Meridian Resources Q4 2008 Earnings Call Transcript

Meridian Resources Corp. (TMR)

Q4 2008 Earnings Call

March 12, 2009 03:30 PM ET

Executives

Lance L. Weaver - Director, Investor Relations

Paul Ching - Chief Executive Officer

Steven G. Ives - Vice President, Finance

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year-End 2008 Meridian Resources Earnings Conference Call. My name is Franklyn and I'll be your coordinator for today. At this time all participants are in listen-only mode. We'll be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions).

I would now like to turn the presentation over to your host for today's conference, Mr. Lance Weaver, Director of Investor Relations. Please proceed, sir.

Lance L. Weaver

Thank you, Franklyn. Good afternoon, everyone, and thank you for joining us today. I'd like to welcome you to our call to discuss Meridian Resources' earnings and operations for the fourth quarter and full year 2008.

My name is Lance Weaver, Director of Investor Relations here at Meridian Resources. I'm joined this afternoon by Paul Ching, our Chairman and CEO; Lloyd DeLano, our Chief Accounting Officer; and Steve Ives, our Vice President of Finance.

The agenda for this afternoon's call is that after I wrap with some of these administrative points, Paul will discuss the financial and operational results for the quarter and year as well as our outlook for the future. Following that, we'll turn the call back to you for questions.

Keep in mind that if you have any additional questions or like to discuss these results in more detail, please give me a call. My number is on the earnings release.

During this call, we will be discussing some non-GAAP measures. A reconciliation of non-GAAP to GAAP measures is contained in this morning's earnings press release. In addition to reviewing historical results this afternoon, we will be making some forward-looking statements. Please refer to Meridian's Safe Harbor language contained within our press releases and SEC filings for a discussion of the risk and factors that could impact our future performance.

And with that I will now turn the call over to Paul.

Paul Ching

Thank you, Lance. Thank you all for joining us today and I and the company appreciates your interest in our company. There is a lot of details in the press release and I am going to try and concentrate on the highlights, and of course if you have questions, we have an opportunity at the end for you to ask those questions.

First of all, I'd just like to touch on a few operational items. We're currently drilling in East Texas, Austin Chalk play. We operate one well and we're participating in another. Our well which is the Blackstone Minerals A-278 No. 1 is currently drilling in the second of two laterals. So far the indications are to... chosen and flair that we have, that we will have a well that should lead our expectations.

We have led a 65% working interest in this well and expect to be down in the next few weeks. We're participating in an outside operator well, the Davis A-39 No. 1 well. They have just completed vertical section and are working on the first lateral. Our interest there is the 28%. And of course, depending on the outcome of our upcoming bank redetermination, future commodity prices, our overall cash flow position, we will have to determine whether we continue to draw the East Texas, Chalk and I'll touch upon that later.

In South Louisiana, where we have very good opportunities in legacy assets, they are vital to the company's near-term and long-term success. Our Weeks Island field continues to be the company's largest oil field and we have a real robust inventory of development projects that we would hope to be able to exploit in this year and next year, depending again upon our cash flow analysis.

In the Weeks Island area, we continue to work on the Goodrich Cocke No. 7 well which was drilled at the end of last year. It came on production, it had over a 160 feet of pay, oil pay, but it sanded up. We're now working on it and putting in a global pack and we expect that that work will be done in the next seven to 10 days, we'll back on production and we have about a 63% working interest in that well.

We have the Weeks Bay No. 15 well which was also drilled at the end of last year, had tested at a gross daily rate of about 685 barrels of oil per day. Since that time, we've been dealing with numerous production facility and pipeline issues and write-away issues that have kept us from bringing the well online. It looks like we now have these issues resolved and within the next four to six weeks that production will come online where we have a 92% working interest.

As far as future projects, I just have to preface it all with the caveat that much of our future exploitation, exploration program depends on how we work our upcoming borrowing base redetermination and our over all cash flows.

Given that our company's projected cash flows allow us some room, our emphasis is only on low to moderate risk drilling activities in our key areas where we exploit the current opportunities that we have.

