Cabot Oil & Gas Corporation
Q2 2007 Earnings Call Transcript

Published: 26 Jul 2007

[Operator:]

Good morning. My name is Wanda and I will be your conference operator today. At this time I would like to welcome everyone to the Cabot Oil & Gas Second Quarter 2007 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. Mr. Dinges you may begin your conference.

[Dan O. Dinges:]

Thank you Wanda. Good morning, thanks for joining us for our second quarter teleconference call. With me today I do have several members of our management team including Mike Walen, our Chief Operating Officer; Scott Schroeder, our CFO; Jeff Hutton, our VP of Marketing; and Chuck Smyth, our VP-Controller. Before I do start the teleconference let me say that the statement regarding forward-looking information or regarding... included in the press release prior to my comments today. As you are aware Cabot issued two press releases last night both illustrating our continuing success, one with the financial highlights for the quarter and the other reporting achievements in our second quarter operations activity. Financially the company again reported solid net income of $38.6 million or $0.40 per share after removing the benefit of additional asset sales activity in the quarter. This level of net income was Cabot Oil & Gas Corp.'s second highest quarter -- second highest second quarter results ever reported only exceeded by last year's effort. The quarter experienced higher realized natural gas prices offset by lower oil price realizations and as expected due to this third quarter asset sale last year; we had lower absolute production for the comparable quarter. Overall expenses were down 4.5% for the year-over-year comparable quarters. I think this is very positive particularly in the escalating service cost environment we've had over the last several years. Relating to pricing, Cabot experience a 7% increase in natural gas price realizations buoyed by $0.66 per MCF pick up from the Company's hedge position. Additionally we had... we have added the hedge impact for the reported periods to the press release tables. Oil price realizations fell 9% to $61.98 per barrel but remained within our caller range of $60 to $80 per barrel. Cabot's overall hedge position is highlighted on our website for both 2007 and 2008 and as it relates to 2008 we remain opportunistic and will look to add to that position. Excuse me. Production as I mentioned, absolute comparable period volumes we down as a result of our sale in last year's third quarter. However what I remain very pleased with is our pro forma growth levels for production of 13% for the second quarter comparisons and 19% for the year-over-year period. Because the production levels are solidly within our guidance, the posted guidance level remained unchanged at this time. The production growth has clearly been driven by 98% success in our 222 well year-to-date drilling program. Moving to your expenses, overall expenses fell in the quarter even with increases due to compression, water disposal and treating costs and direct operations and the amortization of undeveloped leasehold in all our regions; the undeveloped leasehold are those aging areas that are no longer prospective or we have been allowed... or have been allowed to expire due to other opportunity. Because of this increased leasehold amortization, we are slightly increasing our guidance for DD&A in the third and fourth quarters. However guidance for all other expenses categories remain the same. Smooth operations

[Operator:]

[Operator Instructions]. Your first question comes from Ray Deacon with BMO.

[Raymond Deacon:]

Hey Dan, I just was wondering if you could talk about the mechanical issue with the nitrogen fracs and how you plan to... how it will the completion technique going forward? And also maybe just some more detail on what the James lime activity might look like going into 2008?

[Dan O. Dinges:]

Okay, right thanks for the question. The amount of nitrogen that we pumped in with multistage fracs up there on horizontal's anywhere from four to seven fracs is a bunch of nitrogen and we are going into a line. We've tied into a line with laying a 10-inch and 8-inch out into our leasehold position and that line dumps into a line that does not have a great deal of gas in it right now. So the pipeline specs that we are held to limit the amount of nitrogen percent that we can put into the line and since we don't have a great deal of gas to blend with as we were and if we were hooking into a line that had a significant amount of the gas into it. It's requiring us to bring these wells on slower because the percentage of nitrogen being produced from each well is greater than the pipeline specs that we can -- we can put in into the line. So our plan and we've looked at additional ideas, whether or not we put in a nitrogen recovery unit out there which is kind of a slow process or we flare these wells in greater capacity before we start putting these into the lines to get the nitrogen down, and we are looking at those options. But right now what we would hope would happen is as we bring the nitrogen content down on the wells we are flowing into the line right now and as we get more gas into the pipeline the blending effort will help us bring on the wells that we continue... that we plan on drilling out into this area into the future. It will allow the blending process to help bring the percentage down and bring these wells on a little bit quicker, but also we're either going to recapture some of the nitrogen or we might flare a little bit more of the gas on the front end to help bring it down. It's just... when we are flaring them at reduced rates because the levels of production rates high, our flare rates are higher, we just... there's kind of a balancing and tweaking going on right now and that's what we are experiencing. In the James lime... in the County Line and all of these Texas areas we are looking at, we do anticipate that to be a very active program for us. The James lime as we have seen... we drilled a horizontal... I mean a vertical well out there earlier, we've now drilled our first James horizontal well which we've had good success with. We are going to drill an additional 9 horizontal James wells out there on our acreage and with our acreage position we do anticipate going into 2008, that's going to be a significant level of activity for us; the James along with the Pettet. So we look for that to be a pretty good program for us in 2008.

