Cabot Oil & Gas Corporation
Q3 2014 Earnings Call Transcript

Published: 24 Oct 2014

[Operator:]

Good Day. And welcome to the Cabot Oil & Gas Third Quarter 2014 Earnings Conference Call and Webcast. All participants will be in listen only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Mr. Dan Dinges, Chairman, CEO, and President. Please sir, go ahead.

[Dan Dinges:]

Thank you, Zelda. And thank you all for joining this morning. With me today, I do have the members of our executive team. Also, the boilerplate language and the forward-looking statements including our press releases do apply to all my comments today. I would first like to briefly touch upon a few financial and operating highlights from the third quarter that were outlined in this morning's press release before I do jump into the discussion on a few topics that I am sure is on everyone's mind. First off, the equivalent net production for the third quarter was 1.44 Bcf per day, an increase of 24% over the prior year's comparable quarter. Liquids production for the quarter increased 32% compared to the prior year comparable quarter, when you adjust for last year's Mid - Continent and West Texas assets sale. Net income excluding selected items for the quarter was $85 million, an increase of 14% over the prior year comparable quarter. And lastly, cash flow from operations was $358 million, an increase of 29% over the prior year comparable quarter. These numbers highlight that even during a period when we experienced lower natural gas price realization and some unplanned production downturn, we were still able to provide top tier growth in production and cash flows while generating top tier returns which is a testament to the quality of our assets and operations. I have been clear and the general consensus is that 2015 will be another challenging year for natural gas and oil prices. However, we demonstrated this quarter and over the last year Cabot's asset base continue to generate high growth, high returns and we will certainly stand to benefit greatly as we start to see improvements in the price dynamics in the basin, once new pipeline projects are in place, beginning in late 2015 and beyond. And we will have some more comments in regard to Constitution in a moment. The remainders of my comments are going to be focused on addressing questions that I think are on majority of your mind. First, the 2014, 2015 guidance. Today, we did reaffirm our 2014 production range of 530 to 555 Bcfe. Where we ultimately end up in this range will be dictated by the level of demand we see in November and December, and certainly the corresponding market conditions will also impact that range. Today, we also reaffirm our 2015 production growth guidance range of 20% to 30%. This production growth range is based on average gross Marcellus production rate 1.8 to 2 Bcf per day which is essentially the same gross production expectations we have for November and December of this year. Once again production rate will be depended upon various factors throughout the year including natural gas price realizations and to a lesser extent field logistics around the infrastructure including both planned, unplanned maintenances as well as maybe some line pressures. The production growth range also assumes an average net liquids production rate of 18,000 to 20,000 barrels per day of which 88% is crude oil driven by the acceleration of our drilling program in the Eagle Ford. The addition of this high margin production should help us offset some of the loss margins we are seeing from our natural gas sales in the current price environment. The Company's capital program for 2015 is $1.53 billion to $1.6 billion, which include drilling and completion capital of $1.25 to $1.32 billion, approximately 52% of the drilling capital will be allocated to the Marcellus, 46% will be allocated to the Eagle Ford Shale and another 2% or so allocated to drilling another areas. The capital budget assumes five operated rigs in the Marcellus Shale that's down from our current count of six rigs and four operated rigs in the Eagle Ford. Let me emphasis that our 2015 capital program at the mid point is up only 4% over our 2014 mid point, however, we will be generating production growth of 20% to 30%, further highlighting the capital efficiency of our program. Based on this rig count, we expect to drill 180 to 190 net wells in 2015, which include 95 wells to 100 net wells in the Marcellus and 80 to 85 net wells in the Eagle Ford. Our range in drilling in completion capital is ultimately dictated by how aggressive or conservative we choose to be on the completion side of our operations. If the market demand is favorable throughout the year then we would likely accelerate completion resulting in higher production and certainly the reverse is true if we see below average demand certain times of the year winter or summer, we will likely decelerate our completion schedule and move with the market resulting in lower production range. However, it is our intent to stay within our guided range of 20% to 30%. As you might suspect, we have run a number of sensitivities for our 2015 program certainly in light of the dynamics on the macro market of the commodity pricing. We build one of our base case programs for the year off