Good morning. My name is Kimberly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3, 2008 earnings release conference call.
All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. (Operator Instructions) I would now like to turn the call over to Ms. Thom, Vice President, Treasurer and Investor Relations.
Good morning everyone, and welcome to Energy Partners third quarter 2008 earnings conference call. Joining me today from EPL are Rick Bachmann, Chairman and Chief Executive Officer; Steve Longon, our Executive Vice President and Chief Operating Officer; Joe Leary our Executive Vice President and Chief Financial Officer; and John Peper, Executive Vice President, General Counsel and Corporate Secretary.
Tom DeBrock Senior Vice President of Exploration; Keith Vincent, Senior Vice President of Acquisitions and Divestitures; and Dave Cedro, Vice President, Controller and Principal Accounting Officer are also on the call and will be available to answer questions.
Rick will begin today’s call with some comments on 2008, including highlights for the quarter and a preview of 2009. Next, Steve Longon will provide a review of some of the operational details for the first nine months of the year and our activities for the remainder of 2008.
Joe will go into detail on our financial results for the third quarter and first nine months of the year, and I will provide fourth quarter and full year 2008 guidance. Rick, will then wrap-up with some closing comments.
Before we begin, first we need to get the administrative details out of the way with our Safe Harbor statement. This conference call may contain forward-looking information, statements regarding EPL. Any statements included in this conference call or in our press release that address activities, events or developments that EPL expects, believes, plans, projects or estimates or anticipates will or may occur in the future are forward-looking statements.
These include statements regarding reserve and production estimates, estimated timing of production restoration, oil and natural gas prices, the impact of derivative provisions, production expense estimates, cash flow estimates, future financial performance, planned capital expenditures and other matters that are discussed in EPLs filings with the Securities and Exchange Commission.
These statements are based on current expectations and projections about future events and involve known and unknown risks, uncertainties and other factors that may cause actual results and performance to be materially different from any future results, or performance expressed or implied by these forward-looking statements.
Please refer to EPLs filings with the SEC, including Form 10-K for the year ended December 31, 2007 and Form 10-Q as of September 30, 2008 to be filed shortly for discussion of these risks. I will now turn the call over to Rick for his comments.
Good morning. Thank you for joining us this morning. I would like to begin with brief highlights of the results of the third quarter and first nine months of 2008. Starting with our financial results, net income for the third quarter was $34.4 million, or $1.07 of net income per diluted share. This is in stark contrast to last year’s net loss in the third quarter of $4 million or a negative $0.12 per share.
Our net income for the third quarter of 2008, includes an after tax non-cash, unrealized hedging gain of $19 million. On an after-tax basis, our adjusted non-GAAP net income would have been $15.4 million or $0.48 of net income per share beating first call estimates of $0.28 per share. Revenues were $94.7 million, as the quarter benefited from strong commodity prices offset by storm related disruptions in our projection due to hurricanes Gustav and Ike.
Discretionary cash flow totaled $52.7 million and cash flow from operations was $101.8 million. Key to performance in the quarter was a continued decrease in overall cost, a trend that we have seen since the first quarter of this year compared to last year including exploration expenses, lease operating expenses and G&A.
I’m extremely pleased with the progress our staff has made towards meeting our goals this year which include stabilizing production, improving our exploration results and controlling our costs. Based on our performance prior to the hurricanes, we were well on our way to grow production in the third quarter, after we successfully stabilized production between the first and second quarters of this year.
Prior to the storms, we are also ahead of our cash cost reduction goal in the range of $20 million year-over-year. While we expect to incur hurricane related LOE expenses in the range of $11 million to $13 million net to EPL, we will still see cash expenses, namely LOE and G&A down $15 million to $20 million in 2008 versus 2007. Joe will go into more detail on the other income statement components and TJ will provide you guidance for the fourth quarter and the full year 2008.
Production for the third quarter averaged 12,263 BOEs per day, and when adjusted for storm downtime it would have been 16,624 BOEs per day, up from first half production which averaged 15,794 BOEs per day. More importantly, we would have grown production in the third quarter from our successful drilling and construction projects completed this year on the shelf without any contribution from our deep water Raton well.
