W. King Grant - Executive Vice President, Chief Financial Officer and Corporate Secretary
Mark A. Erickson - Director, Chief Executive Officer and President
Michael K. Decker - Executive Vice President and Chief Operating Officer
Gasco Energy, Inc. (GSX) Q1 2009 Earnings Call May 5, 2009 11:00 AM ET
Good morning. My name is Maggie and I will be your conference operator today. At this time, I would like to welcome everyone to the Gasco Energy's First Quarter 2009 Results 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). Thank you.
I will now turn the call over to Mr. King Grant, Chief Financial Officer of Gasco Energy. Sir, you may begin the conference.
W. King Grant
Thank you, Maggie and good morning everyone. Please be advised that our remarks that follow including answers to your questions include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act.
These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. Those risks include among others matters that we have described in our earnings release issued yesterday and in our filings with the Securities and Exchange Commission.
We disclaim any obligation to update these forward-looking statements. While the company believes these forward-looking statements are reasonable, they are subject to factors such as commodity prices, competition, technology and environmental and regulatory compliance, our drilling schedules, capital plans and other factors may cause our results to differ materially.
Now, I will turn the call over to Mark Erickson, President and Chief Executive Officer of Gasco Energy.
Mark A. Erickson
Good morning, everyone. Thanks for joining us for today's call. We continue to focus on our lean operating structure as evidence by reduced G&A and LOE that King will discuss a bit later.
We are positioned to navigate 2009 carefully. As industry is experiencing very low gas prices due to an abundance of supply along with soft demand. The rapid decrease in service cost has been helpful but there is still need for further reductions. We have made excellent improvements in the past 18 months in drilling and completion efficiencies in the field. And we have worked very hard to home and refine our completion techniques along with their associated cost to maximize EURs and per-well economics.
We believe we are turning the corner in this facet of our business. And can use what we have learned to drive when stronger gas prices return. In the mean time, we are managing for the current price environment.
Conversely, shortly lower rig counts should mean that lower natural gas supply and an eventual correction in the supply demand imbalance. This also indicates a possible recovery in gas prices sometime in 2010. We have taken measures such as our derivative contracts, which provides for increased cash flow by allowing us to receive higher prices for some of the volumes produced.
Currently, we have approximately 65% of recent volumes hedged at an average Rockies price of 685 per MMBtu. We recently entered into an additional swap contract for the period January 2010 through March 2011 at a price of 483 per MMBtu for a volume of 3000 MMBtus per day at Northwest Rockies. This was made possible by extending our gas sales agreement allowing for firm sales for volumes up to 50,000 MMBtus per day through 2011.
The biggest threat that we faced is access to capital. The hedges and cash on hand provide us adequate liquidity to execute our 2009 plan. Our semi-annual borrowing base re-determination is pending and we expect the results almost any day but certainly this month.
We are expecting a reduction but do not know the amount. King will cover this in more detail during his prepared remarks.
Mike, King and I have managed through down cycles in the industry throughout our careers. We want to import the message to investors that we are carefully addressing the issues facing Gasco and believe we are positioned to endure the difficulties facing the company and the gas industry in general.
Some of our options to generate near-term cash include monetizing our midstream assets as well as other non-core assets. We are seeking a partner to assist with the continued exploitation and delineation of our Utah project. We have also secured a partner for our Nevada project.
Joining me on the call today are Mike Decker, Chief Operating Officer; King Grant; Peggy Herald, our Vice President, Accounting and Administration. We have a lot to cover on today's call including further discussion of some of the topics I just discussed in my introductory remarks.
Once King covers the financial results, Mike will discuss detailed operations and we will then progress. After the prepared remarks, we'll welcome questions from conference call participants.
I would now like to turn the call over to King Grant to recap the first quarter's financial results.
W. King Grant
Thanks, Mark. For Q1 '09, Gasco reported a net loss attributable to common shareholders at $43.9 million or $0.41 per share as compared to $4.4 million or $0.04 per share in 2008.
Please note that the Q1 '09 results include a non-cash charge of $41 million related to the carrying value of oil and gas properties. As of March 31, 2009 our full cost pull exceeded the ceiling limitation based on oil and gas prices, the $34.40 per barrel of oil and $2.36 per Mcf of natural gas.