a realized natural gas price sensitivity of $2.80 per Mcf and realized old price of $88 per barrel. While our crystal ball is no better than anyone else, we believe these are within the fair way as reasonable assumptions. We will certainly provide quarterly update as we always do regarding our price realization and review our thoughts on the forward strip. However, I think the most important investment consideration focused on is what the program generates throughout the year. We plan on generating robust growth and returns even under these commodity price assumptions. A typical Marcellus and Eagle Ford wells generate returns over 80% and 60% respectively based on those budgeted commodity price realizations we used in this sensitivity. Okay, moving to some hot news that came out this morning regarding the Constitution pipeline. As many of you may or may not be aware, the FERC issued its final environment impact statement this morning for Constitution. As we are extremely excited to achieve this critical milestone, we have yet to fully assess this several thousand page document. That said, we remained cautiously optimistic that assuming the timely receipt of all remaining necessarily regulatory approvals, Constitution could begin construction as early as the first quarter of 2015 and bring the project into service in late 2016 or early mid-- I mean late 2015 or early mid 2016. However, given the uncertainty that still surround final approval process, we are assuming in our budgeting right now a July 16 in service day for our internal modeling purposes. But remain somewhat optimistic that there is still an opportunity to have Constitution in service by the end of 2015. We will continue to keep you updated as we see more information from the Constitution pipeline team. The FERC and all other agencies in the process. Now moving down to South Texas and our Eagle Ford area. During the quarter, we announced the acquisition of 30,000 net acres in the Eagle Ford of which 17,000 net acres are directly offset to our Buckhorn operating area. We close this transaction this last week. Our Eagle Ford team has done an excellent job unlocking the value throughout the Buckhorn area and we believe that they will be able to generate similar results on this newly acquired adjacent acreage. We are in the process of completing our first well on this acreage which should be placed on production near the end of the year. As we highlighted in the press release, during the quarter, we placed 10 wells on production and produced for at least 30 days, these wells achieved an average 30 day production rate of 751 barrels per day with a 91% oil cut which is in line with our type curve. As a reminder, our typically Eagle Ford well generates a return of approximately 50% at the current strip of $80 per barrel. In the press release we also provided an update on our 300 -foot down spaced pilot program which we discussed last quarter. To date, these two wells have combined to produce over 230,000 barrels of oil in the first 180 days. Fair to say that we are pleased with this result. We plan to test more 300- foot down spaced well this year and in the next year, and we will certainly have more to say as we continue to get additional production history to analyze. Assuming 300-foot down spaced does work throughout our position in the Eagle Ford, we have a drilling inventory of over 1,000 gross locations remaining in our Buckhorn and Presidio position. Okay. One quick note on the share repurchases during this quarter. Subsequent to our press in late September, we repurchased an additional 1.6 million shares bring the year-to-date total to 4.3 million shares. And our total since the fourth quarter of last year is 9.1 million shares or approximately $300 million worth of share repurchase. We have 10.1 million shares remaining under our current authorization, giving our current outlook for commodity prices, our capital program next year relative to our expected operating cash flow and our desire to maintain our strong balance sheet, a pace of repurchase is could be tampered for some parts 2015, however, it's certainly remain one of our objectives to effectively allocate our capital and share repurchases will remain a viable piece of that equation. During the third quarter of 2014, we added 29 natural gas derivative contracts for our 2015. The company now has approximately 200 million per day natural gas volumes hedged for 2015 at a weighted average floor of $3.99 per Mcf. So with that comments, Zelda, I will be open for any questions to myself or our management team.

[Operator:]

(Operator Instructions) The first question comes from Doug Leggate from Bank of America. Please go ahead.

[Doug Leggate -Bank of America Merrill Lynch:]

Hi, good morning, so I got a couple of questions if I may. So first of all on the Eagle Ford. If you do end with the 1,000 locations which you said in your press release this morning. Four rigs just seems little -- a little lower in the context of a resource opportunity. So I am just wondering, are the economic still competitive at the current oil price environment? And if so, what would stop you looking to reallocate additional capital away from the Marcellus towards the Eagle Ford? And then I got follow up on Constitution please.

