Cimarex Energy Co. (NYSE:XEC)
Q1 2008 Earnings Call
May 6, 2008 1:00 pm ET
Mark Burford – Investor Relations
Mick Merelli – Chairman, Chief Executive Officer
Tom Jorden – Executive Vice President Exploration
Joe Albi – Executive Vice President Operations
Paul Korus – Vice President, Chief Financial Officer
Larry Busnardo – Tristone Capital
Good afternoon, my name is Barbara and I will be your conference operator today. At this time I would like to welcome everyone to the Cimarex Energy first quarter 2008 earnings and operational results conference call. (Operator instructions) It’s now my pleasure to turn the floor over to your host, Mr. Mark Burford, sir you may begin your conference.
Thank you Barbara and thank you everyone for joining us today for our first quarter conference call. We did issue our press release this morning and a copy of which can be found on our website. And we will be making forward-looking statements in this call so I will refer you to the end of our press release which has a disclaimer regarding forward-looking statements.
Here in Denver on the call we have Mick Merelli our Chairman and CEO, Tom Jorden, Executive Vice President of Exploration and Joe Albi, Executive Vice President of Operations and Paul Korus, our Vice President and CFO and Jim Shonsey our Vice President and Controller. And we’ll go ahead and just jump right into the call today, I’ll turn the call over to Mick Merelli.
Thank you Mark, welcome everyone. We had a good first quarter. Earnings totaled $150 million, cash flow hit $335 million and our investment in E&D was $307 million. We have an active drilling program and it as we’ve advised previously looks like we’re going to invest between $1.1 and $1.3 billion. And it looks like we’ll be able to cover that with our cash flow.
On production, our first quarter production averaged $476 million cubic feet a day equivalent. That’s an increase of 5 million cubic feet a day equivalent over the fourth quarter of last year. We grew sequentially even with property sales of 11 million cubic feet a day at the end of last year.
Our rising production reflects our drilling program, we’ve had a good drilling program so far this year. We’re seeing good results from our horizontal oil drilling programs in the Permian. Oil production grew 3,000 barrels per day over last year’s first quarter reaching an all time high for us of 22,756 barrels per day for this quarter.
Gas volumes increased 16 million cubic feet a day over the first quarter of 07, reaching 340 million cubic feet a day in the first quarter of 2008. This is largely the result of our Texas Panhandle and Yegua Cook Mountain drilling programs. Permian and Mid-Continent production in the first quarter grew 45 million cubic feet a day equivalent or 14% over the first quarter of last year.
Later in the call Joe Albi will cover our production in more detail. As I mentioned earlier, we expect this year’s exploration and development capital to be around $1.1-$1.3 billion. This is a very active program. The program is about 20% larger than last year’s program. So far, so good, we’re very optimistic about our program, we see a good program for the rest of the year and so we’re going to continue on.
At this point I’m going to turn the call over to Tom Jorden and he’s going to tell you more about what’s going on in our drilling program. Tom.
Thank you Mick. I’m going to talk about our exploration development activity in the quarter and our outlook. We’re off to a fast start this year and truly a credit to our organization on both the exploration and production drilling completion side. Everybody is really pitching in and getting a tremendous amount done.
We drilled 126 gross and 76 net wells in the first quarter, completing 91% as producers. We currently have 36 operator rigs running and another one rigging up so I count 36 plus 1 are 37. Our first quarter capital investment totaled $307 million. As Mick mentioned, we still expect our full year 2008 exploration and development capital to be in the range of $1.1 to $1.3 billion.
As I’ve said, we have a very active program and with our current level of activity we’d expect to be at the upper end of that range. So a lot of projects, a lot of activity and we’re pleased to report some good results. Now I’ll cover our program by region.
In our Mid-Continent region which includes Western Oklahoma and the Texas Panhandle, our first quarter 2008 drilling totaled 70 gross or 34 net wells completed 95% as producers. In the first quarter our capital spending totaled $132 million or 43% of our total capital, that’s in Western Oklahoma and the Texas Panhandle.
In the Texas Panhandle granite wash, our drilling totaled 29 gross or 21 net wells with 100% of those completed as producers. Texas Panhandle drilling made up 58% of that total Mid-Continent capital. We bring wells on all the time but we always like to note a few of our recent ones.
