SilverBow Resources Inc (SBOW) 2008 Q3 法說會逐字稿

Good morning. My name is Stacy, and I will be your conference operator today. At this time, I would like to welcome everyone to today's 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, you may begin the conference.

Good morning. I'm Paul Vincent, Manager of Investor Relations. I'd like to welcome everyone to Swift Energy's third quarter 2008 earnings conference call. In today's call, Terry Swift, Chairman and CEO, will provide an overview. Alton Heckaman EVP and CFO will review the financial results for the third quarter and Bruce Vincent, President, will provide an operational update. Terry Swift will summarize before we open it up to questions. Also present on the call are Bob Banks, EVP and COO, and Mike Kitterman, SVP Operations..

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 have allowed additional time for questions.

Thanks, Paul. Thank you, again, for joining us at this morning's conference call. Before I comment on the third quarter, we feel it's important to our shareholders and the investment community participating on this call to briefly mention recent market volatility and our views in relationship to the oil and gas industry and its impact on Swift Energy. We are clearly in a time of great uncertainty. That uncertainty certainly extends to our global capital markets. Global equity and commodity markets have been seeing significant declines and asset valuations are falling. Numerous large financial institutions have either failed or been rescued by the federal government. The credit markets literally froze up causing significant capital movements and flight to quality. These events forced individual investors and companies to reexamine their financial strategies to reduce leverage, to improve liquidity and to seek out high quality banking and customer relationships.

At the same time, oil prices have declined over $70 per barrel from their summer highs near $140 a barrel. Unfortunately, Gulf Coast oil and gas producers also experienced two major hurricanes, Gustav and Ike in the midst of these historic financial events. Swift Energy is aware that the global financial crisis is not fully resolved and that the associated uncertainty with the even greater risk may be greater than any of us can currently contemplate. As a result the Company will be extremely cautious with its available cash flow and capital in the coming weeks and months.

For many years now, we have lived within our means and developed excellent banking and customer relationships. Nonetheless we are currently adjusting our budgets and performance expectations for 2009 to reflect this current environment. Our hedging strategy of utilizing forward to protect the down side is an important aspect of our strategy. Operating within cash flow will not be a new or novel approach for Swift. Swift Energy has consistently grown production reserves, cash flow and earnings by maintaining a cash flow neutral approach. Management of the financial side of the business will continue to employ a low leverage and high liquidity approach.

As Alton will discuss in further detail, we have capital available to us through our cash flow and our bank line. We maintain strong relationships and a dialogue with our bank group as to the market conditions both today and in the future.

Finally, the Company has no credit or derivative obligations which would require us to raise capital through asset or equity sales. We also have minimal counter-party risk associated with our current oil and gas floors. Although we are in uncertain times, we want all of our stakeholders to be aware that we will position this Company to weather this type of market and we will continue to be good stewards of assets while pursuing value enhancing opportunities.

As noted, our third quarter of 2008 was marked by storms of a different kind, storms that through our long term planning Swift Energy was also prepared to weather. Our south Louisiana operations and headquarters in Houston withstood direct hits from hurricanes Gustav and Ike. Although we shut in approximately 515,000 barrels of oil equivalent production from the result of this storm, the Company still produced 2.32 million barrels of oil equivalent for the quarter. This production was achieved at rates that we estimate would have seen us exceed the high end of our third quarter production guidance of 2.81 million-barrels of oil equivalent, if we had not had these massive storms.

We currently estimate that approximately 300,000 barrels of oil equivalent will remain shut-in due to the storms during the fourth quarter of 2008 as we continue our recovery. Allowing for these production shut-ins, totaling approximately 800,000 barrels for the full year 2008, we expect production would have grown 2% to 3% year-over-year with year-end reserves still targeted to grow 3% to 5% over 2007 levels. Although there was some minor damage in several of our fields and significant damage to our Bay de Chene field which will require extensive repairs, with the exception of that field, we are at or above prestorm production levels in all of our producing areas except Bay de Chene.

