Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Petroquest Energy, Inc. (NYSE:PQ)

Q1 2014 Earnings Conference Call

May 6, 2014 09:30 AM ET

Executives

Matt Quantz - Manager of IR

Charles Goodson - Chairman, CEO and President

Todd Zehnder - COO

Bond Clement - CFO

Analysts

Will Green - Stephens Inc.

Ron Mills - Johnson Rice

Amir Arif - Stifel Nicolaus

Rehan Rashid - FBR Capital Markets

Operator

Good morning, and welcome to the PetroQuest First Quarter Earnings 2014 Conference Call. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Matt Quantz, Manager of Investor Relations. Please go ahead.

Matt Quantz

Thank you Andrew and good morning, everyone. We would like to welcome you to our first quarter conference call and webcast. Participating with me today on this call are Charles Goodson, Chairman, CEO and President; Todd Zehnder, COO; and Bond Clement, CFO.

Before we get started, we like to make our Safe Harbor statement under the Private Securities Litigation Reform Act of 1995. Statements made today regarding PetroQuest businesses, which are not historical facts are forward-looking statements that involve risk and uncertainties. For discussion of such risk and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see risk factors in our annual and quarterly SEC filings and in forward-looking statements in our press release. We assume no obligation to update our forward-looking statements.

Please also note that on today’s call, we will be referring to non-GAAP financial measures, including discretionary cash flow. Historical non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release, included in our Form 8-K filed with the SEC today.

With that, Charlie will get started with an overview of the quarter.

Charles Goodson

Thank you Matt and good morning. During the first quarter we produced 9.8 Bcfe or approximately 109 million cubic feet of gas equivalent per day. The 109 cubic feet equivalent per day was comprised of approximately 80 million cubic feet of gas, 2,700 barrels of oil and 2,100 barrels of NGLs. Our daily oil production for the first quarter was the highest quarterly range since the second quarter of 2007 and was 93% higher than the comparable 2013 period.

Revenues in the quarter were $60 million and we posted net income of approximately $10 million which exceeded the net income earned all last year. Product price realizations averaged approximately $100 per barrel of oil, $33 per barrel of NGL. Natural gas realizations were $4.11 per Mcf and benefitted from our marketing structure whereby we sold roughly 50% of our gas on first month pricing and 50% of gas daily. This pricing structure allowed us to capture several days during the quarter when spot prices spiked significantly higher compared to the first month pricing.

Before I turn the call over to Todd to go over the details of our operations. I want to briefly touch on our recent success in Woodford. Last month, we announced our first group of wells in our recently acquired 35,000 acre West Relay field. This was a significant announcement for several reasons; first, while it’s still early this group of wells appears to be performing better than our previous liquids rich wells. These wells have a higher BTU content resulting in more barrels per million. The second significant take away is our Tulsa team stepped out approximately 8 miles from our North Relay field and posted top tier results both from a production rate standpoint as well as the drilling complete cost standpoint. With these positive results we believe that we have de-risk a substantial portion of this acreage.

And finally with a 35,000 acre undeveloped positions secured we now have significant running room and years of liquids rich Woodford inventory to develop. With that I’ll turn it over to Todd to go over the operations.

Todd Zehnder

Thanks Charlie. In addition to our initial six West Relay wells that Charlie just discussed we recently established production from three new West Relay wells. This group of well achieved an average max 24 rate of approximately 3.5 million cubic feet a day and bought under 30 barrels of natural gas liquids. It’s worth pointing out that these wells had an average lateral length of approximately 4,000 feet which is approximately 1,000 feet shorter than the average lateral length of the initial six wells we previously announced due to fault identified on Seismic ahead.

However these wells still continue our trend of better than expected results in terms of initial production rates. We’re also in initial pull back operations on two additional wells and are currently drilling a three well pad. All five of these wells are expected to be on line this quarter. With the second rig scheduled to in West Relay in July; Woodford growth profile will become more pronounced as we begin to bring on new pads at a more consistent pace.