Wells commencing production in the first quarter included our Courson Ranch 4-13 were we had a 35% working interest and that came on at 3.1 million cubic feet equivalent per day, our Flowers 61-22, we had 100% of that, came on at 2.3 million cubic feet a day, our Hobart Ranch 27-68 where we had 100% working interest came on at 1.9 million cubic feet equivalent a day and our Earp 58 5H horizontal well where had a 35% working interest, it came online at 3.5 million cubic feet equivalent per day.
So a very active ongoing program, we’re brining wells on continuously there. In the Anadarko Basin in Southern Oklahoma we drilled a total of 31 gross and 11 net wells with 90% of those being completed as producers. In the Anadarko Basin, we have 5 horizontal wells in the Woodford Shale that are currently producing, that’s our deep Woodford Shale play that we talked about in the past.
So we currently have 5 producing wells, 2 that are at various stages of completion. We have including the one that we’re currently rigging up, we have 3 operated rigs running and we’ll soon be going to a 4 rig operated program in the Anadarko Basin Woodford Shale.
These are 13,000 feet deep wells. We’re currently drilling 2,500 foot lateral links on these horizontals. They’re expensive wells. Based on our current configuration, we’re in the neighborhood of $7 million completed well cost for a 2,500 foot horizontal lateral. We’re evaluating the effect of longer laterals with more frac stages. Some of our upcoming wells will be longer laterals going to 4,000 feet of horizontal section and that will involve additional frac stages. It will also be a more expensive well.
Based upon what we know right now, we’re very optimistic about our chances of moving this into an active development area which would be a very good contributor for our results. We’re moving one additional rig in now that’s rigging up as I said which will bring us to 3 operated rigs. We have a fourth rig scheduled to come in this summer so we should here very soon have 4 operated rigs in that Woodford Shale play.
That brings us to 15 operated rigs currently drilling in the Mid-Continent region, including 9 in the Texas Panhandle and the one that’s rigging up. In the Permian Basin our first quarter 2008 drilling program totaled 50 gross or 37 net wells, 96% of which were completed as producers.
First quarter capital spending totaled $120 million or 40% of our total spending, so we have a very, very active Permian Basin program, we’ve been very pleased with our results there. In Southeast New Mexico in the first quarter 2008, we drilled a total of 27 gross or 17 net wells with 93% of those being completed as producers.
Recent wells that we’ve brought on production in Southeast New Mexico included our Bierstadt 12 Fee 4H horizontal oil well, we had 100% working interest to that and it came on at 300 barrels per day, our Crow Flats 16 State 3H where we have a 62% working interest came on at 550 barrels of oil per day, our Maroon 24 Fee 1H where we had 100% working interest came on at 250 barrels of oil per day and our White City 10 Federal 2 where we had 100% working interest came on at 1 million cubic feet a day.
So as we’ve talked about in the past, we have some very active horizontal oil plays that are coming to fruition. We’re very pleased with our progress and are continually developing new plays in addition to those that we’re reporting.
We have a total of 23 gross, 19 net wells that were drilled in West Texas of which 100% were completed as producers. Our Third Bone Spring program has continued to realize great results. In Ward and Reeves County, drilling totaled 4 gross 3 net horizontal wells in the Third Bone Spring formation.
Recent wells that we brought on production in the Third Bone Spring include our Cimarex University 18-31 1H, 100% working interest that came on at 400 barrels per day, our Cimarex University 18-38 2H, 100% working interest came on at 360 barrels of oil per day, our Cimarex University 20-43 1H, 100% working interest came on at 250 barrels of oil per day and our Fortson 47-1H where we had a 35% working interest came on at 700 barrels of oil per day.
So just like in New Mexico, we had some very nice horizontal oil projects, high working interest and some very nice initial results. We have 16 operated rigs drilling in the Permian Basin including 7 in Southeast New Mexico and 9 in West Texas. So a very nice active Permian Basin program, our Permian region base in Midland has done a great job of getting that program fired up and accelerating into the first quarter of 2008.
In the Gulf Coast, onshore we drilled 6 gross, 4 net Gulf Coat wells in 2008 first quarter. We completed 83% of those as producers. Our first quarter capital spending totaled $50 million or 16% of our total spending. The majority of this activity has been in our Yegua Cook Mountain program in Liberty and Hardin Counties, Texas.
