GeoMet, Inc. (OTCQB:GMET)
Q3 2007 Earnings Call
November 10, 20074:00 pm ET
Steve Smith – Treasurer
Darby Seré – Chairman, President and Chief Executive Officer
Bill Rankin – Executive Vice President and Chief Financial Officer
Phil Malone – Senior Vice President, Exploration
Brett Camp – Senior Vice President, Operations
Tony Oviedo – Vice President, Chief Accounting Officer and Controller
Louise Glenn – General Counsel
Good afternoon, my name is Tina and I will be your conference operator today. At this time I would like to welcome everyone to the GeoMet third quarter 2007 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 session.
(Operator Instructions) If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press star then the number 2 on your telephone keypad.
I would now like to turn the call over to Steve Smith, Treasurer. Please go ahead sir.
Thank you, Tina. Good afternoon, and thank you for joining us. Earlier today, GeoMet issued a press release, announcing our third quarter operating results. If you need a copy of the release, one is available on our website at www.geometinc.com.
Today, you’ll be hearing from Darby Seré, GeoMet’s Chairman, President and Chief Executive Officer and Bill Rankin our Executive Vice President and Chief Financial Officer.
Also, present today are Phil Malone, GeoMet’s Senior Vice President of Exploration; Brett Camp, Senior Vice President of Operations; Tony Oviedo our newly appointed Vice President, Chief Accounting Officer and Controller and Louise Glenn our General Counsel. After remarks from Darby and Bill, we’ll have a question-and-answer session.
Statements made today regarding GeoMet’s business that are not historical facts represent forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated by the forward-looking statements. For discussion of risks and uncertainties, which could cause actual results to differ from those contained in the forward looking statements, please see forward-looking statements and risks factors in the company’s filings with the Securities and Exchange Commission.
I’ll now pass the call over to Darby.
Good afternoon everyone and thank you for joining us today. We are pleased to welcome you to GeoMet’s third quarter earnings conference call. As you are aware, we have experienced a few rough spots during 2007, but I am happy to report that we’re seeing progress.
We have had some positive movement on the litigation front and current daily gas sales volumes in Gurnee field are running about 8% higher than the average for the third quarter of 2007, only partly because the average number of wells producing has increased. We will discuss these matters in more detail later in the call.
On the operations front, during the third quarter, net gas sales volumes for the company were approximately 19.6 million cubic feet a day, a 9% increase compared to the third quarter of 2006, and a 1% increase over the second quarter of 2007.
For the nine-month period, net gas sales volumes averaged 19.3 million cubic feet a day, a 17% increase over the prior year. Currently, net gas sales volumes are approximately 20.5 million cubic feet a day as the impact of recent drilling and improved performance is beginning to be reflected in the numbers.
Our Pond Creek field in Central Appalachian, net gas sales volumes averaged approximately 12.5 million cubic feet a day for the third quarter of 2007, up 15% from the prior year period and up 2% from the second quarter of 2007. Current net sales volumes from Pond Creek are approximately 12.8 million cubic feet a day from approximately 200 wells.
Remember we only drilled six wells in Pond Creek in the first half of the year due to the risks resulting from ongoing litigation. We drilled an additional 10 wells in Pond Creek in the third quarter and brought three new wells online, which did not materially contribute to production for the quarter. We expect to drill eight more wells and bring online a total of 18 new wells in the fourth quarter.
In the Gurnee filed in the Cahaba Basin, our net gas sales volumes averaged 6.1 million cubic feet a day for the third quarter of 2007, up 2% from last year’s third quarter and up 1% from the second quarter of 2007. Current net sales volumes from Gurnee are approximately 6.6 million cubic feet a day from approximately 230 wells.
As in Pond Creek, drilling was also delayed at Gurnee with only two wells drilled before May. We drilled a total of 10 wells in Gurnee in the third quarter, which completed our 26-well drilling program for 2007. 14 of the 26 wells drilled in 2007 were either connected later in the third quarter or will be connected in the fourth quarter. Therefore, these recent wells contributed little to gas sales volumes in the third quarter of 2007.
We have continued to focus on testing well treatments at Gurnee with mixed success. The general production trend in the field is improving mainly because wells that were previously declining have either flattened or have started to flatten in advance of an expected incline to peek production.
Also, per well production rates from our 2007 drilling program at Gurnee are higher than the historical average for the filed. We are not saying that the performance issues at Gurnee are resolved, but we are encouraged. I would like to emphasize, again, that we do not believe that the current well performance in the Gurnee field will result in a material decline in quantities of proved reserves for the field.
