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Bois d'Arc Energy Inc. (NASDAQ:BDE)

Q4 2007 Earnings Call

February 12 2008 10:00 am ET

Executives

Gary Blackie - President and CEO

Roland Burns - Chief Financial Officer

Jay Allison - Chairman

Analysts

David Heikkinen - Tudor, Pickering, Holt

Pavel Molchanov - Raymond James

Operator

Good day ladies and gentlemen and welcome to the Fourth Quarter 2007 Bois d’Arc Energy Incorporated Earnings Call. My name is Michele and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's conference, Mr. Gary Blackie, Chief Executive Officer. Please proceed.

Gary Blackie

Thank you. Good morning to all, and welcome to Bois d'Arc Energy's 2007 Fourth Quarter Conference Call. We will discuss our fourth quarter and annual 2007 financial and operating results on this call. You can view a slide presentation during or after this call by going to our website at www.boisdarcenergy.com and clicking presentations. There you will find a presentation entitled Fourth Quarter 2007 Results.

I am Gary Blackie, President and Chief Executive Officer of Bois d'Arc, and with me today are Roland Burns, our Chief Financial Officer, and Jay Allison, our Chairman.

Our discussion today will include forward-looking statements within the meanings of the securities laws. While we believe the expectations in such statements to be reasonable, there can be no assurance that such expectations will prove to be correct.

We had a pretty good year in 2007, actually a great year, as demonstrated by our financial results and strong production growth and reserve growth. Our production increased 34% in 2007 over 2006. We are also able to grow our reserves by 16% in 2007.

Our 2007 discoveries in the successful water flood project at Ship Shoal 113 have added 96 billion cubic foot equivalent to our proved reserve base. We also had excellent financial results in 2007. Our revenue soared to $355 million, and we generated EBITDAX of $291 million and operating cash flow of $262 million.

Our net income for 2007 increased by 43% to $79 million, or $1.39 per share. We also saw our cost structure improve in 2007. Our lifting cost averaged $1.17 per Mcfe in 2007, as compared to $1.70 per Mcfe last year, and that was a 13% decrease. We also saw a reduction in our finding cost this year which fell $2.22 per Mcfe, a substantial improvement from the $4.76 averaged in 2006.

I will now let our CFO Roland Burns go over the financial results in more detail.

Roland Burns

Thanks Gary. On slide 3 of the presentation you can follow our production growth over the last three years. Our production averaged 116 million cubic feet of natural gas equivalent per day, both in the fourth quarter and for the entire year in 2007. Production increased 20% over production in the fourth quarter of 2006, and is up 34% for the full year as compared to 2006. The growth in production is the result of the continued strong performance of our 2006 discoveries, especially the Sockeye well at South Pelto 22. This year we expect production to increase to 46 to 49 Bcfe as compared to the 42.2 Bcfe we produced in 2007.

Our production was down last month to around 108 million tons per day. Our platform at Ship Shoal 118 has been shut in since January 1st after a fire broke out on that platform. But now repairs are almost complete, and we expect that platform to be returning to service soon. We expect our production to reach around 130 million tons per day by March with this platform returning to service and a new platform at Ship Shoal 97 coming online.

On slide 4, we cover our oil prices. Our average oil price increased 58% in the fourth quarter of 2007 to $91.51 per barrel, as compared to $57.77 in the fourth quarter of 2006. In 2007, our realized oil price was $74.15 which increased 15% of our oil price to $64.66 in 2006. Our average oil price has been running at around 103% of the average NYMEX WTI price this year.

Slide five shows our average gas price, and the average gas price improved by 10% in the fourth quarter to $7.48 per Mcf, compared to $6.78 in the fourth quarter of 2006. For 2007, our average price increased 1% to $7.19, as compared to $7.13 in 2006. Our gas price realizations have been very strong, and our realized gas price was 105% of the average Henry Hub NYMEX price in 2007.

The strong production growth for 2007 increased our oil and gas sales, which is presented on slide six in the presentation. Oil and gas sales increased 51% in the fourth quarter to $100 million, as compared to $66 million in 2006's fourth quarter. For all of 2007, our oil and gas sales totaled $355 million, which is 40% higher than our oil and gas sales of $255 million in 2006.