Drilling in the first quarter totaled 3 gross or 2.4 net wells with a 100% success rate. This has been a great program for many years, you’ve heard us talk about this in past calls and it’s been a great program again this year. We also have a very deep inventory. In fact as we look at our program today, we have as deep an inventory as we’ve ever had and we brought on some very nice wells so far this year.
These include our Leonora well where we had a 70% working interest, it came on at 10.3 million cubic feet equivalent per day, that’s 5.6 million cubic feet of gas and 780 barrels per day of oil. Our Pic Realty Corporation where we have a 72% working interest recently came online at 17.6 million cubic feet equivalent per day, that’s 11.9 million cubic feet a day of gas and 950 barrels per day of oil.
So a very, very nice start to our Gulf Coast program. We have 5 operated rigs drilling on the onshore Gulf Cost, 4 in Texas and 1 in Mississippi. We’re also actively shooting addition 3D data out there, we’re looking to grow that program both through new shooting and the acquisition of additional shelf data. So a very nice growing program for us, as I said our inventory on that project remains as deep today as it’s ever been.
With that, I’d like to turn the call over to Joe Albi, our Executive Vice President of Operations.
Thanks Tom. Well we’re extremely pleased with where production ended up here in Q1 and it’s a direct result of accelerated activity and the successes in both our exploitation and exploration programs. Our rig count has increased from 23 rigs a year ago to the 36 rigs that we reported in our operations update and we’re seeing the impact directly on our production.
We had a great quarter. Despite selling 11 million a day of production at the end of December, our reported volumes of 476 million a day for Q1 exceeded our fourth quarter of 07 volumes of 471 million a day and beat our Q1 guidance of 458 to 468 million a day by a healthy margin.
The quarter’s production also continued a trend in production growth for the total company as compared to first quarter 07 volumes of 442 million a day, our first quarter 08 total company volumes were up 8%. More importantly, we’ve also seen good double digit production growth in each of our core operating areas.
As compared to Q1, our first quarter 08 volumes were up 15% in the Permian, 13% in the Mid-Continent and 12% in the Gulf Coast. As Mick mentioned, the successes of our horizontal oil programs in the Permian continue to increase our total company oil production. First quarter 08 net volumes of 22,757 barrels a day represent a 16% increase to first quarter 07 volumes of 19,552 barrels a day.
That said, we also have seen volume increases on the gas side. Our first quarter volumes of 340 million a day are up 5% from a level of 324 million a day in the first quarter of 07. Each of the drivers in our core operating areas are contributing to our production growth.: our horizontal well oil programs in the Permian, our vertical and horizontal granite wash program in the Texas Panhandle and our South Texas and Liberty County programs in the Gulf Coast.
Our exploitation activities have also had a positive impact on production. At the end of March, our exploitation efforts added approximately 13 million a day of new production. With our rig count and exploitation activity on solid footing, we’ve bumped our production guidance up for the remainder of the year.
For second quarter we’re projecting another increase in quarterly production with guidance of 478 to 488 million a day. Our hopes are to end the quarter in the higher end of the range, but we’re being a bit cautious due to seeing a few recent shut ins relating to plant and or pipeline maintenance and repairs.
Also with a good solid first quarter behind us, we’re increasing our full year guidance to 475 to 495 million a day, up from our initial estimate of 465 to 485 million a day. Again, we’re hopeful to fall in the upper end of the range, but need to have a few more new wells under our belt before we feel comfortable increasing guidance any further.
Accounting for 2007 sales, our new guidance represents a very respectable 8-12% increase in production from 2007. I want to mention a few words on our exploitation program. At the beginning of the year our production group put together a fairly ambitious plan for exploitation activities, inventory in $175-$200 million in projects.
We’ve maintained a more deliberate approach to our exploitation activity in the first quarter, putting $32 million to work during the quarter. It now appears we may fall in the range of $125-$150 million for the year. Having said that, our current program has met all of our expectations with regard to production add and project economics.
Of the 463 projects originally identified in our 08 exploitation plan, we’ve completed 104 of them at the end of the first quarter, 24 new drills and 80 recompletion and or work over projects, the majority of our exploitation drilling activity occurring in our Southwest Westbrook field in the Permian Basin where we drilled 23 new wells and performed 9 recompletions
With an identified remaining inventory of more than 30 new wells and more than 40 recompletion projects, our near term objective for the field is to focus on optimizing the conformance of the flood. In addition to Westbrook, we have numerous other drilling and recompletion projects identified throughout New Mexico and West Texas in the Permian.