The impact of these storms on the communities we operate in as also been extreme which makes the effort of our employees to return to work and bring our production back online all the more impressive. Here are some operational highlights of the quarter which include the success of the State Lease 18669 number one exploration well at our Shasta prospect. This will drilled to a depth of 18,855 feet and demonstrates to us that our seismic inventories generates prospects that we would not otherwise drill without this valuable tool. Although we have slowed our exploration program as we assess the current operating environment, we continue to develop sizable exploration targets from within these data sets. Our South Texas area continues to perform well and all 18 wells drilled there were successful. We are continually improving the performance of new and legacy wells through improved fracture and refrac simulations. We continue to add to our acreage position in South Texas.

Although we face uncertain times, the management team of Swift Energy is confident that the strategy that has gotten us to this point, and the decisions that are being made currently will position the Company to be stronger than ever when inevitably the equity debt and commodity markets begin to reflect the underlying fundamentals of the securities they trade. At this time I'd like to turn the meeting over to Alton Heckaman for our financial highlights.

Thanks, Terry. And good morning, everyone. Despite the slide in oil and gas prices during the latter part of the quarter and the effect of two hurricanes, Swift Energy posted solid third quarter financial results. Revenues were $213.8 million, up 25% over 3Q, '07. Net income from continuing operations was $62.3 million, up 45% and diluted EPS from continuing operations came in at $1.98, an increase of 42% compared to the third quarter 2007 while cash flow before working capital changes increased 20% per diluted share to $4.90.

These strong results were achieved even as the storm affected production decreased 14% to 2.3 million barrels of oil equivalent. Crude oil prices remained strong for most of the quarter, but began to decline during September. Since 63% of Swiss 3Q production came from crude oil and natural gas liquids, the high oil pricing environment proved very positive for Swift's financial results. Swift's averaged realized price in 3Q '08 increased 47% over 2007 at $92.34 per Boe. As crude oil prices actually averaged over $122 per barrel for the quarter compared to approximately $76 per barrel a year ago, allowing Swift to increase its quarterly oil and gas revenues 26% over third quarter 2007.

We continue to vigilantly focus on our controllable per unit cost in metrics, especially given recent pricing volatility. All of which came in above our prestorm guidance as production was shut in due to the hurricane. G&A came in at $4.36 per barrel. ED& A per unit came in at $22.52. Production costs including some hurricane related expenses came in at $10.77 per barrel. Interest expense increased to $2.99 per barrel. Production taxes actually came in below guidance on a Boe basis, primarily due to certain state severance tax credits that were realized. The result was income from continuing operations for the quarter of $62.3 million, $2.02 basic and $1.98 diluted, again above first call mean estimate. Cash flow before working capital changes for third quarter came in at $154 million or $4.90 per diluted share while EBITDA was $159 million for the quarter or $5.04 per diluted share. Third quarter CapEx was $201 million, including $46 million related to our South Texas property acquisition.

Given the recent global credit crisis and the effect on the financial markets, let me spend a moment to highlight Swift's solid financial position. Swift's debt to cash ratio currently in the low 30% range, highlights our conservative leverage strategy and our conscious decision to maintain our CapEx within cash flows. Our two senior no cap spending had very good interest rates and are well aligned with our long-term assets. With respect to our $500 million bank line facility with our 10-member bank group that currently runs through October 2011, our boring base was just this month affirmed at $400 million and we continue to maintain a commitment amount at $350 million. The drawdowns at quarter end of $117 million, currently around $150 million, we still have plenty of liquidity and resources available for any additional value adding strategic opportunities that come along which we continue to cautiously review.

I should note that the recent affirmation of our line speaks to our solid bank group. Certain members of our bank groups are also the exclusive counter parties that we use for our hedging activities and as to those hedging activities, we have natural gas floors in place for approximately 50% to 55% of our production for the fourth quarter 2008 and an average NYMEX strike price of $9.15 per MMBtu. Likewise, crude oil floors have also been purchased for approximately 45% to 50% of our production for the fourth quarter and an average NYMEX strike price at $98.15 per barrel. Given the current pricing environment we find ourselves in, these oil and gas floors are significantly in the money and are likely to have a very favorable effect on our fourth quarter 2008 financial results.

