西南能源 (SWN) 2002 Q1 法說會逐字稿

Ladies and gentlemen thank you for standing by. Welcome to the Southwestern Energy Company first quarter conference call. During the presentation all participants will be in a listen only mode. Afterwards we will conduct a question and answer session. At that time if you have a question please press the one followed by the four on your telephone. As a reminder this conference is being recorded on Monday, April 22nd, 2002. I would now like to turn the conference over to Harold Korell, President, and CEO of Southwestern Energy Company. Please go ahead sir.

Good morning, and thank you for joining us today. With me are our Executive Vice President of Exploration and Production, and our Chief Financial Officer. After some preliminary comments I'll turn the floor over to Richard for an update of our EMP operations and then to Greg for comments on our financial results, and after that all of us will be available for questions. If you have not received a copy of the press release announcing our first quarter results you can call Carol Ann at 281-618-4710, and she'll fax a copy to you.

Also our attorneys have asked that I point out that some of the comments during this teleconference may be regarded as forward looking statements that involve risks and uncertainties, which are detailed in the company's Securities and Exchange Commission filings. While we believe they are reasonable representations of the company's expected performance actual results could differ materially.

Well, how did we do in the first quarter 2002? From a drilling standpoint the quarter would appear slow. We participated in 13 gross wells in the first quarter of 2002 versus 32 gross wells in the first quarter of 2001. Oil and gas prices clearly had an impact on our activity level. We drew less wells in the Arkoma but continued drilling at a measured pace in our other operating areas. Although we began the year with an ENP budget of $61 million as prices have firmed and costs associated with drilling have come down we're feeling some pressure to increase our budget to allow for additional drilling in our origin field in East Texas. With regard to results our focus on growing organically through the drill bit yielded a 15 percent growth in production in the first quarter compared to the same period last year. We reported solid financial results for the quarter, however they were down from the same period last year as a result of significantly lower commodity prices. Overall I'm very pleased with our first quarter results. They confirm the fact that our formula is working. I also believe we're beginning to stand out from the rest of our peers primarily because of our focus on value added per dollar invested. We continue to believe that the long-term fundamentals for the national gas market are very strong, and that our overall strategy will leave us well positioned to benefit from it.

That concludes my comments and I will now turn the conference over to Richard for an update of our ENP operations.

Thank you Harold and Good morning everybody. In the first quarter of 2002 we continue to achieve good operating results from our active exploration and development programs in the Arkoma and Permian basin, East Texas, and South Louisiana. Production for the quarter was 10.3 BCFE, a 15 percent increase over the 9.0 BCFE we produced in the first quarter of 2001. The daily production rate in the first quarter was $115 million cubic feet equivalent per day, up slightly from the average rate in the fourth quarter of 2002. In total we participated in 13 wells that were spud during the first quarter. Of these seven were successful and five were in progress at the end of the quarter.

We participated in just two wells in the Arkoma basin in the first quarter. However, with the improvement in gas prices, our activity in the Arkoma basin has increased significantly. We're beginning to see both more non-operated well proposals and increased participation in our operated wells. The Hunt 1-10 well in our binary of Yellow County, Arkansas was drilled, and penetrated over 100 feet above pay at a depth of approximately 4,200 feet. Two zones in the well tested at a combined rate of 3.6 million cubic feet per day. Southwestern operates this well with a 77 percent working interest. We currently have four rigs drilling in the basin now. Although our drilling activity in the first quarter was reduced we have continued to aggressively pursue our work over program. To date in 2002 we have performed 13 work overs and have realized a net production increase of 4.6 million cubic feet per day. One work over of note is the stimulation of our courier 135 well. Gross production from this well has increased from 125 Mcf per day to over $1 million cubic feet per day as a result of that work over.

In the premium basin we made a discovery at our prospect in Crane County, Texas. This prospect is located five miles northwest of our 2001 earlier Rifke discovery. The town ranch 58 number one was drilled to a total depth of 7,960 feet, and was completed in a lower at a depth of 7,600 feet. We operate this well that tested at a rate of 119 barrels of oil per day and have an 88 percent working interest. Pending some additional evaluation we may have offset development locations to the 58 one well. Additionally we are currently drilling at about 5,000 feet at our Empire Deep prospect located in Eddy County, New Mexico. Southwestern operates this well targeting the moral formation at 11,000 feet with a 50 percent working interest.