As we discussed on our second quarter conference call in August, our first production from Raton is expected in the latter part of the fourth quarter. Our drill well performance on the shelf is at 93% success rate, which is above our historical success rate in the mid 70% range.
Our development drill well program in particular is yielding better than expected results from our oil opportunities exploited in the East Bay and from several projects in South Tim 26. We also expect to be within our planned capital budget of $200 million for 2008 despite the impact from the storms to our rig operations.
Control in our costs throughout this year has positioned us well, during this period of production disruptions caused by the hurricanes. We began this year with the expressed goal of paying off our bank revolver before year-end. At the end of the third quarter, we did that and we had a zero balance on our revolver with $150 million of borrowing capacity and ample cash on hand of approximately $16 million.
This is a very challenging environment for all of us in the industry from both a price and a cost standpoint, but let me make one point very clear, we will manage operations within available cash flow. We are unlike other on-shore E&P companies who typically rely on raising capital from the public debt or equity markets to fund their development programs.
Due to the high production capabilities afforded us, as the Gulf of Mexico producer we do not need to go into the market to fund our drilling operations. Even with the hurricane disruptions experienced within the last three years, we are a seasoned offshore operator that has demonstrated tremendous amount of resilience during these times.
Our overall investment approach going forward into 2009 will be conservative. We plan to manage capital expenditures one quarter at a time in a concerted effort to stay well below or expected cash flow. In this challenging economy and commodity price environment, our overall investment approach remains the same and includes three investment arms; exploration, exploitation and acquisitions to limit the dependency on any one investment program to meet our desired goals.
We remain prospect rich with the multi year exploitation and exploration drilling inventory and we will prudently evaluate the timing of these investment options. We plan to slow down our capital expenditures in early 2009 by reducing rig utilization until drilling and service costs come in line with the most recent decreases in commodity prices. As Steve Longon will cover in a moment, we are well positioned to do this since we currently have no long-term rig contracts in place.
We will also continue to focus on controlling our cash operating costs with further cost reduction goals likely to be set again in 2009. These combined efforts will enable us to build cash which could be used to be opportunistic when acquisition opportunities arise or to pay down debt. It is important to keep in mind that we now have a full-time dedicated acquisition team in place actively working to find and close transactions.
With that, I’ll turn the call over to Steve to provide more details on our operational results and upcoming activities.
Let me begin on the production side of the business. As reported, the vast majority of our producing properties which are located on the shelf have suffered minor damage as a result of hurricanes Gustav and Ike. Current daily production is approximately 50% of pre-storm production levels.
Restoration of our remaining production is dependent upon acceptance of production from two main third party pipelines damaged during the storms. One sales line, the discovery pipeline which normally accepts gas production from wells in our South Tim complex is in the process of being repaired. The other pipeline, the Bluewater system is undergoing repair, is delaying production restart from few of our western properties.
This same line is preventing the start-up of production from our South Marsh Island 79 #E-1 well, a 100% EPL owned discovery from a prior year and a recent re-completion in our Eugene Island 277 field. Based on the current repair estimates from these third parties, we expect the majority of our new shelf and pre-storm shut in production to be on stream in the later part of this quarter.
Turning to deep water, we are still expecting our first deep water Raton gas well in Mississippi Canyon 248 to commence production, late fourth quarter of this year. Completion of this project is dependent on the installation of a control umbilical by the operator, Noble Energy which is currently on schedule.
We have a 33% working interest in this well and we are expecting initial production to average around 1,500 to 2,000 barrels of oil equivalent per day net to EPL. With the benefit of these new sources of production on the shelf and from deep water combined with the current schedule of pre-hurricane production restoration, we project that 2008 production exit rate will range between 16,000 and 20,000 barrels of oil per day.
Based on these same projections we expect full year 2008 production in the range of 13,000 to 14,000 BOE per day, with our fourth quarter 2008 production estimated to range between 9,000 and 11,000 BOE per day. As we turn from production to our operating expense, I’m extremely pleased that we were able to meet our pre-storm LOE guidance for the third quarter, despite some hurricane expenses being incurred in September.
The team has done an outstanding job this year with LOE reduction in what was a rising cost environment without sacrificing our production run time or our leading EH&S performance.
