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Energen Corp.(NYSE:EGN)

Q2 2010 Earnings Call

July 29, 2010 10:30 pm ET

Executives

Julie Ryland - VP, IR

James McManus - Chairman and CEO Energen

Chuck Porter - VP, CFO and Treasurer

Analysts

Jonathan Lanfear - Wells Fargo

Holly Stewart - Howard Weil

Kevin Kavala - Raymond James

Justin Tuohy - Tuohy Brothers

Presentation

Operator

Name is Amanda and I'll be your conference operator today. At this time, I would like to welcome everyone the Energen Corporation Second Quarter Earning Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be question and answer session. (Operator Instructions)

I would now like to turn the call over to Julie Ryland, Vice President of Investor Relation.

Julie Ryland

Thank you Amanda and good morning. Today's conference call is being held in conjunction with Energen Corporation's announcement yesterday of the results of operation for the second quarter and year-to-date 2010. Results were provided on a consolidated basis as well as for Energen Resources, our oil and gas exploration and production company and for Alagasco, our single state natural gas utility. Please note that our prepared remarks will include statements expressing expectation of future plans, objectives and performance that constitute forward looking statements made pursuant to the Safe Harbor Provision of the Private Security Litigation Reform Act of 1995.

 

Except as otherwise disclosed, the company's forward-looking statements do not reflect the impact of possible or pending acquisitions, divestitures or restructurings. All statements based on future expectations rather than all historical facts are forward-looking statements that are dependent on certain events, risks and uncertainties that may be outside the company's control and could cause actual results to differ materially from those anticipated.

 

A discussion of risks and uncertainties that could affect future results of Energen and its subsidiaries is included in the company's periodic reports filed with the Securities and Exchange Commission.

 

At this time I'll turn the call over to Energen's Chairman and Chief Executive Officer, James McManus. James?

James McManus

Thanks Julie and good morning to all of you joining us today. As you know, we announced last week that we are writing off our unproved capitalized lease on associated with the deep Conasauga shale acreage in Alabama. That chart was non cash and totaled 10 million after tax or $0.14 per deluded share. We entered the Marchant well earlier this year and performed three asset etching and two CO2 stimulations in five zones spanning some 4000 feet at depth of about 7500 to 115. We were able to establish a flow rate of 3 to 400 Mcf per day at pressures 120 to180 Psi.

Given the associated capital cost and the outlook for natural gas prices, we were not encouraged at this deep formation would be economically violable. So where does that leave our Alabama Shale efforts? At the end of this month, we plan to complete a thick up hole interval in the Marchant well. This zone is found in depths of 3000 to 4000 feet and is a non deformed Conasauga interval. The future, they lower structural dip rate and has higher shale content than the deeper carbonate intervals.

We also plan to complete our Westervelt well in Tuscaloosa County over the next couple of weeks to determine if the Devonian age Chattanooga shale has economic viability. Our remaining capitalized unproved lease hold associated with the Chattanooga shale and the shallow Conasauga shale is 14.4 million after tax or $0.20 per diluted share. The Chattanooga shale anchorage is $8 million after tax, $0.11 per diluted share and the shallow Conasauga anchorage is $6.4 million or $0.09 per diluted share.

We consider non cash write offs associated with our shale lease hold in Alabama to be outside the parameters of our normal ongoing operations. Therefore, I'm going to talk about financial results today excluding the write off. The numbers however provided both was in our news release of yesterday. Energen's net income totaled $65.5 million or $0.91 per diluted share in the second quarter of 2010.

This compared with $55 million or $0.76 per diluted share in the same period a year ago. Higher realized sales prices and increased production was the big drivers of this 20% increase in second quarter earnings. The year-over-year average realized sales price for the company's natural gas, oil and natural gas liquids products increased 17% in the second quarter and production increased 2% to 27.9 billion cubic feet equivalent. Our current capital focus is in our oil producing properties in the Permian Basin where production increased 14% over the same period a year ago. Before I turn the call over to Chuck Porter, our CFO for a more detailed review of Energen's financial results for the quarter and year-to-date, I want to re-affirm our 2010 earning guidance range of 430 to 470 per diluted share excluding the non-cash write off.

