Cimarex Energy Co. (XEC)
Q3 2007 Earnings Call
November 7, 2007, 1:00 PM ET
Mark Burford - Director, Capital Markets
F. H. Merelli - Chairman and CEO
Thomas E. Jorden - EVP, Exploration
Joseph R. Albi - EVP, Operations
Paul Korus - VP, CFO, and Treasurer
Good Afternoon. My name is Sharona and I will be your conference operator today. At this time, I would like to welcome everyone to the Cimarex Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions].
It is now my pleasure to turn the floor to your host, Mr. Mark Burford, Director of Capital Markets. Sir, you may begin your conference.
Mark Burford - Director, Capital Markets
Thank you very much Sharona and thank you everyone for joining us today for third quarter conference call. We did issue our earnings release this morning the copy of which can be found on our website, if you do not have that.
We will be making forward-looking statements in this conference call, so I also refer you to the end of our press release, which discuss these forward-looking statements.
And today here in Denver, we have Mick Merelli, our Chairman and CEO on the call. Tom Jorden, Executive Vice President of Exploration; and Joe Albi, our Executive Vice President of Operations: and Paul Korus, our Vice President and CFO as well as Jim Shonsey, our Vice President and Controller.
With that we’ll quite and get started right away and now I’ll turn the call over to Mick Merelli.
F. H. Merelli - Chairman and Chief Executive Officer
Good afternoon everybody and probably most of you it’s afternoon. It’s good morning here.
We had a solid… a good quarter… a good solid quarter. We reported earning of $73 million and cash flow of $235 million. Our exploration and development capital in the third quarter was a little bit over $234 million. Regarding production, we are seeing improved production performance. Our third quarter production average is $448.5 million essentially $449 million was an increase $5.9 million over the second quarter of this.
We are seeing good results from horizontal drilling programs in the Permian and we continue to like and see strong results from our Texas, Panhandle Granite Wash program. Our Permian and Mid-Continent regions are… production is growing. Sequentially, second quarter ’07 to third quarter ’07, production in these areas increased by 15 million cubic feet equivalent a day or about 5%. Again, a lot of that growth was a result of our horizontal oil drilling and well our horizontal oil drilling and gas to improve projects.
Overall, Company growth and production was little bit of the negative mitigation there. That came from our Gulf of Mexico and Gulf Coast regions. They were down about 10 million cubic feet a day equivalent quarter-over-quarter. That you are going to here us later in the call some positive news out of both of those areas. Again, later in the call, Joe Albi will cover production in more detail.
Regarding our drilling program, we expect our exploration and development cap to investment to be close to $1 billion, which is pretty much what we thought it would and it continues to be in that area. Nearly 80% is going towards our Mid-Continent Permian basin regions. Our overall after tax rate return… our return on our program is looking better this year than it did last year and part of that is that this year’s moderate-risk drilling program, returns have not been squeezed as much by higher cost to drilling complete. We are seeing some reduction in those cost which oppose in those programs.
We continue to constantly moderate our returns and we run up as you all those of you that have listened to us in the past, now we run flat case sensitivities and that’s how we make our drilling decisions, and try to watch it as we go along. We have an active program with 31 rigs running. Where we are going to be next year? And I know some of you are kind of wondering that. That’s going to depend on commodity prices, what’s going to happen to those. We have a lot of gas opportunities, lot of oil opportunities. We are not sure what the year holds ahead for us in that regard. And of course, it depends on service cost and continued success in our… on our horizontal oil and gas place and expansion actually of those place.
Tom Jorden and his teams are currently compelling their project inventories in preparing plans for next year. But again, we are going to be very flexible in our approach to activity and that’s going to as usual depend on our returns. We did have some asset sales. We continue to evaluate our base property for assets that are non-core to trying to get done. So, far this year, we sold about $110 million of properties, which have either closed or we expect to close in the fourth quarter.
As I’ve mentioned in the past, we are continuing to work on our sale for Gulf of Mexico assets that… hopefully, by our next conference call, I can give you a little more detail on where we are at with all of that, but that’s an active program that’s going hit and probably I don’t want to say too much about it, because we are negotiating with people as we speak. So that’s something we shouldn’t talk about too much.
With that, I think I am going to turn it over to Tom Jorden, and he can tell you little more about what’s going on our drilling program.
