Talos Energy Inc.
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

Good morning. My name is Mellissa and I will be your conference operator today. At this time I would like to welcome everyone to the Stone Energy First Quarter Earnings 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. Thank you. Mr. Welch, you may begin your conference.

[David Welch:]

Okay, thank you very Mellissa and welcome everyone to our first quarter 2013 earnings conference call. Joining us this morning is Ken Beer, our Executive Vice President and Chief Financial Officer. Ken will discuss our quarterly financial results and then return the floor to me where I will discuss our progress in implementing our strategic plan. After that we will be happy to answer your questions. So, with that, Ken.

[Ken Beer:]

Thanks Dave, let me start with the forward-looking statement. In this conference call we will make forward-looking statements within the meaning of the Securities Act of 1933 and Securities Exchange Act of 1934. These forward-looking statements are subject to all the risks and uncertainties normally incident to the exploration for and development and production and sales of oil and natural gas. We urge you to read our 2012 Annual Report on Form 10-K and our soon to be filed first quarter 10-Q for a discussion of the risks that could cause our actual results to differ materially from those and any forward-looking statements we may make today. In addition, in this call we may refer to financial measures that may be deemed to be non-GAAP financial measures as defined under the exchange act. Please refer to the press release we issued yesterday, which is posted on our website for reconciliation between the differences between these financial measures and the most directly comparable GAAP financial measures. And with that, rather than go through the first quarter press release in great detail we will assume everyone has seen the release and the attached financials accordingly I’ll focus on selected financial items on this call. Our discretionary cash flow for the quarter was $159 million or over $3.15 per share and earnings for the quarter were $40.8 million or $0.82 per share; with both of these results being well above the analysts’ first call estimates. Production for the quarter came in at 40,000 barrel equivalents per day or 241 million cubic feet a day, just above the upper end of our guidance with a split of approximately 46% oil, 6% NGLs and 48% natural gas. Production of natural gas, NGL and condensate was affected by the previously announced third party pipeline issues in West Virginia which restricted volumes in the first quarter and into the second quarter as well. However, the Williams pipeline has been fully repaired although there is still some restriction due to high pipeline pressures from liquids build up. Our production guidance for the second quarter of 2013 is 38,000 to 40,000 barrel a day equivalents per day or 230 million cubic feet to 240 million cubic feet equivalents per day which is flat with the first quarter guidance. The Williams pipeline restrictions throughout April and into May and one week compressor change out at the Pompano field which had it down for the week have been factored into the guidance. Our guidance for the year remains it 40,000 to 43,000 Boe per day or 240 million cubic feet to 255 million cubic feet equivalents per day with the production mix becoming more gas weighted as we progressed through the year. Our quarterly oil price utilization remains above $100 per barrel as the Louisiana Sweet premium remains above WTI; however, there has been a narrowing of this differential which is narrowed down to around $10 per barrel. Our NGL prices were up versus the fourth quarter to just over $42 per barrel as there was a greater proportion of the higher price Gulf of Mexico NGLs due to the restricted Marcellus volumes just wanted to highlight them. On the cost side, our LOE was $53 million for the quarter in line with our expectations. The transportation processing and gathering expense of $5.4 million was a little light due to the reduced Appalachian volumes; we would expect this expense for the year to trend upward as the Appalachian volumes increase. Our DD&A rate for the quarter averaged about $3.44 per mcfe and then accretion expense should remain at just under $8.5 million per quarter going forward throughout the year. Our G&A expense also included a positive adjustment of $1.5 million this quarter due to an insurance reimbursement as noted in our last conference call we do expect G&A to trend upward as we’ve seen increases in the personnel and salaries, particularly as we step up our deep-water efforts. Reported interest expense of $9.6 million incorporates the full quarter of 300 million 7.5% notes issued in mid fourth quarter of 2012 and still contains about $4 million in non-cash interest primarily tied to the convertible notes accretion. Regarding taxes, we’re still projecting roughly a 36% tax rate although for the first quarter; we show a $3.7 million current tax benefit which is in expected tax refund from the carry back of the current year’s expected tax loss. Our CapEx for the quarter came in at around $115 million, a run rate below the budgeted $650 million. However, with our Gulf of Mexico shelf program starting this month and our Deep Water programs starting late in the third quarter, we would expect to realize an increase in our quarterly CapEx. Our debt position remains stable at $975 million assuming the $300 million face value for the convertible notes or around $920 million if we use the recorded discounted $242 million figure for the convertible notes. Our $400 million borrowing base on our bank facility was just reaffirmed last week and actually could have been higher if we had desired and that facility remains undrawn. Additionally, we exited the quarter with over $250 million in cash. During the quarter, we did add a few more hedges for both oil and gas volumes to further protect our 2013 and 2014 cash flow and CapEx program and have included that updated hedge position in the press release. I believe that wraps it up for the financial overview and with that I’ll turn it back over to Dave for his comments.