The guidance assume the commodity prices applicable to our unhedged production for the remainder of the year that averaged 450 per Mcf for natural gas, $85 for barrel for oil and $0.92 per gallon for liquids. Approximately 70% of our production for the remainder of the year is hedged at an averaged non-mix equivalent NYMEX price of $9.69 per Mcf equivalent. I would refer to yesterday's new release for other key assumptions driving our earnings guidance as well for details about the very limited sensitivity our earning to changes in commodity prices. Our cash flow outlook remains strong. We estimate that energy resources are oil and gas exploration and production company which generate after tax cash flows in 2010 of 560 to 590 million.

After funding identified capital spending of $360 million, Energen Resource is expected to have 200 to 230 million of excess cash flows, put that together with 40 million of available cash at year end 2009 and we estimate that Energen resources will have discretionary fire power in 2010 between 240 to 270 million. This cash to be used to acquire oil and gas properties and fund other opportunities or repay debt. We'd point out Energen's resource does have a $150 million debt facility due in December of 2010. in general, our natural gas utility, Alabama gas uses all of it's after tax cash flow to fund this capital expenditures and the majority of Energen's dividend.

The capital investment opportunity that we are most interested in the near term of course is property acquisitions. We built Energen Resource to acquire and exploit strategy and are prepared to capitalize on our financial strength made more acquisition that fit our investment criteria. As anticipated, M&A market has picked up significantly. Of course, I can't tell you which packages we have or will be bidding on but what I can tell you is we're part of the process, getting a lot of calls about opportunities and visiting the lot of data rooms.

We are not however going to make an acquisition simply because we have cash available. We obviously want it to be the right properties for the right price. In short, the deal has to fit our criteria. In general however, the more opportunities, the better the odds are that one or more will go away. At this time, I will ask Chuck Porter to view our results of operations in the second quarter and year-to-date 2010. Chuck?

Chuck Porter

Thank you and good morning. As James, at the outset of his remarks, Energen's net income totaled $65.5 million or $0.91 per deluded share in the second quarter excluding the non cash write off. This compared with $55 million or $0.76 per diluted share from the same period a year ago. Energen Resource net income in the second quarter totaled $66.8 million as compared with 55.9 million in the same period a year ago. this increase primarily was due to a 17% in the increase realized sales price of our aggregate production and a 3% in total production to 27.9 Bcf equivalent. Partially offsetting these gains were increased DD&A expense and higher production taxes. These production taxes are driven by higher commodity prices. Enegern Resources oil production was up 13% in the second quarter relative to the same period last year. And Permian Basin production of oil and gas and liquids increased 14%.

Both of these increase reflect the impact of the June 2009 acquisition of Range Resources Corporation's interest in the Fuhrman-Mascho Field as well as new water flood development in the North Westbrook Unit. Total per unit LOE in the second quarter of 2010 increased 7% from the prior year's second quarter to a $1.98 per Mcf equivalent. This was primarily due to a 41% increase in per unit production taxes. Base LOE and marketing and transportation expenses were essentially unchanged at $1.60 per Mcf equivalent. Per unit DD&A expense in the second quarter of 2010 increased 13% over the same period last year to $1.78 per Mcf equivalent. This largely was due to higher development cost and price related reserve revision at year end 2009. Net G&A expense for unit in the second quarter of 2010 increased 12% to $0.47 per Mcf equivalent.

This increase largely was due to labor and benefits related expenses and certain legal expenses. Alagasco, our natural gas utility recorded a net loss of $23 million as compared with net income of $0.9 million in the same period last year. This $1.2 million screen largely reflected the timing of rate recovery and revenue reductions on the Alagasco's rate setting mechanism.

Turning to next to year-to-date results, Energen consolidated net income in the first six months of 2010 totaled $183.3 million or $2.53 per diluted share and compared with $150.6 million or $2.09 per diluted share in the second quarter of 2009. Energen Resource net income for the year-to-date period totaled $138.4 billion as compared with net income of a $102 million in the first half of 2009. This increase in the year-to-date 2010 net income reflects the impact of higher realized sales price and the increase oil and liquids production, partially offset by increased DD&A expense, higher administrative expenses and a lag in commodity prices and production taxes.