On the cost side of the equation our Tulsa team continues to drive down the number of drilling days and as we sit here today, we’re reaching total depth in approximately eight to 10 days. Recently, we set a new company record of reaching TD in seven days, which will in turn likely be our least expansive standard lateral well drilled to date. This coupled with other cost saving initiatives has translated into our most recent wells coming in below our 2014 goal of $4 million per well. These lower costs obviously increased our rates of returns but also extend the life of our drilling carriers.

Speaking of the drilling carrier as of March 31st, we have $48 million remaining. Our latest estimates call for this call sharing arrangement to last into the second quarter of 2015.

Moving on to the Gulf Coast where we recently completed our Thunder Bayou sell down program and have reached our goal of approximately 50% working interest. Those who have followed our Gulf Coast story throughout the years notably traditionally retain 20% to 25% working interest and prospects in order to limit our risk exposure. The fact that we’re keeping 50% of this project should indicate our level of excitement about this project’s potential. While it has risk we’re very excited about the reward which could be north of 160 Bcfe. We have contracted 3,000 horse power land rig, completed all location work and expect spud this high impact project in approximately three weeks.

In addition to Thunder Bayou, we recently spud our moderate risk oil focus Eagle crest prospect. The well is currently drilling at approximately 7,000 feet toward the proposed TD of 10,700 feet. We have an approximate 50% working interest in this 600,000 BOE target. And these taxes were set to begin the completion operations on our initial three Cotton Valley wells in 2014.

First will be a two well pad with our PQ#10 and PQ#11 which are expected to be fracked this week. These wells have a 55% working interest. Following the two well pad our PQ#12 well will be completed which is a 100% working interest well. In addition, we recently reached total depth on a number -- another well and expect the spud our fifth and six wells of this year’s program over the next couple of weeks. Our average working interest in these three wells is 85%.

As you can see we’ve a lot of near-term base points coming from this area and expect a meaningful production contribution net to our company. Just like Woodford, we expect our Cotton Valley production profile to be back and loaded and are excited to see what we can accomplish with the continuous growing program.

With that I will like to turn it over to Bond.

Bond Clement

Thanks Todd. During the first quarter we generated discretionary cash flow of approximately $34 million a 79% increase as compared to the 19 million during the first quarter of last year. As a reminder since closing our Gulf Coast acquisition July of 2013, we posted the following quarterly discretionary cash flow numbers. 26 million in the third quarter of last year, 28 million in the fourth quarter and now 34 million in the first quarter of this year. Based on our projected production ramp up the continued support of gas prices, we expect this sequential discretionary cash flow growth profile to continue which should meaningfully improve our cash flow base leverage statistics by year-end.

During the quarter, our LOE totaled 12.3 million or $1.25 per M, which was within our previously issued guidance. Absolute LOE in the first quarter was down 2% from the fourth quarter of last year. G&A cost for the first quarter totaled $6.2 million and included $1.8 million of stock comp expenses. Overhead costs were within the range of our guidance.

Interest expense during the quarter totaled $7.6 million, which was also in line with guidance and we capitalized 2.2 million of interest during the quarter.

Looking at the balance sheet, during the quarter, we invested about $37 million in CapEx. The breakout of this capital was approximately $27 million of direct CapEx, 2.4 million in leasing, 1.4 million, 1.3 million of seismic and G&G cost and $6.5 million of capitalized overhead and interest. We continue to maintain our full year CapEx guidance of approximately 145 million which we believe will be funded through cash flow.

Looking at production guidance for the second quarter our current plans call for producing between 116 million cubic feet and 120 million cubic feet equivalent per day and midpoint of which would up 8% over the first quarter of this year. In total our production mix for the second quarter is projected to be 70% gas, 16% NGLs and 14% oil. On hedging front we recently reared in an additional oil hedge 250 barrel per day swap for the second half of 2014 at a price of $100.90. In total, we now have 1,000 barrels per day hedge for the second half of this year or roughly 37% of what we produced in the first quarter of 2014.