And we have a number of these projects in Weeks Island areas as well as Black Sea, Marcellus area. And as I said in East Texas we have finished the well we're currently drilling, plus one we're partnership with and any future drilling will be the subject of our bank redetermination and our overall cash flow position.

Would like to talk about reserves. We ended the year with 80.3 Bcf that's compared to 90.5 Bcf at the end of 2007. During the year we discovered 15 Bcf as a result of our joint program in East Texas and Weeks Island. This represents a reserve reproduction replacement ratio of a 107%. However, of course our reserves were negatively impacted by the lower commodity prices we saw in the last part of the year.

As you might expect a large part of our negative revisions were price related and were in the East Texas, Austin Chalk area. About 67%... 63% of the company's reserves are natural gas with 37% being crude oil. Proved developed reserves are 64% of the company's total crude reserves with remaining 36% representing proved undeveloped reserves.

According to the SEC guidelines and prices used at the end of the year, our current PV-10 value of the company's total crude reserves is about $179 million.

Quickly talking about our financials, as you can see from this morning's press release our earnings for the fourth quarter and full year were highly impacted by the non-cash impairment. We recorded a net loss in the fourth quarter of 21... $215 million, a net loss of $210 million for the full year.

During the fourth quarter, we recognized a one-time non-cash impairment of $223.5 million. Of this amount $216.8 million was related to the oil and gas properties, and $6.7 million is related to other fixed assets.

The effect of the oil and gas portion of the write down is that we should see a decrease in the company's future depletion rate. If we exclude the impact of the non-cash impairment, we would have reported a net income of $2.9 million or $0.03 per share for the full year.

Our discretionary cash flow for the fourth quarter of 2008 was $15.5 million and for the full year was $81.6 million. The reasons for the, the primary reasons for the lower cash flow for the quarter and full year is that we saw a reduction in prices combined with lower level of production.

I'd like also for you to keep in mind that our production was impacted in the third and fourth quarter by our friends, Hurricanes Ike and Gustav, and we estimate that our production was curtailed by about 1 Bcf equivalent.

Our production volumes for the fourth quarter totaled 2.5 Bcf equivalent or an average of 38.3 million cubic feet per day which is also about what our average was for the full year. Currently we are producing about 35 million cubic feet per day.

I'd like to now discuss with you the debt covenant; we have a debt covenant failure and which could result in a subsequent possible going concern letter from our auditors. As we said in this morning's press release according to our credit facility agreement we are required to maintain certain covenants one of which is related to our current ratio, current assets to current liabilities.

Later in the fourth quarter we slipped below the minimum current ratio of one the result of which is that we had technically failed to abide by the terms of our credit facility. Main reason that we have found that we did not have any availability under our credit agreement which is used in the calculation of this current test, of this current ratio test.

At this point, we have of course notified our lending group about the covenant default. And we are working diligently with them to try and obtain a waiver with them. Of course, if we do not, we secure our waiver before we file our 10-K, our auditors will most likely include an explanatory going concern paragraph in their opinion letter which is included in the 10-K.

I need to touch upon our borrowing base redetermination. And as you all know, we're at... we have a current borrowing base of $95 million, and we are currently maxed at $95 million. We are scheduled to undergo our semiannual borrowing base redetermination starting in this month. Given the current price environment our reduced reserve base, which I talked about, we expect that the banks will lower our borrowing base. But, it is uncertain at this time what the amount would be.

We have been and continue to proactively engage with the bank group to explore all options. And we are open to all options and working with them, and appreciate them working with us.

In the event that they do a lowering our borrowing base, we will have 90 days to cure the deficiency. And when we do borrowing base amount to determine it will become effective on April 30th.

And of course, if we are not able to come up with the cash needed to pay up the borrowing base deficiency from our cash flow, we were... we are forced to find other outside sources of capital or to liquidate certain assets.

At this time, I can not provide any assurances that those funds would be available to us. But I do appreciate that the banks have been open and they're working with us. And I continue to hope that we would come to a reasonable understanding as to how we are able to meet our availability.