As shown on slide seven, our earnings before interest, taxes, depreciation, amortization and expiration expenses and other non-cash expenses or EBITDAX, increased 63% in the fourth quarter to $82 million, as compared to $50 million in 2006’s fourth quarter. In 2007, our EBITDAX increased 48% to $291 million, as compared to $197 million in 2006.

Slide eight covers our operating cash flow. Our cash flow increased 57% this quarter to $71 million, as compared to cash flow of $45 million in 2006's fourth quarter. In 2007, we generated operating cash flow of $262 million, 44% higher than cash flow in 2006 of $181 million.

As shown on slide nine, we reported a net income of $28.1 million, or $0.42 for this quarter, as compared to $11.9 million or $0.18 per share in the fourth quarter of 2006. In the fourth quarter we had several special items included in G&A expense this quarter, which also affected our net income. These totaled around $4 million, and they included the early vesting of our stock-based incentive awards in connection with the retirement of Mr. Laufer and the cost of our strategic alternatives process, including a special bonus that we pay to our employees at the end of 2007 for sticking with us during the process.

For the year 2007, we had earnings of $78.7 million or a $1.17 per share, as compared to net income of $55 million or $0.84 per share in 2006.

We'll review our operating costs on slide 10. Our lifting costs this quarter averaged to $1.53 per Mcfe, as compared to $1.75 in the fourth quarter of 2006. And our depreciation, depletion and amortization per Mcfe decreased slightly to $2.77 per Mcfe in the fourth quarter, as compared to $2.79 in the 2006 fourth quarter.

For all of 2007, our lifting costs per Mcfe produced were $1.39 as shown on slide 11, as compared to $1.70 in 2006. And our DD&A per Mcfe increased to $2.72 in all of 2007, as compared to $2.45 in 2006.

On slide 12, you can see our capital structure at the end of 2007. We had $80 million in debt outstanding under our bank revolving credit facility as we were able to pay down $20 million of our debt in the fourth quarter.

Also, in the fourth quarter, our borrowing base was increased to $350 million, giving us additional availability of $270 million available on the credit facility. We ended the quarter and the year with $602 million in equity. Our debt-to-book capitalization ratio is at a very low 12%.

We did repurchase 100,000 shares of our common stock in the fourth quarter, as part of the improved $100 million share repurchase plan that we put in place in late 2007.

I will now turn it back over to Gary to review the 2007 drilling results and our plans for this year.

Gary Blackie

Thank you, Roland. On slide 13, we spent $214 million in 2007 on our exploration and development activities, as compared to the $231 million we spent in 2006. Bois d'Arc drilled 15 wells, 12 net to our interest, 7 or 6.6 net of these wells were successful and 8 or 5.4 net were dry holes.

We spent $89 million on exploratory drilling and $46 million on development drilling. We also spent $26 million on production facilities, and $36 million on recompletions and abandonment work.

In order to support our exploration efforts, we spent $16 million on purchasing licenses for 3D seismic data or for reprocessing seismic data, and on acquiring new leases. Our "all in" finding costs averaged $2.22 per Mcfe in 2007, as we were able to add 96 Bcfe to our proved reserve base as a result of our exploration and development activities.

Turning to slide 14, at the end of 2007, our proved oil & natural gas reserves are estimated at 250 Bcfe of natural gas and 24.6 million barrels of crude oil or 398 Bcfe, an increase of 16%, as compared to our 344 Bcfe of proved reserves at the end of 2006.

Our reserves are 63% natural gas and 37% oil. 74% of the total proved reserves were classified as proved developed with only 26% proved undeveloped, and we operate 99% of our reserve base.

The present value, using a 10% discount rate of the future net cash flows before income taxes of our proved reserves, was $2.2 billion using our actual year-end market oil and natural gas prices of $94.64 per barrel for oil, and $7.26 per Mcf for natural gas.

We were able to add approximately 96 Bcfe of new proved oil and natural gas reserves since the end of 2006. We replaced our 2007 production of 42.2 Bcfe by 228%.

The M-8 sand water flood at Ship Shoal Block 113, the successful well at South Tim 75, the Walleye discovery, the Sockeye Well, and upward revisions due to strong well performances from last year's discoveries, accounted for the reserve gains.