Total LOE in the first six months of 2010 increased 3% per unit from the same period a year ago into a $1.98 per Mcf equivalent. Base LOE and marketing transportation expenses fall approximately 2% while production taxes raised 32% on a per unit basis. Per unit DD&A expense in the first six months of 2010 increased 14% over the same period in 2009 to $1.77 per Mcf equivalent, largely due to higher development cost and price related reserve revisions at year end 2009.

Per unit G&A expense in the first six months of 2010 increased $0.51 or increased to $0.51 per Mcf equivalent largely due to labor and benefits related expenses and certain legal expenses. Alagasco net income for the first half of 2010 totaled $43.9 million as compared with $48.4 million in the same period last year. This decrease largely reflects the timing of rate recovery and revenue reductions on Alagasco rate setting mechanism.

About the quick look at the quarter and year-to-date, so I'll turn things back over to James.

James McManus

Thanks Chuck. This concludes our formal remarks. At this time, I'll turn the phone back over to the moderator to get our Q&A session underway.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jonathan Lanfear of Wells Fargo. Your line is open.

Jonathan Lanfear - Wells Fargo

Just on the CapEx and I apologize if you already mentioned this. I hopped on a little late. It looks like it went up a bit to $360 from $315 million at Energen Resources. Can you just comment on that?

James McManus

John, I'm going to have Johnny Richardson who is our President of Energen Resources touch a little bit on those increase for you.

Johnny Richardson

The largest CapEx increase will be, about half of the increase will be increased capital spending for workovers and a few incidental wells in the second half of the year that as we go along, we see need to be drilled and we found some thing to execute there. I don't think they'll have a lot of production increase in the last half but there's work to do, we think will payoff in the future. And then, there are a few incidentals and some minor acquisition and another well or two that we looked at drilling and some side tracks in the San Juan that we decided to do because of very good performance, historywise there.

James McManus

I think John in general, it's more activity in the Permian Basin that's going to occur later in the year, won't have real impact on production this year but may help us move them to next year and then as Johnny pointed out, a small amount on sidetracks on San Juan.

Jonathan Lanfear - Wells Fargo

In terms of the acquisition market, I know you probably limited on what you can say but any change? Obviously, things are picking up, which is positive. But any change in your thinking on what types of property you might look at, producing properties versus more virgin properties?

James McManus

John, I think there are some plays, particularly some oil plays where we would look at properties where we got a high degree of confidence in the play that are not, that don't have a heavy component approved. They were also probably be some shale properties in the existing, more established plays that may come up that we'll have some proved developed producing but some play potential as well. So I think in terms of the areas that we're going to be looking the heaviest are of course the areas we're in which would be Permian Basin and San Juan but they are probably going to be some opportunities with some folk either divesting their shale plays that are more mature than the newer and hotter plays and also companies looking to divest their convectional assets. And I don't think it's a secret that there at least couple of majors out there with a lot of packages out.

They're also private companies that are looking to divest this year because of change, potential change in capital gains rate next year. We're actually in a but you never know what you going to able to catch but we are right now, at this moment in time, we're seeing more activity per quality than we've seen in quite some time.

Jonathan Lanfear - Wells Fargo

And are you seeing more on the oil or gas side of the equation?

James McManus

Really both. They are some gas properties come to market and there are good many oil properties coming to market as well. So it's not really but from our perspective, what we're seeing I can't tell you as one commodity over the other, it's really a combination.

Jonathan Lanfear - Wells Fargo

And do you have a preference for one or the other?

James McManus

Not really. As we've always said since we do engage in some form of hedging, I think it's really the character of the property and what we think the potential upside might be on the property and what the price of the property is. I know I'm really not zeroing in but really just all depends and if the characteristics are right, we certainly would be happy to say gas in this environment if we could hedge it forward a good bit and take some of this short term risk off the table. I think oil obviously has a lot of positive characteristics to it. And it's something that we have moved towards. So adding some more oil to the portfolio would also make a lot of sense to us as well.

Jonathan Lanfear - Wells Fargo

And just one last one. On the legal expense, can you just maybe get, shed a little light on that?

James McManus

Let me see if Chuck got some more detailed information on legal experience.

Chuck Porter

John, that wasn't this year item. It was actually a credit to some extent as last year where we had a reserves setup. I believe in we were able to settle the case and form less in what we had. And so, it was just, it was a credit basically to expense in the prior year.