At our Overton Field in Smith County, Texas we have continued our very successful development-drilling program. In the first quarter we drilled five wells, of which four were successful and one was still in progress. Including in this well count is the second well that we drilled on our South Overton Farming acreage. The results from Overton continue to be very encouraging. We surpassed an important milestone last week with our gross production from the field exceeding 20 million cubic feet per day. Our high working interest and net revenue interest in this area make it a significant contributor to our overall effort. We have also realized a significant reduction in drilling costs in Overton. Current costs are approximately 25 to 30 percent lower than they were at their peak in mid 2001. This reduction is due to a combination of lower service costs, and our continued improvements in operating time required to drill and complete these wells. We have agreements with several of our primary vendors to provide their services at their current rates for the remainder of 2002.

At our last teleconference in February I reported that we had just made a discovery at our Crown prospect in Cameron Parish, Louisiana. The Miami core 27-1 the test well for the prospect was put on production in February, and is currently producing 12.2 million cubic feet per day, 42 barrels of oil per day, with a flowing tubing pressure of 8,450 PSI. An offset well the Miami core 34-2 drilled during the first quarter to extend this discovery did not penetrate the objective SAM. This well has been temporarily abandoned and we are evaluating the possibility of side tracking the well. Southwestern operates the Crown wells with a 40 percent working interest.

In March we commenced drilling operations on our Tulleymore prospect also located in Cameron Parish. This exploratory test which we operate with a 40 percent working interest reached total depth of 12,600 feet earlier this week. The well did not encounter commercial quantities of gas in our objected Planulina section and is being plugged and abandoned. We have begun acquisition of our 140 square mile Duck Lake 3D project in St. Mary and St. Martin Parishes adjacent to previously successful exploratory areas for Southwestern. Southwestern is operating this shoot with a 50 percent working interest. It is anticipated that the seismic data will be delivered for interpretation during the fourth quarter of 2002. We expect that this shoot will lead to a number of exploration prospects that we will begin to test in 2003.

In summary, we are pleased with the results of our year to date 2002 program. We achieved strong operating results as demonstrated by the year on year 15 percent increase in production rates. We have set a goal to reduce our overall operating costs for Mcfe over last year's level, and we're already seeing progress. Operating expenses in the first quarter were 43 cents for Mcfe as compared to 51 cents for Mcfe in the first quarter of 2001, and 45 cents for the full year 2001. We continue to have a strong inventory of internally generated drilling prospects in our core area, and continue to evaluate new areas for additional future growth. Our focus continues to be on maximizing the value of every dollar we invest while building our production and reserve base.

I will now turn the teleconference over to Greg Kerley who will discuss some of the company's financial information. kerley: Thank you Richard and good morning. As Harold indicated we had solid financial results for the quarter, however they were down from the same period last year as a result of significantly lower commodity prices. We reported net income of $6.7 million or 26 cents a share for the quarter as compared to $16 million or 63 cents a share for the same period last year.

Cash flow from operating activities before working capital changes was $25.9 million compared to $38.6 million for the first quarter of 2001. Operating income for exploration and production segment was $7.3 million, down from $22 million for the same period last year. The reduction in operating income resulted primarily from lower oil and gas prices, which were partially offset by our increase in production.

We realized an average gas price of $2.76 in Mcf in the first quarter, which was 38 percent lower than our realized price for the same period in 2001. With commodity prices strengthening in the last few weeks we've taken the opportunity to increase our hedge position to approximately 72 percent of our remaining 2002 gas production.

Our hedges have the effect of placing an average floor price of approximately $3 in Mcf are a little over 21 BCF of our production for the remainder of 2002 but still leaving room for upside on the unhedged volumes and the collared volumes. Our detailed hedge position is available on our web page and is also included in our Form 10Q filed at the end of last week.

Our ENP segment continues to benefit from very low production and operating costs. Lifting costs on an equivalent unit of production basis were 43 cents in Mcf for the quarter, down from 51 cents in Mcf in the first quarter of 2001. Our production tax is also decreased during the quarter to 15 cents in Mcf, down from 23 cents in Mcf for the same period last year. Depreciation, depletion and amortization expense for the ENP segment was up in the first quarter due to our higher production volumes and a higher amortization rate. Amortization rate for the full cost pool average $1.16 in Mcf in the first quarter compared to $1.08 for Mcf in the prior year period.

