Callon Petroleum Company
Q1 2008 Earnings Call Transcript

Published: 3 Jun 2008

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Callon Petroleum Company first quarter 2008 results conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, May 8, 2008. I would now like to turn the conference call over to Mr. Fred Callon, Chairman and Chief Executive Officer.

[Fred L. Callon:]

Thank you and good morning. We appreciate you taking the time to call in to our first quarter conference call. Before we begin the formal portion of the presentation, I’d like to ask Terry Trovato, who heads our Investor Relations, to make a few comments.

[Terry Trovato:]

Thank you, Fred. We’d like to remind everyone that some of the comments made during this call will be considered forward-looking statements. As such, no assurances can be given that these events will occur, that the projections will be attained. Please refer to the cautionary language included in our news release and in the risk factors described in our SEC filings. We undertake no obligations to publicly update or revise such forward-looking statements. It is also important to note that the SEC permits us in their filings with them to disclose only proved reserves that we have demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions. During today’s discussion, we may use terms like reserve potential and probable reserves that the SEC’s guidelines strictly prohibits us from using in our filings with them. These estimates are by their nature more speculative than estimates of proved reserves and accordingly are subject to a substantially greater risk of being actually realized by the company. Finally, today we will be discussing 2008 cash flow which is considered a non-GAAP financial measure. Reconciliation and calculation schedules for the non-GAAP financial measures were stated in our first quarter 2008 results news release and could be referenced there on our website at www.callon.com for subsequent review.

[Fred L. Callon:]

Thank you, Terry. First, I’d like to provide an update on operations and then Bob Weatherly, our CFO, will discuss the results of operations for the first quarter of 2008. Then we’ll conclude with a guidance for the second quarter and the remaining of this year. Before I discuss the first quarter operations and production from our existing property base, I’d like to make a few comments regarding our strategy over the past year and current status of our Entrada project. As most of you know, Entrada Field is our single largest asset and we’re working diligently to bring it online. Once producing, Entrada has potential to double our production and our cash flow. Since the milestone of acquiring BP’s 80% working interest in Entrada in March of 2007, bringing our interest up to 100% and taking over as operator, we quickly focused on managing the liquidity to preserve the funds necessary for developing producing our reserves in Entrada. Last year, we decided to use our capital expenditure program to committed projects only. Although, this temporary reduction in investments impacted our reserve for 2007 and currently having a short-term impact on our daily production, it was the right move for preserving our ability to execute our Entrada development plan and increase our long-term shareholder value. We’re currently on track for achieving first production from Entrada during the first quarter of 2009, less than a year from now and two years from our acquisition of BP’s interest and taking over as operator. Since the BP acquisition, we have achieved a #of milestones for bringing Entrada to first production. Immediately after acquiring BP’s interest, we fast tracked the engineering and development plans and ordered all the long lead items. We signed a critical production handling agreement with Conoco Phillips and Devon Energy to produce through their Magnolia TLP, which significantly reduced the total capital required to bring in [inaudible]. We secured a rig slot with Diamond Offshore semi-submersible rig, the Ocean Victory. And then we initiated and completed the search for a financial partner to reduce our capital costs nor to fully develop the Entrada Field on a timely basis and help manage our financial risks. In addition, during December 2007 we sold for $61.5 million non-core royalty and mineral interests which further improved our liquidity. Each milestone was accomplished all in time and we’re currently on track for initiating first productions from Entrada in the first quarter of 2009 as planned. Here’s a quick update on Entrada operations

[B.F. Weatherly:]

Thank you, Fred. For the first quarter of 2008, we reported net income of $7.6 million or $0.35 per diluted share, which was over the estimate of $0.09 per diluted share. Our daily production rate for the first quarter of 2008 was 42.1 billion cubic feet equivalent per day. Natural gas and oil production were within our guidance ranges of 2.1 billion cubic feet and 290,000 barrels respectively. Oil and gas revenue for the first quarter of 2008 totaled $45 million. Average realized oil prices for the first quarter were $86.65 per barrel, which was a significant improvement over $55.53 for the same quarter last year. The benchmark oil price for the period measured by the average closing price of NYMEX contracts for the delivery of WTI averaged $97.90 per barrel. As discussed in previous conference calls, the spread between benchmark oil price and our average realized price is due primarily to quality adjustments incurring the sale of our oil production from Medusa and Habanero, which combined, accounted for 89% of our oil production in the first quarter of 2008. Please refer to our news release for a reconciliation of our realized oil price to the average NYMEX price. In addition to these quality adjustments, previously established [crudo] hedging positions decreased our average realized price by $6.34 per barrel for the three month period ended March 31, 2008. Natural gas price realizations averaged $9.50 per Mcf for the first quarter of 2008 and this is an increase of 19% compared to the same quarter last year. On the expense side, fleet operating expense for the first quarter of 2008 was $5.2 million or $1.35 per equivalent Mcf of production and was in the middle range of guidance of $5 to $5.5 million. G&A expense for the first quarter of 2008 was $2.7 million or $0.69 per equivalent Mcf of production. This was at the low end of our guidance range of $2.6 to $3 million. Interest expense was $9.9 million and below the guidance range of $20.8 to $23 million for the first quarter of 2008. When guidance for the first quarter was issued, we assumed we would close the CIECO transaction in the first quarter. However, the transaction did not close until April 8 and will be reported in our second quarter results. Depletion depreciation and amortization for the first quarter totaled $15 million which was within our guidance range. Discretionary cash flow for the first quarter totaled $29 million or $1.34 per share. Discretionary cash flow is a non-GAAP measure and in our news release, we provided a reconciliation to cash provided by operating activities. Cash flow for the quarter was used to fund capital expenditures and abandonment obligations. Our current borrowing base for our Union Bank of California led credit facility is $50 million. Presently, there are no outstanding draws on this line but availability is $35 million due to an outstanding letter of credit of $15 million. Following is a summary of the guidance for the second quarter in full year of 2008, which was also provided in our news release

[Operator:]

The first question comes from the line of Philip Dodge from Stanford.