In the Mid-Continent area, we performed 20 recompletion projects in Q1, most of which were in our Walnut Bend field, located just North of Dallas. We’ve maintained a very healthy pace of activity in Walnut Bend, keeping us on track to meet our 08 plan, which called for 36 work overs, 6 deepenings, 4 new drills and 33 injection projects.
We expect our exploitation activity in the Mid-Continent to pick up steam starting here in the second quarter. As of the early part of April, a total of 91 projects had been approved or were in various stages of completion. Here at the first part of May we’ve got 198 AFE projects now in the cycle.
A good percentage of the work was not only associated with Walnut Bend but various other recompletion and artificial lift projects through Southern Oklahoma and the Texas Panhandle. In the Kansas Panoma area we completed 32 of the 131 projects we had identified for 2008. All of our Q1 activity in this area was concentrated on recompletion work over re-stem and artificial lift projects in both areas.
However, in the second quarter we’ll initiative the beginning of our 20 well drilling program which was planned for 08, the majority of which are going to be wells that are located in or around the Kansas Hugoton area.
In addition to our drilling, recompletion, work over and various other exploitation projects, our production group has continued its efforts to lower LOE via projects like saltwater disposal, compressor optimization, chemical programs, lift design and since the fourth quarter of last year, saltwater disposal projects performed in just the Texas Panhandle and West Texas alone will save us about $8-$9 million a year in LOE.
In a nutshell, our production group has done a great job to get our exploitation program off to another good start and we expect to continue a very healthy pace of activity for the remainder of 08 and then to continue into 2009.
Just a couple comments on what we’re seeing in the market before I turn the call over to Paul. Our rig rates have stayed fairly well in check over the last year, hovering around an average of about 18,000 a day. Keep in mind that about two-thirds of our rig fleet is now running with top drives which have bumped day rates about 3,000-5,000 a day.
Although we see the market tightening up a bit, the continue demand for new builds seems to be keeping rates in check. Steel costs, however, are on the uptick due to a run up in material and shipping costs as well as a weakness in the dollar, we’ve seen more than a 50% increase in market price for pipes since January and we’re hopeful the market will correct itself by the third or fourth quarter.
Nevertheless, we are well positioned with an inventory of pipe and have allied ourselves with various suppliers to guarantee allocated deliveries to keep up with our inventory of projects. While steel is going up, we’ve seen a fairly sizable decrease in stimulation costs over the last year. The majority of our fracs are slip water jobs which due to competition have come down in price by a factor of two over the last 12 months.
So all in all while drilling and completion costs are staying somewhat in check, even with the pressures we’re seeing in the steel market. Nonetheless, day to day, to ensure our chances of success for economic investment, we’re constantly incorporating current market conditions into the cost estimates we use as we move the program forward.
So with that I’ll turn the call over to Paul.
Thank you Joe. I guess kind of in the current political environment in the oil and gas company doesn’t want to talk too much about record revenues, earnings and cash flow, but yet we are seeing them and of course if oil continues to trade in the $110-$120 range and natural gas prices north of $10.00, as we look to the second quarter and remaining quarters it’s a little bit like you aint seen nothing yet.
But nonetheless we did have very good earnings and cash flow in the first quarter. $150 million of earnings which was 2.3 times what we earned in the first quarter of 2007. Similarly the so called non-GAAP measure of after tax cash flow from operations was $335 million or 55% higher than what we were seeing a year ago.
If you divide those cash flows by units produced, we were bringing home $7.72 per Mcfe on cash flow versus $5.42 a year earlier. Revenues, earnings and cash flow obviously befitted from strikingly higher oil and gas price realizations and as you know we are very lightly hedged on gas and completely un-hedge on oil.
Our first quarter 2008 gas price was $8.38 which was up 25%. More importantly though, our oil price increased a whopping 71% to $94.38 from what seemed high a year ago, $55.22. In the last couple of quarters we’ve beat the analyst estimates of our earnings and despite that fact that we pre-release our production volumes and give some near term guidance on prices as well.
But like the fourth quarter of last year and the first quarter of this year we benefit from the tightness in the natural gas liquids market which gets translated to a higher realized gas price for us and I think that’s largely the difference between what you see for our reported earnings and analyst estimates because we’re not trying to do that on purpose, we think there’s value added from estimates being closer to actuals.