Thomas E. Jorden - Executive Vice President, Exploration
Thank you, Mick. I am going to just walk through our exploration and development activity, our year-to-day results. Some of our region focus and some of our particular programs and then give a brief flavor what we are looking at accomplishing for the upcoming years.
As Mick said, we are currently putting our plans together for the upcoming year and we’ll be reviewing those over the next six weeks or so. But year-to-date, we have drilled 345 gross or 199 net well during the first nine months of this year, and we completed 92% of those as producers. Our exploration and development capital for the first nine months of the year is totaled $717 million. And as Mick mentioned, we are on track and expect our 2007 full year exploration development capital to be approximately $1 billion. We have 31 rigs running and I will cover those region-by-region.
Let’s start I would like to talk about our Mid-Continent region. In the Mid-Continent, we drilled 191 gross or 97 net wells during the first three quarters of 2007 and 96% of those wells were completed as producers. Year-to-date, we have invested approximately $270 million and we expect the full year for the Mid-Continent region to be about $390 million. The bulk of that activity is in our Texas Panhandle Granite Wash program where we have drilled 70 gross or 51 net wells and completed a 100% of those as producers. So, that’s a low risk repeatable program that we are very, very happy with. Notable wells that commenced production in the third quarter include our Wilson 217, we had a 90% working interest in that, that was a Morrow well that was currently 7.1 million a day. The DD Payne 3BH a horizontal Granite Wash well at 2.7 million a day, we had 50% of that. Hobart Ranch 67.18%, a 100% working interest at 2.1 MMcf a day. And the Europe 584 where we had 80% is at 2 MMcf a day. So, it’s an ongoing project while we are high activity project there, we currently have six rigs running in the Texas Panhandle. We expect to average between 9 and 10 through the year 2008 and we have an outstanding team work in this area.
We are very, very pleased with the progress our team is making, both in exploiting our existing assets, but also looking at some new opportunities and those opportunities are finding not only in land acquisitions, additional farming opportunities, joint ventures, but also technology. We have a very, very exciting pad drilling program underway. We are utilizing pad drilling for drilling horizontal wells and are able to more efficiently exploit our reservoirs not only from a reservoir management standpoint but a lot of Texas Panhandle is tough, inaccessible terrain and we are able to get wells drilled that wouldn’t have been available to us otherwise. Out team is working to quickly evaluate and close on a $36 million acquisition that we expect to add over 60 drilling locations, the majority of which we think will be horizontal wells. That $36 million acquisition, we have slated 44 additional horizontal and 16 additional vertical locations and we think those will average about 2 Bcf per well for horizontal and maybe 1 Bcf per well for vertical so very action oriented, great team work in the Texas Panhandle and we are delighted with our results this year and we are looking at stepping it up significantly for 2008.
We have also seen some good results in Anadarko basin and our Southern Oklahoma project where we drilled a total of 69 gross, 22 net wells completing 91% of them as producers. In Anadarko basin in Cattle County, we drilled the Barney 129 which is a 100% working interest well had a nice thick Red Fork section which commenced production at 4.9 million cubic feet a day and we are currently in discussions as to… it certainly will generate offsets and we are discussing how many offsets that will generate. Many of you have heard us talk in the past calls about our growing Woodford Shale presence. Not only we have a small presence in the Arkoma basin, but also the Anadarko Woodford Shale, there we are participating in two wells that are currently in the completion stage. One is operated by another company and second one we operate. We should have some completion information from both those wells here in the next month and will help us to significantly evaluate that play. It is an active area of leasing.
In Southern Oklahoma and Garbin [ph] County the Harrell A9 where we had a 100% working interest came on production at 3.8 million a day. We had two rigs running in Southern Oklahoma and we have had some very, very nice results from that program this year. We have 12 operative rigs currently in aggregate in Mid-Continent region and as I said six are in Texas Panhandle and six are in Western and Southern Oklahoma.
In the Permian Basin we have really found our rhythm this year. In pulling that asset together, we have got a great team working the Permian Basin. For the first nine months of 2007, they drilled 122 gross and 80 net wells, 92% were completed as producers and year-to-date our capital investment in the Permian has totaled $250 million. We expect the share in aggregate to spend $380 million in the Permian Basin. And that’s split up into a number of significant plays to us. As Mick mentioned, we have some very, very nice horizontal drilling oil opportunities in the Permian Basin that our teams are getting after, has certainly contributed to the increase we reported in the oil production.