Over the last five months we’ve not been active with our gas hedging program as we prefer to maintain exposure to a significantly undersupplied gas market. In fact, our last 2014 gas hedge was executed in mid January. We currently remain un-hedged for 2015 as we believe there is potential upside to the current 2015 back rated strip price, as we get into the ejection season to get a better determination on the trajectory of inventory we supply.

With that I’ll turn it back to Charlie to close out.

Charles Goodson

Thanks Bond. As we approach the back half of this year, we positioned the company to post one of our strongest years of production reserve growth in our 29 year history, while operating with cash flow and continue to maintain a strong balance sheet. Our additional results in West Relay have exceeded our pre-drill expectations in terms of higher operating rates and BTU content; these best-in-class results have been realized offsetting internal records on the cost side of the equation. In addition, our East Texas team will be a significant contributor to our growth story as we’re set to bring along a company record six horizontal Cotton Valley wells over the remainder of 2014. We’re running a continuous program on applying our deep knowledge to Cotton Valley sands, we expect big thing from this asset. Lastly, our Thunder Bayou prospect which was spud in the end of this month has potential materially impact our production and serve in cash flow profile. But all gas located in basins and areas in country where services and take away capacity to readily available. We’re looking forward to executing our 2014 plan which we believe will create significant shareholder value.

With that we’ll turn it over to questions.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. (Operator Instructions). The first question comes from Will Green of Stephens. Please go ahead.

Will Green - Stephens Inc.

Good morning guys. So maybe we could start with the guidance, you know 2Q guide looked a little bit lower than we had. It sounds like you guys are still pretty confident about hitting the full-year. I assume that means we probably see a pretty big sequential uptick in 3Q. You guys went through, kind of, a number of things that are driving that potentially. Can you maybe break down what’s the biggest potential driver of that? I know West Relay has been seeing better results. Is it longer laterals on West Relay? Or just simply more of those results, is it the additional Woodford rig coming on? Or is it just the timing of when these Cotton Valley has come on? What kind of the biggest contributor in you all’s mind, as to what drives that big uptick in the back half?

Charles Goodson

I think you nailed a couple of the biggest reasons, well the two biggest are -- we haven’t bought a Cotton Valley well on yet this year and we’re about to bring four of them on over the next 45 days. Those are going to have a meaningful impact to our production. We’re going to have six in total. And that we haven’t gotten any contribution yet. So we’re clearly looking at a big second half of the year for that, as well as having to rig operating in West Relay full-time for the second half of the year, where we have driven this drilling days down by, call it, 30%. So you’re getting more wells drilled. We came out a little slower with initial production than we originally thought. But that’s really was driving the second quarter growth. And we have two of those rigs plus the Cotton Valley consistently, we’re clear we’re seeing the second half of the year still the strongest we ever did. And you know in the second quarter we have brand new wells. We’re not exactly sure how these things are flowing. We feel real comfortable about our guidance for the second quarter. And we recognize that it may be a little lower than what some people had thought. But we came out -- but a little slower with bringing those first wells on. But we are very comfortable with it.

Will Green - Stephens Inc.

Got you. I appreciate all that color. The other thing I was going to ask about is, is Eagle Crest, I would love to hear some back run on how that prospect was generated? The timeframe on when we should see some production there and then what kind of [indiscernible] you guys were thinking.

Charles Goodson

Generated local shop here in Lafayette, that we have done plenty of business with. They were the original generators of it. We took the deal and operated with a 50% working interest. It’s a pretty relatively inexpensive well, the drill, 5 million bucks or probably a little less to drill in 2D. We should be there within a week or so. It is mainly oil. It’s probably a -- it’s called a 600,000 BOE prospect of which somewhere around 400 of that is oil and if successful -- it’s in the [indiscernible] area and it’s in and around a lot of existing production. We should have that online; call it sometimes in the third quarter, in the beginning of the third quarter.

