Ardagh Group S.A.
Q1 2008 Earnings Call Transcript

Published: 21 May 2008

[Operator:]

Welcome to the Arena Resources 2008 First Quarter Financial and Operating Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. It is now my pleasure to introduce your host Mr. Tim Rochford. Thank you Mr. Rochford you may begin.

[Tim Rochford:]

Thank you, operator. And welcome all listeners to our first quarter 2008 financial and operations conference call. Again my name is Tim Rochford, I'm the CEO of the company. Along with me is Phil Terry, our President and Chief Operating Officer, as well as Randy Broaddrick, our Chief Financial Officer. Before we begin, I would like to make reference that any forward-looking statements which may be made during this call are within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For a complete explanation, I would refer you to our release issued this morning. If you do not have a copy of that release, one will be posted on the company website at www.arenaresourcesinc.com. Today, we will cover the financials and operations for the first quarter ended March 31st, 2008. We will review our results and provide some insight as it relates to the progress thus far in the second quarter. At the conclusion of our overview we will open up for questions you may have. Now this time I would like to ask Randy Broaddrick, our Chief Financial Officer, to review the financials. Randy.

[Randy Broaddrick:]

Thank you, Tim. I will be reviewing the financial results for the three months ended March 31st, 2008. For the three months ended March 31st, 2008, the company had oil and gas revenues of 45.3 million and net income of 18.3 million as compared to revenues of 16.6 million and net income of 5.7 million in the first quarter of 2007. This represents an increase of 172% in revenues and 221% in net income. On the diluted basis the earnings per share for the three months ended March 31st, 2008 were $0.51 or $0.54 per share excluding a 1.76 million non-cash charge for share based compensation. This is compared to $0.18 per diluted share in 2007. Net cash flow from operations adjusting for changes in operating assets and liabilities, for the three months ending March 31st, 2008 was 37 million or $1.02 per diluted share compared to 12.4 million or $0.40 per diluted share in 2007. Our average commodity prices received in the first quarter 2008, for oil we received an average of $92.10 per barrel, for gas we received $9.34 per MCF. Further our shareholders equity exceeded 279 million at the end of the first quarter. To highlight some of our specific line items from our earnings, I will begin with production costs. Our production costs for the three months ended March 31st, 2008, were higher were higher than those for the three months ended March 31st, 2007. The increase is a result of a variety of factors including increased rates for essentially all our services, materials and equipment, and particularly labor. We also seen significant increases in our electrical services, as most of our electrical generation -- or most of the electrical generation in areas of operations are affected by oil and gas prices. Additionally, we still have to truck water for disposal while we wait for permits to convert wells to water disposal wells, which we did not have to deal with as extensively in the first quarter of 2007. However we have had more permits approved and have converted more wells, so the cost will decrease in the future. We did see a further increase in our oil and gas production taxes for the three months ended March 31st, 2008 when compared to the three months ended March 31st, 2007. Most production taxes are based on the values of oil and gas sold. So our production taxes per BOE increased with commodity prices and will continue to move up and down with commodity prices. Looking forward, we anticipate our lease operating cost to be in the range of $7.50 to $8 oil BOE and gas production taxes to be $4.50 plus based on current commodity prices during 2008. Our depreciation depletion and amortization also increased for the three months ended 2008 as compared to the same period in 2007. As has always been the case depletion of our oil and gas properties is the primary contributor to our DDA. A gradual increase in our depletion cost is expected as we continue to develop our properties. This gradual increase is a result of our adding capitalized cost as we develop our properties, and adding future development costs as we add additional reserves. The acquisitions made throughout 2007 contributed to a further increase on depletion rate as with each acquisition we add our acquisition cost to the depletion base as well as all future development costs related to the reserves added. Additionally at the commodity prices at which our year end 2007 reserve estimates were prepared, it is a appropriate to include reserves for wells that would not have been considered economic at year end 2006. However these wells will cost to same to drill as similar wells with greater production potential. The effect of this is that the ratio of future development cost to other reserves versus the amount of reserves added for the wells causes an increase in the depletion per BOE. Although our DDA per BOE was $11.88 per BOE, we anticipate an increase each quarter to ultimately average approximately $15 per BOE for the year, excluding the impact of any additional acquisitions throughout the year. Our increases in G&A are the result of increasing payroll as we continue to add more new employees in order to sustain our growth as well as significant increases in the stock based compensation expense as we grant options in order to entice new employees and well as to retain both new and old employees. Management believes that this is necessary to continue to add quality personnel with the experience and knowledge we need. Stock based compensation increased from approximately 640,000 for the three months ended 2007 to approximately 1.76 million for the three months ended March 31st, 2008. We anticipate a gradual decrease in stock based compensation amount each quarter through 2008 subject to increases resulting from additional option grants. Lastly, we do have one hedging component in place. The color we have in place runs through year end 2008. We had a realized loss in the quarter of approximately $1 million after tax or $0.03 per diluted share. We also showed an unrealized loss of approximately $384,000 after tax, as other comprehensive loss, which did not affect our earnings. This is our only hedging component in place. With that, I will turn this back over to Tim.

