James McManus – Chairman and CEO
David Woodruff – VP, General Counsel and Secretary
Dudley Reynolds – President, COO, Alabama Gas Corp
Emily Law – City of New York Office Comptroller
Julie Ryland – VP, IR
Energen Corporation (EGN) Annual Shareholders Meeting April 25, 2012 10:30 AM ET
Well good morning and welcome to Energen Corporation's 2012 annual meeting of shareholders. Its great pleasure to have you in attendance here today at Energen corporate headquarters. Also want to welcome those who will be listening to this meeting live on the web. At this time, I would like to call the meeting to order. I am James McManus, Chairman of the Board of Energen and I will preside over this meeting. David Woodruff, General Counsel and Secretary of the Company will act as Secretary of the meeting.
On February 24th, 2012 the record day for this meeting. There were 72,115,736 shares out stock outstanding. We want to thank those shareholders who took the time to be here today in today's meeting. But of course most were not able to be at this meeting in person, but they have expressed their interest in the company by voting their proxies. The first order of business involves that voting procedure; I would like to introduce Mr. K.R Patel of Computershare Shareholders Services who has been appointed by the board to serve as judge at this meeting.
At this time I would ask all holders of proxies to identify themselves. The chair recognizes Mr. Woodruff.
On behalf of Mr. McManus and myself I report this company holds proxy for 65,115,403 shares of common stock which approximately (inaudible).
If anyone else is holding proxies please identify yourself and deliver your proxies to Mr. Patel. If there is anyone who wishes to vote in person, please identify yourself to pick up your ballot from Mr. Patel.
Mr. Patel what if the total number of shares of common stock present at the meeting?
Thank you Mr. Chairman. There are at least 65,115,423 shares present in person or by proxy which constitutes approximately 90% of the shares entitled to vote at this meeting of shareholders.
The quorum is present and the meeting is now open for such businesses as might properly come before it. The first item on the agenda is the election of directors. Chair recognizes Mr. Reynolds.
Mr. Chairman I nominate Judy M. Merritt, Steven A. Snider and Gary C. Youngblood for election to the Board of Directors of Energen Corporation for a three year term to expire in 2015 and I nominate Jay Grinney for election to the Board of Directors of Energen Corporation for a one year term to expire in 2013.
Unidentified Company Representative
Mr. Chairman, I second the nominations made by Mr. Reynolds.
The company has not received the required notice of other nominations and I declare the nominations closed. If all ballots and proxies have been turned in, I'll ask Mr. Patel to make his report regarding the election of directors at this time.
Thank you Mr. Chairman. Each of the four directors nominated by the board of election received at least 56,702,309 in favor or 87% of votes passed.
In accordance with the judge's report, I declare the following persons have been duly elected directors of Energen Corporation served for the specified terms and until their successors have been elected and shall have qualified. I'll ask each of them to stand as his or her name is called. Judy Merritt, Steven Snider, Gary Youngblood, Jay Grinney.
I would also like to introduce our other directors and ask that each of them stand as his name or her name is called and remain standing until all have been introduced, Steve Bant, Julian Bant, Ken Duvet, Mike Goodrich, Dave Wilson and myself.
We are also privileged to have with us some former directors; I will ask that each of them stand as I call their names as well. Jamie French and Mike Warren.
The chair recognizes Mr. Cook (ph) and Mrs. Ryland for the purpose of bringing before the meeting the next two items of business, each of which has been proposed by the Board of Directors.
Unidentified Company Representative
Mr. Chairman, I might be following two motions, I move that we ratify the appointment of Price Waterhouse Coopers LLP as the company's independent register public accounting firm for 2012 and I move that we adopt the executive compensation advisory resolution presented in the proxy statement.
I second each of the two motions made by Mr. Cook.
Motions have been made and seconded with respect to the appointment of Price Waterhouse Coopers LLP and the advisory approval of executive compensation. If all ballots and proxies have been turned in, I will ask Mr. Patel to make his report regarding these two items of business.