Year-to-date, in Southeast New Mexico, we drilled 47 gross and 32 net wells with 89% of them being completed as producers. We had two major horizontal oil plays in Southeast New Mexico that we are quite excited about. One is on the area between Eddy and Chavez County and another is in Lake County. And we have an aggregate between three different projects I will talk about. We have 13 rigs running in the horizontal oil plays in the Permian Basin. Recent wells we brought on production in Southeast New Mexico include the Crow Flats 16 State 2H. We have 73% working interest in that well and it came onto 350 barrels of oil per day. The Homer State Com 1, a 100% working interest at $300 million a day and the State HH2 a 100% working interest well at $2.9 million a day. So, we are brining in wells online on a regular basis. It has been a nice manufacturing process out of the Permian.
In West Texas we've drilled a total of 21 gross or 12 net wells of which 90% were successful. In Ward and Winkler counties, we have drilled 15 gross or 7 net horizontal wells in our third Bone Spring play that we talked about in recent conference calls. As a result of this program, our Bone Spring production in the area has increased from approximately 600 barrels of oil a day in early 2006 to nearly 5000 barrels of oil a day currently and it’s growing. We have 16 operating rigs drilling in the Permian Basin and the bulk of those are proscading these horizontal oil plays. We are actively leasing, we are pursuing joint ventures, it’s a growing program and we are looking for a significant ramp up in those programs in 2008. In the Gulf coast we drilled 32 gross or 23 net wells during the first nine months of 2007, completing 69% as producers.
Year-to-date on shore Gulf Coast we have invested $145 million. We expect full year expenditures to be approximately $175 million. Current year Yegua/Cook mountain drilling in Liberty and Harton Counties has totaled 12 gross or 10 net wells with an 83% success rate. We have talked about that play continuously over the last few years. That’s 3-D seismic driven, it’s an amplitude versus offset fairly high technology play and we have had a great run there and we continue to be very, very pleased with the economic results that play has been turning. Wells we have recently commenced production include the Grammier 1 a 98% working interest well at 5.8 million cubic feet a day. Our Blackstone Rock Creek 1, a 100% working interest well at 5.6 million cubic feet a day and our Barbeaud 1 again a 100% working interest at 3.5 million cubic feet a day. So that’s a very nice high working interest project for us. We have two operative rigs currently drilling well in the onshore Texas Gulf coast.
So far so good, this year. We are very pleased with the results, we are looking at ramping it up and significantly increasing activity in some of our horizontal oil plays. Moreover we are currently pouring our plans for 2008 and we will be pulling those together and talk about them in our next quarterly conference call. With that I would like to turn the call over to our executive vice president of operations.
Joseph R. Albi - Executive Vice President, Operations
Thanks Tom. Excuse me. Mick mentioned it was a good quarter for us. In fact it was a pivotal quarter for us. Our increased drilling and exploitation activity lifted our total company production from levels of 441 to 442 million a day in the first half of the year to an average of 448.5 million a day for the third quarter. Late in the third quarter we saw a very nice production increase from the activity that Tom just described. Our accelerated Permian and Mid-Continent drilling activity and then some late quarter successes in our Gulf Coast program. And in fact it jumped our September productions to a level of 460 million a day. We anticipate continued production growth into Q4 which after counting for property sales we are projecting to fall in the range of 460 to 470 million a day. And that would equate to 4.5 to 6.5% increase to where we were in the fourth quarter of ’06. So we are certainly seeing a reversal and hope to have a nice attractive growth rate when we are comparing exit rates ’07 to ’06.
During Q3 Tom mentioned the 31 rig count presently but we increased our operative rig count by 25% from levels of 24-25 rigs to 30 to 32 rigs. Most of these were in the Permian and Mid-Continent and that accelerated activity continued to fuel production in growth that we had already had in those areas. Our third quarter Mid-Continent production of 194 million a day was up 6.6% from last quarter of the Permian jumped 2.1% from last quarter to an average of about 145 million a day. The impact of our Permian horizontal successes have also hit the score card when you look at our oil mix. In fact our Permian net oil production is up 18% from Q3 ’06 to our current levels of 9600 barrels a day and in fact when you look at total company production mix we have gained 2.5 points approximately. percent of our total production as oil as compared to third quarter company wide… as compared to third quarter of ’06.