This highlights our long-term strategy that Terry mentioned of maintaining an active price risk management plan which protects against a precipitous decline in prices, affording a buffer to soften the landing, so to speak, and allow the associated cost side adjustments to catch up. Recent price volatility has not allowed Swift to enter into any 2009 hedges currently, but our website remains the best source for complete and current detailed, ongoing hedging information. As always, we've included additional financial and operational information in our press release, including guidance for the fourth quarter and full-year 2008.

These are indeed interesting times in our world and in our sector. I think that Swift is very well positioned financially to take advantage of opportunities that always seem to present themselves during periods of uncertainty and adversity. To reiterate what Terry said, we are up to the challenge. And with that, I'll turn it over to Bruce Vincent for an overview of our operations.

Thanks, Alton and good morning, everyone. Today I will discuss third quarter 2008 activity, including our production volumes, recent drilling results, activity in our cooperating areas and our plans for the rest of the year, beginning with production. Swift Energy's production from continuing operations during the third quarter of 2008 totaled 2.32 million barrels of oil equivalent or 13.92 billion cubic feet equivalent, a decrease of 14% from the 2.7 million barrels of oil equivalent produced in the same quarter of 2007. Approximately 515,000 barrels of oil equivalent of production were shut-in during the quarter as we prepared and began recovery from hurricanes Gustav and Ike. Sequential production decreased 15% due to the hurricane related shut-ins when comparing third quarter 2008 production to production in the second quarter of 2008. The Company estimates that production during the third quarter of 2008 would have exceeded the high-end of our previously stated guidance and resulted in a 4% sequential increase in production, and a 5% increase in production when compared to the third quarter of 2007 production if the hurricane related shut-ins had not occurred.

Now let's talk about our drilling results. Swift Energy completed 27 of 28 development wells in the second quarter 2008 for a success rate of 96%. One non-operated development well and one non-operated exploration well were unsuccessful.

I will briefly review our activity in each of our cooperating areas beginning with Lake Washington. The Lake Washington area includes the Lake Washington field and the Bay de Chene field. Most of the production shut-in during the quarter associated with hurricanes Gustav and Ike was in this area. As a result, production during the third quarter of 2008 averaged approximately 12,506 net barrels of oil equivalent per day or about 75 million cubic feet equivalent per day of net gas equivalents in the area. A decrease of 23% when compared to our second quarter 2008 average net production from the same area. The Company estimates that including production shut-ins would have resulted in a 5% sequential increase in production in the area. Lake Washington averaged approximately 10,169 net barrels of oil equivalent per day or 61 million cubic feet equivalent per day, a 27% decrease when compared to second quarter 2008 volumes while Bay de Chene's sequential production increased 5% to 2,337 net barrels of oil equivalent per day.

At the Lake Washington Field in Plaquemine Parish, Louisiana, despite hurricane-associated delays causing us to suspend drilling on five wells for a period of 26 days, we drilled and completed five wells during the third quarter. One of these, the SL or State Lease 212 number 167 side track two, which was drilled to 12,596 feet initially tested at rates over 1,000-barrels of oil equivalent per day with flowing tubing pressure above 800 PSI. This well is currently on production and producing more than 800-barrels of oil equivalent per day. Another well, the CM 398 side track two was drilled to 10,042 feet and is currently producing at rates over 400 barrels of oil equivalent today with flowing tubing pressure of 720 PSI.

Progress was made during the quarter in expanding the pressure maintenance project at Lake Washington. Permits were submitted to the state to provide additional water injection into the Newport reservoir for pressure maintenance. Water injection into the current injection well has been averaging 1200 to 1300 barrels per day, an improvement over what it was doing before. We don't, however, expect to see a significant production response from the pressure maintenance program until late next year. A second six-inch diameter production line was installed between the Newport header and the West Side facility during the quarter. This line successfully reduced back pressure on the wells at the Newport header and resulted in a production increase of around 600 barrels of oil per day. The positive impact of this line on third quarter production is certainly overshadowed by the negative impact, of course, of the two Hurricanes.

In Bay de Chene, two wells were drilled in the third quarter before hurricane shut-ins. Damage to equipment and facilities in the field have not allowed us to resume production or test new wells in Bay de Chene. We anticipate limited production to be restored during the fourth quarter before the end of the year. Prestorm levels of production will not be possible, however, until full repairs have been completed. These repairs are expected to be completed in the first half of 2009, more than likely the latter part of the first half.