[Tim Rochford:]

Randy, thank you. And I just might add that that hedging component represents 1000 barrels a day. Again through the remaining part of this year. Just to summarize our first quarter, our first quarter we drilled 55 new wells, 54 of which were at Fuhrman Mascho in Andrews county Texas, one of which was on our Y6 property in Fisher county Texas, and in addition, we performed 10 refracs, continued to improve and upgrade our leasehold infrastructure. Now at the first quarter our sales as a result of production were 517,042 barrels of oil equivalent. This is a 54% increase over the same period in '07, and a 17% increase over the fourth quarter of '07. Our average net daily production increased to approximately 500,682 barrels of oil equivalent per day. The average sales price per BOE we received in the first quarter was $87 and $0.64 that’s a 10% increase from the fourth quarter of '07 and a 77% increase from the first quarter of' 07. At this time I would like to ask Phil to review some of the property activity to date. Phil? Phil Terry - President and Chief Operating Officer Thank you, Tim. As Tim outlined in the first quarter of 2008, we drilled 54 wells at Fuhrman Mascho and refraced 10 wells. The breakdown of those 54 wells

[Tim Rochford:]

Thank you. Well in summary we are now drilling our 325th well at our Fuhrman Mascho project since we started that development program in the spring of '05. In addition we have refraced another 118 wells, and 55 additional wells are scheduled to be drilled in the second quarter, as well as 10 more additional refracs. We currently have three rigs running at Fuhrman Mascho and we're considering a fourth rig could be available as soon as the second half of this year. Our average daily production for the month of April exceeded 6400 barrels of oil equivalent. We recently acquired an additional 3000 plus acres from Fuhrman Mascho increasing the Fuhrman Mascho total gross acreage to approximately 26,000 acres. We are on schedule with our Yates project anticipating 60 and 90 wells will be ready for production by early first quarter of '09. And just as a reminder 98% of all of our assets have activity planned this year. And although we continue to look for acquisition opportunities I think all will agree with other 18000 remaining potential locations just at Fuhrman Mascho alone, we have plenty to keep us busy for some years to come, and that's not factoring in five acre potential. Well, with that, this concludes this company's portion of the 2008 first quarter financial and operational review. I would like to now turn it back to Jerry, our Operator. And Operator, I would like to open it up for any questions that our listeners may have.

[Operator:]

Thank you. We will now be conducting a question and answer session. In the interest of time you will be limited to one question. (Operator Instructions) And remember that in the interest of time you will be limited to one question. Our first question comes from the line of Neal Dingmann with Dahlman Rose. Please proceed with your question.

[Neal Dingmann:]

Hey guys great quarter.

[Tim Rochford:]

Thanks, Neal.

[Neal Dingmann:]

I wanted to ask three part question for you, Tim. I was wondering on concerning on the Fuhrman Mascho, couple things for you or Phil as far as -- One, how far does that thick or is there way to know how far the thick goes, and then will that impact your decision as to how far when or how soon you will go after some fives in that area?

[Tim Rochford:]

Well, I'm going to defer to Phil. But I think what we have seen is as we had, we are getting in to the curve, on that Grayburg, we're learning more about it. It's becoming more promising for us in terms of the vastness. Phil maybe you could address that more specifically.