[Philip Dodge:]

Morning everybody. Thanks for the comments. Let me ask you with little more money available this year from what money that originally been expected, what properties in your portfolio would be the priorities to take a look at earlier?

[B.F. Weatherly:]

Sure, Phil. The kept priorities is kind of coming off of opposing trends of CIECO and then just a Board meeting and my comments earlier, of course we’re just stressing the fact that we really last year has been pursuing a strategy of focusing liquidity. And now with the CIECO transaction closed and looking at cash flow for the rest of the year, we certainly have the cash flow and I think the liquidity to pursue some yet new activities. And in coming out of our Board meeting though last week, quite frankly we’re in the process of prioritizing. As we mentioned before, we do have a nice inventory of drilling prospects. To try to pursue the question is to priorities, the priority really is focusing on some opportunities where we could hopefully see production later this year. We have some drilling prospects that we certainly like to pursue but realistically by the time we drill them and if successful, have them online, we’re looking at a longer time period. So we are looking at some opportunities, perhaps where we could pursue some drilling activities that would have the infrastructure where successful we could hopefully have them online certainly about the fourth quarter or going into the first quarter of next year. We also, at least we’re taking a look at, perhaps some producing properties, acquisitions on some of the selective basis where we see that might fit into our current strategy. And so, that’s the reason we haven’t specified at this point. Certainly we will be over the next several months but we haven’t actually identified some of the projects we want to pursue right now. But certainly the point is we’ve got significant cash flow here in the remaining half of this year and to work with. So the focus is on drilling opportunities or perhaps producing property opportunities that could enhance the production in the near term.

[Philip Dodge:]

Maybe dropping the gun for easier measurements, can you accelerate on West Cameron 295 or the High Island fields that you mentioned?

[Fred L. Callon:]

Certainly from our standpoint, and those two properties for example, we would like to see them develop and accelerate as soon as possible with respect to High Island 165/130. Of course, we are in the process of recompleting a well there in terms of West Cameron 295. We have a new operator there with Mariner and I think we’re looking at possibility of an additional drilling out there but I think it’s going to take some time. And then certainly with perspective to current production, we’re going to need to obviously deplete the current reservoirs before you can actually go up and plug back and recomplete into zones up the holes. So, it’s sort of hard to accelerate that. It doesn’t make sense to leave a reservoir until you depleted it and then move up the hole. But I think in terms of near drilling opportunities, I think we’re going to see some activities either, as I said, on the drilling side or on the acquisition side. I think we will have opportunities here certainly in the third quarter and fourth quarter.

[Philip Dodge:]

Understood. Thanks, Fred.

[Operator:]

[Operator Instructions] And our next question comes from the line of Joseph Beckman from Howard Weil.

[Joseph Beckman:]

Morning, guys. Just had a quick question on North Pronghorn. I guess on the fourth quarter call, you talked about it coming online during the second quarter. Just wondering what the delay was in the third quarter to its online date now?

[B.F. Weatherly:]

I’m trying to remember what the delay was there. And you’re right, it was a delay and I think it had to do with maybe some changes to the production facility. Sorry I don’t have the specifics with me right now, but there was some change there and all of sudden we go from 30 day, 60 day, 90 day delay but certainly nothing with respect to obviously the production what we anticipate. I’ll find out exactly what it was and be sure to get back to you on that.

[Joseph Beckman:]

Okay, great, and then one last one regarding development costs for Entrada. You guys have talked about the $300 million gross range. Has increase in steel costs or anything like that impacted that number or is that still a good number right now?

[Fred L. Callon:]

Yes, I think right now we are in a process of still finalizing some of the costs but as you know, we certainly had ordered some long wait items and had locked in calls on most of the equipment and pipe. But the fuel cost is certainly something that is going up. But certainly there’s nothing that we’ve seen that should have a major impact on that but we certainly are still in the process of finalizing some of the cost particularly with the modifications to the TLP at Magnolia. And so at this point no major changes but certainly from our standpoint everybody is working extremely hard to monitor cost and keep cost down and certainly within our initial plans. So, not to say that there aren’t still some things that can push it up some but right now I think everyone’s working pretty hard to keep cost down. I think no major changes at this point.

[Joseph Beckman:]

Okay, great. That’s all I had. Thanks, guys.

[Operator:]

There are no further questions at this time. Please continue with your presentation or closing remarks.

[Fred L. Callon:]

Again, we do appreciate everyone taking time to call in and, as always, we’re available here to answer any questions. If anyone has any question, please don’t hesitate to give any of us a call. Thank you so much. Copyright policy