[David Welch:]

Okay, thank you very much, Ken. We felt that this was a good quarter as we achieved many strategic milestones and also delivered above our first quarter guidance while maintaining our guidance for the full year, despite the extended third party pipeline downtime in Appalachia and also our reserves were stable and expected to grow again this year. We also continue to generate significant discretionary cash flow of almost $160 million which more than funded our $114 million of capital needs in the first quarter. The balance sheet remains strong as we ended the quarter with over $261 million in cash and an undrawn bank revolver of $400 million with no debt obligations due until 2017. Also, our current assets of approximately $478 million far exceeded the current liabilities of about $206 million. We continue to exploit our legacy conventional shelf assets as we develop our three growth areas Appalachia, Deep Water and the liquids rich Deep Gulf Coast gas. Our strategy remains the same as the last seven years, and that is to pursue investment and price advantage nature gas and material oil prospects. Our proved reserves are still balanced with approximately 49% liquids and 51% natural gas. Disposition in continuing performance sets us up well for the execution of our three year plan. The three year plans includes an aggressive work over program with limited drilling investment in the conventional shell; continuation of our two rig program in Appalachia and accelerating investment in the deep liquids rich gas; Gulf Coast play and also in Deep Water. On the shelf, we plan to drill about three to four oil wells this year with the aim of maintaining a relatively stable liquids production rate but not trying to grow reserves there due to the limited size of remaining opportunities. In the quarter, we signed a rig contract for the ENSCO81 to drill three or four development wells near our Ship Shoal 113 Unit. We expect the rig to arrive this quarter possibly than this month to complete all the wells this year and get down among production quickly. And Appalachia, we see many years of development drilling ahead of us at our liquid's ridge Mary Field and for the next three years, we plan to continue drilling with our one vertical rig, one horizontal rig and one effective program. This steady program is yielding dividends for us as our efficiency is ramping up. Originally, we forecasted drilling just over 25 wells this year with this program; how we are renowned a pace to exceed over 30 wells as our team continues to deliver improving results. During the first quarter, we also drill the horizontal test well to test the upper Devonian shale which lies just above the Marcellus at Mary. The upper Devonian is condensate rich and produces at commercial rates. It could materially enhance the value of our Appalachian assets. We plan to get this well farced and tested later this year possibly even in the third quarter. In the liquid ridge, deep gulf coast area, we've completed the drilling of the third well at La Cantera which is operated by PetroQuest. This was a success and we expect to have this high rate well on production by June bringing the whole fuel gross rate to be over a 100 million cubic feet equivalent per day which includes about a 20-20 plus barrels per million liquid yield. Our net production should rise to approximately 25 million cubic feet equivalent per day for our 35% working interest. We plan to drill or participate in the drilling of two to three or four exploratory wells over the next three years and our liquids ridge deep gas business. This is very attractive play for us and there are many good opportunities and when the discovery is made, it can be brought on production relatively quickly. This year we hope to spud the La Montana prospect and the La Cantera basin and possibly the outside operated under value as well as possibly the Tomcat prospect in the shallow offshore waters. During the first quarter, we increased our working interest in La Montana from 25% to a 100%; we'll now take that prospect to the market and plan on keeping up to perhaps 50% or so with a smaller cost interest in the exploration well. All of these are exploration prospects which are expected to offer high rate wells with material liquids content. Stone's the operator for La Montana and Tomcat, we now have several attractive prospects being developed in our inventory, and we're keen to get them drilled in 2014 and 2015 timeframe as well. In Deep Water, we achieved many milestones in the first quarter, we begun work preparing for what we believe will be a significant increase in production over the next three years. Let's start with Northern Mississippi Canyon corridor, anchored by our two 100% owned production hubs at Amberjack and Pompano, during the quarter we authorized two development wells and one exploration well which would be sub-sea tieback to the Pompano platform. These are the Cardona development wells and the Amethyst exploration well. These are our first company operated deep water drilling wells and sub-sea tiebacks. During the quarter, we successfully secured the Ocean Victory which is a (moored) rig to drill the Amethyst and the Insco 8500 series rig, which is a dynamically positioned rig to drill the Cardona wells. We've been able to speed up the schedule and now expect the Amethyst well and possibly then the Cardona well to spud this year, we believe we can get both Cardona wells on production in early 2015. We've also now ordered long lead critical path items and are making platform modifications to the Pompano platform rig to accept both additional new tiebacks and the platform rig, we still expect to secure platform rigs for both Pompano and Amberjack and can drill 4-6 wells from each of these platforms beginning in late 2014 as well. So we're poised for material production growth in our company operated Mississippi Canyon corridor. In addition to this, we expect to drill or participate in 2-4 exploration wells in Deep Water each of the next three years, this year that could include San Marcos, Guadalupe, Taggert and or Phinisi. Next year, in 2014, we also expect to commence drilling in the first of up to four of the prospects in the previously announced Conoco joint venture. The partnership at our Parmer discovery may also be ready to drill the next appraisal well there in 2014. So as you can see Deep Water has become very active area for us, and we're expecting significant growth in both oil production and oil reserves over the course of our three year plan and thereafter for Deep Water. So to sum it up, we’re moving forward successfully on our all fronts of our strategic plan. We’re managing the Shelf decline and achieving a growth in Appalachia, the deep liquid rich Gulf Coast and the deep water Gulf of Mexico. With that, we’ll now be happy to take your questions. So Melisa, back to you. Operator?