The impairment is a result of the commodity price used and does not reflect any change to production forecast or well performance.
Q1 '09 results also included unrealized derivative gains of $700,000 attributed to hedge affect and the $4.7 million cash payment to the company's rig contractor for early termination of rig contract.
Before the impairment charge and the early termination payment and excluding the effect of unrealized derivative gains, our non-GAAP measure Gasco would have posted net income of $2.5 million or $0.2 per share.
I would like to also point out that Q1 '08 results included non-cash derivative losses of $5.9 million attributed to hedge effects. Including the effect of hedges, derivative losses of non-GAAP measure, we would have posted net income of $1.5 million or $0.01 per share for Q1 '08.
Due to lower commodity prices offset impart by 15.6% higher sales volume, we posted oil and gas sales for Q1 '09 of $4.2 million as compared to $8.5 million in the same period in '08.
Gathering revenue were flat quarter-over-quarter at $0.9 million, rental income of $0.4 million of revenues from our drilling rig, which was under contract to another E&P company.
Let's talk about commodity prices received. Gasco's average realized price was $5.67 per Mcf for Q1 '09 including the effect of hedges compared to $7.19 per Mcf for the first quarter 2008.
Our risk management activities increased the average gas price by $2.39 during Q1 '09. Prior to the impact of hedges, our average gas price received for production during the first quarter of 2009 was approximately $3.28 per Mcf as compared to $7.61 in the prior year period.
For oil, we received an average price of $25.45 per barrel for Q1 '09, down sharply from $75.28 per barrel for the first quarter of 2008. Gasco does not hedge its crude oil prices.
Now, turning to the unit cost comparisons that we use to access our performance. Lease operating expense for the first quarter decreased by 45% in 2009 to $0.7 million or $0.55 per Mcfe from $1.3 million or $1.17 per Mcfe in the same period in '08.
As we mentioned in the press release last evening, a number of factors contributed to lowering the LOE. Reduced chemical cost, reduced work over cost, overtime elimination and determination of contractor services were the primary contributors.
Depletion, depreciation and amortization expense for Q1 '09 was $2.6 million or $2.06 per Mcfe as compared to $2.4 million or $2.25 per Mcfe for the same period in 2008.
G&A expenses for Q1 '09 was $1.9 million or $1.48 per Mcfe. This compares to $2.2 million in Q1 '08 or $2.02 per Mcfe. G&A expense was -- for Q1 '09 includes $25 million of non-cash stock-based compensation expense or on a per unit basis $0.40 per Mcfe as compared to the prior year period total of $0.7 million or $0.67per Mcfe.
Gasco implemented certain cost cutting measures to reduce G&A expense that resulted in the decrease of $112,000 during the first quarter. Cost cutting measures included reduction and compensation to all of our salaried employees at 10 to 20% and the 10% reduction in force.
Our 2009 G&A budget excluding non-cash stock compensation is $4.8 million, a 20% reduction from 2008 $6 million.
Cash and equivalents were $9.1 million at March 31, 2009. Also at March 31, 2009 and today, we have $44 million drawn on our reserve base revolving line of credit facility with J.P. Morgan, of which 45 million of the $250 million was available for borrowing.
As of last evening, we had 5.7 million in cash on hand, accounts receivable of 6.3 million and accounts payable of $1.5 million. We've provided the lenders all of the information that they've requested to re-determine the borrowing base. We are expecting reductions, but do not yet know the amount for the loan agreement.
If the outstandings are in excess of the re-determined borrowing base, we'll have 30 days from the date of notification to present them with the plan to reduce outstandings below the new limit and an additional 30 days to make the repayments if any.
We are currently pursuing a sale in interest in our gathering system and are having discussion with potential drilling partners in our Utah project. Our banks have indicated a low interest to work with us and provided us with sometime to revise this discussions but their continued willingness would have been on several factors, which may include how much of loans exceed the borrowing base line, how quickly we are able to make progress on selling assets and bringing in additional cash and how their outlook on the sector Gasco and the economy may change.