Prior to the storm, we were on track to reduce LOE in the range of $10 million for the full year 2008 as compared to 2007. On a positive note, our cost reduction efforts this year could allow us to be flat or slightly less than full year 2007 in total LOE expenditures despite the storms. On the drilling side of the business, the hurricane did not impact our progress in our drill well programs located in our core areas of South Timbalier and East Bay.
As we released this morning, we have another successful sidetrack in East Bay with multiple [Inaudible] and close to 150 feet of pay. This means our 2008 shelf-drilling program is at a 93% success rate, with three successful wells in Bay Marsh Island, three in South Timbalier 26 and seven in East Bay.
For the remainder of the year, we will conclude our shelf exploitation operations with one rig work over at East Bay. Outside of this work and from necessary PMA work we will likely perform before the year-end, we’ll have no rig commitments remaining.
With the decrease in commodity prices, our strategy of not having long-term rig contracts is paying off and will allow us to control our capital spending next year. As Rick mentioned, we plan to time our spending to take advantage of rig rate reductions likely to occur if commodity prices stay at the current levels or dip lower.
In the deep water, our appraisal sidetrack of Mississippi Canyon 292, # 5, the south Raton well in deep water Gulf of Mexico went well optionally. As recently announced by Noble, this sidetrack successfully found all pay-up dip of the original well and development plans are being evaluated. We have a 21% working interest in this well.
As we go forward in 2009, we will remain disciplined in our exploitation and exploration programs waiting for the right rig cost in this changing commodity price environment. We remain excited about the multi-year portfolio we have, which includes great opportunities on the shelf and the deep water Gulf of Mexico as well as on shore in south Louisiana.
In the New Year our Explorationist will continue to flange up our existing prospect inventory and generate new prospects. This focused effort is already benefiting from under 1,000 square miles of additional and newly reprocessed seismic data that has come off covering our expanded core areas of south Timbalier, Ship Shoal and West Delta and we should have additional reprocessed seismic data in-house by mid 2009 covering our East Bay Field and South Pass.
I will turn the call over to Joe now to give you more details on our finances. Joe.
The company earned net income of $34.4 million or $1.07 per diluted share for the third quarter of 2008 compared to a net loss of $4 million or $0.12 per diluted share for the third quarter of 2007. This improved performance was primarily the result of higher commodity prices, reduced operating expenses and unrealized hedging gain.
Reduction in expenses included lower Lease Operating Costs, minimal dry hole costs and impairments, and lower depreciation, depletion and amortization expense or DD&A reflecting the decline in production compared to the prior year’s quarter.
Results for the third quarter 2008 included non-cash, unrealized after tax gain on derivative instruments of $19 million. Excluding the after tax impact of the unrealized gain, EPL’s adjusted non-GAAP third quarter 2008 net income would have been $15.4 million or $.48 per diluted share. This is well ahead of the first call’s earning estimate of $0.28 per share.
For the first nine months of the year, net income was $40.8 million or $1.27 per diluted share compared to a net loss of $6.5 million or $0.18 per diluted share for the same period 2007. This improved performance was largely due to the same factors that impacted the third quarter of 2008, offset by non-cash unrealized after tax loss on derivative instruments of $18.3 million experienced in the first half of 2008.
Excluding the after tax impact of non-cash unrealized loss on derivative instruments, EPL’s adjusted non-GAAP net income for the first nine months of 2008 would have been $40.3 million or $1.26 per diluted share.
Third quarter 2008 production averaged 12,263 barrels of oil equivalent, BOE per day down 48% from the 23,701 BOEs per day in the third quarter of 2007. This decrease in production was due primarily to natural field declines as well as hurricane related shut in production of approximately 4,400 BOEs per day.
Third quarter production was comprised of 5,189 barrels of oil and 42.4 million cubic feet of natural gas per day. Oil represented 42% and gas 58% of total production. Third quarter production was within our storm adjusted guidance range of 12,000 to 12,500 BOEs per day. Commodity prices remain strong for the third quarter 2008 at $83.87 per BOE, up 66% from the $50.60 in the third quarter of 2007. For this period, oil was $114.61 per barrel, 62% over the $70.89 in 2007 and gas was $10.22 per MCF, 54% over the $6.62 per MCF in 2007.
Commodity prices in the third quarter were able to partially offset production declines, resulting in revenue of $94.7 million down 14% from the $110.4 million in the third quarter 2007. Cash flow from operating activities in the third quarter of 2008 was $101.8 million, compared to $62.6 million in the same quarter of 2007.