Operator

The next question comes from Ron Mills of Johnson Rice; please go ahead.

Ron Mills - Johnson Rice

Couple of question, just one on the Woodford. You talked going back to last month and now about the Woodford well performance. I know, you’d been looking for 4.5 Bcf type wells, given the first six wells in the West Relay area and most recent completions and upcoming completions. You have any sort of sense in terms of order of magnitude of how those are performing related to that 4.5 Bcf curve.

Charles Goodson

Qualitatively, we’re excited about them. It is too early for us to put out the West Relay pie curve, but the IP rate that we’ve seen are above and beyond what we had over in the North Relay area eight miles to the East of there. We look forward to come out with some numbers as soon as we can. We have six wells that have now been producing for roughly 30 days and then three wells that have been producing for about 10 to 15 days. We’re clearly excited about it. We think the EUR have upside potential. But until we see the pie curves would a good be factor of fitting this area, just have a little bit more time. We are not going to say what the EURs are. But recognizing that it could be an important piece of business. I think the other think that we need to continue point out are two things is, the well cost are significantly lower than what we’re doing 18 months ago which is dollar for dollar [indiscernible] we all know, and then secondly this is 1250 Btu gas, six plus GPM gas. So the liquids uplift that we’re seeing in the amount of liquid, you know I think is about, somewhere 52% of our latest IPs from natural gas and liquids. So the diversity to the product mix and a single commodity price are very important.

Bond Clement

I want to kind of add to that, we got a chance to go out and talk about this entire West Relay area. You know few people have seen it but, you know we stepped out in 18 months and went from 3000 acres in North Relay to additional 35,000 acres in West Relay, stepped out eight mile, punch to the acreage position to put five wells, where more steady wells are coming at every drill, you know about 10 miles salt water, gathering system, gas lift systems into that area, looked our line, always has been done in a real harsh winter. And we’re kind of brining on a number of wells move in the second rig and so the market is going to get probably about as much color out of this area over the next ensuing quarters as it’s got anything we’ve ever done. And that was a big criticism but North Relay was simply a nice add on but the West Relay is certainly can be transforming asset.

Ron Mills - Johnson Rice

And I think given a little bit slower start up in the Woodford earlier in the year that’s what directed you to add a second rig to the East Texas program which seems like will result in your planned six wells getting drilled here in the first half of the year. Any plans to revisit East Texas plants over the rest of the year do you plan on dropping those rigs and just staying at two in the Woodford or what should we think about potential impact?

Charles Goodson

The current CapEx plan is to leave the two rigs operating in the Woodford and we have not adjusted the capital expenditure at this point and so to drill those six wells and to let those rigs go. Obviously with better performance, better commodity prices everything is opened for change but at this point that’s our current plan.

Ron Mills - Johnson Rice

And then given the impact of those two areas, when you look at the product mix over the remainder of the year. The second quarter looks pretty similar to the first quarter. Bond should that mix change very much in the second half in terms of becoming maybe a little bit more NGL heavy or should it still remain in the second quarter type outlook?

Bond Clement

Yeah, you’re going to see growth in both dry gas and NGLs in the back half. So from a product mix perspective I think that 70, 30 gas to liquids that we have guided in the second quarter and I think sort of ties into our full year guidance as well is how you need to be thinking about it.

Operator

(Operator Instructions). The next question comes from Amir Arif of Stifel. Please go ahead.

Amir Arif - Stifel Nicolaus

Just got couple of quick questions. So with the reduced drill time, can you give us an update on what the well costs are now trending in that region? I think you initially estimated 4 million. And then secondly do you plan on drilling more than 50 wells now given the lower CapEx?