[Dan Dinges:]

Okay. Yes, we certainly like to return in there as I mentioned. With the typical well right now with our typical current bits we have a 50% at current commodity prices $80. We have a 50% return profile for our wells and as far as expectations in 2015 on our program; we have this new acreage 70-- new acreage is going to require drilling to maintain that acreage. And so on the near-term outlook and certainly with the returns that we get, our group is gearing up to expand our operations, moving our operations around a little bit than what we had say a couple of months ago. And again if we have little prices that stay in the range they are today or better, we do not anticipate or even if they go a little bit lower than $80 certainly, we do not anticipate pulling any capital from the Eagle Ford. We expect to keep these rigs busy, keep a couple frac crews busy throughout the year. And I would say that we would probably ramp up our program as we move into the latter part of 2015 on into 2016.

[Doug Leggate -Bank of America Merrill Lynch:]

That's helpful, thank you. I guess the news obviously this morning on Constitution give you not a chance to fully absorb all the details, but I just want to try and get some color around the implication for takeaway capacity in your mind, Constitution is obviously a big deal but in your mind does it enough to resolve the ongoing issues given the strength of the wells and not particularly north east and of course the continued improving efficiencies and so on. And if I missed a final follow up, I wondered if you could also give us the exit rate of production in the third quarter -- give us some idea how would then in Q4. Thank you.

[Dan Dinges:]

All right. Well, first off, the Constitution is just one component to several infrastructure projects that will be implemented up in the north east. I'll let Jeff discuss these in one moment. But certainly the Constitution is the most impactful near-term inflection point. And we think we are going to be able to get a half Bcf of our gas to different price point. And that price point certainly currently and historically has been a better price point than the general market. So that is attractive to us and we think with the projects as they unfold down into 2016-2017-2018, we think the market will rationalize the supply side, certainly demand is going to be enhanced. And we think that we will be able to get gas to a broader index if you will on a weighted average basis that from today we think we will improve significantly up from what we are seeing today. I think if you look at and you look at 2015, I think everybody is kind of on the same page, at least the people that I have discussed this with. At 2015, it's probably going to be the most challenging year and Cabot weathered this period if you will for the last six months to a year and we do expect that realization would go down for all the players out there, probably in gas and oil price for 2015. But we are in a position with our program to deliver decent returns through the period and come out other side which we think is going to a better market. I'll come back to the third quarter exit volumes once I'll let Jeff discuss a little bit on the other projects that are out there.

[Jeffrey Hutton:]

Okay, Dan. I think as Dan alluded to Constitution, certainly one step for us specifically I think the -- I think your question had to do a little bit with the micro market as well. There are several projects that are out there Leidy Southeast and others, Rose Run and Columbia East side, I mean there is numerous project that affect us directly. And numerous projects that affect us indirectly from Southwest PA that will certainly expand this to take away during 2015, 2016 and 2017. But for us specifically Leidy Southeast is the big project, we have some additional firm coming on in the next few years; it's going to impact us on the existing pipeline. Then of course Atlantic Sunrise is the next big step in 2017 with 850,000 day takeaway on that pipe. So all-in-all, it's shaping up, we are thrilled about Constitution step forward, but there is always additional capacity that's on the horizon. We are always looking to get it.

[Dan Dinges:]

Thank you, Jeff. And regard to the most recent affected volumes, we are on the gross Marcellus were about 1.6, 1.625, somewhere around there. And we have said, we did slide a little bit of maintenance from what we had anticipated to do in December into October. So we would be able to take it full advantage of what we expect, we will be a little bit better pricing in December.

[Operator:]

The next question comes from Charles Meade from Johnson Rice. Please go ahead.