[Phil Terry:]

Yes. Neal, as best we can determine right now, that thick section of the Grayburg, will basically fall in in to about 5,000 acres as best we can see now, there is are on going studies we are doing to completely delineate that. But we are encouraged by the fact we feel like we have a nice corridor to pursue. The 10 acre locations that we have drills have been productive and good in terms of initial production and IPs, and it appears they are going to produce very similarly to the 20s. But if I had to put a number on the number of acres it would be somewhere around 5,000 of the total.

[Neal Dingmann:]

And what about the five acre space, Tim, could you go after some of those?

[Tim Rochford:]

Yeah, I think that that again falls in line with the San Andres in terms of how that's developed, we have had so much on our plate for some time, Neal, that although I think that we all believe including the listeners on this call have been following the story on Fuhrman Mascho and are so familiar with what our neighbors are doing, that there is no question that five acres will enter in to this. But I think we're some time out before we're seeing that. Phil, would you have any thoughts on that?

[Phil Terry:]

I agree with that. Neal, we are pursuing our plan to develop the field on 10 acres, particularly and specifically those areas that we have experienced the excellent response and the IPs that approximate the 20s and 40s that have preceded the 10s. So we don't plan come and drill five acres in the immediate future. It's going to be I would guess several years down the road or a few years down the road until we have fully developed on the 10s.

[Neal Dingmann:]

Okay. And if I could sneak one last one in, Tim, at these prices, any thoughts about hedging more?

[Tim Rochford:]

Well, you can't help but think about it Neal. I can remember having a serious conversation just two or three weeks ago, and we are sitting there looking at each other saying should we pull the trigger or not, I'm glad now looking back we didn't. But I can assure you and all listeners that this is something we talk about and discuss on a daily basis and we monitor on a daily basis. The thing that you have to look at particularly as we approach this on a cost basis, we look at the downside, what do we think, we try to risk where we think that threshold may be in terms of the low end. And just to respond, we are open to it and we're monitoring it closely.

[Neal Dingmann:]

Alright, guys. Keep up the good work.

[Tim Rochford:]

Thanks, Neal.

[Operator:]

Thank you, our next question comes from the line of Jeff Hayden with Pritchard Capital. Please proceed with your question.

[Jeff Hayden:]

Good morning, guys, nice quarter.

[Tim Rochford:]

Thank you, good morning.

[Jeff Hayden:]

Couple of quick questions here. The acreage you guys just acquired, the 3,000, is that 100% and how much of did that cost you guys?

[Tim Rochford:]

Yeah, actually it's a little more than 3,000. It's about 3200 acres. It is 100% working interest. I believe our NRIs on that are about 75%, if I'm mistaken, Phil, maybe Randy could correct me, but I think it's an NRI of 75. And our total cost was right at about $.0.5 a million, maybe a little bit higher than $0.5 million.

[Jeff Hayden:]

Okay. And that's all undeveloped stuff?

[Tim Rochford:]

Yes it is.

[Jeff Hayden:]

Okay, great.

[Tim Rochford:]

And by the way just so that you know and others know, that this is contiguous and it joins our block there, so it's not something that is out in some goat pasture, it's right in the fairway.

[Jeff Hayden:]

Okay, great. I was just wondering, it sounds like production was going well in March, I was wondering if you guys can give us an update on what production is currently running?

[Tim Rochford:]

Well I can tell you that for April, we average 6,400 barrels a day. And we are feeling very great, just super about that as you can appreciate, that's a pretty nice move upwards, and we are continuing to see the same kind of trend. So as you know we don't give formal guidance, but I can assure you that 6,400 barrels a day plus is where we have been and a little bit better as we go into May.

[Jeff Hayden:]

If we assume that trend, are we adding 400 barrels day, a month on average? Is that a decent way to think about it?

[Tim Rochford:]

I don't think so.

[Jeff Hayden:]

Okay. That's a little -- that's going too hard.

[Tim Rochford:]

Yeah, I think so.

[Jeff Hayden:]

Okay, guys, appreciate it.

[Tim Rochford:]

Yeah, thank you.

[Operator:]

Thank you, our next question comes from the line of David Heikkinen with Tudor Pickering. Please proceed with your question.

[David Heikkinen:]

Had a question as you think about your operating cost, how much are going to save at Fuhrman Mascho for water disposal as you look forward with the injection wells?