We are fortunate to be working with well capitalized banks and J.P. Morgan and Guarantee Banc of Colorado. Once the borrowing base is re-determined, we will issue a news release and file an 8-K to update you.
I would now like turn the call over to Mike Decker to continue today's conference call with the discussion of operations.
Michael K. Decker
Thank you, King. Estimated cumulative net production for the quarter ended March 31, 2009 was 1.25 billion cubic feet equivalent, an increase of 15.6% over first quarter 2008 production of 1.08 Bcfe.
The net production increase is attributed to the re-completion of three existing wells, partially offset by normal production declines in existing wells. In order to preserve capital and to wait until improved commodity prices, Gasco seized drilling operations during February, 2009 and temporarily halted completion operations.
During the quarter, Gasco conducted no initial completion operations and re-entered three gross wells or 0.92 net to complete behind-pipe pay zones. At March 31, 2009, Gasco operated 130 gross wells.
The company currently has an inventory of 32 operated wells with up-hole re-completions and four Upper Mancos wells awaiting initial completion activities. Due to low gas prices in the Rockies, the company is selectively recompleting up-hole pay.
We continue to be very pleased with the Gate Canyon State 23-16 well. As it has been previously stated, the well came on at initial rate of 5.7 million cubic feet of gas per day, up 5.5 inch casing from six stages in the Mancos Shale and three stages in the lower Blackhawk formation.
The 30 and 60 day average rates were 3.2 and 2.6 million cubic feet of gas per day respectively. Our production log has shown that about 70% of the production is coming from the Mancos Shale. Tubing has recently been run in the well and after 80 days, the well is making approximately 1.6 million cubic feet of gas per day.
Currently, based on offsetting wells, we estimate that the Gate Canyon 23-16 will ultimately produce approximately 2.75 to 3 Bcf from the current preparations in the Mancos Shale and Blackhawk formation.
There is also another 1.5 Bcf gas estimated for the remaining up-hole behind-pipe pay within the upper Blackhawk and lower and upper Mesaverde formations.
We estimate that this well may yield ultimate reserves up to 4.5 Bcfe. I think that it is also very important to note that our engineers have estimated that an AFE to currently drill this well would be about $4.5 million.
Using an 81.5% NRI, we calculate an FD cost of $1.23 per Mcfe. This value is very is very competitive with the other shale plays in the nation. We are encouraged that we have been able to establish commercial production from vertical shale completions.
Our wells have benefited from having a substantial amount of up-hole pay that can be commingled with the shale gas productions. The Barnett Shale, the Fayetteville Shale and the Haynesville Shale all began as vertical plays.
The vertical wells identified the resource and established baseline economics. Each of these plays came into their own, once horizontal drilling techniques were introduced.
We feel the Mancos Shale play in Utah will follow the same progression from vertical completions to horizontal completions. We are currently evaluating drilling and completion designs and costs so as to be ready to get back to drilling.
And finally, I'm also pleased to announce that we have recently signed an agreement with a large oil and gas company to continue our exploration efforts on our nine prospects in Nevada. This is a multi-year agreement with several option periods. Our partner is currently in Nevada conducting geological field work. We are not budgeting any expenditure by Gasco on these projects in 2009 or 2010.
Thank you again for joining us. Operator, I would now like to turn the call over for questions.
Thank you. (Operator Instructions). And sir, we have -- I'm showing no audio questions at this time. (Operator Instructions). Our first question comes from the line of Gordon Dilbert (ph) with Wachovia.
Yeah, good morning guys.
Good morning, Gordon.
Hi, just a quick question regarding your networking capital, if -- it so was necessary I'm just wondering if you could maybe attempt an estimate on what you might be able to monetize relatively quickly should you need the liquidity for your revolver?
With me -- Gordon, in this market, it's a difficult question to answer both what we could monetize and what the price would be. I wish I could give you some more specific -- specificity but that's difficult in this market and I'm sure you know.
Well that's all that all I have right now.
Okay. I appreciate it. And you've got a busy morning.
Thank you, sir. And there are no further questions at this time.
This does conclude today's conference call. You may now disconnect.
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