Compton Petroleum Corporation Q2 2009 Earnings Call Transcript

Compton Petroleum Corporation (CMZ)

Q2 2009 Earnings Call

August 6, 2009 10 am ET

Executives

Susan Soprovich - Director of IR

Tim Granger - President and CEO

Leigh Cassidy - VP of Finance and CFO

Shannon Ouellette - VP of Operations and Development

Analysts

Terry Peters - Canaccord Adams

Presentation

Operator

At this time, I would like to welcome everyone to the Compton Petroleum 2009 Second Quarter Financial Results Conference Call. (Operator Instructions). Following the presentation, there will be an opportunity for analysts and shareholders to ask questions. Media may monitor this call in a listen-only mode.

I advise participants that this call is being recorded today, August 6, 2009. This call is also being webcast and will be available on the Company's website, at www.comptonpetroleum.com.

I will now turn the call over to Ms. Susan Soprovich, Director of Investor Relations for Compton Petroleum Corporation. Please go ahead.

Susan Soprovich

Today, I am joined by members of our management team, including Tim Granger, our President and CEO; Leigh Cassidy, our VP of Finance and CFO; Shannon Ouellette, our VP of Operations and Development; Marc Junghans, our VP of Exploration; and David Horn, our VP of Business Development and Land.

Before we start, I'd like to remind listeners that certain statements made in this call are considered forward-looking in nature as outlined by security regulations. Actual results may differ from expected future results as a result of various risk factors associated with our business. Accordingly the forward-looking caveat contained in today's news release is applicable to discussions and comments made during this call. I would refer you to the cautions appearing in our news release and in our annual and interim reports.

At this time, I would like to pass the call over to Tim Granger, our President and CEO.

Tim Granger

We released our Q2 data this morning, so I'll just touch on the highlights and then focus on some of our strategic initiatives. Leigh and Shannon will offer some additional information on the second quarter in their discussions.

Though the expected longer term trend is for increased commodity prices through 2010, continued depressed natural gas prices have impacted our financial results. The outlook for North American demand for natural gas is expected to improve once the economic recovery takes hold. In the short term, supply is decreasing due to reduced development activity and natural declines.

In addition, some natural gas has been shut-in to low commodity prices. In this environment, we remain focused on restructuring our balance sheet and we will continue with our defensive strategy until a clear signal in the recovery of commodity prices are evident.

We made some strong, positive steps in realigning the Corporation for the second quarter. I am pleased to announce that we've completed the changes to our management team and I look forward to working with them as we go forward.

We are delivering on our promises and are progressing with our recapitalization. We renewed our credit facility with our banking syndicate. We are living within our cash flow and a focus on value-added investments. We've started to see progress in reducing our internal cost structure and we've begun improvements to systems and processes and we've begun to improve our depletion strategies.

As previously announced, we are taking a multifaceted staged approach to recapitalization that considers a number of alternatives such as conversion of debt to equity, issuance of new capital and/or equity, the sale of assets or gross overriding royalties on some of our property, mergers and acquisitions.

Progress has been achieved on several fronts of our restructuring. Our financial advisor has provided options for restructuring, which we have discussed with our Board and we are currently in discussions with the noteholders and we are currently evaluating bids on the sale of a gross overriding royalty on our assets. We expect to be able to report on these initiatives to our shareholders in the weeks to come.

I will now turn it over to Leigh to discuss the financial highlights.

Leigh Cassidy

I'll touch on some of the key points of interest in the quarter. I refer the participants in the call to the comprehensive disclosure of the Company's financial statements as to the discussion and analysis as well as other disclosures of the Corporation which you will find on the SEDAR site.

During the second quarter, overall financial performance was in line with our expectations. Average daily production in the quarter was 21,440 barrels of oil equivalent per day within the range of our guidance average of 20,500 to 21,500 BOE per day annualized.

[G&A] expenditures were $7.7 million in line with our annualized guidance of between an annualized amount of $28 million and $29 million. Operating costs amounted to $19.8 million or $0.15 per BOE. Capital expenditures amounted to $15.5 million in the quarter with an aggregate $32.1 million on a year-to-date basis.

Included in these capital expenditures is approximately $10 million in respect of the relocation of our corporate offices. A commitment was made in prior years and was unavoidable.

Fund flows from operations amounted to $9.6 million in the quarter or $0.08 per share. Year-to-date funds flow from operation aggregated $31.6 million or $0.25 per share.

We reported our earnings at $19.8 million with year-to-date earnings of $2.5 million. The variability in the net earnings is significantly attributed to the volatility of the Canadian and US dollar exchange rate, which causes the Company to record unrealized foreign exchange gains and losses in respect to our unhedged US dollar denominated senior notes with a principal amount of US$450 million.

The second quarter annualized foreign exchange gain was $44.5 million with the first quarter loss being recorded at $16.7 million. Also, the effective royalty rate experienced by the Company decreased significantly during the quarter as lower natural gas prices gave rise to reduced royalty rates under the Alberta government's new royalty framework and the Company also benefited from a gas cost allowance adjustment.

As management considers the outlook for the balance of the year, the strength of the Canadian dollar relative to the US dollar and the sustained level of low natural gas prices reduces our expectations for cash flow from operations. Cash flow generated from operations for the full year 2009 is projected to range between $50 million and $60 million, representing a downward revision of $10 million.