Operator

You're next question comes from Holly Stewart of Howard Weil. Your line is open.

Holly Stewart - Howard Weil

Just a couple of follow up. I guess since we're on the oil topic, James, can you just give us a little bit of color on, I know you guys are going to drill both in the Bones Springs and Wolfberry plays this year. They were potential targets for you guys. Can you give us any results that you've had thus far?

James McManus

Let me do this. Got Johnny here. He can a little bit about how our performance is in general I think. The Wolfberry continues to perform extremely well. We've had a few delays in the Bones Springs but I think our results in those wells, can you do all the sharing things Johnny?

Johnny Richardson

We are very pleased and with both those areas with the results we're getting and they're sort of typical I guess the Bones Spring with, as an impact player, you can get several hundred barrels, 500 barrels a day out of those wells. We've achieved those kind of rates. And so we are pleased with that. We're about mid way through our drilling program with that and I think we had six wells to drill this year. So in place a so far, Bones Spring is a good area and will continue to try to increase our footprint there. The Wolfberry is I mean results are like most everyone is there. They're very good well, they come in 50 to 100 barrels a day as a rule and decline from there and predictable manner.

James McManus

Holly, we would love to as Johnny pointed out, we love to expand our footprint in both of those plays. We're trying to do that both looking things that might be available and also on the leasing front. And so, we've been very pleased with the results in both plays and would love to expand that obviously with the kind of metrics and returns you got on oil right now.

Holly Stewart - Howard Weil

Are you still expecting kind of that $8.5 million well cost in the Bones Springs?

James McManus

No. Our cost have come down again. We don't have a lot history there but we have force that cost back then into the seven and below range now.

Holly Stewart - Howard Weil

Perfect. And then, any color on the NGL utilization, the pricing there during the quarter? I think if we model it how we have historically, it seems to have come in, the realized price seems to come in where we would've thought. Any color? Anything that happened during the quarter we should be aware of?

James McManus

Let me do this Holly. I think in general, let me make this comment. I think the NGL pricing, as everybody know is sort off. A good bit of these plays like the Eagle Ford and others that are going to generate a lot of natural gas liquids. Ethane being the largest component of ours and generally the largest component of everybody else. And that particular market, I think if you continue to see all these NGL get produced, its hard to see what the outlook for that market is other than lower price. But let me let Chuck comment on that.

Chuck Porter

I think through the year, we've averaged NGL prices in the upper 70 range per gallon, I think June for example is $0.76 whereas in our original earnings guidance, I think we were assuming closer to $0.90 or $0.92. the good new is it's not terribly impactive to us. It's only a little bit over 10% of our production and I think we've got roughly half of that hedged or it's a major impact but yes, we have seen with these realization on that pricing.

Holly Stewart - Howard Weil

I should know if there was there was a transportation issue or something during the quarter that if we model it how we typically have, it would have been maybe $0.08 or $0.09 higher?

James McManus

There were no issue related to transportation. Its more just the supply and the man issue. And what we have seen if you are modeling it as a percentage utilization of West Texas and immediate oil, we have seen that relationship kind of break away. And so, we're not getting the same kind of realization on the percentage of oil but this is just the supply and demand for the actual liquid that driven the prices down from what we had assumed.

Holly Stewart - Howard Weil

Got you. Okay. And then, I guess just big picture question on the gas production. It looks like you're going to have to make up a little bit of ground here in the second half of the year to get to your guidance on the gas side.

Chuck Porter

Holly, we would expect that at year end, we do expect to make our target of 114 and we got something that we think are going to happen in San Juan basin that are going to make that happen, to make us comfortable. Let me call on Johnny to add some color to that. I think earlier in the year, we were own because there was bad weather in the San Juan. I think our activity is down, going to pick up there and we expect again to make that 114. Johnny?

Johnny Richardson

Right Holly. We are used the San Juan had to do location as James said because of weather. We've also had some plant turnarounds got worse. It happened earlier in the year than we anticipated but the good news they're behind this now and we're catching up in all area they also. As we side track wells which had a little bit of side track program, we have to of course take that well off production that we're side tracking and any other wells that are on that same pad. So that had a little impact but that program is largely behind us now and we anticipate making that follow that ground in the second half.

Chuck Porter

Holly, we're down a little bit to our own budget, not sell all the models that you guys do through the six months that we fully expect that will be on target at the end of the year.