During the fourth quarter at Lake Washington, we will slow our drilling program in response to recent commodity price volatility. We will end the year with reduced activity in the Lake Washington area, but expect to increase our activity levels in this area again once we feel the cost of drilling services and supplies reflect the current commodity price environment. Those have to adjust quickly just as the price for commodity adjusted quickly. We currently have six barge rigs contracted in this area. Five are operating in Lake Washington and one in Bay de Chene. During the third quarter, five rigs were forced to delay operation for 26 days as a result of hurricanes Gustav and Ike. When these rigs complete their activity, all but one in Lake Washington will be released.

In our South Texas area, which includes our Cotulla area and AWP field, third quarter 2008 production averaged 7,527 barrels of oil equivalent per day, a 2% increase in production, when compared to second quarter 2008 production in the same area. In the third quarter, we successfully completed 11 of 11 development wells in the AWP area and eight of eight development wells in the Cotulla area. Also during the third quarter, the Company closed the acquisition of additional properties in the Cotulla area for $46.4 million. That was previously announced in mid-September. The drilling program for the remainder of the year at AWP includes another eight Olmos wells, a previously announced well to test the Edwards Formation in the AWP area will be moved to the 2009 drilling schedule. We have two rigs in the Cotulla area and will drill 9 to 11 more wells during the rest of the year in that area.

In the north Lafayette area, which we previously referred to as Toledo Bend, contributed 2,847 barrels of oil equivalent per day production in the third quarter 2008. Activity was light during the quarter in our Brookeland and Masters Creeks field and these fields were briefly shut-in also following hurricanes because of power problems downstream. But production from new wells brought on line at South Bearhead Creek resulted in a 1% increase of production in this area when compared to second quarter 2008 levels in a 3% production increase when compared to third quarter 2007 production in this area. One new well will be completed and put on production in South Bearhead Creek during the fourth quarter.

In our Lafayette south area, which is comprised of Horseshoe Bayou, Bayou Sale, Jeanerette, Cote Blanche Island, Bayou Penchant, production averaged approximately 1,949 barrels of oil equivalent per day or 11.7 million cubic feet equivalent per day during the third quarter a decrease of 24% when compared to second quarter production in this area. This area also experienced prolonged shut-ins during hurricane preparations and recovery. In Bayou Sale one development well was drilled to 14,380 feet. This well encountered 46 feet of true vertical pay and was noncommercial in the first of three zones to be tested. The completion activities are underway in a second prospective zone.

Updating the Company's strategic 3D based south Louisiana exploration program, let's begin outside of our major field during the third quarter. Two wells have been drilled with one being classified as successful. The State Lease 18669 number one previously referred to as the Shasta prospect reached a measured depth of 18,855 feet during the fourth quarter. This well encountered 30 feet of measured pay in two zones and will be completed late in the fourth quarter. This well may not be on production until 2009. Swift Energy with a 50% working interest will operate this well. One non-operated prospect of which we had a 25% interest was drilled closer to the Company's high Allen field and was unsuccessful. The Company is currently drilling one additional high potential prospect in the west side area of Lake Washington. This well is intended to be a 12 to 15,000 foot test. Swift maintains 100% working interest in this prospect. Additional high impact exploration activity will continue in 2009 as market conditions allow.

Further, the Company continues to carry out the work necessary to design and plan an 18 to 20,000 foot subsalt test in the Lake Washington area for drilling sometime during the first half of 2009. Thanks for your attention and I'm going to turn it back to Terry.

Thanks, Bruce. Before we open the line for questions, I want to summarize Swift Energy's third quarter results and fourth quarter 2008 planned activity. To review some of the highlights from this morning, Swift Energy's management team is very aware of what's happening in our economy and our capital markets. Although we don't know the extent or duration of the current environment, we are doing everything we can to protect our stakeholders. This is being accomplished through maintaining ample liquidity, not planning on utilizing the capital markets to fund operations and communicating with our bank group on a regular basis.