[Raymond Deacon:]

Great, thanks Dan.

[Operator:]

Your next question comes from the line of Larry Busnardo with Tristone Capital.

[Larry Busnardo:]

Hey, good morning.

[Dan O. Dinges:]

Hi Larry.

[Larry Busnardo:]

Hi. Just looking at the County Line... I am just looking for a little bit more information on the two wells. The first one tested 2.5 million a day. Was that... the second one had more oil than gas, what's kind of the ratio of the first one and I know they are two different formations there. But was that expected to have more oil coming out of the James lime there?

[Dan O. Dinges:]

Well the... I will turn it over to Mark and let him answer also Larry. But the James well tested at a different rate, we are flowing it... that about 2.5 million a day right now. And I will let Mike visit about the gas-oil ratios.

[Michael B. Walen:]

Yes Larry the James is generally a dry gas reservoir, we have very little liquids involved with that. As a matter of fact that will part of the story with the Pettet, the Pettet zone is a higher... it's really oil zones more than gas zones out of the Pettet. And the goal going forward is to get enough James gas production to then blend with the Pettet gas and reduce our hydrocarbon dew point that way into our pipeline system and then set up some gas slip to lift this oil out of the Pettet. We think that there is a lot of potential in the Pettet for this oil reservoir and probably we will see some activity on that Pettet fronts in '08.

[Larry Busnardo:]

Okay. What's the --

[Dan O. Dinges:]

The oil and gas.

[Larry Busnardo:]

Okay. On the pipeline front, what's going to be the takeaway capacity of that pipeline?

[Dan O. Dinges:]

I will... there's a lot of activity in these taxes in and around this area and I am going to turn it over to our VP of the marketing, Jeff Hutton.

[Jeffrey W. Hutton:]

Okay Larry. Initially we expect to have about 15,000 a day capacity hopefully here around September. We've got a second project that's in the work that may add or essentially double that by let's say October. And then in addition to that there is two or three very competitive gatherers out there in the area that are proposing some very large diameter pipes to cut through that whole area; we are talking 24 inch type pipes. So capacity should not be an issue here as we get later towards the end of the year.

[Larry Busnardo:]

What would be the timing of that second boost that would double that takeaway capacity?

[Jeffrey W. Hutton:]

Towards the end of September... late September.

[Larry Busnardo:]

Okay. Alright. Just shifting over to the Paradox. You've got obviously McKenna and then South Gypsum. I think there was a third one Vancorum [ph]. Is that still on the agenda... is that being pushed out 2008, I take it?

[Dan O. Dinges:]

Yes, with the level of activity every place else, Larry, we are moving Vancorum to 2008.

[Larry Busnardo:]

Okay and maybe a question for Scott there, just on the deferred tax rate came in higher than... significantly higher than what I was looking for. Do you think it's still going to be in that 15 to 25% range that you have been talked about or is there a possibility that it comes in higher than that going forward?

[Scott C. Schroeder:]

Yes there's a possibility it comes in higher; we will adjust the guidance, it's still 15% to 25%, we need to do some research for the tax department on that. We got kind of caught... we are just running out of time. So we will post new guidance under per taxes here by the end of the week.

[Larry Busnardo:]

Okay good. Alright, thanks a lot.