Our gas distribution segment reported operating income of $8.7 million in the first quarter of 2002 compared to $9.4 million in the first quarter of 2001. The decrease in operating income was primarily due to warmer weather, which was 5 percent warmer than both normal and the prior year. Our energy marketing efforts also provided $800,000 in operating income during the first quarter compared to $1.1 million for the same period last year. We were able to pay down approximately $7 million of debt during the quarter and our interest expense decreased 20 percent during the period due to our lower average borrowings and our lower average interest rate. Our capital investments totaled $21.4 million for the first three months of 2002 including $19.9 million of exploration and development expenditures.

That concludes my comments and now we'll turn back to the operator who will explain the procedure for asking questions.

Thank you. Ladies and gentlemen if you'd like to register a question please press the one followed by the four on your telephone. You will hear a three-toned prompt to acknowledge your request. If your question has been answered and you wish to withdraw your request you may do so by pressing the one followed by the three. If you are using a speakerphone please lift your handset before entering your request. One moment please for the first question. Our first question will come from of Friedman Billings Ramsey. Please go ahead with your question.

Good morning guys. Congratulations on a good quarter. I had a couple of questions for you. The first one is with regards to your capital budget. Harold I know you mentioned that you might be increasing the budget. When do you think you'll be firming those numbers?

When we get convinced that we should, I guess is the real answer to that, and I would say that as we speak we're increasing it incrementally because we're continuing with one drilling rig running at Overton. So although we haven't announced anything specific to that, any increase in capital would likely be-- I mean it would be related to continuing drilling at Overton.

OK. And the second question actually relates to Overton. The new wells that you are drilling out there, is that with the minority interest partnership still?

No sir that was drilled up last year. The 14 wells that we had in that partnership were-- ended with last year's drilling. So the drilling we're doing this year is not within the partnership. It's entirely on our interest.

OK, and one final question just regarding the Crown drilling, I know you had several wells targeted for that area. With the results of the offset well does that change your timeline or the outlook for that area?

Basically the well-- the second well we drilled at Crown was along the same-- basically the same-- some people might have called it a development well, although we were moving along on strike into I guess it's southerly, southwesterly direction but it would affect that location only. It won't affect our activity at Cameron Prairie Shoot itself. We have five or six more wells planned to be drilled within that shoot that are totally independent of this second well we drilled, specifically at Crown.

Thanks a lot. Again congratulations on a good quarter.

Our next question will come from Van Levy with CIBC World Markets. Please go ahead with your question.

Good morning gentlemen.

Good morning.

A couple of questions. Your farming acreage on the Overton Rich you mentioned the one well that you drilled there.

Right.

Since the size of the acreage how many wells you'll have to put down on that area to kind of outline it and start feeling this is as low risk as the other areas that you've successfully drilled?

Well, you'll recall we did drill one there last year as well that was successful. One of the first quarter wells as you said Van was on that acreage, so we now have two good wells on that acreage. The number of acreage we have down there farmed in is approximately 5,800 acres. In terms of how many wells it will take to get the same kind of comfort level we have to the north there in Overton, the circumstances are pretty similar to what they were when we started on Overton in that each unit down there which was a 640 acre unit already had a well in it. So if you think about it it's sampled pretty consistently across the acreage. So I think we're close to being there now in terms of our level of confidence in the southern area. We'll do probably two to three more wells on that acreage during 2002.

OK. Second question. Could you give us a kind of a roadmap or schedule of the exploration wells-- the high impact wells? I know it's kind of fluid but give us a schedule of what we should be watching for over the next two or so quarters?

Sure. In South Louisiana the wells that we have queued up if you will for the second quarter include our Belmont, Piedmont, and Bushmill prospects. Piedmont and Bushmills are probably-- certainly the ones we control the most. Belmont is outside operated, and Piedmont and Bushmill should both start during that second quarter. We have a little bit more working interest we'd like to place in those before starting so depending on how that goes we'll dictate which one of those prospects starts first. And they're both fairly significant for us in terms of reserve potential on a net reserve basis. Piedmont has 15 to 20 BCF of potential net to us, and Bushmill is about 25 BCF. Piedmont is in our-- to give you some idea where these are, Piedmont is in our Old Henry project area and Bushmills is another exploratory test within our project area.