In addition to the proved reserves, we have 127 Bcfe of probable reserves and 183 Bcfe of possible reserves.

On slide 15, we cover our drilling results in 2007. In 2007, we drilled 7 or 6.6 net successful wells out of the total of 15 or 12 net wells. And with that, we had 8 or 5.4 net dry holes. The largest discoveries included wells drilled at Ship Shoal block 93, which proved up on the Walleye prospect. And a second well drilled at South Timbalier block 75, which extended our Doc Holliday discovery made in 2005 and the ultra-deep well drilled at South Timbalier block 81, proved up our Butch Cassidy prospect.

We also drilled three successful wells as part of our M-8 sand water flood project in the Ship Shoal 113 unit. And during the fourth quarter of 2007, we drilled a successful development well at Ship Shoal block 119, which had 89 net feet of pay in three commercial reservoirs.

As outlined on slide 16, we expect to spend $250 million on our development and exploration activities in 2008, and to drill the 21 wells. The 2008 program includes eight low-risk development-like projects, six moderate-risk exploration projects, and seven higher-risk, high-potential exploration projects.

We are currently drilling our Chinook prospect at South Pelto block 21, which is targeting 38 Bcfe net to our interest. We anticipate results in the next couple of weeks from this well.

In total, our 2008 program targets 305 Bcfe reserves. Adjusting for drilling risks, this program could add 82 Bcfe reserves to the company.

Our 2008 drilling program is off to a strong start, with two successful development wells as shown on slide 17. We drilled a successful well at Ship Shoal block 97 to a depth of 12,983 feet, which encountered 71 net feet of pay in two high quality reservoirs.

First production for the Ship Shoal 97 well is expected by the end of this week, and it should add 7 million cubic feet of gas net to Bois d'Arc's production. We have a 78% working interest in this well.

The second successful development well was drilled to test the Perch prospect at Ship Shoal block 120. This well was drilled to a total depth of 5,000 feet to develop multiple previously proven, undeveloped shallow gas reservoirs within the Ship Shoal block 113 field area.

The well encountered 109 feet of pay in eight objective sands. First production for this well is expected in the second quarter, and should add another 2 to 2.5 million cubic feet of gas net to Bois d'Arc's production. We also have a 100% working interest in this well. And as previously mentioned, we are currently drilling an 18,500 foot exploratory well to test our Chinook prospect at South Pelto block 21.

As shown on slide 18, we have an extensive inventory of prospects, all of which were developed by our team of explorationists. We have 78 defined prospects, both conventional and deep shelf. We estimate that these prospects have unrisked net reserve potential of 3.1 trillion cubic feet equivalent.

And turning to slide 19: In summary, 2007 was a good year demonstrated by a production and reserve growth and the strong profits that we generated. 2007 production increased by 34%.

Our 2007 discoveries, well performance and successful water flood project, have replaced all of our production this year and added 96 Bcfe to our proved reserve base, replacing 228% of our production.

We are also seeing improvements to our cost structures in 2007. Lifting costs decreased to $1.39 from $1.70 in 2006. Finding costs decreased to $2.22 from $4.76 in 2006. Our planned 2008 exploration program exposes us to over 300 Bcfe of reserves and will support continued production growth.

The company has substantial financial strength, with 2008 cash flow expected to exceed our drilling budget, and with very little debt on our balance sheet. We plan to continue to reduce our debt and to repurchase shares of our common stock with the excess cash flow.

And now, we will open the conference for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from David Heikkinen of Tudor, Pickering, Holt. Please proceed.

David Heikkinen - Tudor, Pickering, Holt

Good morning, guys. Just a question on the comments that you made about share repurchases, given your relatively limited float. Why use your cash flow to buying your own stock as opposed to look at the M&A market, looking at drilling additional wells, or farm-ins and other projects, either deep water or shelf? How do you decide to allocate capital towards buying back stock?

Gary Blackie

Well, coming out of the strategic process that resulted in those, we felt like it would be a show of support for our company and the strength of the stock that we anticipate there. So, the plan was put it in place for that purpose, and we see the company as a great investment. And if there is any fluctuation in our stock price, we will feel comfortable in making that investment.

