Washington, Bay de Chene and Cote Blanche Island we will be drilling this year, 2007. These deeper wells with targets that are more material in reserve size and their potential is more meaningful then past wells -- being that they are larger in target size and deeper -- should give us production growth opportunities to continue our sustained improvement in value of the Corporation.

We are encouraged by our progress in all of our core areas, especially with the planned growth in South Louisiana, Lake Washington and the opportunities I've mentioned in Bay de Chene, Cote Blanche Island, as well as South Bearhead Creek. Recompletion and drilling activities in our five newest areas in South Louisiana, which includes Bayou Sale, are also very important to us -- we are very focused there.

Once again, controlling costs and executing our strategic plan should bring Swift Energy Company another successful year in 2006. Swift continues to raise the bar, and as a performance organization, we are committed to achieving all of our 2007 goals.

At this time I'd like to begin the question-and-answer portion of our presentation.

(OPERATOR INSTRUCTIONS) Rehan Rashid of Friedman, Billings, Ramsey.

Good morning, gentlemen. On the platform that's being added, did I hear that right, that first half of '08 is kind of when we should expect that to come online?

That's correct. That will be undergoing the construction this year; we expect to begin commissioning it early next year and have it fully operational during the first half.

Got it. And in terms of volumes, does this platform -- is being added simply because the additional discoveries are further away from the existing platforms, or this is going to be additive from a volume standpoint in totality?

Well, it's a combination of a number of things, Rehan, both -- the field is, particularly the west side of the field, hasn't really been developed that fully before. The Newport discovery validates that side of the field, plus there's substantial additional identified probable/possible reserves on the west side of the field. We have the Bondi discovery that's located up over the northwest side of the field, which you may recall is five miles away from the existing infrastructure. Those kinds of things then would be closer to the west side.

But also, we are constrained with capacity there, our gas lift capacity, processing capacity, so adding a new platform will not only give us more flexibility in terms of where to take stuff but also the opportunity for additional volume growth.

We also believe there's deeper potential, particularly over on the west side below the current Newport discovery -- could be oil but likely to be high-pressure gas. And we would need additional high-pressure gas capability. And we think that platform will help give us some of that.

Got it. And the deep Newport -- when will we test that?

Possibly the latter half of this year. You know, we are still doing the PSTM work and quite frankly we are focused with some of the deeper drilling right over in Bay de Chene right now. So it might be the first -- the latter half of this year; could move into '08, but somewhere in that time frame.

Got it. And this is -- we are talking about deep Newport, not anything below [salt] right now?

Well, I don't know that I would add that latter part.

Okay, so you will attempt something below salt with the same well --?

I think we need to finish our G&G work that we're doing, and understand the picture down there before saying whether it's above or below the salt and exactly what the potential is and those kinds of things.

Okay, and the Bay de Chene well that's drilling, the deeper one, when should that reach TD? Or has (multiple speakers)?

Well, we have a couple of wells drilling in Bay de Chene right now. And you know, certainly one of them ought to be finished up this quarter; the other one will probably move into the following quarter.

Okay, thank you.

(OPERATOR INSTRUCTIONS) There appears to be no further questions at this time.

Well, we appreciate everybody listening in. We are certainly available for any further questions on a one-on-one basis; please call Scott or Paul. But thanks for listening in.

Thank you; this concludes today's conference call, you may now disconnect.