OK, and then kind of blows into the next question. Could you give us a sense of field flow or prospect flow? You guys have done a great job of originating prospects and filling them down to mitigate your risk. What's the market like today both from selling the prospects and I guess acquiring the acreage on that end?

In terms of acquiring the acreage on ideas we generate-- we kind of like to call it land capture, we're finding that's still fairly favorable. We're very competitive along those lines, and able to lease most of the things we're after. The deal flow in terms of place and working interest is still a little bit slow. I would say it never really got very high last year and it's kind of at the levels it was the previous year. So that's part of the effort there is getting those other working interest owners signed up.

OK, and finally obviously the Overton has been a home run for you guys. Any more properties like that or potential acquisitions that you can see looking down the pipeline?

Well, the team that manages that project for us Van is doing work along those lines, currently mapping out away from that area, and looking at other properties and we are evaluating other things similar.

Great. All right, thanks. Congratulations on a good quarter.

As a reminder ladies and gentlemen to register a question please press the one followed by the four on your telephone.

Our next question will come from with . Please go ahead with your question. heikkinen: Good morning. unid: Good morning. unid: Good morning.

Quick question. Most of the questions have been answered. You mentioned in the press release a utility rate increase. Just had some questions about what impact that could have on the timing? Really is it an 03 impact or some guidance on that?

This is Greg Kerley. David it is an 03 impact with the Arkansas Public Service Commission you file for a rate increase, and then there's about a 10-month period before you can put those rates into effect. They or request an increase and to allow time for testimony. So we would expect to-- I think our plan is to file potentially in the second half of this year and then it would be something that we'd try to have it in place before the end of 2003, before the start of that winter period.

That was it. Everything else was answered. Thanks a lot guys.

As a reminder ladies and gentlemen to register for a question please press the one followed by the four on your telephone. Gentlemen I'm showing no further questions. I'm sorry we do have one more question. We do have a follow up question from Van Levy with CIBC World Markets. Please go ahead with your follow up.

Yes. Harold maybe you can-- maybe we can get an update on the hedging program. Your thoughts, like in your strategy on hedging in terms of how far you go out, how you lay this stuff in, and how it relates to price sensitive basins, maybe like the Overton area and the Arkoma?

Yeah Van our hedging strategy for the last couple of years, and I think we're sticking fairly to close to this now is that we would like to be hedged generally given our debt level we'd like to be hedged maybe at the 50 percent level in the year and front of us. So that's fundamentally where we come from. The kind of hedging we generally like to do is-- that we prefer to do Collars so that we have a floor and then can participate in some amount of upside. Of course leaving the other 50 percent if we are half hedged we'd have the other 50 percent with up side. At the present time we are more heavily hedged in the remaining 3/4 of this year. We're in that shape because in the first quarter of 2002 we were concerned that prices were going to be low in the second and third quarter, and particularly the second quarter and therefore we went and hedged doing some swaps in the second quarter 2002, otherwise we wouldn't normally be as hedged as we are in a given year. We have put in place some hedges in the year of 2004-- well first of all we're more or less Greg I guess 40 percent hedged with some swaps and collars. And then we have done one BCF per quarter of hedging which is a very minimal amount in 2004, and we did a collar with the thought of taking advantage of layering, and that's our main concept is to kind of layer it in because we can't ever pick the peaks. We know that. How it relates? I think your other question was how it relates to projects we have. I guess the real answer to that question is if we're 50 percent hedged they're not tied to specific projects so notionally on a marginal or the next dollar invested basis in a project we're in fact not hedged if you think about the-- you're only at a 40 or 50 percent level, and we don't assign our hedges to specific projects.

OK, great. Thank you.

Once again ladies and gentlemen as a reminder if you do have a question please press the one followed by the four on your telephone. Gentlemen we have no further questions at this time. Please continue with your presentation or any closing remarks. kerley: This is Greg Kerley. Thank you for joining us today, and please feel free to call me or our manager of investor relations Brad Sylvester with any other questions you may have or for other information you may need. That concludes our conference. Thank you.

Ladies and gentlemen that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your line.

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