Turning now to the financial position of the Company, which has strengthened in the quarter, Compton increased its risk management activities by expanding the natural gas price hedges position to reduce cash flow volatility as management expects natural gas prices will not recover to mid cycle levels until late 2009 or the first half of 2010. Approximately 60% of the Corporation's 2009 third and fourth quarter production is hedged at a price between $4.50 and $7.18 per gigajoule AECO.

In the quarter we renewed our financial and other arrangements in respect of our Mazeppa gas plant for further five years. In connection with this renewal, we have changed the description in our financial statements on the face of our balance sheet to read "NPP Term Financing." We have also moved some of the associated financing expense on the income statements to the caption "Interest and Financing Charges."

We also renewed our banking facility for a further year. This revolving credit facility is authorized at $383 million and is currently drawn at approximately $340 million, providing $43 million of headroom. Resulting from this reduced level of production in capital expenditures by the Company in 2009 compared to 2008 and consistent with our defensive strategy, the Company's working capital deficit in 2009 over 2008 caused some of this increase in the bank line.

To address the leverage concerns of the Company, management progressed its various recapitalization options. During the third quarter 2009, the Corporation expects to address its leverage concerns, realign its capital structure and reduce overall financial risk.

I'll now turn the discussion over to Shannon Ouellette to discuss operations.

Shannon Ouellette

Our second quarter was relatively quiet from a drilling standpoint. It was busy in terms of realigning teams, reassessing our assets and formulating preliminary plans for the future.

As Leigh stated, we've seen production decline over the first quarter compared to Q2 of '08, largely due to the sale of assets in 2008 as well as natural declines. Results to-date indicate that we're in line to meet our production guidance for the year.

My first step coming on board with the Corporation was to sit down with Marc and our new team to work together to identify opportunities to add value. We focused on several initiatives that will benefit our capital structure and operating efficiencies going forward.

We have launched an operating expense benchmarking study to better understand our operating costs and identify cost savings opportunities. The study is expected to be completed by the end of October with an action plan in place by yearend.

We continued the optimization study initiated in the first quarter by thoroughly reviewing properties and wellbores to identify workover and recompletion opportunities. Implementation is expected to continue during the second half of the year and provide addition benefit through adding production volumes and/or lowering operating costs.

We started reviewing and making improvements to our internal processes around accruals, reserves and procurement, which is expected to increase our efficiency as an organization. We started creating a multiyear strategic plan which will be completed by yearend.

The majority of our activities during the quarter were focused in Niton. We drilled another Rock Creek horizontal well that we spud in June. Well cost is expected to be approximately 10% less than previous horizontal wells drilled in the area due to our focus on cost reduction and lower industry rates. Overall, we expect drilling costs to decrease by about 15% from last year.

We are also in the process of monitoring the Niton horizontal well drilled in the first quarter to determine the six-month production rate. This will provide us additional data in evaluating economic and design of future wells in the area.

The second quarter capital expenditures were significantly decreased compared to last year. The decline in commodity prices has adversely impacted funds flow and economic return. In establishing Compton's 2009 capital expenditure levels, our objective is to limit spending to within funds flow generated from operations, which is consistent with our defensive operating strategy. Every project is being evaluated to ensure that our 20% rate of return hurdle is being achieved.

As capital plans are assessed for the balance of this year, management will consider additional activities as funds become available. We have identified areas to allocate additional capital in the future so that we can act quickly on these opportunities.

At this point, I'd like to turn it back to Tim.

Tim Granger

With the first half of 2009 complete, we are showing our commitment to deliver on our promises by meeting performance targets, focusing on value creation, living within cash flow, reducing our internal costs and increasing efficiencies.

In addition, the team is focused on creating a completion strategy to optimize asset value while building a comprehensive five-year plan by the end of the year. I expect to provide an update to shareholders in the weeks to come as to the direction of our restructuring plan, which will result in the resolution of our capital structure concerns and a stronger financial position.

Though these are early days, I am confident that we will continue with our positive momentum. Once our capital restructuring is complete, the strength of our team as it implements a multiyear strategic plan will position the Company to deliver long-term value to its shareholders.

This concludes the formal part of our presentation and our team will be pleased to answer any questions that you may have. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Terry Peters from Canaccord Adams. Your line is open.

Terry Peters - Canaccord Adams

My question is really on the recapitalization plan that you are working towards this quarter. You have itemized a number of different measures you are taking a look at. Is there a way in which you could prioritize what you would prefer to do first?

Tim Granger

What we'd prefer to do and what we want to do is recapitalize our organization obviously. We are looking at a number of opportunities and we are just going to determine which one would create the greatest value for the shareholders and proceed with that plan. So I don't want to get into too many specifics right yet as nothing is signed at this point in time.

Terry Peters - Canaccord Adams

So you're going to look at all of them and rank them as to their net impact?

Tim Granger

Basically whether you look at the sale of an asset or debt for equity or new equity, they are all an equity issue, if you will, of some sort. So it's which one would create the most value to their shareholders going forward.

Terry Peters - Canaccord Adams

Can you elaborate on any kind of discussions you may have had with the bondholders as to where their heads are at?

Tim Granger

We've had discussion with the noteholders and we understand a conversion price that we could proceed forward with. So now we are just determining the value of that compared to other options.

Operator

There are no further questions at this time.

Susan Soprovich

Well, thank you very much. If there are no other questions, we would then like to thank everybody at this call who attended and look forward to speaking to you at the next quarter conference call.

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