[Charles Meade:]

Good morning, Dan, and to the rest of your team there. If I could back to rather pick up on the Marcellus volumes question a bit. You said in your prepared comments that November, December are just going to be kind of demand driven picture for you guys as far as what you produced, but you also I think you mentioned in the press release, you got a number of wells schedule for completion up there. So can you talk about the inner play of those two and what's your -- what kind of hurdles you guys are clearing day to day on deciding what's your volume is going to be?

[Dan Dinges:]

Well, we do have -- we are balancing I guess our rhetoric again in regard to the market. The early forecast right now for early winter is that it might be a little bit warmer than normal, so we just picked up bed and couching expectation to say that if it is little bit warmer and you don't have the demand that would be expected then we could balance our production in light of that market. However, with your point about the number of wells that we are bringing on. We will be bringing on a list of wells that are probably greater than a 1,000 frac stages, well it is a grater than 1,000 frac stages and you can do some quick back of the arm below math and the rates from those wells would be significant. In fact, if you did just back of the arm below -- you could almost get to the rate that we are producing today on an instantaneous basis. But, again with that said, we are just trying to tamper expectations a little bit, but we do expect most likely that we are going to fall in the range that we discussed that in November and December, 1.8 to 2 Bcf a day.

[Charles Meade:]

Got it. Yes, that's a frac stage, that is -- a lot of potential there. And, Dan, one other thing if I could redirect to the Eagle Ford. It looks like a big step up in your emphasis there and that make sense both with what you had in the Marcellus and your recent acquisitions there. But I wonder if you could talk more broadly about what your goals are for 2015 in the Eagle Ford? Whether it is to delineate some of the new acreage that you recently acquired? Whether it's to test more long laterals or more emphasis on this down spaced? Just what are your overall goals that you like to deliver on in 2015?

[Dan Dinges:]

Yes, now that's good question, Charles. And we are excited about what we have been able to do. The south region has done a great job of implementing some new processes and is completion; I'll let Steve Lindeman give some color on that after I make a comment on the acreage. But it is our plan to delineate if you will the acreage position that we recently acquired. We are still in the game putting together additional acreage. And we are doing so because of the returns that we expect and that we are realizing out there in this program. So our goal is to be able to provide a consistent level of operations and results in the form of returns, and have a fair way that is going to be something that we can plan in our capital allocation for a number of years adding in front of us. I'll let Steve talk a little bit about maybe what we are doing in our efficiency efforts out there.

[Steve Lindeman:]

Charles, in terms of what our goals would be, we are migrating to more pad development and really looking at every phase of drilling and completion operation to try and enhance our efficiencies. Earlier in the year with only -- in the beginning of 2014 with just two rigs running in the field, we couldn't maintain a steady frac through now with the four rigs, we got a steady frac through and even a second crew that's coming in from time to time. That's really helped us significantly in terms of efficiencies in a drilling out plugs, packers, all those, all the ancillary type things. And then secondly, we've been trying to with this acreage acquisition, it helps us work to extend our lateral length. And that's where we are working to incorporate this acreage, extend some of the unit and try and work up, increase what our average lateral length is.

[Operator:]

And the next question comes from Pearce Hammond with Simmons & Company. Please go ahead.

[Pearce Hammond:]

Good morning. Dan, I may have missed this and I apologize but in your prepared remarks, did you provide any color on expectations for company wide gas differentials for Q4? And what do you experience Q4 to date?

[Dan Dinges:]

No. We had not.

[Pearce Hammond:]

And any color you want to provide there now.

[Dan Dinges:]

No. We will have all our fourth quarter realization on our call in February, but just in a general sense, Pearce, we are seeing similar so far in this early stage of fourth quarter, we are seeing similar realizations as we have seen in the third quarter.

[Pearce Hammond:]

Okay, thank you, Dan. And my follow up question, in response to Doug's question earlier you had mention, did your capital program in Eagle Ford, number of rigs run specifically the four rigs, did you currently lock down on that and even if prices were little bit below $80 a barrel for 2015 on NYMEX oil that you would probably stay still with that four rigs. Given the rates of return that you are running there, is there a threshold price at which you would adjust those rigs? You have $75, is it $70? Is there a number?