[Operator:]

(Operator Instructions). Your first question comes from the line of Michael Glick with Johnson Rice.

[Michael Glick:]

Just a question on Amethyst, I know you guys have a cartoon on the prospect in your presentation, but I was wondering if you could kind of just walk us through the history of the prospect and what you like about it.

[David Welch:]

Well, just in general we like the fact that there is a, what we believe to be a down dip well drilled that had an oil [show] [ph] and we have new seismic data which we believe indicates a good strong positive ABO response and indicates that the sand could likely thicken up as we move up dip. And so that in a nutshell is what we like about it.

[Michael Glick:]

And then in just terms of funding, I mean given your increased activity level both on the operated side and on the non-operated side, could you kind of walk us through some potential funding scenarios and do you have some success on the exploration side.

[David Welch:]

Sure. Ken you want to take that one.

[Ken Beer:]

Yes, Mike and again we entered the year recognizing that we wanted to have a strong and flexible balance sheet because of this issue, we didn’t want to be hurt by success, we wanted to take advantages of success; and (inaudible) with the quarter of a billion dollars of cash and undrawn line, we’ve got a lot of flexibility going through this year and into 2014. Although as you highlight one of the things we certainly can do as we have exploration success is turn to either sell down some interest to help pay for, fully pay for development expenditures. We can bring in partners more on the front end. Certainly, the debt and equity markets are always out there but we really are trying to position ourselves to have a lot of different arrows in the quiver and again I think starting off with a pretty strong and flexible balance sheet as your, I am sure, where Mike none of our public debt is, as that becomes due in really 2017 – 2022. So we have a lot of flexibility in our capital structure with the thought of looking at the different alternatives, of which there are several win-success-occurs.

[Michael Glick:]

Would selling a portion of the shelf be one of those potential possibilities?

[Ken Beer:]

Certainly as we progress through this year, that’s certainly something, we will address this as we get closer to the end of the year. We have certainly been pinged by different people on that and yet feel like that is an asset that has provided us with really positive cash flow and allowed us to really [prompt] [ph] the pump for both Deep Water and Appalachia during the last several years.

[Operator:]

Your next question comes from the line of Dave Kistler with Simmons & Company.

[Dave Kistler:]

Just following up on the Marcellus a little bit here; gas prices are getting a little bit better on the margin. Does that cause you guys to think about stepping out to Christine and Katie, potentially, or is that acreage that you’re just going to maybe let expire over time?

[David Welch:]

Well, let me just take that one. You know we have this program that we gotten very efficient, executing in the Mary area, and our intent over the next three years is to really stay focused in Mary. Christine is up in an area where there is a lot of industry activity and we have a number of 10 year leases there, David, so we don’t feel a sense of urgency to really get up there and do something in Christine. And then our Katie area; it’s a smaller area and we like the results there. But it is dry gas and we just feel the economics would actually require an even stronger gas price to make that something that would worth picking up another rig for.

[Dave Kistler:]

Okay, I appreciate that. And then going back to Amethyst for a bit. You guys have talked about selling that down in the past. Would the timing of that sell down impact the timing of when you drill that, especially now that you’ve gotten the Diamond rig or won’t you be willing to if you don’t sell it down to just continue to press forward and try to be spudding that by year end?