[Scott C. Schroeder:]

Thanks Larry.

[Operator:]

Your next question comes from the line of Eric Hagen with Merrill Lynch.

[Eric Hagen:]

Hey, good morning Dan.

[Dan O. Dinges:]

Good morning Eric.

[Eric Hagen:]

On the James... in the James lime play, or actually on both the James one and Pettet, do you have any estimates out in terms of EURs and the well costs, if it's too early for that?

[Dan O. Dinges:]

It's really a little bit early to get that. We want to... I think towards the October period when we can turn these things in line a little bit and just kind of make sure they hold up as expected in all. I think that'd be a better time to be able to speculate on that.

[Eric Hagen:]

Okay. On the James lime well I think you mentioned... was the test rate at $5 million a day and just flowing it 2.5 capacity constraint, is that correct or --?

[Dan O. Dinges:]

Yes, it was a little better than $5 million a day.

[Eric Hagen:]

Okay, great. And then in the Rockies with Rockies prices, does that impact your drilling plants out there and if not at what price do you think you'll... you might consider reducing activity?

[Dan O. Dinges:]

The Rockies as always gets hit with the differential and it does effect the percentage of capital we allocate out there. We do have a good hedge position on with our Rockies gas, we have a $7 floor with about 20 million cubic foot out there. So we feel good about that. We do expect that differentials in the long run will relax a little bit once you get the new... like the Rex line in out there and you don't have quite the gas-on-gas competition. But it has tempered a little bit the percentage of capital we allocate into the Rockies.

[Eric Hagen:]

Okay, and then finally in Appalachia on the horizontal program, did I hear... so are you going to dedicate one rig, just the horizontal wells and if that's the case, I mean, how many wells per quarter and what sort of a basic outline in the drilling program for... and the rest of year in 2008.

[Dan O. Dinges:]

Yes and really the rest of 2007 we are going to dedicate this rig to horizontal drilling and in 2008 they will have probably a couple of rigs dedicated to just horizontal drilling in 2008. We are going to expand our horizontal drilling program.

[Eric Hagen:]

All right, great. Thank you.

[Dan O. Dinges:]

You bet.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Ellen Hannan with Bear Stearns.

[Ellen K. Hannan:]

Good morning. Hi, just a question for you on Canada, could you just refresh my memory what is your takeaway capacity in your Canadian regions on the pipeline --?

[Dan O. Dinges:]

Are telling about the Hinton area Ellen?

[Ellen K. Hannan:]

Yes, yes.

[Dan O. Dinges:]

We had a firm... $22 million a day firm on that Hinton pipeline and I'll let Jeff kind of just add to kind of what's going on out in that area.

[Jeffrey W. Hutton:]

Okay Ellen, we have like Dan mentioned 22,000 a day firm, that's net to Cabot. The pipeline capacity was build to through 50,000 a day of... at the current stage that it's at with just a little bit of compression add and a little bit of looping in that 50,000 a day goes to 100,000 a day. And with deliveries both into two large interstate pipelines, Alliance and TransCanada. Though, for short-term and long-term, the capacity should not be a problem.

[Ellen K. Hannan:]

And I had a question, you may have already tried to answer this and I apologize if I missed something. On the James lime horizontal, do you have a cost per well for that?

[Dan O. Dinges:]

Cost per well as completely well cost is approximately $3 million.

[Ellen K. Hannan:]

And you are not... you do not want to talk about what your expectations for the EUR yet?

[Dan O. Dinges:]

No, it's a little bit early for that. We should be able to get to that in the next quarter.

[Ellen K. Hannan:]

Okay, very good. Thank you.

[Dan O. Dinges:]

Okay.

[Operator:]

Thank you. Your next question comes from the line of Pavel Molchanov with Raymond James.

[Pavel Molchanov:]

Hi, good morning. Question about your Appalachian property, you mentioned before that both your pipeline and some of your upstream assets may be MLP capable, can you just talk to us about your latest thoughts about that?