[Dan Dinges:]

I think you have to get below $70, for us even consider adjusting that program at this stage. We certainly have the balance sheet be able to capture this acreage; we see the value in the acreage with the return profile we can get at a reasonable price, Pearce. And in the near-term, we are going to capture that acreage and we are going to stay at it. So it would have to fall up quite a bit for us to deflect from our program.

[Operator:]

The next question comes from Brian Singer from Goldman Sachs Group Inc. Please go ahead.

[Brian Singer:]

Thank you. Good morning. Could you guys remind us what your pricing outlook is for market at Constitution serves? And how much additional gas you think it's possible to send to those markets beyond Constitution, the four Constitution like pipeline expansions are no long accretive?

[Dan Dinges:]

Well, I'll let Jeff answer the marketing question, Brian, thanks.

[Jeffrey Hutton:]

Sure, Brian. I think at this point I just want to remind everyone that we are in numerous contract negotiations with buyers at the tailgate of Constitution pipeline at station called Wright, So Constitution will deliver at Wright into both Iroquois going North and Iroquois going south. And a Tennessee 200 line that feeds the Boston area or Tennessee Zone 5 that's the pricing point. That said, I wanted to dodge these specifics. But if you look, just look at the historic prices at Iroquois Zone 2 and Tennessee, I think an impact of additional 500,000 they have gas which is not really incremental. We think it will be backing off the Canadian suppliers, they are coming from Echo. So we don't think there is enough gas there to saturate the market necessarily. And so we are easing into with a number of different buyers. Turning out north to Canada will be sending gas out to Long Island and we will be introducing some gas to Boston from that point. So it looks very favorable. Obviously, I will say it's above NYMEX of high pricing, but there is -- there is a lot of negotiations going on at this point. And I think you have a follow up question with regard to expansion. Iroquois is -- our competition, obviously the 30 inch pipeline has some room for expansion. We are not concentrating at all on expansion right now. We are looking at the project as it is proposed and planned and obviously we are again -- we are happy with the final EIS as the 30 inch pipeline and that's what we are sticking to at this point.

[Brian Singer:]

Thanks. And then my follow up is also with regard to Constitution. I guess it's maybe understandable, you haven't read 3,000 pages in an hour or two hours, but I wonder whether you had or engaged at all any of the state regulatory agencies that are going to be looked to here with the SEIS now out there or if you have any update from what you are hearing, from Williams or others?

[Jeffrey Hutton:]

Okay. Well, you are correct. Well, the executive summary looks fine looks exactly what we expected. There is a lot devil in the detail on a document of this size. Remember, through that the finally EIS does a number different things. Probably the most important thing is it sets stage to receive the certificate. And that's of course what we are all going to be looking forward to next. The second thing it does is confirmed they are out. And that's always been on the back of everybody's mind is when we have the route fully confirmed. And then the EIS does that. The third thing it does is there are going to be a number of agencies, both state and federal that are waiting on information that's contained in this document. New York PA, all kinds of federal agencies, all the permits, and there is hundreds and hundreds of permit that -- permit inside permit. They are waiting on data from this document. So we are thrilled that's finally out there. Everyone can proceed now with the finalizing the permits and looking forward to getting the certificate.

[Operator:]

The next question comes from Matthew Portillo of Tudor, Pickering, Holt & Co.

[Matthew Portillo:]

Good morning, guys. Just a quick follow up question. As we look into 2015, you guys mentioned kind of your guidance implies relatively flat production from the current acts that you are looking at in December of this year. Could you provide us a little bit of color in terms of how many wells do you think you actually need to complete to hold your production profile flat? And then I guess second follow up question along side that. As you kind of highlighted the productivity of these wells, with your current drilling plan, are you planning on building a backlog of inventory going into 2016 which will start to go down once you have some of the Constitution capacity coming on?