In our last call, we discussed development of our Lasher Project located in Wyoming and McDowell counties, West Virginia, just 10 miles north of our Pond Creek field. As compared to Pond Creek, the coals are thinner at Lasher and the gas content is also somewhat lower. Therefore, we expect lower reserves per well.
Offsetting these lower reserves, all-in well costs are expected to be lower than at Pond Creek, and we have a water disposal well on the property, which will significantly reduce water disposal costs as compared to Pond Creek. As a result, we expect the economics at Lasher to be similar to the attractive Pond Creek economics.
We have obtained permits for two production test wells, which will be drilled and tested in the fourth quarter. We are also in the process of negotiating agreements with Columbia to tap into their KA-20 line, which crosses the property. We have adequate firm transportation capacity to deliver our expected future production from the field to the market.
We also announced, in our last call, plans to move forward with a Peace River Project, near Hudson’s Hope in northeast British Columbia. Since that call, we have added an additional 5,700 acres to the project. We now control approximately 50,188 gross acres, 25,094 net acres to our 15% working interest in this project, and this acquisition completes our expansion to the western geological boundaries of the play.
There is a gas pipeline with significant available capacity that crosses the acreage. We have the option of selling our gas into either the US or Canadian gross markets. The negative differentials to NYMAX at Sumas (ph) in the State of Washington have been narrowing for some time and have recently turned positive.
At this time, the permitting process for water disposal wells, production wells and infrastructure is continuing. We plan to drill and test two shallow water disposal wells and conduct an injection test in an existing deep well in the fourth quarter. We also have recently moved an experienced GeoMet operations manager to the area. We expect to commence development drilling after the spring fall, probably in June.
Garden City, our newest exploration prospect, was announced in August. To-date, we have acquired ore than 61,000 gross acres of leasehold in Blount and Cullman counties in north central Alabama. We own 100% working interest and operate.
Our target is the Chattanooga Shale at depths averaging from 1,700 to 2,000 feet across the prospect area. We have drilled five core holes to determine the gas in placed the reservoir properties of the Shale. We have also drilled the first of three production-test wells planned for this year.
I would now like to update you on our ongoing litigation with CNX Gas. We have just learned that the Virginia Supreme court agreed to hear our appeal in our ongoing pipeline dispute with CNX. As you may remember, the issue arose back in 2006 when we were beginning construction of our Pond Creek gathering line. We obtained an easement for our line from Pocahontas Mining Company over land it owned in Buchanan County, Virginia.
Immediately thereafter, CNX claimed to hold the exclusive right to build and operate gas pipelines over that land. We attempted to resolve the dispute directly with CNX, but after failing to do so, on May 26, 2006, we filed a lawsuit in Buchanan County seeking a declaratory order that the easement granted to GeoMet by PMC was valid.
As a result, three weeks later, on June 15, 2006, the Circuit Court in Buchanan County enjoined CNX from obstructing the construction of our gathering line on the PMC land, thus, allowing to complete construction of our lines. Then, almost a year later, on May 23, 2007, the Circuit Court reversed its position and ruled that CNX did have the exclusive right to transport gas across the PMC land.
The Court granted CNX injunctive release and held that we would be allowed to continue using our Pond Creek gathering line, only if we escrowed net proceeds from the sale of gas transported through our line and posted a bond in CNX’s favor.
We immediately appealed the injunctive portion of the ruling. And on June 20, 2007, the Supreme Court of Virginia overturned the injunctive portion, which allowed us to continue using our Pond Creek gathering line without escrowing funds or posting a bond.
We appealed the remaining portion of the May 23 order that CNX holds the exclusive right to transport gas over the PMC land, presented our oral argument before the Virginia Supreme Court on October 17, and on Tuesday learned that our appeal had been accepted.
The Supreme Court at the same time denied all motions filed by CNX in the appeal. The appeal filed by the landowner, PMC, who also contested the lower court’s ruling on the exclusive right, was also accepted. All points of err raised by GeoMet and PMC were accepted by the Supreme Court.
We continue to transport the gas we produce from the Pond Creek field through our Pond Creek gathering line. I would like to emphasize that we are not and have never escrowed any funds in connection with this matter. So far, in 2007, we have been before the Virginia Supreme Court three times in the course of our litigation with CNX. And at each time, the court has held in our favor.
Lastly, in regard to strategic alternatives, we remained committed to exploring all value-creating opportunities that may be available to GeoMet now and in the future. This is an ongoing process.