In the Gulf Coast with the sale of our Columbus assets we are down slightly in Q3 but with the late third quarter successes that Tom mentioned some of those in the fourth quarter. We anticipate Q4 to be back in the range of 70 to 72 million a day. Offshore once again we had weather delays and pipeline destructions through a portion of our production during Q3. We dropped from about 38 million in Q2 to 33 million in Q3. And although delayed by weather our main past hookup operation is ongoing and we hope to have 5 million a day on not as soon as tomorrow but certainly by mid November with an additional 15 to 20 million a day anticipated decline in late Q1 or early Q2 of ’08. Of course however these volumes will hit the books if the sale of the field occurs prior to hookup. But even with the delays offshore and accounting for 2007 closed and anticipated… to be closed property sales we are projecting ’07 to average in the range of 448 to 451 million a day although virtually flat to ’06 we are very pleased. And we have reversed the production drops that we saw in ’06 and projected in the year with a fourth quarter accel rate 5 to 6% higher than where we were last year.
Touching on a couple of highlights of our exploitation program. We continue to be on track to meet our projected budget of 100 $150 million for the year. In fact at the end of September we already put a $100 million to work. We drilled 63 new wells, performed 190 significant work over re-completion projects. Most of these in the Mid-Continent and Permian areas. We continue to be active in nearly all of the core project areas we discussed with you guys before. In the Permian, the majority of our activity continues to be focused in the Westbrook field in West Texas. We drilled 33 wells to date performed 21 re-completions through September.
We anticipate further development of the field and that development to extend through 2008 with continued drilling re-completion operations concentrating primarily on optimizing our flet conformance. We have accelerated our re-completion and deepening activity in our Walnut Bend field located just north of Dallas. Have seen some real nice re-completions come out of that higher than expectations. Through September we performed 23 re-completions, started on our deepening program and in fact the activity that we have done over the last 17 months has more than doubled the total production from about 700 barrels a day 17 months ago to current levels of 1450 barrels a day. We have got an inventory of higher quality projects that’s in the range of 80 to 100 type number of projects and again here we see exploitation activity continuing well beyond 2008. In Panoma we drilled 25 wells, performed 21 workovers through September and for the most part completed most of our infield drilling.
But we are now going to embark on the next phase of our exploitation activity and that’s if you look at the numerous work over re-completion opportunities that we have in this 637 well field. Those guys won’t be bored looking at that. In the third quarter we started to embark on accelerating our reserves in the Hugoton field. This is through the adoption of new field rules which allow for 3 take points per unit of chase and counts for growth intervals. With the new rules we have identified 48 projects on our operated properties. We performed a half a dozen or so of those with very good success and we suspected further evaluation work will lead to additional re-completion and inter drilling opportunities there. In Southern Oklahoma we shifted our focus to re-complete the lower oil Simpson sections of the numerous wells we have in three major fields and that make the wins. And early results are encouraging and I believe that this can provide additional growth as well into 2008.
In the Texas Panhandle we are in the initial stages of what I think will be very successful Granite Wash re-completion program. We performed four projects today. We have got immediate inventory of 15 to 20 projects with numerous other wells in line behind those. And one reason for re-completion a 100%, working interest flowers [ph] 184 just came on at rates of 2 MMcf so that certainly can have an impact on our production. Also in the Texas Panhandle we made significant progress during the third quarter reacting very quickly and we are proud the production group for reacting as quick as they did to implement three saltwater disposal projects to help reduce some of the re-increases we have seen on the saltwater disposal side. The projects that are currently in place are reduced by 1.5 million a year, $1.5 million a year. Further activity that we have planned over the next few months should shade $1 million to $1.5 million of that ROE. So that could mean about $0.02 an Mcf reduction in ROE.
Overall we continue to be encouraged as we dig deeper into the exploitation potential of our assets. We have a healthy inventory by days that seem to lead to another generation by days after we dig into it deeper. The projects are fueling new ideas for the future. We have been able to expand our groups to attack the projects and I get more faces looking at them. We find new projects. And importantly our look backs are confirming that ’07 will once again be a very profitable year for the program. So that’s all I have and with that I will turn it over to Paul.