Discretionary cash flow that is cash flow from operation before changes in working capital and before exploration expenses was $52.7 million or $1.64 per share in the third quarter 2008, down from last year’s $66.5 million or $2.09 per share primarily due to lower production in the quarter. Discretionary cash flow estimates from the first call was $1.50 per share.
Now to our expenses for the third quarter; lease operating expense, LOE for the quarter was $16 million excluding transportation charges, down 16% from $19 million in the third quarter of 2007. This decrease was due to ongoing efforts to reduce LOE costs in 2008 and the absence of unusual repair costs incurred in 2007, offset by hurricane related expenses incurred in the period. LOE for the quarter was at the high end of our guidance range of $14 million to $16 million.
Exploration expense including dry hole, G&G and impairment was $2.7 million for the quarter, significantly lower than the third quarter 2007 expense of $22.7 million, driven primarily by reduced dry hole costs and impairments. The majority of the exploration expense for the third quarter 2008 was made up of seismic and delay rentals totaling $2 million.
Exploration expense for the quarter was below our guidance of $5 million to $10 million. DD&A, excluding accretion from our abandonment liability was $22.7 million for the quarter, a 46% decrease from $41.7 million incurred in the same quarter a year ago. The decrease was primarily due to decreased production volumes partially due to the hurricanes.
On a dollar per BOE basis, DD&A for the quarter was $20.15, which is below our guidance range of $23 to $26 per BOE. G&A expense for the quarter was $12.1 million, a 3% decrease from $12.5 million incurred in the same quarter a year ago. The G&A for the third quarter was within our guidance range of $11.5 million to $12.5 million.
Net interest expense was $10.8 million for the third quarter compared to $12.7 million in the same period 2007. This decrease was primarily due to lower interest rates and lower average borrowing compared to the third quarter 2007. Net interest expense for the quarter was below the guidance range of $11.5 million to $12.5 million. Income tax for the third quarter was $19.6 million at a rate of 36% which was all deferred.
Turning to the balance sheet, at the end of the quarter we had current assets of $41.4 million, current liabilities of $125.3 million and negative working capital of $83.9 million. At quarter end we had $15.6 million in cash, no debt outstanding under our bank facility, $4.5 million remaining in our old senior notes and $450 million of senior unsecured debt.
The company had $148.5 million of shareholders equity at the end of the third quarter, a 46% increase from the $102 million at the end of 2007. Of our $150 million bank credit facility, we have $21 million drawn as of the end of October. We are using our bank facility to fund what we expect to be short-term declines in our operating cash flow due to hurricane related production delays in the fourth quarter and any letter of credit requirements. We are currently undergoing our semiannual borrowing base re-determination which is expected to be completed later this month, thank you. TJ.
I’ll be taking you through our fourth quarter and full year guidance. Starting with production volumes, as mentioned earlier we expect to average 9,000 to 11,000 BOE per day for the fourth quarter and between 13,000 and 14,000 BOE per day for the full year 2008. The percentage of oil is estimated to range between 45% and 55% for the fourth quarter and between 40% and 50% for full year 2008.
These production ranges are dependent on third party pipelines for the restoration of remaining storm shut-in production and new production from the shelf, as well as first production from our deep water Gulf of Mexico Raton well. In regard to pricing, going forward we expect our price realizations to continue to be on par with Henry Hub for natural gas and $1.50 per barrel lower than WTI for oil, excluding the effects of NGL production.
Now turning to expenses. For LOE in the fourth quarter, we expect our absolute LOE to include hurricane related expenses of approximately $10 million, with total LOE in the range from $23 million to $26 million. According to full year guidance which had been $57 million to $65 million, we have changed that to a range of $68 million to $71 million.
For G&A expenses, we expect this line item to range between $9 million and $11 million for the fourth quarter with annual guidance range between $43.5 million and $45.5 million for the full year. Taxes other than on earnings should be within 2% to 3% of our revenue for fourth quarter and full year 2008.
For exploration expense, we expect these costs to range between $1 million and $3 million for the fourth quarter. For full year 2008, we are reducing our previous guidance range from $30 million to $40 million to a lower range of $31 million to $34 million. Turning to DD&A, guidance for both the fourth quarter and full year is at a rate of $23 to $26 per BOE.