[David Welch:]

I think we are going to continue to try to press forward, but we do have a full (inaudible) press on trying to market that. Now I can tell you that we do have a number of people that are actively evaluating, participating with us on Amethyst.

[Ken Beer:]

And Dave realize one of the very attractive parts about Amethyst is with the Pompano facility right there it is a exploration project that has with it some pretty quick turnaround to production, so I think that’s one of the more attractive parts about the prospect and as Dave said, we’ve got a number folks who are certainly looking at it.

[Dave Kistler:]

Okay appreciate that. And then just think about your commentary about La Cantera the operator on lot of that activity indicate that they thought production could reach 120 million to 130 million Boe equivalent per day, you guys kind of talk of 100 plus, can you kind of help us understand the deviation between the two of those?

[David Welch:]

I hope the operator knows more about it than we do. I said overall 100 but I feel little - I don’t know I feel a bit out on a limb promising you a number that I didn’t - have not had detailed review and we do feel confident it will get above a 100 and hopefully that will be correct and we’ll see a bigger buzz from it.

[Dave Kistler:]

Okay, appreciate the additional color, thanks guys.

[Operator:]

Your next question comes from the line of the Samuel Culbert with the University of California.

[Samuel Culbert:]

I’ve listened to several of your calls, and I’m encouraged because you keep talking about making money and growing the business. What you haven’t talked about is what you plan to do with the money, we’re going to see dividends, we’re going to see acquisitions, where are you headed?

[David Welch:]

Well, I’ll just take a stab and Ken you can fill in what I missed, but we have an incredible opportunity set now Sam that we feel like we can continue to use the proceeds of these earnings to continue to organically grow the business; that being said though we have been opportunistic in terms of always looking at acquisitions when assets are available and we’ll continue to do that as well. Ken anything else to add?

[Ken Beer:]

You know that’s again right as Dave highlighted, I think at least in our minds, the reinvestment into these projects and I think it’s been highlighted that we do have an abundance of project right now that our sense is relative to a dividend that’s the more appropriate reinvestment vehicle for Stone at this point in time.

[Samuel Culbert:]

Where we are going with this? As an investor, I have not a clue about what’s ahead for me. You are going to make more money? You are going to show better profits? To what end?

[Ken Beer:]

Yes, as I said, the way the stock market does work, is there are some dividend payers but you also do have a majority of companies that do take that capital that cash flow and reinvest it in their business if they see that, if they have got an abundance of projects. And the ultimate investment at least as we see at it is less tied to a dividend and more tied to stock appreciation, so that would at least be the suggested answer.

[Samuel Culbert:]

Well, here is an analogy, consider yourself a kid with a very rich parent. Don’t you want to go out to dinner every once a while or do you have to wait for him to die?

[Ken Beer:]

Well, with my kids, I know a lot of times I just would not give them a whole lot of money during a growth period I rather have that build up and not provide a very hefty allowance if we think we can, as parents, we can invest it a little more wisely. So we can talk about lot of theoretical analogies, but the decision by the company and by the Board is that we have got plenty of projects to reinvest in, to grow the company.

[Operator:]

Your next question comes from the line of Mario Barraza with Tuohy.

[Mario Barraza:]

Just wonder if you visit the Marcellus for a second. What is kind of your midstream? We have had a couple of issues in the past that obviously aren’t your fault weather-related and then these repairs. What do you have I mean can you go out and seek access third capacity if there are any other hiccups you know if you do find, have some good success with this upper Devonian or if you want to further accelerate the Marcellus, do you have the capacity on the Williams’ pipeline to support a decision like this?

[David Welch:]

Ken, you want to talk about the pipeline issue or you want me to?

[Ken Beer:]

Let me jump in there, again this has been a bumpy road with the pipeline situation some of which has been some real bad luck. And going forward I think we are certainly working with Williams to address issues and problems. We are also working with Williams to even address different options. As you may be aware in our Heather field, we are actually tied to different gathering systems mid stream to system. So, we feel like once we get a lot of these issues quick to dead, the bottle neck has not been at the major trunk line which is the Texas eastern line; we have plenty of capacity there. It's really just been working through these issues as William's is again digesting their acquisition of the came in lines between that and as you pointed out Mario, some real bad weather. I think it’s a matter about just working with them to try to work through these issues. This is a start up situation where; came in handed the keys to William and just taking a little more time to work out the gains.

[Mario Barraza:]

And then I asked this question last quarter; I am going to try it again; the non-core profit is the small Eagle Ford, The Paradox Basin and the Niobrara. I know there is no CapEx going there. Do you have a data room opened for those assets? I know you're balance sheet is in solid condition right now, but where do you see those going longer term in the portfolio considering there are not going to get any CapEx right now.