I continue to strive to cut costs to become efficient, to become effective in the organization, and to preserve cash flow. And that's why you will see that we have a minimum capital budget for the year.

Another item that was identified previously was the delisting. And a few weeks ago, the New York Stock Exchange suspended its non-compliance rule related to stocks that trade below a $1 until the end of June. And it is anticipated they will further extend that ruling until the end of the year.

But for the moment, being delisted in the New York Stock Exchange does not appear to be an issue, and we just continue to abide by the rules currently.

In wrapping up, I'd like to say that since I've been here we've taken actions to reduce our level of spending. We've implemented about a 35% reduction in our G&A costs. And we continue to look at that daily.

In addition to that, we've taken steps in our operator properties to reduce our operating expenses by approximately $3.5 million, and we look at that daily. We've managed through 2008 roughly keep our production flat, despite our field 20 to 30% decline rates. We also enhanced our 2008 and 2009 cash flow with favorable hedges, and we're hedged out through 2009 with about 35 to 40% of our production.

Drilling costs for wells in East Texas were reduced in 2008 by about 20%, compared to wells drilled in 2007. And we continue to keep on that learning curve.

We have a very meaningful acreage position in the potential Eagle Ford Shale play area, and we have a number of people interested in that. And we're working with others to potentially take a position, and get some wells drilled.

And we have a very large seismic database in South Louisiana that we continue to understand how we can maximize value from that asset. There has been a number of several promising prospects that have been developed in that program. And we just have to see if there is others that might want to take those on certain deals or we'll just keep those in the back shelf for future opportunities.

As many of our peers, Meridian faces several challenges over the last year which included production interruptions from two hurricanes, commodity price swings on the downside, all resolving and actually having that large negative on our revisions to proved reserves and negative impairment to our overall company profitability.

Looking forward, we've a significantly constrained capital budget. Preservation of cash here is king. It is adjusted and as we work on those with the banks to solve our default covenant and determine our work through the borrowing base redetermination that will be... that will determine what our overall capital budget will be in 2009.

With that I am going to turn it over to Lance and let you ask questions that are on your mind. Thank you.

Lance L. Weaver

Franklyn, go head and prompt people for questions please.

Question-and-Answer Session

Operator

Yes, sir. (operator instructions). Our first question comes from the line of Larry Flood (ph) of Wellington Management. Please proceed.

Unidentified Analyst

Good afternoon. I was wondering if you could help us with a little breakdown of your current production you say of $35 million. How much of that is oil and gas, how much of that is from East Texas, how much of that is from Weeks Island?

Paul Ching

Well, Larry, oil and gas is split about 65%, oil, 35%, gas I think... I am sorry, actually 63% gas and 37% oil. Currently that ratio is about the same and I don't have the details in front of me and we will have to have Lance get back with you to give you the details as to what we're producing from each field.

Unidentified Analyst

And will you have in that respect further details in the 10-K as far as the distribution of your reserves?

Paul Ching

Steve?

Steven Ives

No, we don't generally publish that.

Unidentified Analyst

That's your call. But I think you would help yourself by spelling out a little bit more about where your reserves are and where your production is coming from?

Steven Ives

Well, basically about 90% to 95% of our reserves are concentrated in six fields and again those are fields, not individual wells. So yeah, and that's spilt out between East Texas, South of Louisiana offshore and yeah, so basically with Louisiana being the concentration.

Unidentified Analyst

Okay. And one other question, the present value that you cited was a after-tax, do you have a pre-tax present value figure by any chance?

Paul Ching

They are one and the same.

Unidentified Analyst

All right.

Operator

(operator instructions). I'm not showing any questions in the queue. You have another question from the line of Larry Flood (ph).

Unidentified Analyst

I hope I am not the only person here. Could you, just kind of discuss a little bit more in terms of the prospects of selling properties or leases down in order to... your debt problems as far as the opportunities to do so between proven properties on the one hand and your exploratory leases on the other hand?

Paul Ching

So we are working hard to and I believe that we are potentially close to a deal on our exploratory properties in South Texas which is mainly look at Eagle Ford Shale and then in Chalk, and we have a party that is very interested and we're close to it to deal and actually sell that down. We have been working on our... to sell down our East Texas, Chalk and again we're working in that direction with a party.