[Dan O. Dinges:]

Well MLP area is certainly abuzz and a number of announcements made for upstream assets be placed and midstream be placed in MLP. Cabot certainly has both of those, we have a large infrastructure in the East and our Cranberry system is about 2,700 or 2,8000 miles of pipes with a significant compression on that and we certainly have a type of assets that are low decline, low intensity that are conducive to MLPs. We look at the MLP space, we evaluate what we have as far as opportunity is to place in that. There is certainly a position to take that would say, if the MLPs are going to need to continue to facilitate their vehicle with additional acquisitions and assets to be placed end of those then we think Cabot whether it is a portion of our asset placed in MLPs or whether or not we position our asset in a way that would be attractive and secure what we think might be superior value for MLPs to dump into their vehicles, we think in both cases Cabot's going to be well positioned. But we continue to look at it and monitor the space.

[Pavel Molchanov:]

Okay. Thanks very much.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Omar Jama with Oil Creek [ph].

[Unidentified Analyst:]

Good morning.

[Dan O. Dinges:]

Good morning.

[Unidentified Analyst:]

I am wondering if you guys have given... you have sold assets in the past and I was wondering if you have given any thoughts to perhaps shedding some of the... either the Western assets or the Canadian assets, and so far the early results were pretty strong in Appalachia and maybe rededicating some of that capital to higher return drilling projects. Is that something you guys have talked much about?

[Dan O. Dinges:]

Yes we have. It's a fair question. We always are looking at how we allocate our capital, we look at the depth of our portfolio with the... these 10,000 locations we have out in front of us and we are making efforts to create a little bit better present value on all of those locations and selling assets certainly is one way of doing it, I think when you do sell assets, I think it's a opportune time to do that. We have both and... certainly in the Rockies and in Canada we have a significant level of activity or locations or prospectivity in our portfolio now that is unrealized and for example on a number of the areas that we made discoveries, on Chime and Boltan and Norway, Hinton, we have a significant level of additional acreage available out there that you don't recognize by PUDs [ph]. You can put it in the probable... possible category at this stage but we don't think we would realize the value at this time for those types of assets. So if somebody came knocking on our door however and they would recognize the value as we do then certainly we would entertain that conversation. But it is a fair question on where we allocate our capital and what we get for the capital we spend in different regions and frankly I think that's the one of the strengths of Cabot that we do have multiple regions to allocate and it both... and all of them give us different input into our summation metrics that we report at the end of the year. Canada gives us a... just like the Hinton well we just tested that Hinton well at 12 million a day. A significant pass in our production where the East for example gives us a very, very good cost of fine number good rates of return in reserve replacement but certainly the way we return up there is not going to be equivalent to a well that you bring on at 12 million a day. So there's a good balance and that's certainly our objective as we put together a capital program and we're going to be looking at as we put 2008 together.

[Unidentified Analyst:]

Okay. So given your kind of outlook for the CapEx breakdown looking into next year [Multiple Speakers].

[Dan O. Dinges:]

Well we have a broad meeting today and tomorrow we have our entire management group. In the office today we have a meeting scheduled and after our board meeting tomorrow to really talk and go in depth into our 2008 program and talk about all aspects of our portfolio.

[Unidentified Analyst:]

Okay. Thank you.

[Dan O. Dinges:]

Yes.

[Operator:]

Your next question comes from the line of Eric Hagen with Merrill Lynch.

[Dan O. Dinges:]

Hello Eric.

[Operator:]

Eric, your line is open.

[Eric Hagen:]

Hey Dan.

[Dan O. Dinges:]

Yes, I got that.

[Eric Hagen:]

Okay, sorry about that.

[Dan O. Dinges:]

No problem.

[Eric Hagen:]

Just a follow up on the MLP question. In terms tax leakage you think that's going to be significant issue there, have you invested enough capital into the infrastructure and into drilling to increase the tax basis or --?

[Dan O. Dinges:]

Well yes I think the tax leakage... I think everybody that's dumping these properties into MLPs has to make that as a consideration when they put these vehicles together and we are looking at the tax aspect of it. Certainly our assets in the east are assets we've had a long time and we have a reduced book value on those assets as far as the upstream assets, midstream assets we continue to put dollars into expanding the infrastructure to allow us to expand our drilling program. So the tax aspect of that is something we are just looking at, at this time.