However, based on the current price of our stock, we do not believe that a sale or merger of the entire company is likely. We will disclose further information regarding this process, when and as such information becomes material. We also can make no assurances that this process will result in any specific transaction.
At this time, I will turn the call over to Bill, to discuss our financial results.
Thank you, Darby, and good afternoon everyone. On October 29, we announced that a syndicate of commercial banks, led by Bank of America, had completed our min-year borrowing base determination and established a borrowing base of $180 million, representing a 20% increase over the previous borrowing base of $150 million.
As of September 30, 2007, we had $88.5 million outstanding under our credit facility. Debt to total capitalization was 29%, and bank debt constituted $0.27 per Mcf of the yearend 2006 proved reserve quantities.
Borrowing base increase provides more than sufficient liquidity to execute our business plans through the end of 2008. We will target to keep at least 25 to 30% of our borrowing base and utilize it all the time.
Net income for the quarter totaled $1.6 million as compared to $4.2 billion in net income for the prior year quarter. Each of these quarterly periods impacted by unrealized hedging gains resulting from the mark-to-market of our open hedge position.
In the third quarter of this year, we recorded unrealized after-tax hedging gain of $400,000 as compared to an unrealized after-tax hedging gain of 2.5 million in the same period last year. Adjusted for these unrealized hedging gains and losses, net income would have been 1.2 million in the ’07 quarter compared to 1.7 million in the prior year quarter.
Average natural gas prices, adjusted for realized hedging gains and losses, was $6.95 per Mcf in the current quarter, essentially flat as compared to the $6.92 per Mcf in the prior year period. Excluding the impact of these hedges, the actual natural gas price realized was $6.26 per Mcf in the ’07 quarter versus $6.60 last year.
Additionally, was we set out in tour press release, we have a very favorable hedge position. More than half of our expected sales volumes are hedged through next summer, and we have recently layered in additional hedges to the extent through the summer of 2009. These hedges employ traditional and three-way collars and swaps, providing us with significant downside protection, while retaining significant price subsides.
EBITDA for the current quarter was $5.9 million, and it compared to $9.9 million in third quarter 2006. Adjusted EBITDA, which excluded unrealized hedging gains and other non-hedged items, was $5.6 million in the current quarter versus $5.9 million in the third quarter of 2006. Please refer to this morning’s release for a reconciliation of these non-GAAP measures.
Transportation costs were $0.30 per Mcf for the current quarter versus$0.34 per Mcf for the third quarter of 2006 and $0.37 per Mcf for the second quarter of this year. This is a first quarter, during which we have transported our gas from Pond Creek exclusively through our own Pond Creek gathering system.
Compression costs were $0.35 per Mcf in the current quarter, up from the $0.29 per Mcf experienced in the third quarter of 2006 and down from $0.40 per Mcf during the prior quarter. Compression efficiency has approved somewhat, and repair and maintenance and electricity cost were down.
Lease operating expenses were $1.97 per Mcf for the current quarter as compared to $1.52 per Mcf in the third quarter of 2006 and $1.94 per Mcf in the second quarter of 2007. Well treatment and servicing costs, particularly in the Gurnee field, along with higher ad valorem taxes in West Virginia were the primary factors affecting these increased costs.
G&A expenses were $2.5 million in the current quarter as compared to $1.9 million in the third quarter of 2006. G&A was $2.2 million in the second quarter of this year. Higher G&A in the quarter was due to increased staffing costs, the expense portion of legal fees associated with litigation, and costs related to SOX compliance.
The depletion rate for gas properties is $1.30 per Mcf for the current quarter as compared to $1.31 per Mcf last year and a $1.25 per Mcf in the second quarter of this year. We are tightening the range of our previously issued guidance for sales volumes growth for the year from our previous guidance of 14 to 18 %, it is now 16 to 18%. Our capital expenditures are expected to be approximately $59 million for 2007.
We’re currently in the middle of our budget process for 2008 and are not yet ready to provide guidance. We expect to complete the process in late January and will at that time provide guidance for 2008 as well as report yearend proved reserve data.
And with that, we’ll return the call back to the operator to arrange for any questions.
(Operator Instructions) At this time I would like to remind everyone, in order to ask a question, please press star and then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster.
(Operator Instructions) Again, in order to ask a question, please press star then the number one on your telephone keypad.
(Operator Instructions) At this time, there are no questions.
Very good. Well, we appreciate everyone taking the time to listen to our call this afternoon. And we’d be happy to visit with you offline, if you’d like. That will be the end of the call, until we report earlier next year.
Thank you. And this concludes the GeoMet third quarter 2007 conference call. You may now disconnect.
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