[Ken Beer:]

Fair enough and at least a couple of them have some industry activity around them that were hoping to benefit from; certainly and I think you categorized them correctly, these are more non-core assets and certainly subject to someone knock on our door or us being a little more aggressive into putting them out to bid. But in the Interim, for instance in the case of the Eagle Ford it is, its generating some production and thrown off some cash flow. It can increase again industry activity around there but again certainly not a focus for the company now and my sense is over time those non-core assets will be disposed from one form of fashion.

[Operator:]

And then the next question comes from the line of Hubert van der Heijden with Tudor Pickering.

[Hubert van der Heijden:]

Just a quick question on the Marcellus kind of the higher level way of thinking about the Mary area, on your current kind of one, or one horizontal one vertical rig, you've quite a long inventory life there. What would it take for you guys to put more capital to work there and accelerate that program then?

[David Welch:]

Think it would take some sustained higher natural gas prices and our belief that they were going to stay high or else our ability to hedge amount in the future where we could lock in returns that we think would be comparable to what we can get on our other businesses, Ken, what are your thoughts?

[Ken Beer:]

Yes that again, it's the sustainability obviously we've had over the last 2-3 months we've seen some strength in the price of natural gas. I think for us to shift gears would want to see that at a sustained rate for some period of time, and as Dave pointed out I do think it's, the Marcellus is also competing against other parts of our business and that's some pretty hefty competition when you're talking about some of the people or the projects that have very strong rates of return, so I think as Dave highlighted in his commentary, the idea of us just staying focused with a two rig program for at least the next couple of years is probably the path we'll take.

[Hubert van der Heijden:]

Okay, so to quantify higher price, is that kind of sustainably at 4.50 to 5 or would you really to have see higher than that?

[David Welch:]

Yes, I'd think we'd want to see something above 4.50 and hopefully in a $5 range, but the other thing to point out is that as we have really to hone in on this particular area and get into a factory production mode almost, we've seen a number of wells, that we've been able to drill per year go from 18 wells a year up to over 30 wells a year with the same program, so we're getting a lot more efficient and it's almost like we've added another rig up there just by the efficiency that we've gained over the last three years.

[Operator:]

(Operator Instructions). The next question comes from the line of Dave Kistler with Simmons and Company.

[Dave Kistler:]

Hey guys, just to follow up real quick on a couple of things, when you look at 2Q production guidance you talked a little bit about Pompano field being down. Can you kind of guide us through why that number is kind of need first as we what we saw in Q1, I know Q1 surprised a bit to the upside. Any color you can give us on that would be useful.

[Ken Beer:]

Dave, we had a combination of; Pompano was down for a little over a week, but more importantly during the month of April, Appalachia, the volumes at Appalachia were very restricted as we highlighted in the press release. It’s really comeback but it’s really comeback only in the last few days. And so we want to make sure we had appropriate guidance for the quarter. And certainly the month of April, in a three month quarter was on a lower end and so we wanted to make sure we didn’t over our skills on the second quarter value. So again, a lot can happen as you know, there is always downtime, Appalachia might be up in running today but it still could be down two weeks from today. And also as you might be aware there is, in the second quarter particularly as the weather in the gulf is relatively mild, I would expect to see some additional downtime from other areas, other pipelines during the course of the quarter; might not be for a week or 10 days but I think you can see some other downtime projects. As you might be aware of the Pascagoula plant went down for I think several weeks. We were able to divert gas to keep our productions at Pompano flowing but those are the types of issues we’ve to deal with as we come up with projections or guidance for the particular in the second quarter.

[Dave Kistler:]

One just to understand on the Marcellus, if I recall from your previous releases you were saying it was producing kind of towards the low end, 30 million to 35 million a day in April and then shall just be blending that with 60 million to 70 million in May end and June.

[Ken Beer:]

We would certainly hope so. But that’s were again;

[David Welch:]

But that’s where we are right now, I mean we just want to get confidence that we can keep this cash flow and sustainably that we not continue to have any more of these pipeline problems David. That’s the uncertainty.

[Dave Kistler:]

I appreciate that and I understand probably a frustration level on your end thinking that onshore would be more predictable than offshore but understand and appreciate the color.

[Operator:]

There are no further questions at this time.

[David Welch:]

Okay, thank you Mellissa, and thanks everyone for joining our call and we look forward to seeing you in various conferences and speaking to again at our next call, so long.

[Operator:]

This concludes today’s conference call. You may now disconnect.