Swift Energy had strong financial results in the third quarter of 2008. Our revenues increased 25% to $213.8 million. Income from continuing operations was $62.3 million or $1.98 per diluted share and cash flow before working capital changes was $153.9 million or $4.90 per diluted share. In the third quarter of 2008, after shutting in approximately 515,000 barrels of oil equivalent, we had production of 2.32 million barrels of oil equivalent for the quarter. The high end of our previous third quarter guidance was 2.81 million barrels of oil equivalent which we estimate would have been surpassed without the storm shut-ins and operational delays.

Our seismic generated drilling inventory continued to yield results in south Louisiana and South Texas. We are building a large seismic library and adding additional acreage and expanding our drilling efforts in the Olmos and Edwards Formations. Our performance has improved in South Texas and we're looking forward to continued activity there in 2009.

Finally it's our goal to grow reserves and production. Over our history, we have been successful in growing through the drill bit and the acquisition market. If economic activity stays low and commodity prices remain low, our organization will still be able to grow and prosper in the future. At this time we would like to begin the question and answer portion of our presentation.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Nicholas Cope with JPMorgan.

Good morning, guys.

Good morning.

I was hoping you could help me out with, I guess, the damages at Bay de Chene. Can you describe, I guess, what actually is wrong with the facilities right now? I think initially you all had mentioned like a small crack on one of the pilings. Is that -- I guess what's going on is what I'm --

I'll take an executive level brief at that and Bob Banks, our Chief Operating Officer is here, if he wants to give any more detail after, that would be good. Bay de Chene was very, very close to where hurricane Gustav made land fall and the storm surge that came through Bay de Chene actually ripped up the bottoms of a lot of our field houses and took some tanks and just shifted them around in such a way that they weren't utilizable or couldn't be utilized. We had older facilities there. We had previously, in Lake Washington, been building and improving our infrastructure and getting our structures up higher than historical construction had deemed and the Bay de Chene area, we still had a pretty low platform height out there and older platforms. We've done all the work to go in and survey, resurvey the area. We've got a good handle now on what we believe it's going to cost us to restore the field, but given that the old standards had those platforms at kind of too low of a level for the storm surge that we saw, we actually want to improve the facilities out there.

It's still an area we believe we've got a lot of growth in. We estimate right now it's kind of like an AWP to us and growing. From that perspective, we're taking our time going about it. We've got some high pressure gas out there that we think we can get back to market sooner than the rest of the fuel. They're working on that and should have a little bit of that late in the fourth quarter, but certainly into 2009. The rest of the facilities, as I noted, we're not just going to restore them, we want to improve them. We're estimating right now around $20 million worth of damage that we've incurred out there. I want to be careful about how I say that, because we are insured. We're expecting our insurance providers to provide us some substantial recoupment from that. We're working with them. Obviously the only thing that's insured is what was there, not the improvements we intend to put out there. Bob, you want to add a little to that?

Yes. None of the insurance reimbursements are in our capital numbers.

Right.

Yes. I mean I'll just add a little color to what Terry and Bruce were saying. Basically some structures were significantly damaged. This was a very low elevation facility. It's one that we acquired in an acquisition and a lot of our tank batteries were damaged, production lines going into the tank batteries, our walk ways were fairly significantly taken out and as Terry mentioned, all of our buildings, all the flooring was ripped up by the high tidal action and so it's a pretty significant issue and we were faced with the choice of what do we do? Do we rebuild that existing facility or do we make it better and stronger to with stand these types of Hurricanes and the decision we've come to is we want to build it bigger and stronger. We have a lot of faith and confidence in Bay de Chene and what we can do there, so we're going to rebuild that facility to similar standards that we've done at Lake Washington, which by the way with stood both of those storms extremely well.

So that's the type of buildings that we want to have so that we can come back very, very quickly and we're going to actually elevate these facilities so we don't have those types of tidal surges in the future causing us damage. So that's kind of where we want to go with Bay de Chene.

Okay. And you said -- I guess it was producing about 3,600 barrels a day before the hurricanes. What kind of level is the -- I guess the minimal production you all think you can get back online in fourth quarter and then, I guess, are you all going to be able to get back up to that level in the first half of 2009, is that what you're talking about getting back up to?