On our main assets as far as selling properties, our main producing assets, we've not lead, we look at the alternatives but we've not come to a conclusion. Yes, we've to do that and I think that depends on the discussions that we're having with the banks. And whether or not we end up having to go in that direction, it is not a preferred direction we would hope that we can work through the borrowing base redetermination with banks and with potentially other kinds of structures, our ability to maintain those properties and keep those in the company and of course as prices improve and for better day.

Unidentified Analyst

So it sounds clearly as if the, the focus is on your East Texas properties in terms of assisting your liquidity and in regard to the South Texas and Eagle Ford Shale places et cetera on the assumption that you try and maximize a front-end payment out of that what would you expect to retain in the way of working interest in those wells?

Paul Ching

Larry, we expect to retain about 25% working interest in those wells.

Unidentified Analyst

And get an upfront cash payment?

Paul Ching

And yes, some up front cash payment... and be reimbursed for the laying cost.

Unidentified Analyst

Thank you.

Paul Ching

You're welcome.

Operator

(operator instructions).

Paul Ching

Franklyn, when she says is really--

Operator

We have a question from the line of Aaron Masterson (ph). Please proceed.

Unidentified Analyst

Hello.

Paul Ching

Hello.

Unidentified Analyst

Hi, I appreciate you taking my call. As I've watched the message boards light up over the last ten days to two weeks. Hello?

Paul Ching

Yes, we're still here Aaron.

Unidentified Analyst

Okay, okay I am sorry, I apologize. I think I am listening to your mic, okay. It sounds like things are becoming extremely dire, extremely negative. Do you expect to be able to come through this and keep this company intact or do you feel that there is going to be a necessity for a merger or a sale?

Paul Ching

We continue to look at all our strategic options, and we have a number of them that that we're working with that have potential. So that is our first option, at the same time we continue to work with the banks, and see what we can do on that aspect of it. My intention is to maximize from this point forward the shareholder value.

And every thing we're doing is generated in that direction. Whatever maybe it seems like that the price of natural gas just keeps going down and one day oil goes up and you think that things might be looking better and then it goes back down and the credit markets and every thing else I mean, we are not in, somebody said little bit of an interesting time.

And we're in an interesting time. But my intention is to make it through this with this company in some manner and we and I are producing, are pursuing every opportunity and option we can. And I've said it before is that our first option is it sell for cash but nothing can be ruled out as you work through these options. And so and I can't say anything about who we're talking to or what we're doing. But, we are working a lot of these issues at the same time.

Unidentified Analyst

I will have to clearly tell you that a great deal of people do respect the job you're doing. And the fact that you did not create this issue that you inherited it. I also understand that you can not or anyone can have a good business model in today's environment. These are not the kind of situations that you do plan for. And we understand that. I appreciate you making the effort. And we'll just have to sit and see what happens.

Paul Ching

Well, thank you, Aaron. I really appreciate that. And yeah, it's a... it is you don't sleep as well at night as you used to?

Unidentified Analyst

No, I have got the same kind of situation. So I will ask a question and then I'll leave. You did make some comments, and I do understand the intricacies of this, because I deal with it daily. Are you getting what you may feel or what you can qualify is a reasonable working dialogue with your lenders?

Paul Ching

Yes, absolutely.

Unidentified Analyst

Okay. That's answers my questions. Thank you very much.

Paul Ching

Yeah. Thank you, Aaron.

Operator

Ladies and gentlemen, that concludes the Q&A portion of today's presentation. I would now like to turn the call over to Mr. Paul Ching.

Paul Ching

Well, thank you very much. Thank you for those questions. Thank you everybody for listening. And yeah, we are on a tough road. We are doing everything we can, as I said, to bring stability and semblance (ph) to that road. And we will keep you informed as we have things to announce. I really appreciate everyone's support. And can use it. So if you want to say a few prayers for me, and in current management team, we would all appreciate it.

Thank you. And you all have a good day.

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