Paul Korus - Vice President, Chief Financial Officer, and Treasurer
Thank you, Joe. A couple of comments about our third quarter earnings as we have already mentioned our third quarter earnings totaled $73.2 million or $0.87 per share and that compares to the third quarter of last year when earnings were $94 million and $1.11 per share. And we want to point out as we described in our news release that the latest quarter had three unusual items that on a combined basis reduced our earnings by about net $0.02 per share. So ex-items we really look at it is about $0.89. And then last year we had items that boosted our earnings by a combined totaled of $0.18 per share. So, we just wanted to point those things out for you. We’ve covered a lot about production just to recap for you, our production volume in 448.5 million equivalent a day did come in within our guidance of… which had 445 to 455. We were up 1% sequentially and also up versus a year ago. Those numbers may not sound that impressive to you but we are very excited about a couple of things. One, is that we had good timing and that our production, our oil production volumes were up 12.5% year-over-year and the second thing is as we look into the fourth quarter, we are forecasting that our production should average somewhere between 460 to 470 million equivalent per day which add a mid point of 465 would be a new all time record for the company. It will be up 3.5% sequentially and 5% year-over-year. Our production volume has struggled over the last 18 months and obviously the first stage, a turn around is that things have to stop going down and will be getting going up and I think you can tell from the comments for Mick, Joe and Tom that we all certainly feel that we are at beginning stages of that.
Just a few comments about our prices, our realized gas price before hedging this quarter was $6.4 versus Henry Hub average of $6.16 like many companies that have already reported we too had mirror work differentials in this case $0.12 per Mcfe pre-hedge versus the second quarter of $0.36 and the result of that is the reading for that is simply the result of a much tighter mid-continent versus Hendry Hub bases differential. In addition to that our gas price hedges netted us another $11.5 million of revenues, which equated to $0.39 per Mcf. So we reported a average gas price $6. 43. We already have October and November index prices in and looking at the forward curve for December and both mid-continent and NYMEX. We would expect that our pre-hedge differential for the fourth quarter would be about $0.80 and after hedge may be about $0.60 which we would have paid to by $6.75 reported price for us.
Our oil price in the quarter average $71.63 versus an average WTI spot price $75.38, so if WTI were to average $90 or so in the fourth quarter, we would net about $86 and given that production… oil production is currently running a little over 21,000 barrel a day. I have to remind myself everyone throughout that’s $1.8 million a day of revenue that we are getting from our oil production and just to remind everyone about our current hedge position through the fourth quarter, we have 80 million a day of mid-continent gas hedged that Mid-Continent floor of $7. So it does look as… well we did make money on those in October and November and we will see where December turns out. There is probably a few things that I should talk about, our expense guidance, we did up our production expense guidance.
Our average for the third quarter was a $1.36 per Mcfe, which was up from $1.26 in the second quarter. Mostly, where we see cost increases is in saltwater disposal, electricity, fuel and compression costs, plus the fact that oil wells are inherently more expense to operate than gas wells but with the cost control measures that Joe has mentioned principally focused on saltwater disposal as well as more efficient pumping mechanisms. We think we should be within our guidance of $1.32 to $1.35 in the fourth quarter.
The other item I think that needs mention is because we did increase our guidance on our combined DD&A and asset return obligation…
Question and Answer
Please go ahead.
You all did such a great job was comments on the call. I actually don’t have any questions but I want to congratulate you on having production growth starting to increase again.
F.H.Merelli – Chairman, Chief Executive Officer and President
Thank you very much.
Thomas E. Jorden – Executive Vice President, Exploration
And our next question is coming from Matt Stewart from [inaudible]. Please go ahead.
Hi good quarter, guys. Just had a quick question. I think you said it on the call but I missed it. Of the fourth quarter production, what… how much are you expecting coming from the newly held Gulf of Mexico assets?
Thomas E. Jorden - Executive Vice President, Exploration
An additional 5 million a day will probably come on, mid November. So we price incremental 2.5ish average for the quarter. That would be a safe estimate. Thank you to remind us. We sell the main pass area that doesn’t show up if it closes before the hooker.
Right. That is just what I’m trying to understand. Thanks a lot.
At this time we currently have no further questions.
Mark Burford - Director, Capital Markets
Okay. Thank you all for joining us today and we appreciate your attention your participation in our call today and we look forward to reporting to you in the future our progress on all fronts we are looking on and we will report to you next quarter. Thanks again for joining us.
F. H. Merelli - Chairman and Chief Executive Officer
Thanks every one.
This completes today’s Cimarex third quarter results conference call. You may now disconnect.
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