[Tim Rochford:]

Yeah, its good question David. Phil, I think I will let you address that.

[Phil Terry:]

Alright. David, historically if the numbers that you look at in terms of moving water by truck exceed $1 per barrel. We have we feel like by the time we get all of our facilities in place we will be able to save and decrease our LOE per barrel by probably not a full $1 because we have power cost associated but. somewhere in the $0.75 per barrel range. We produce about 34,000 barrels of water on a daily basis at Fuhrman Mascho, a relatively small percentage of that is trucked. But eventually we will eliminate just about all trucking. So I would say we would be able to probably save in the neighborhood of around $0.75 a barrel by the time it's all said and done, $0.75 a barrel of oil. Yes.

[David Heikkinen:]

Just making sure. A follow-on to that, as you think about your DDA stepping up per quarter, on average up to $15 for the year, where do you end the year?

[Tim Rochford:]

Yeah. And I think that is a good question, David. And we will let Randy respond. I think Randy's intentions were to show to the listeners we anticipate an average of that, so as we escalate up, Randy, maybe could cover that.

[Randy Broaddrick:]

As you go forward and you calculate for example for the second quarter, say the average price goes up to 13 per BOE, you increase the total BOE -- or you increase the DDA, not just for the volumes in the second quarter, but for the volumes for the full six months. So at year end I'm estimating we will be at $15 per BOE for the year that's calculated at the end of the fourth quarter. That causes a little bit of -- it's hard to compare the -- it makes it look like the fourth quarter is roughly $21 or $22 per BOE when really it's at 15 and the rest of the amount in the fourth quarter is raising the average depletion per BOE for the volumes produced in the first, second and third quarter.

[Tim Rochford:]

So it's retro active, is what you're saying.

[Randy Broaddrick:]

Basically yes.

[David Heikkinen:]

That's what I needed to confirm. Thanks.

[Tim Rochford:]

Thanks David.

[Operator:]

Thank you, our next question comes from the line of Mark Lear with Sidoti & Co. Please proceed with your question.

[Mark Lear:]

Hey, guys. How's it going?

[Tim Rochford:]

Great Mark.

[Mark Lear:]

Just curious if you guys completed the first clear forecast, and if you had anything you could report to us on that?

[Tim Rochford:]

Yes, As a matter of fact we've drilled both of those. And I will let Phil give a summary of that. And before you wrap up, Mark, thanks for the photographs. Go ahead, Phil.

[Mark Lear:]

You bet.

[Phil Terry:]

Yes, Mark, we have drilled the two clear fork tests, neither of those encountered productive clear fork. However both were productive in the San Andres and Yates and pipe has been set for the completion of both wells as San Andres wells. Further to that clear fork question, I'll just add that although these first two wells were not successful, we have several other opportunities and potential clear fork plays to pursue, we will do that from time to time, and we are also looking at the possibility of some other horizons that we will explore. But the first two were not productive.

[Mark Lear:]

Thanks for the heads up there. I guess just a follow up, I was wondering if you could give me on idea at how the wells on the sweet spot are performing compared to the wells that are hitting the San Andres, and what would be the IP rates on those Grayburg wells as well?

[Phil Terry:]

Alright. Mark, we have compiled some numbers based on preliminary information and just as an example, the nine "sweet spot wells" that we completed in the first quarter, had an average net IP of 162 barrels equivalent per day. And compared to the other wells that we drilled, having IPs in the 130 to 140s range. So you see a pretty significant increase as a result of that -- of the Grayburg addition.

[Mark Lear:]

That's great. Thanks a lot.

[Tim Rochford:]

You bet, Mark. Thank you. And Mark I'll just add to that you will notice that Phil was making reference to net. So you gross that up, keep it in mind the NRIs at 75%.

[Mark Lear:]

Will do. I will keep that in mind, thanks.

[Operator:]

Thank you. Our next question comes from the line of George Whiteside with SWS Financial. Please proceed with your question.

[George Whiteside:]

Good morning, Tim.

[Tim Rochford:]

Good morning, George.

[George Whiteside:]

Congratulations. I don't think it was a nice quarter, I think it was a spectacular quarter.

[Tim Rochford:]

Well, thank you.