[Eric Hagen:]

So from a tax point of view, the midstream might be more perspective given the investments you've made over the past few years, is that fair to say?

[Dan O. Dinges:]

Well we are looking at it but that might be a fair conclusion.

[Eric Hagen:]

Okay, great. Thanks again.

[Operator:]

Your next question comes from the line of Jack Aydin with Keybanc.

[Jack A. Aydin:]

Hi guys.

[Dan O. Dinges:]

Hey Jack.

[Jack A. Aydin:]

I got to know a couple of questions. The increase in CapEx for the balance of the year is $65 million. Could you break it down where you are going to spend that money, where you are allocating it to?

[Dan O. Dinges:]

Yes. Jack I'll just... might touch on a couple of points and then turn it over to Mike. But certainly the success we are having in County Line with the horizontal drilling is going to see probably the majority of it and we are expanding the mid continent area also and also we have added a couple of horizontal wells to the program in the East.

[Jack A. Aydin:]

Second question I thought I was under the impression maybe I am wrong that you are acquiring additional acreage in... for the prospective Marcella [ph] shale. Did you... could you comment on it a little bit, could you share a little more color if you are adding acreage there?

[Dan O. Dinges:]

We have active programs in all of our regions right now with the line man [ph] and brokers.

[Jack A. Aydin:]

Okay. That's all you are going to say. Okay, now let me ask you another question. You are talking about your implied value in the grant of about 220 and alternatively you think instead of doing acquisition buying share, are you in the market buying shares... stock?

[Dan O. Dinges:]

Well we are really just recently Jack... the market turned soft, everybody has looked at the weather and the storage numbers and that convergence has created a lot of softness in this space and everybody is given up some of their move that they have made and when you look at now where that has brought Cabot to, we would never really be equivalent to our peers in the ground, we are always under our peers on a Mcfe equivalent. But coming back to now 220 an Mcfe it's approaching now what we look at as our replacement cost with our organic program and when we say that and look at that and now knowing that we have added to our capital program we are pushing our staff as hard as we can and we get to a certain level of affective capacity with the staff to be able to drill efficiently and not waste money in trying to do too much and when we look at that and certainly with the strength of our balance sheet we do consider buying our shares back. We have not made any share buyback recently though and Scott might want to add to that.

[Scott C. Schroeder:]

Jack right now governance rules prohibit us from being in the markets simply because of the earnings and everything. Just for example when officers are blacked out, the company has to be blacked out also.

[Jack A. Aydin:]

Okay. And the other question I have is... Dan is this... okay you mentioned you have got almost 10,000 locations and you are talking about the capacity in terms of human resources and technical know-how. Now did you give... are you giving a thought that you might want to bring somebody through joint venture in some areas such as the Paradox Basin or other area?

[Scott C. Schroeder:]

Yes, Jack --

[Jack A. Aydin:]

And to accelerate the development of your... that 10,000 locations?

[Scott C. Schroeder:]

Yes Jack that's a good question, and that's been a... I referenced in my annual report... in our annual report that it is a significant value that's out there and multiple years of drilling locations are out in front of us and to really recognize some of the value we have to as a management group figure out a way to maximize the value of what we have in our portfolio and certainly coming up with the methodology to allow us to expand our program in a number of different ways. We could expand it by adding to staff which we are doing some, we still have probably 16 to 18 open job requisitions right now that we are trying to fill. We have filled some in various different regions, so we are adding that way to expand our program and we are ramping up as much as we can and what we think is an efficient manner. But we also looking at other ways of looking at maybe our locations that would be three, four, eight years out in front of us and maybe carve out an area that would allow somebody to come in and us still participate in some... in some way in some method but also allow us to recognize significant value that's hanging out there that we are not able to get to for multiple years but we might be able to find another way to skin the cat. And that is a consideration, it is a project that I'm trying to solve and it will be one that we continue to work on. We are not going to try to give away anything and we are not going to give away anything but we are going to try to recognize value with what we have in our portfolio. Thanks [ph].

[Dan O. Dinges:]

Thank you Jack.

[Jack A. Aydin:]

Thank you.

[Operator:]

Your next question comes from the line of Larry Benedetto with Howard Weil.

[Larry Benedetto:]

Hi Dan.