Charles Goodson

Well our latest group of wells are trending underneath the $4 million, that’s kind of been our mid-year goal was to get them on a consistent basis under $4 million. So I would think that for modeling purposes $4 million well with a little bit of upside to that is where we’re. So I’d stick with that number for right now. But what we anticipate continuing to trend of lowering that.

As far as the number of wells we got out to a slower start with the second rig not coming in until July. So while we’re going to increase the number of wells per rig day use, we have not seen first of all the number of non-op activity that we anticipated in having the second rig a little bit slower. So we won’t drill more than the 50 wells and we’re just kind of what we see the second rig come in and getting full year of activity with 1.5 of another, we’ll have a better call on how many wells we actually drilled.

Amir Arif - Stifel Nicolaus

And then I think you mentioned there is some natural faulting in the area, can you just give some color in terms of what that means to our laterals or how you’re changing your basically your well designs going forward?

Charles Goodson

Well we’ve always for the last five or six years we’ve recognized a 3D in Woodford an important tool to be using. And so we recognized that fault (ph) can throw you out of section and can tamper well results. When we encounter those, we either depending on where the fault is, we either just drill a shorter lateral as we did on this latest pad. And if it’s a long enough area to get an effective lateral or we’ll do stand up pooling in the state of Oklahoma, they are very friendly pooling state and you can pool north south and we’ll go ahead and pool across sections and drill an extended lateral in order to get a pit area of a section.

So it’s on a case by case basis, we’ve been very progressive on how we pool and how we design the wells and how most efficiently maximize the gas plays or liquids plays out there.

Amir Arif - Stifel Nicolaus

Sounds good. Thank you.

Operator

The next question comes from Rehan Rashid of FBR. Please go ahead.

Rehan Rashid - FBR Capital Markets

Couple of quick kind of miscellaneous questions. Number one, the realized prices for natural gas, how are you guys kind of thinking about your marketing, spot volumes kind of -- how much are you saying the week, how much off of on the spot market. And then second generally as you kind of progress for the year. What are the key prog milestones that we should kind of keep an eye out for to continue get comfort with the second half execution or maybe how things kind of spill over into 2015?

Charles Goodson

We’ll I’ll take the first Rehan. I would suspect our marketing strategy to be fairly similar to what we employed during the first quarter, and that’s generally selling about half of gas first month, other half at gas daily. When you look at what we’re able to accomplish in the first quarter, we were able to take advantage of some pretty significant price spikes particularly in the mid-con. In February the gas daily average was closer to 650 versus the first month pricing for February at 520. So the nice little uplift we’re able to take advantage of. On the second part of your question, could you repeat you were looking for milestones in the second…

Rehan Rashid - FBR Capital Markets

Yes, just kind of as I maybe it’s a little bit earlier so I was trying to phase it a little bit different 2015 as I kind of think about what do I need to see on the Woodford on the Cotton Valley program to get comfortable with the statement made earlier that transformative kind of program here.

Charles Goodson

I’ll start with it I think if you continue to see us deliver well under $4 million in the Woodford and under $6 million in the Cotton Valley which is the target there is to have IP rates and ultimately when we are able to give EUR color how that are exceeding our type curve I think those are the milestone you ought to see and ought to be comfortable with that these repeatable large programs with multiyear developments and it’s all of that execution at that time.

Bond Clement

Yes, I’ll add too to that is that while there is going to be a lot of attention given to Thunder Bayou there is certainly a lot of projects it will be that we’re working on in South Louisiana and Shallow water Gulf of Mexico that this will continue to have a lot of impact and we don’t wonder about it just follow on Thunder Bayou selling there going on we have a lot activity in that area and it’s we’ll be talking about it more as years goes on. So I think that for the first time we had really balanced approach where no one’s waiting for one of our areas to gain activity. So those three areas are certainly execution all three of those as we’re looking for smaller changes and if we do that we feel like we can achieve our goals.