For net interest, we would expect this expense for the fourth quarter to range between $11 million and $12 million and for full year to range between $45 million and $47 million. Finally, our income tax rate should range between 34 and 37 for the fourth quarter and full year 2008. As a reminder, we have posted the fourth quarter and full year 2008 guidance we gave you on this conference call to our website later today.
With that, I’ll turn the call back over to Rick for a few more comments and then we will be happy to answer any questions you may have, in a moment.
We are all happy to be able to report to you a much improved first nine months of 2008. We are also very pleased with our drill well success for this year, which was primarily focused on projects to allow us to achieve our production goals.
I am also pleased with our cost reduction efforts. These combined efforts have positioned us well to weather this lower price environment without undue strain to our liquidity. We believe our initial plan to curve spending in the first part of 2009 is prudent to allow costs to normalize against decreased commodity prices and could give us the additional advantage of building cash in this changed environment. With that, we will open the floor for questions.
(Operator Instructions) Your first question comes from Steve Berman - Pritchard Capital.
Steve Berman - Pritchard Capital
Rick, I was just wondering what your ability and your thoughts and desires about investing in yourself. If I calculate the enterprise value of the company marking, your high yield bonds to markets to improve reserves it’s around $7 a BOE, which is pretty cheap and its hard to go out and drill with that cost and certainly go out and buy something anywhere close to that. Can you address that issue for me?
I think everybody in this industry and this sector at this time is looking at their NEV’s, they are looking at their trading levels of their equity, they are looking at the trading levels of their debt and pretty much looking at horror at the tremendous discounts that the market is -- I don’t think we or anybody else feels that either our equity or our debt is realistically trading relative to its true intrinsic value. We continue to evaluate our options going forward in this environment.
Steve Berman - Pritchard Capital
As far as any restrictions, I mean the bank debt or the bonds, do you have the ability to carve out in there if you wanted to, to be able to do that.
The restrictions Steve, is in our public debt in terms of buying back equity when debt exceeds $9 of BOE.
I’m sorry, $10, but other than that we have no restrictions to the buying back debt.
Steve Berman - Pritchard Capital
One other question, the PetroQuest I guess La Posada, La Cantera, I believe that was on the docket for early next year. Do you still intend to participate in that red-rill?
That is currently one of the wells scheduled on our planned exploratory budget for next year. Probably first quarter, but there’s some rig issues and as I think we’ve discussed Stone Energy has joined that group along with PetroQuest and ourselves.
Steve Berman - Pritchard Capital
One more question. Looking ahead to 2009 and drilling within cash flow etc, you said what you thought an exit rate might be for 2008, any thoughts on 2009 production at this stage?
I think it’s too early to do that. It’s going to be dependent on one of the many different cases that we are going to be presenting to our Board in the coming weeks, but we have, as I’m sure everybody has, we have done exhaustive amount of sensitivities in terms of the cases we are running, different prices, different options in terms of what types of wells we drill, whether we are in the acquisition game, whether we buyback debt, it’s all in the mix.
Your next question comes from Ron Mills - Johnson Rice.
Ron Mills - Johnson Rice
A follow-up on 2009, as you look at the potential program, this year was greatly focused on exploitation and development with the original thought of beginning to bend the exploratory pick again. If you look at your development or exploitation versus exploratory break down next year; would you expect it to remain focused again on development until the commodity price environment improves significantly, or how are you all approaching it from a big picture?
Ron, I think as we said in the presentation, we are going to be conservative as we approach the year, so you may see us build a little cash in the first quarter, but next year is fully expected to be weighted toward exploration and we will do exploitation and we expect to do acquisitions. Typically very difficult to find the right type of acquisitions in the Gulf, in a high price environment as prices come down we’ve been successful in getting some properties we want. So the three-legged stool is very viable concept. It’s one we are going to go forward with, but you’ll see us definitely doing more exploration.
Ron Mills - Johnson Rice
Is there any change in depth, really over your development inventory? I ask, because this year, that program did a good job, the storms notwithstanding, kind of maintaining and really even somewhat growing your production. Do you have a similar inventory of those type prospects as well to help compliment the exploratory drilling.