[Dan O. Dinges:]

Hey Larry, how is you?

[Larry Benedetto:]

I am doing well.

[Dan O. Dinges:]

Good.

[Larry Benedetto:]

In the East, the EUR that you have given for recovery is 1 to 1.8 bcf and that's a fairly wide range?

[Dan O. Dinges:]

Yes.

[Larry Benedetto:]

Is there any thing other than rock quality that would determine whether that recovery would be in the high end of the range or low end of the range?

[Dan O. Dinges:]

No. And it's still a very small sample pool Larry. We have been conscious on putting out numbers out there because we didn't want to get ahead of ourselves and we still have a fairly large range. But we only have five well that are produced... been producing now for a month and really it's still early to be... I think to be talking about EURs but we felt a little bit of a need to get some numbers out there and certainly represent and recognize that the horizontal program is a viable program for us. I would think with additional drilling, you are going to have a myriad of different results. You are going to have better wells and you are going to have wells that are not as good. I don't know where the average is going to fall out. Obviously we'd like for it to fall out on upper end and if through... weather we can enhance that upper end by the extended drilling... getting out 3,400, 3,500, 3,600, 3,700 feet and adding multiple fracs or how we frac the wells as being one way. But also if we find the fracture swarms in it... that are maybe significantly better than the range that we've found here, certainly the average is going to be on the upper end. But rock quality and the fractures and the rock, Larry, are going to be the key to our result.

[Larry Benedetto:]

Okay. And then a quick one for Scott. Do you have a diluted share count?

[Scott C. Schroeder:]

One second Larry. Six months 98077.

[Larry Benedetto:]

Thank you very much.

[Dan O. Dinges:]

Thanks Larry.

[Operator:]

[Operator Instructions]. Your next question comes from the line of Biju Perincheril with Fortis Securities (sic) [Fortis Bank, Inc.]

[Biju Perincheril:]

Yes hi. Can you expand a little bit on your... the cost and the second quarter production costs and your expectations going forward, I see that you've maintained the guidance in the second half.

[Dan O. Dinges:]

Biju, we were within a Penny of the unit cost, Dan alluded to the fact that we had water [ph] disposal, compression costs that impacted the second quarter, some workovers. We expect the increase volume that that will come back in line with those. We have forecasted so that's why we did not change the direct operations guidance.

[Biju Perincheril:]

Okay. And then the nine more-or-less horizontal wells that you will be drilling at County Line, are those going to be dual add-ons at Pettet and James lime?

[Dan O. Dinges:]

No, right now we are just focusing on the James lime with it being... the Pettet being oily and the James being gassy. We are going to focus right now just on the James horizontals.

[Biju Perincheril:]

Okay, thank you.

[Operator:]

Your next question comes fro the line of John Ragard with Friess Associates.

[John Ragard:]

A question on the Moxa area, you guys have been very successful in the frontier. And if I recall in the past you have drilled the wells a little deeper to target another formation and the name of which is escaping me now and you had at least one successful well. Out of those 15 you've drilled this year, is that the only successful additional pay you have completed below the frontier?

[Dan O. Dinges:]

Yes. John we have... Dakotas is what we have deepened the wells to when we do. As I have mentioned Dakota is a more of a fluvial type of channel sand that we look for. Of the 15 wells, we felt like where those 15 wells were located based on our best guess geology that only five of them were warranted in deepening and we did deepen five of those. We've had that one success and the other five wells we felt like were not economic for effective completion in the Dakota. But we will continue with that program. Again as we have always stated it's a higher risk program but can't add... we think if you find it's significant value to the program.

[John Ragard:]

And the incremental cost is fairly low per well bore, correct?

[Dan O. Dinges:]

Very low.

[John Ragard:]

Okay. Thank you.

[Dan O. Dinges:]

Yes.

[Operator:]

At this time there are no further questions.

[Dan O. Dinges:]

Okay, Wanda, I appreciate it, appreciate all the good questions and we certainly look forward to our 2007 third quarter to be our most active quarter and look forward to our report in October. Thank you very much.

[Operator:]

This concludes today's Cabot Oil & Gas second quarter 2007 conference call. You may now disconnect.