Holly Stewart - Howard Weil

Okay. Perfect. And James, I won't even ask you on Alabama shales because I know you're not going to comment. So that's all I've got.

Operator

Your next question comes from Kevin Kavala of Raymond James. Your line is open

Kevin Kavala - Raymond James

I have kind of a follow up to Holly's question. Do you have any idea of how many Bone Springs and Wolfberry locations you have left, or potential locations?

James McManus

Kevin, we really haven't disclosed that particular information. So I think we want to kind of hold that right now.

Kevin Kavala - Raymond James

I guess, I mean are you guys still planning to allocate the same percentage of CapEx this year as you would looking ahead to 2011, or is that just something you guys haven't really planned for yet?

James McManus

Well, we'll be looking at all that as we put the budget together. I think its highly likely that where prices are that we're going to try to tilt heavy towards the Permian Basin and our oil properties. So I would imagine that's going to be tact we take. Maybe use some gas things and I've said it before, we got gas properties that are economic in this particular environment. We just going to have to look at whether it makes sense to do some of those now or continue to hold them off. But I think it's going to be a lot like it would this year where you are going to see a lot of our capital go into oil.

Kevin Kavala - Raymond James

Okay. And over the past couple of quarters you've seen production kind of decline in your Texas and Louisiana operations. I mean, would you be willing to monetize any of these assets to help fund like a property acquisition?

James McManus

Well, the thing we've got Kevin is we really don't need any capital to help us fund an acquisition. We got so much free cash flow in the balance sheet is so elaborate that it's not really necessary to do that. you are right in pointing out that those areas production is falling because we are not spending any capital in the gas prone areas of North Louisiana and we're not really spending a lot of capital but oil here, they continue to be good assets for us and if we needed to raise capital certainly, those would be particularly North Louisiana and East Texas would be an area we'd look at but I don't see any need right now to raise capital with the kind of balance sheet, lines credit and free cash we got.

Operator

Your next questions comes from Justin Tuohy at Tuohy Brothers. Your line is open.

Justin Tuohy - Tuohy Brothers

Your oil and NGL volumes continue to improve from the first quarter. Do you have any thought about a targeted production mix run rate for the rest of the year?

James McManus

I'm not sure I'm. Can you repeat that?

Justin Tuohy - Tuohy Brothers

With your oil and NGL volumes picking up as a percent of your volumes versus Q1 '10, do you have just a thought about the production mix run rate for the balance of the year in terms of how that oil and NGL volumes will continue to ramp up as a percent of total production? I know you guys talked about NGL differentials or realizations falling back a little bit in the quarter, so I don't know if that maybe changes anything.

James McManus

Chuck is looking for that right now and we'll have it here in just a second. Have you got another question while he works on that answer?

Justin Tuohy - Tuohy Brothers

Well, I was also going to ask about 2011. I guess the second question would be you talk about your base lease operating expenses sort of being flattish for the quarter. Do you have a thought on potential drivers for any unit cost improvement throughout the balance of the year?

James McManus

I wouldn't expect them to continue to drop. I mean I think what we've see is they moderated year-to-year but we did have an increase in the base level built is this year but year-to-year, they did remain flat. John, you got a thought on that?

Johnny Richardson

No. Nothing that. LOE looks pretty stable at the current time.

]

James McManus

Chuck, how are you doing?

Chuck Porter

Well Justin, I think the best act to do that now is to tell you that our projections, the gas run rate compared to the oil run rate would probably be fairly consistent with what it is right now. We're going to producing probably going out here at the end of year, 62% in gas. I think the June numbers were kind of around that level. So we're perhaps beginning to see a major change and certainly we were a little bit behind in gas. I mean, in oil, we're going to be trying to make that up, some the rest of the year but some of that may, that increase may fall into next year a little bit.

Justin Tuohy - Tuohy Brothers

Okay. That's helpful. Fair enough. And that's all I have.

Operator

There are currently no other questions in the queue. I turn the call back over to the presenter.

James McManus

Well, thank you all for joining us today. We hope to see some of you at the intercom oil and gas conference in next few weeks. In the mean time, if you have any questions, please give Julie Ryland a call and she will get to that answers. Thank you

Operator

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

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