Mr. Chairman the proposal to ratify the appointment of Price Waterhouse Coopers LLP received 64,781,534 votes in favor representing 99% of the vote cast. The proposal to adopt the executive compensation advisory resolution received 53,921,951 votes in favor representing 82% of the votes cast.
In accordance with the judge's report, the appointment of Price Waterhouse Coopers is ratified and the executive compensation advisory resolution is adopted. Chair now recognizes Emily Law, representing the City of New York Office of the Comptroller for purposes of presenting the shareholder proposal set forth in the proxy statement.
Mr. Chairman, I move that we adopt the resolution reclined in the proxy statement; we expect to buy the classification.
Mrs. Ryland will you provide a second for that motion?
I second the motion made by Mrs. Law.
Mrs. Law, would you like to make a brief statement in support of your mission?
Sure. Good morning my name is Emily Law and I am here on behalf of New York City Controller. John (inaudible) and the Trustee of the New York City Pension Funds. I hereby present the proposal calling on the companies to classify its director and to establish any more actions whereby director will be elected and will be announced by classes. We believe that the ability to elect director is the single most important use of shareholder franchise. And accordingly directors to be accountable to shareholder on an annual basis. Besides, classified board's and change management seems only reflection of the board, if you elect annual, this could fluctuate possibly to the attachment of the long term shareholder into it. The efforts of the readers as prior control or a challengers engage successfully in the proxy content.
Non-classified boards are becoming standard government trend. Over 72% of S&P 500 companies have declassified their boards. Shareholders are part of the proposal; SH 73.5% last year up from 12% (inaudible) from 2010. So the address that classified board may also reduce from value. Once they are funded, classified boards may reduce the market value of a firm by the market cap by 4 to 6%. We strongly urge the company to declassify the board of director. Thank you.
Thank you. The motion has been made and seconded. If all balances and proxies have been turned in, I will ask Mr. Patel to make his report regarding this shareholder proposal.
Mr. Chairman, this shareholder proposal received 48,640566 votes in favor of representing 74% of the vote cast.
In accordance with the judge's report, the resolution with respect to board declassification is adopted. Having completed the business portion of this meeting I want to take a few minutes to talk to you about our excellent results we are realizing from our activities in the Permian Basin. Also want to share some thoughts with you about what may lie ahead for Energen as we continue to focus our growth efforts on oil and liquids in Permian Basin of West Texas. I'll be making forward-looking statements today. In the course of my remarks, I would encourage you to review our filings with the SEC for more information regarding risks and uncertainties that could affect our future results of operations.
Energen has made significant progress towards becoming a major independent producer of domestic, oil and liquids. Today we are a top 20 independent producer of domestic, oil, liquids and natural gas. We have more than 940 million barrel of oil equivalents proved, probable, impossible reserves. More than half of our reserves and 37% of our entrée of reserves are in the liquids rich Permian Basin where our first quarter 2012 production increased 52% in one year.
Since mid-2009 we have capitalized on our strong balance sheet and financial capacity to acquire more than 900 million approved properties and unproved result in the Permian Basin and we are investing record levels of capital in 2012 to develop the Vertical Wolfberry play in the Midland Basin and to explore the Third Bone Springs Sands in the Delaware Basin. Our results today have exceeded our expectations and we are positioned to look more closely this year at several plays that could add significantly to our drilling inventory in the years ahead. As per our active drilling in capital programs we continue to use hedging to help protect our cash flows and commodity price volatility and we have an excellent hedge position for the remainder of '12 and into 2014.
Energen's operations are all on short contiguous US. Our largest area of operations is the Permian Basin. It is now armed to 54% of our total proved reserves. Energen Resources are EMP Company. It’s the 12th largest producer of oil in Texas. Another 38% of our proved reserves are in the San Juan Basin in to Mexico and Colorado where Energen Resources is the fourth largest producer in the San Juan Basin. Record capital investment is driving double digit production growth at Energen Resources, our ENP Company. We invested 810 million of drilling and development capital in 2011 primarily in the Permian Basin and we expect to invest a record 950 million to drilling complete assets in 2012. In addition we've invested some 68 million in the first quarter of 2012 to acquire approved properties and earned results. Almost half of our 2012 capital or 420 million is being deployed in the Midland Basin where we're currently seven to eight rigs to drill a 170 net Wolfberry wells. Another 350 million will be invested in the Delaware Basin where five to seven rigs were focused on drilling 43 net wells in the Third Bone Spring trend. And 145 million is being invested in our other premium properties. We expect there to continue running one to rigs in the Central Basin platform to drill water flood producers and injector well.
In light of low natural gas prices, we recently announced plans to eliminate capital spending in the San Juan Basin in the second half of this year and plan to only invest 35 million in our dry gas properties this year.
Not surprisingly the Vertical Wolfberry and Third Bones Spring production are the drivers of our estimated production growth this year. We estimate that record production of 20.4 million BOE in 2011 will be supplanted this year by a new record of 24.5 million BOE. This means that 20% increase in total production in one year as well as a 39% increase in oil and liquids production alone.
We’ve made a commitment to the Permian Basin and to the production of oil and liquids. The expected result of our oil and liquids focus by 2013 is shown in the table on the right. By the end of 2013, given our current outlook for drilling and capital investment in '12 and '13, we believe production could double from our 2010 levels.
Energen Resource's proved reserves at year end 2011 increased 13.3% to a record 343 million BOE. The graph on the left shows our year end improved reserves by commodity. As you can see, our major proved reserve growth has been in oil and liquids driven by a Permian Basin activities. Oil and liquids now comprise 54% of our proved reserves up from 47% in 2010. Energen's probable, impossible reserves at year-end 2011 totaled 598 million BOE. This springs our total inventory of 3 P reserves to 941 million BOE and there are a number of potential reserves not reflected in these numbers.
Energen Resources has been active in the oil fields of the Permian Basin since the late 1990s. Today we have more than 268,500 net acres there. Beginning in 2009, we invested more than 900 million to acquire pre-properties in own pre-leasehold. Our seven major acquisitions are marked on this map with a diamond shape. Our most recent acquisition was 66 million of Wolfberry properties in Midland County in February of this year.
Let's take a closer look now at the opportunities and plans in the Midland and Delaware basins. Our Vertical Wolfberry play is in full development mode in the Midland Basin. In the first quarter of 2012 we tested 51 new Wolfberry wells; their average initialized, stabilized rate was 88 BOE per day. 72% of the product stream was oil and the remainder was wet gas. Over 30 days, the wells average 73 BOE a day, 77% of which was oil. These rates are very consistent with our expectation.
We have 49,000 net acres in the basin that are perspective for the Vertical Wolfberry play, approximately 33,000 acres remain undeveloped based on 40 acres spacing, we estimate that we have 835 potential locations remaining to be drilled. At the current drilling pace of some 175 net wells a year, Energen Resources has a five year drilling inventory here. And in addition to that, 20 acre down spacing could add another 675 wells in four more years to our potential drilling inventory. There is drilling excitement in this particular area about the horizontal Wolfcamp and climb plays in the Midland Basin, south of our acreage position. We currently are participating as a non-operative partner in a horizontal Wolfcamp well near our Glasgow County acreage and the early results are encouraging. We also are closely monitoring the horizontal plane activity in the Midland Basin.
We now have drilled enough wells to put out an average type curve that reflects the expected performance of our Vertical Wolfberry wells. The average estimated ultimate recovery of a Wolfberry well is 155,000 BOE per well and the other key attributes of the wells are listed on the left hand side of this slide.
The primary point I want to make is that $100 per barrel for oil and $4 per mcf for gas, we estimate that the Vertical Wolfberry program over the next several years will generate a very attractive, 33% per tax rate of return.
Our Third Bones Spring program continues to generate improved well performance in 2012. Particularly now that our operations are focused on the east side of the Pecos River, which you can see cuts through the heart of that map in Ward, Winkler, and Loving counties. The company's Third Bones Spring drilling programs in '12 and '13 will be concentrated in this core area. Energen tested seven Third Bones Spring wells in the first three months of 2012. The initial stabilized rates range from 514 BOE per day to 1737 per day. At 1737 a day, this Ward County well is the company's top initial performer to date.
Five of the seven wells had sufficient production history to generate a 30 day average well rate of 783 BOE per day, 72% of which was oil. On the east side of the Pecos River Energen has a net acreage position of 33,000 acres with 17,300 net acres remaining to be developed. Based on a likelihood of a 160 acres spacing, we estimate that there are 92 potential locations remaining to be drilled in this area.
To better reflect the growth reserve potential of the Third Bones Spring wells to be drilled in our core area over the next several years, we have adjusted the estimated ultimate recovery to an average 475,000 BOE per well. Again, all the other metrics on the left hand side of the slide that you can see, the important one is that a $100 per barrel per oil and $4 per mcf for gas, we estimate that our Third Bones Spring program over the next several years will generate an outstanding 72% before its tax rate of return.
Commodity prices certainly can influence returns, generate about our Wolfberry and Bones Spring wells. This graph shows the influence of those changes in oil prices from $80 a barrel to $110 a barrel as natural gas is held confident. What I think is particularly impressive about this data is that even at $80 oil, all of our major Permian employees generate solid double digit pre-tax returns.
A definitive agreement signed in February by Energen Resources and BHP bulletin, could lead to our joint exploration development of 56,549 acres in the Delaware Basin currently under leased to us in Reeves and Ward Counties. Under the terms of the agreement BHP purchased three wells that we have drilled for approximately 18 million and are carrying us in the horizontal completion operations in two of the wells at an estimated cost of 12 million. And the third well we will split completion costs. Three wells are denoted on this map with a green star. By beginning completion operations on two wells, BHP has earned a 50% undivided interest in 4829 net acres. By May 1, BHP has the option to purchase from us a 50% undivided interest in 51,720 net acres. If BHP exercises this option, we expect to recoup our investment, to acquire the joint venture acreage and still have a 50% interest.
Key components of Energen's financial strength are an excellent balance sheet and strong after-tax cash flows. Both of which allow us to move forward in confidence with our record capital plans. In 2012, we estimate the consolidated after-tax cash flow will range from 795 to 824 million. Key assumptions underlining our estimate are shown on the blue bar on the slide.
Hedging has always been an integral part of our business strategy for the last 15 years. We have approximately 60% of our estimated production hedged in 2012 and 13 and a strong position already established in '14. In addition to helping secure our cash flows from protect and secure from oil price volatility, we're glad to have some 50% of our estimated natural gas production in 2012 and 13 hedged in a NYMEX equivalent price close to $5.
For a wrap-up I'd like to take a moment to talk to you about our single state natural gas utility, our legacy business, Alagasco is a complement to our upstream operations. It is the primary contributor to Energen's cash dividend. Alagasco as many of you provides natural gas to more than 425,000 homes, businesses and industries in central and North Alabama.
The Energen boards of directors increase the annual dividend in January for the 30th year in a row. Our dividend is supported largely by Alagasco as we reinvest the earnings of Energen Resources to fund growth.
So, as you can see Energen has made significant progress in recent years towards becoming a major independent producer of domestic oil and liquids. In 2011 and again in '12 we are focused on exploring and developing our extensive acreage position in the Permian Basin while adding to that position through acquisition. The result of our Wolfberry and Third Bones Spring plays are strong and we're excited about the prospects offered by other plays in the basin that we've not booked, that we've not explored for yet that have a good potential. Our significant hedge position and strong cash flows and excellent fundamentals, allow us to move forward with our record capital and drilling programs that are expected to result in substantial double digit production growth in 2012 and '13.
And with that, I would open the floor for any questions that any shareholders might have. Seeing no questions, the chair recognizes Mrs. Ryland.
Mr. Chairman, I move that the meeting be adjourned.
Unidentified Company Representative
I second the motion.
You have heard the motion. All in favor signify bye aye.
Unidentified Company Representative
All opposed to no. Motion is carried. The shareholder meeting is hereby adjourned. Thank you. If directors will make their way upstairs, we'll start the board meeting here shortly.
[No Q&A session for this event]