David Heikkinen - Tudor, Pickering, Holt

Maybe I missed. In the fourth quarter, how many shares did you buy back?

Gary Blackie

100,000 shares.

David Heikkinen - Tudor, Pickering, Holt

And what is the remaining commitment?

Roland Burns

Well, David, this is Roland. We purchased those at little under, somewhere around $19 a share, so there is -- the (average) is very little of the plan.

David Heikkinen - Tudor, Pickering, Holt

Okay.

Roland Burns

Couple of million dollars of it.

David Heikkinen - Tudor, Pickering, Holt

Okay. And so when you think about your exploratory program this year, 300 plus Bcf of adds, I am just looking at the schedule in the presentation that you provided. Is this in order of when you're going to drill, or is this just grouped? It looks like it's grouped by project. Can you talk about what is beyond Chinook, the order of your drilling program?

Gary Blackie

Sure, if you look at the list, Wild Bill is on there, which is probably one of the bigger impacts. The results of Chinook would lead us into Wild Bill, basically as a direct offset for Chinook. So most of the plays do have an order of sequence, depending on what was found in the previous well. And you also have some land issues that have to be clarified and solidified before you can move the rig in, which include permitting issues. So, it's a rather dynamic schedule, but that's the schedule we planned on executing.

David Heikkinen - Tudor, Pickering, Holt

Is there an order though to the schedule? I mean, does it start at Main Pass and goes down? It looks like it's organized by block, and not by drilling ton?

Gary Blackie

Right, now we're going to move to the Kelsie prospect, the Diamond Ocean, and then when we're finished up at Kelsie, I believe the Diamond Ocean is going to move probably to our Butch Cassidy well to complete testing that well. The [Amsco] rig is on Chinook as we said. And of course, depending upon the results there, we'll decide whether we have to move right into Wild Bill.

David Heikkinen - Tudor, Pickering, Holt

And on service availability, is there any update, as far as the jack-up availability and scheduling? Is there anything coming up, problems or updates on cost?

Gary Blackie

No, we don’t see any problem with availability. We never had to wait that long for rig costs, or hold-up study. So, I think it’s going to be good year to get the rigs out there and for exploring.

David Heikkinen - Tudor, Pickering, Holt

Alright, thanks guys.

Gary Blackie

Okay.

Operator

(Operator Instructions). And you next question comes from the line of Pavel Molchanov of Raymond James. Please proceed.

Pavel Molchanov - Raymond James

Hey, good morning, a great quarter guys. A question on your production guidance, you’ve said before 10% to 15% production growth target for 2008. Can I get some color on quarterly progression, in terms of the ramp up from Q4 levels?

Roland Burns

Yeah sure, Pavel. This is Roland again. As far as what we have talked about, earlier during the review production, the first quarter will potentially show little growth with the slow start in January, due to the one platform we had to shut in. We think that we should show just a little growth in the first quarter from the fourth quarter. Then by second quarter, we will start to show a higher rate, more like the 130 million a day that we think we will have in March.

A lot of our production growth this year is really contingent on how the drilling plan works out, and how some of the development wells we drilled come in, and the timing of them. So, it’s kind of a wide range of guidance, which will unveil as we get into the middle part of the year.

Pavel Molchanov - Raymond James

Got it. And just a house-keeping item, any thoughts on the DD&A rate for 2008? It was 278 in Q4.

Ronald Burns

And we would think it would be very similar to that. I think the DD&A rate has been fairly consistent since the fourth quarter of 2006, and we would see a similar rate with what we expect. In 2008, it could be changed a little bit depending on if there are some big discoveries or other factors.

Pavel Molchanov - Raymond James

Got it. Thank you very much.

Operator

And there are no further questions at this time. I will turn it back to management for closing remarks.

Gary Blackie

Well again, in summary, as I've said, we had a really good year in 2007. The projects that we have scheduled for 2008, in my estimation, are some of the best exploratory projects we have undertaken and we are looking forward to the excitement around here.

We have drilled some great discoveries. We're back up and running, and really looking forward to 2008. And it's always a challenge, as all of you know. Exploration is wild and woolly, but we've got the best exploration staff, in my opinion, assembled here, and we are looking forward to the challenges. Thank you very much.

Operator

Well, ladies and gentlemen. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.

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