It continues to grow, the group has done an exceptional job of putting opportunities on the table and growing inventory we have.
Ron Mills - Johnson Rice
TJ, just two real quick follow-ups on your guidance. Is the non-cash compensation still expected to remain in that $1 million to $1.5 million range a quarter?
Roughly, yes. We can talk a little bit further on that, but we do see it staying about in that range.
Ron Mills - Johnson Rice
Then are you still planning on deferring most of -- I think right now you have been deferring most of your reported taxes, is that still --?
Your next question comes from [Catherine Tsibulsky] – Jeffries.
Catherine Tsibulsky – Jeffries
Going back to the question of acquisitions in 2009, how are you guys thin to finance acquisitions, with the bank?
We typically believe that we can finance 50% of an acquisition based on its own merits, its own back and we would expect to pay 50% of it with cash flow. Recently, there has been a transaction which to me is one that could kind of set future expectations where private equity continues to come into this sector and someone has been successful in paying 50% of the acquisition price in terms of non-recourse bank financing, another 40% based on private equity and 10% owner financed.
At the end of the payout, the private equity took 50% of the asset. I think you are going to see more of that type of structure going forward, but I think it’s going to be challenging to the financial staffs to come up with creativity, because I don’t think there’s any one source that we are going to rely on.
Catherine Tsibulsky – Jeffries
Going back to your 2009 capital budget, I know that you guys haven’t set it yet and it may be difficult to answer this question given that drilling costs are moving around, but do you have a sense of kind of what range you would have to spend in order to maintain your production at about the $16,000 to $20,000 barrels of oil equivalent a day that you plan to exit the year at?
I think it’s fair to say that even at these price levels, at $60 oil we generate enough cash from our properties to replace our withdrawals and if nothing more, hold production flat to possibly growing it.
Catherine Tsibulsky – Jeffries
The revolver, you said that you drew another $21 million just on mismatches and cash flows. Do you think you will look to bring that back down to zero sometime this year or early next year?
We drawn a little bit, we will probably draw a little more before the end of the year. Our goal is to get that depending on prices for the first half of next year, our goal is to get back to zero. It’s not going to be zero at the end of the year, we don’t expect that, but our goal is to get down as quickly as we can. As Rick mentioned we are going to be very cautious of spending in the first quarter and see how that goes, but the goal is to get it down and then be a little bit more flexible with what we can do with free cash flow after that. It’s going to take a while to get it down.
Catherine Tsibulsky – Jeffries
Could you give us your current cash balance?
We are roughly running about half of where we ended up in at the end of September, but we still have significant cash on hand.
Your next question comes from Tom Nowak - Merrill Lynch.
Tom Nowak - Merrill Lynch
Your exit rate, what does that assume for storm related shut-ins by year-end?
It assumes the majority of our storm shut-ins are back on production. I think that the one area we are a little bit skeptical right now, Chevron Bay Marsh Island is totally shut-in, and we have got some of our newest exploratory successes on the CC platform are being affected by that, but the production we control, we fully expect to have on by year end.
Tom Nowak - Merrill Lynch
Just regarding the borrowing base predetermination currently underway, do you expect in your conversations with the banks, do you think they will be using a much lower price stack than they used the last time this was done?
Well, yes but we think it will get renewed at its current level $150 million. We are very optimistic and that will happen within the next two or three weeks or so. The last time this was done, of course was in May so probably use a little leaner price deck, but we are optimistic it will get renewed at $150 million.
(Operator Instructions) Your final question comes from Kelly Krenger - Banc of America.
Kelly Krenger - Banc of America
Good morning. All my questions have been asked and answered, thank you.
I think we are pretty much wrapped up on questions. We really appreciate everybody joining us and one more time, I just want to say a big thank you to the employees who have worked tirelessly to bring our production back on to work through a very challenging environment with our storms. Despite that, we’ve achieved the record reductions in expenses and we continue to grow our production.
The 93% drill success rate is pretty remarkable. So we are pleased where we stand, we think we’re positioned well to continue to achieve the goals we have set forth. So thank you for joining us, I think we have very much performed in accordance with what we have told the Street and for that, we are very happy. Thank you.
This concludes today’s Q3 2008 earnings release conference call. You may now disconnect.
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