Operator

The next question is follow up from Ron Mills of Johnson Rice. Please go ahead.

Ron Mills - Johnson Rice

Todd you mentioned the shorter laterals to the faulty on those most recent three wells but despite the shorter laterals the rates look pretty similar to the first six wells. Is that just more effective fracs or what do you think is driving that?

Todd Zehnder

Well, it’s exciting it’s part now say it’s we’re not exactly 100% sure yet on we feel like we have a very clean shale over on the site we’ve been very impressed with IP rate thus far and give us a little of comment is that I hate to just to say what our thesis is but we’re doing a lot of work on it it’s clearly an exciting time for our company and our Tulsa (ph) operations in general these ten wells have come in really are getting nine wells at this point and have come in really good and time will tell Ron exactly which driving it we’re doing a lot of analysis at this point we’re doing a lot of science of these wells and I mean that’s kind of the impressive thing we’re doing new area work on some of these and still keeping our cost down below everywhere and then more three way areas.

So I know that’s kind of somewhat evasive on the answer but give us a little bit more time and we’ll have some nice guess some better answers.

Charles Goodson

The fact that it’s proved out to be the richest gas that we have and it was some of things that we are stand about the BTU content and there how well it produced and so the year will lately saying out.

Ron Mills - Johnson Rice

And then if we look at your the drilling in the west driller I know you had that five well pad that stepped out 8 miles in your initial group are there test to continue to step out to the west or most of the wells going to be more in the central part and moving towards the east of west drill really or should we think about how you’re scheduled if it lays out?

Charles Goodson

It kind of spread out throughout the position run the next is going to the pad that we’re drilling right now is the way on the east side it’s the far best multi convert on the third at three wells right now that’s the one where we told one wells in less than seven days. After that we’re going to come back more down towards the south and we want to start proving up the north a little bit and then we have plans with the second rig to go little bit farther west. So we have two extension that do up to the north even though there has been wells drilled we want to drill our own wells with our techniques to the north and then we have some wells over to the west as well.

And there has been well we have control out there through the Woodford it’s just drilling then with modern designs and modern frac and with our team up there to where we say this has really proved up. So, it’s not a carry day for now we’re going to go to the west it’s kind of we’re bounce it around a little bit for multiple reasons.

Todd Zehnder

And we also have already penetration points to know the shale thing is an all out to the west so it’s probably more important to stay along your gathering system and getting production on and there are facilities out and generate income and we pay over the field very comfortable this whole area will be built.

Ron Mills - Johnson Rice

Okay and then lastly Todd you’ve continued to provide economics for your areas. Can you just remind us on the Woodford if you exclude the impact of the drilling carry how those economics compared to say the Cotton Valley? And I know those are increasing as should be increasing both because of well cost and also because of well performance versus what you have published?

Ron Mills - Johnson Rice

Right, baseline before we come out with lower well cost and hopefully higher EURs over time, one I think definitely based are and already being executed by our group, the other time will tell. But just using the existing base case IRRs you’re probably in the 30, low 30s. And that’s without, that’s obviously on a heads up basis which we see upside. So I just can’t answer that question yet on what the number is. Our type curve on the Cotton Valley is somewhere around 45% to 50%. I think both of those numbers are starting $4 per BTU gas. I think the other -- I mean not to just harp on everything on West Relay but I think what you’re going to see is the well cost have done what we need them to do. The BTU factor is different than what our base take economics have.

So if you believe that heavier end and this is like I said over 60 gas but you’re going to have a lot of the heavy wind there. If you believe that those prices are going to be more accretive to your internal rates of return and dry gas, you’re up there and in the last piece, as what are IP rates [indiscernible] translate into.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Matt Quantz for any closing remarks.

Matt Quantz

Thank you everybody for their time and support this morning and please follow up with any additional questions.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PetroQuest Energy's (PQ) CEO Charles Goodson on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts