Atlas Energy Resources, LLC (ATN)
IPAA Oil & Gas Investment Symposium
April 23, 2007 3:20 p.m. ET
Rich Weber - President and CEO
Matt Jones - CFO
|TRANSCRIPT SPONSOR |
If everybody could take a seat, we will go ahead and get started. It's a pleasure for me to announce and introduce Rich Weber, who is President and CEO of Atlas Energy Resources. He will be presenting today along with his colleagues and they will be in break room after directly following this presentation. So, please welcome Rich.
|We are a limited liability company focused on the development and production of natural gas principally in the Appalachian Basin. We sponsor and manage tax-advantaged investment partnerships, in which we coinvest, to finance the development of our acreage. Our goal is to increase the distributions to our unitholders by continuing to grow the net production from our natural gas and oil production business as well as the fee-based revenues from our partnership management business. |
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Thank you very much. We're pleased to be here at the IPAA conference. We're a new company. We just went public back in December, but obviously you are probably all familiar with our affiliates, Atlas America, Inc. and Atlas Pipeline Partners.
We'll start with our investment highlights. Our mission at Atlas Energy Resources is to generate predictable tax-advantage distributions through our unit holders and to grow our distributions per unit while maintaining our low risk profile.
Our distributions are protected by three basic attributes. We drill almost all of our wells through syndicated drilling programs. These programs generate substantial upfront and ongoing fees and we get a carried interest in these programs. And as a result, we're able to enhance our rates of return on capital, while lowering the risks of our cash flows.
Secondly, almost all of our activities, all of our activities I should say are in the Appalachian Basin, where the drilling is low risk, 98% of the wells are drilled commercially successful, and we create long-lived natural gas reserves. And lastly, we aggressively hedge our production to minimize our exposure to commodity risk.
At the same time, we intend to create unit price appreciation by growing our distributions per unit and we really see three ways that we are going to be able to do that. First of all, we want to continue our expansion of our investment programs, which I will speak to in a minute. This is something that we have been able to do consistently over the last several years and we have been able to grow our company organically through the expansion of our programs.
Secondly, we want to accelerate our development of the Marcellus Shale, which others are also talking about in Pennsylvania. And third, of course, we do see the potential for future acquisitions that are accretive to our cash flow.
We have a unique business model. I have seen a few other presentations; I don't think anyone has the model that we have. It's a scalable, low risk business model with high rates of return. And it really is the integration of two businesses into one, and that is, we are a large oil and gas producer. In fact, we are one of the largest operators in the Appalachian Basin with over 7,500 wells and we operate in almost 80 million cubic feet equivalent of natural gas, of which about 28 million is net to our account.
We have almost 650,000 acres. We have identified over 3100 shallow drilling locations on this acreage, which is [really] our inventory for our drilling programs. We also have just shy of 170,000 acres today in the emerging Marcellus Shale program. We plan to drill almost 900 wells in 2007, which would make us one of the top 10 drillers in the United States and I believe the most active driller in the Appalachian Basin.
At the same time, we are also a leading sponsor of tax advantage investment partnerships. We'll raise hopefully over $270 million this year in direct investment programs, that's up from $218 million, last year.
As I said, these programs significantly enhance our rates of return and this fee revenue that we generate as a result of these programs reduces the risk of our cash flows. These fees are generally upfront and they are not directly dependent on commodity prices.
A lot of people ask us to help them understand the partnership business; it's not as common these days. So, I'll take a minute. Potentially, there is a trade. We allocate the intangible drilling cost to our investors. We then take a deduction in the year that they are received, and then in return, we receive fees and a carried interest in the partnerships.
On the below here, if you can read it, what is the value to us? Well, first of all production, we are the largest investor in these programs. We typically have a 35% partnership interest, of which about 7% of that is carried interest.
We also generate fees from the construction and oversight of the drilling and we charge a cost plus 15% markup that generated $26 million last year in gross margin to our account.
We also charge an administrative and oversight fee, which is $15,000 per well, and last year that generated $12 million in fees to our account. We charge the partnerships of course, for the operations of wells on an ongoing basis. We currently charge various fees that add to about $437 per well per month, over the last 12 months, or in 2006 I should say, that generated about $6 million of gross margin to our account. And of course, we get reimbursed for our acreage costs and typically are charging the partnerships $10,000 to $15,000 per location.
I know that many of you are numbers oriented. So, I thought I would summarize what I mean by enhanced rates of return. Here's an example, it's an average well in Pennsylvania, our EUR's are about 156 million, if we use the realized natural gas price, which today is conservative of $7.50 and third party drilling complete costs of $279,000 are returned if we were to drill this well heads-up if you will, would be about 18%.
But as we implement a drilling program through our investment partnerships, of course, we are able charge fees and we get carried interest etcetera. And what happens is, our net investment in the well after taking into account the upfront fees, etcetera, is actually fairly modest, and it results in a much higher rate of return on our invested capital, of about 69%. This demonstrates the enhanced rate of return concept that I was trying to make.
Our partnership business is growing, it has been growing. We have achieved almost a 40% internal rate of return over the last five years. The partnership management margin is quite significant generating almost $43 million to our account. Last year, it has been growing actually at a greater clip.
People, often ask, well, why isn't everyone doing this? Well, one of the reasons we believe is there is quite a bit of barriers to entry. We have the trust of the financial community. We've been doing this for over 35 years. And quite frankly, trust among our broker dealers is probably one of our greatest assets that we have in our company. We treat our investors well and we've been doing this for many, many years.
We have a network of over 80 broker dealers who sell our programs. AIG, ING, and Lincoln Financial are names that you've probably heard of. These are broker dealers. They're primarily engaged in selling tax-oriented investments. Last year, we sold programs to almost 5,500 different investors in all 50 states, typical ticket size of $40,000.
Scale is important here. We have a large business. It is not cheap to be in this business, but with our scale, we are able to cost effectively operate and generate profits for ourselves. And I think that's a big reason why you don't see a lot of operators. It's something you don't want to dabble in. We make it a business. And lastly, it's not easy to be in this business. There is a lot of regulatory compliance that we need to deal with and that we're very good at.
The areas of operation, again we’re in Appalachia, we are in New York, Ohio, Pennsylvania and Tennessee. Most of our drilling activity is taking place right now in Pennsylvania and to a certain extent in Tennessee. You all sure are familiar with the Appalachian Basin, very low risk, long-lived reserves. We get a location premium of $0.30 to $0.40 [an ounce]. We have very low cost of operation due to the fact the gas is very dry, you don't have to treat the gas etcetera.
And lastly, this basin is largely unexplored under 6,000 feet and that's something that we're quite excited about as different technologies are now being imported into Appalachia and it looks like there are several places that might take off. One is, what we are excited about is the Marcellus Shale, others call it the Devonian Shale, and its part of the Devonian package in Pennsylvania.
We have, as I said, almost 170,000 acres. We've drilled three wells, completed all three under production. Right now, it's a little bit early for us to be making any specific remarks about these wells. But we are very pleased with the results. Industry's answer talks about a EUR of 600 million to a Bcf per well. Our results would be consistent with that kind of statement.
Right now, we're planning to drill 50 Marcellus wells through March 31st of '08. We will have a rig on our acreage by the end of this week. That rig will stay with us for over a year, and we will have other rigs as well moving to allocations in the third quarter.
This Marcellus Shale truly has the makings of a play that could change not only our company, but really the entire basin, as the economics are much superior to that of the shallow wells that we have typically been drilling.
Production is a critically important element of our company. Last year, we produced just shy of 10 Bcf. It's something we watch carefully everyday, and we continue and strive to grow our production quarter-after-quarter, year-after-year.
Our oil and gas production segment has been growing its cash flow for each of the last four and if we went back, five years. Obviously, we've been benefited by increasing commodity prices, but again we watch our production in the way, what we can control this to grow our production.
Our acquisition strategy is pretty straightforward. We are looking for long-lived properties where we can sustain accretion over a long period of time. We are looking for properties with minimal technical reserve risks. If we were to look outside Appalachian, we would like to find a strong operating team and it's something that we are looking actively. There are properties on the market as you all well know, and it's an area that we think we are going to be able to grow our company.
And with that Matt can I have you come up and talk about our financials. Matt Jones, our Chief Financial Officer. Thank you.
Yeah. As Richard said, our business model creates two separate and distinct, but closely related cash flow streams. One of those cash flow streams is generated from the fees that we create from the partnership management business. The other cash flow stream is generated from gas and oil and that we sell, this is financed with the partnership business.
And on a segment basis about 37% of our segment margin was generated from the fee-based partnership management business last year, about 63% from the sales of oil and gas.
Our strategy over the last four, five or six years has allowed us to grow on a compounded annual basis of greater than 30%. It's important to note that all of this growth has come from internal expansion, as opposed to acquisition expansion. We think that going forward, we are well positioned to continue to grow meaningfully, perhaps not at this level, but meaningfully from internal exploitation of our acreage positions and drilling opportunities. But, also joint acquisition strategy that we think will also add meaningfully to our growth in the near and immediate future.
In our S-1 filing document, we went public in December of '06. In our S-1 filing document, we've put forward the projection for our business, for 2007, where we expected to generate about $106 million of EBITDA. From that, we expect to extend about $35 million estimated to do so for maintenance expenditures to maintain our production stream in 2007.
Also, our intention at that time was to spend about $43 million to invest in the expansion of our business. We intended to finance that with debt. In a moment, I will cover our capital structure, which is unlevered currently.
We estimate that we generated about $69 million of cash flow, of which we payout approximately $1.68 per unit to equate to about a $1.1 to $1 coverage of that distribution to our unitholders.
We hedge fairly aggressively and extensively. The duration of our hedges now extend through 2011. We'll be updating some of this information on our earnings call next week, as that takes place.
However, as of the end of the year, our hedge position included hedges through 2011. Generally, our approach to hedging is to hedge four or five years forward, and the most remediate period, it's a two to three year [forward] period.
Our effort is to have 70% to 80% of our production hedged. We do this methodically. However, we'll deviate from our methodical strategy, if you will, from time-to-time, when we see opportunities to present themselves on the forward curve that may come about as a result of certain anomalies that occur in marketplace.
Generally, the instruments that we use to hedge will generally swap our floating positions for fixed positions. From time-to-time we'll use collars to hedge our positions. We look closely to create or acquiring puts, as well as to augment our collar strategy. However, we have found in the recent past is that puts have been hardly expensive, relative to our ability to swap on our position.
As far as capital structure, we have a $250 million committed facility, with $155 million borrowing base. We have nothing drawn against that facility, at the end of December 31, '06, which leaves us in a really a great position, to again continue to expand through internal growth and opportunities as well as to finance potential acquisitions that we may see in the near and distant future.
|TRANSCRIPT SPONSOR |
We are a limited liability company focused on the development and production of natural gas principally in the Appalachian Basin. We sponsor and manage tax-advantaged investment partnerships, in which we coinvest, to finance the development of our acreage. Our goal is to increase the distributions to our unitholders by continuing to grow the net production from our natural gas and oil production business as well as the fee-based revenues from our partnership management business.
Read all investor conference presentation transcripts here.