[George Whiteside:]

My question is related to the issue of hedging and you're to be congratulated on the way you have managed debt or the lack thereof, so that the banks haven't been in the position to force you to hedge. And related to that, what do you see in the future in terms of your pattern or need for borrowing to continue this aggressive drilling program?

[Tim Rochford:]

Good point, George. You noticed that in my summary that I commented on the fact that we have the three rigs running, that's part of the initial CapEx budget that was put out earlier in the year. You noticed that I also commented that we are seriously considering adding a fourth rig component that would be in full posture readied for the beginning of the second half of this year, and if that's the case we undoubtedly will be increasing the CapEx. Our CapEx initially for the year was right at $218 million, that was excluding any opportunities for acquisitions or excluding any acceleration in terms of our development schedule. Undoubtedly we will be looking at increasing that by at least I would imagine another 10% to 20% as we go through the year. I'm not making a commitment now that the fourth rig is coming in, but we are leaning in that direction. And there's nothing that would as I see it that would prevent us from doing that at this point although we haven't made the final decision. So referencing that, I would say that that of course increases our short fall. Our projected cash flow for this year although on a very conservative pricing component of about $85, we were looking at a short fall that was going to run somewhere in the neighborhood of about $40 to $50 million. I think that that improves because of the higher pricing but at the same time we have a short fall. Right now it's been our thought at least earlier in the year it's been our thought that our credit facility in fact would be able to accommodate that. Our credit facility as most of you know is $150 million with $100 million borrowing base. And as we speak we owe just under $50 million on the base. Along those lines as well the banking group, we have provided all year end information, financials obviously along with the reserves, and we are anticipating we will receive an increase in our base here before too long. But that leads to the latter part of your question, I think, George, and that is this, will we depend solely on our credit facility to make up the short fall projected cash flow and our projected expenditures this year? That remains to be seen. We certainly as we go through the year, if we're seeing what we think are more opportunities that would require additional cash components, we would be open and consider further equity opportunities. So first and foremost credit facilities, second would be the equity markets. But we are just going to play by ear a bit longer before we make that decision.

[George Whiteside:]

Great. Just keep up the good work. Looks terrific.

[Tim Rochford:]

CEO Thanks, George.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Jeff Hayden with Pritchard Capital. Please proceed with your question.

[Jeff Hayden:]

Hey, guys. Just a couple of follow-ups. The LOE on a preunit basis looked fantastic during the quarter, a lot lighter than what I was looking for. I was wondering if you could give any additional color around that number and what kind of per unit number should we be looking for the rest of the year on LOE, if you can give us any color on that?

[Tim Rochford:]

You bet, Jeff. I will let Phil address that. And I think he can give you more specifics. But I know on a general basis that we are seeing a decrease as it relates to the water hauling issue as that improves. But Phil, if you don't mind, if you would give us a little more detail on that please.

[Phil Terry:]

Sure. Jeff, we were rewarded in the first quarter with lower unit costs in terms of LOE. Couple of things contributed to that, obviously the increase in production; two, we have been able to get more water permits approved and more water wells converted -- I'm sorry, more wells converted to water disposal and ejection. So our costs have gone down some on a unit basis. Going forward, I would anticipate that we will continue to reap some benefits as our production increases, but we also anticipate that the LOE will start to move northward, as it always does when we see the increases in gasoline and diesel prices, because those come back to us in terms of higher invoices from our contractors and our service providers. Having said all that, I would anticipate that we are not going to change our model at this point in time, although we were considerably lower than what we had anticipated. We are going to leave room in there as far as estimates for the remainder of the year to see what happens when these increased fuel prices and increased labor prices come back to us on future invoices.

[Jeff Hayden:]

Okay. So it's probably the best way to think about it, just something just $7 to $8, a BOE range, kind of similar to what 2007 was?

[Phil Terry:]

Yes. I think if you're using $7.50 to $8, Jeff, you'll be -- you won't be disappointed.

[Jeff Hayden:]

Okay, guys, appreciate it.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

[Tim Rochford:]

Very good. Thank you, Operator. And I would like to thank -- we all would like to thank all of the listeners today for taking the time. We know it's a busy season right now, and of course your ongoing interest in the company, we appreciate as well. You all have a good day. Bye.

[Operator:]

That concludes today's teleconference, you may disconnect your lines at this time. Thank you for your participation.