Actually, yes, the first part of that question has to do with reestablishing some of our high pressure gas production and our target is to reestablish about 10 million cubic feet a day in the fourth quarter before year-end on the gas production. As far as getting back to prestorm levels, we certainly will get back to prestorm levels. In fact, we have a number of wells stacked behind it ready for completion and hook up as soon as we have the ability to take those full production streams that we would expect to be at or above prestorm production levels probably by around mid-year, depending on some construction-related issues, but we're progressing that quite nicely now, but I think as far as looking forward, we're talking about mid-year to have the full new built facilities up and running and commissioned.

Okay, thanks. I guess moving to something a little different here, with Lake Washington, the pressure maintenance program, I mean is the response that you're getting, I guess with the initial water injection what you were expecting and have you had to shut-in any other production to maintain the reservoir pressure. I think that sounded like that was an issue previously in the last quarter.

Good question. I'll try to answer the pieces of it there. First of all, we really only have one well right now that we're injecting water for pressure maintenance and we're injecting into two different zones. We're injecting a little over 1,000 barrels a day out there. That's not enough for the plans that we put together. We do believe there's some things we may be able to do in terms of acid washes and things like that to get that up over time. We've done some of that already, but we really need to be putting into the ground significantly more than that. We have plans for other wells, either conversions or other wells that will be drilled in there. We were proceeding with those plans when hurricane Gustav came and, in fact, we had to move out of the area. That delayed us.

We also have put permits into the state for various conversions. We fully anticipate to get those permits pretty soon and we're ready as soon as we get the permits to start putting more water in the ground. That is necessary. In terms of our contemplated production profiling, we're really looking at keeping a few of the wells pinched back. We did have some changes that we shut the field in due to the hurricanes and brought the field back online, we've ended up with more oil and a little less gas, actually a small item in terms of how we report, but it's an important item in terms of Newport. So we're producing less gas. We've got the gas wells -- or the gassier wells pinched back a little bit because the oil is more valuable and we want the pressure -- we want the pressure to stay up in there.

and I guess with -- it sounds like with cutting back on rigs at Lake Washington, do you think that -- could that have any impact on the piles that are booked at Lake Washington at year end or do you think it's not going to have an impact?

No, I don't think it would -- Lake Washington has got some very high impact types of production and even at the lower pricing environment, we feel pretty good about Lake Washington. I would say that the cutbacks in drilling activity is directly related to the cost of drilling and as you well know, oil prices have got up to $147 this past summer and all costs were creeping up very, very fast underneath that, especially items like steel. We are keenly of the mind set that in the lower pricing environment, we want to get advantage of lower cost and so deferring some of that drilling till we get the right service providers and right commodity prices on the steel side, the service side, I think it's good for everybody. We did make a lot of progress out there in 2008 and we're finishing up the year with a lot of progress, but I don't think it really will impact our reserve picture. It's really a question of us conserving capital and waiting for the costs to come down a little bit.

Certainly I don't see it affecting the picture in Lake Washington, but there are a couple of impact wells that we were thinking of drilling that we're going to put off in the next year and so -- but that's reflected in the guidance that Terry talked about. I think just to reiterate Terry's comment about cost, you know, we've talked for years about margins and the way the cost distribution between DD&A or refining costs and cash operating costs and profit margins work in relationship to long-term price of the commodity and clearly long-term price of the commodity or forecast for it has come down dramatically. We need to drive those costs down quickly and we're sending a message to the drilling contractors and vendors of that very thing and doing it demonstrably by cutting back on some rigs. We think that will align itself with a $65 to $70 world and we'll be picking those rigs up early next year. It is a symbiotic relationship really between explorers and the contractors and the other service providers to work through these down periods and basically spreading costs out among everybody and we've used downturns like this as very opportunistic. We're in good shape. Our balance sheet is strong, our liquidity is strong, we're going to sit back quake frankly and look for potential opportunities in this marketplace. We also think we can get some impact wells drilled next year at a much lower cost as a consequence.

That's all I had. Thanks a lot.

Thank you.

(OPERATOR INSTRUCTIONS) At this time there are no further questions.

All right. Well, thank you, everybody, for listening in. If anybody has any questions they think of later, please call Paul, and we'll be happy to talk to you.

Thank you for joining today's conference call. You may now disconnect.