[Dan Dinges:]

Yes. We have one, the ability with our results and type of wells and results tha we have in the Marcellus. We have the ability to tweak our production profile fairly quickly. And looking at your first question, what it is take to hold these -- hold our production flat. And I will be a little bit bolder, I don't know if I get a raising eyes from some of the guys around the table, but with the tranche of wells that we are going to be completing between now and the end of the year, I think it would be safe to say that we would probably not have to drill another well or complete another well in 2015 to maintain our production flat. Because of the backlog of production that we have coming from those wells. So that would be a kind of a little bit of bold statement maybe but nevertheless I believe it to be true. When you look at the backlog of wells that we might have, as we go through the approval process with Constitution, we are going to manager how we complete wells and how we bring wells on and how we handle the field allocation and logistics have moving our gas based on the expected turn in date line for Constitution. But if you go to our budget as we set it out right now with a mid 2016 Constitution commissioning date, we should have going into the end of the year, almost 1,400 or so stages in the queue, if you will at the end of 2015.

[Matthew Portillo:]

Great. And then I guess just as a second follow up question along side that. As we think about kind of the next year or so really going into 2015 with that in mind kind of the drilling program you are guys setting in 2015, sets you out for effectively just using some of that backlog inventory to grow your production in the 2016 timeframe, is that the right way to think about it so as you guys continue to build this inventory? Your 2016 capital program probably doesn't need to change all that much in terms of your drilling CapEx to achieve that growth rate you kind of layout with Constitution?

[Dan Dinges:]

Yes, I think we are not going to-- we haven't put together our guidance for 2016 but I would not expect a large increase in our capital program in 2016.

[Operator:]

The next question comes from Mark Hanson with Morningstar. Please go ahead.

[Mark Hanson:]

Hey, good morning, guys, thank you. If you could maybe just a more color on where your expectations are for operating cash flow for 2015 given the budget do you expect to live within cash flow? Or will there be some borrowing to bridge the gap there?

[Dan Dinges:]

Mark, with the prices that we laid out in the guidance last night, we are looking at the small deficit sub $100 million in our base 2015 plan.

[Mark Hanson:]

Okay. And then maybe can you just help me bridge the gap there in terms of drilling and completion and the ongoing equity investment there in Constitution and Central Penn. Looks like there is maybe 200 million or so give or take beyond of -- now those buckets, and I am just wondering maybe if you could give us more color on kind of where that spending is directed?

[Jeffrey Hutton:]

It's a lease acquisition; it's going to be some production equipment and facilities, exploration and capital dollar in there as well.

[Operator:]

The next question comes from Marshall Carver from Heikkinen Energy Advisors, LLC.

[Marshall Carver:]

Yes, good morning. And I guess you addressed my question around completion activity in the Marcellus. But you outlined the drilling program in Eagle Ford 2015, how many wells do you plan on completing and putting online in the Eagle Ford in 2015?

[Dan Dinges:]

Well, we will be drilling 20-80-85, as far as the number of -- when you look at the 2014 wells that are being drilled now that roll over into 2015 and then you look at the carryout wells that are drilled in 2015, that will be completed in 2016, I am guessing it is going to be close to 70 to 75 wells.

[Marshall Carver:]

Thank you. And one other question. You give the liquids production guidance for 2015, is that all crude and condensate or is there an NGL component? And how large would that be if there is any NGLs?

[Dan Dinges:]

Well, the majority of it is crude. Of the 18,000 to 20,000 barrels. And I think we have -- I think it's less than 15%, probably 10% NGL in that.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dan Dinges for any closing remarks. Please go ahead.

[Dan Dinges:]

Thanks, Zelda. Again I appreciate everybody's questions. As we mentioned, we are excited to get the FERC Constitution pipeline EIS and we will have more color on that as it unfolds. But one thing that, I think it's safe to say is that this macro market certainly has created a little of anxiety for a lot of investors. But when you step back and you evaluate company like Cabot and company that can provide like strong growth, excellent returns, maintain investment great balance sheet. It is a company that is going to be here for long term. I think we are weathering the worst of the storm as we speak. And there is going to be better opportunities to enrich shareholders as we roll forward from this date. So I'm n it for the long haul and again I appreciate all your support. Thanks again.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.