Nonetheless our pre-hedging gas price for this quarter was $8.35 which was $0.32 higher than the average Henry Hub price of $8.03 for the quarter. In the first quarter of 2007, our overall gas price was $0.22 below Henry Hub. These differences are despite the fact that Permian Basin and Mid-Continent gas index pricing was $0.73-$0.88 respectively below Henry Hub in the first quarter of this year.
And last year, those indexes were about $0.45 below Henry Hub. So that clearly illustrates the impact that the NGL prices are having on our gas price realizations. We’ve covered production quite a bit already, so I don’t want to say too much other than that you should note that we had some nice Gulf Coast wells which clearly offset the decline in Gulf of Mexico production that we had after we sold our main pass properties last year.
So with our full year guidance being raised 10 million a day on both the bottom part of the range and the top end of the range to 475-495, you may ask, why keep a bottom range that is below our current rate of around 480 or so? The short answer is to allow for the uncertainties that some of which Joe mentioned with pipeline capacity limitations, but we’re also entering the time of year where we see hurricanes, bad storms on shore, refinery outages, things like that.
Now we can’t predict that any of those events will occur but our experience tells us that they may and often do. So that’s why you continue to see a fairly light number on the bottom part of our range. I think the rest of the numbers in our release and our guidance for cost structure are pretty clear.
The only confusing point may be our G&A in the first quarter coming in at $11.6 million below guidance. We expect that to go back to $13 million a quarter or so. We had some accounting adjustments that resulted in about $1 million flip from G&A to production costs in the first quarter, so I think you can clearly rely on our guidance for the rest of the year.
The thing we don’t provide in our guidance and cost structure in income taxes. We are at about a 36.5% rate for those who model cash flow. You do have to decide how much you think we’ll defer versus how much we’ll be current. In the first quarter about 34% of our taxes were current, 66% or so deferred. As we look ahead with higher prices than we’ve received in the first quarter, if the markets do hold and of course that’s always a question that everyone has to decide for themselves when they make forecasts.
But if we remain in that $110 range for oil and $10 gas range, so if you do a mark to market on pricing, all the sudden you see for Cimarex our taxable income being well north of $1 billion on a book basis. In which case, we’d probably be deferring only about half or 50% of our tax provision. We’d owe the government about $200 million.
So for those of you that model our future cash flow, I just want to make sure that you’re not surprised that if you’re using something close to current market prices, you should probably assume that about 50% of our taxes will be current. If you’re using what seems to be more along the lines of consensus analyst estimates of $8-$9 and $80-$90 oil, then you’re probably safer to use something around 40% current.
That’s enough on the numbers, so operator we are ready to entertain questions.
(Operator instructions) Our first question comes from Larry Busnardo – Tristone Capital.
Larry Busnardo – Tristone Capital
First on the Woodford Shale, can you give us a little bit of details regarding what the program is going to shape up for this year in terms of the number of wells that are going to be drilled or that could be drilled?
Of course it depends on rig rate, the number of rigs we have deployed, what we’re going for this summer, we have 5 down in the program.
It’s still an emerging play and obviously we’ve got some level of positive result on it but we don’t have our arms around it yet, so we’re optimistically moving ahead with some more rigs and I think based on what we’ve seen so far, but we’re a long ways away from really understanding what the overall economics and of course we’re poised to increase our activity there.
We’re always going to say contingent, contingent, contingent. There’s a lot that we don’t know here in the play. We’ve had initial encouragement and I think we could easily get somewhere between 20 and 30 wells done this year depending on rig availability and operational constraints. Right now we’re in the very early stages. So we would accelerate or throttle back pending new information.
Larry Busnardo – Tristone Capital
So you have 5 wells drilled right now?
We have 5 wells producing and 2 wells currently in various stages of completion.
Larry Busnardo – Tristone Capital
On the well cost, the $7 million, since it’s early, do you think you can shave that down some as you go forward and go into market with development mode?
I’m explorations so my answer is yes we’d like to get cost down. The drilling guys stand up and say wait a minute, we’re under a lot of cost pressures, I mean they’ve done a great job thus far. Our completion costs are reasonable but as Joe mentioned, our tubulars are putting some pressure on us. So we are not modeling a cost savings going forward.
When we’re looking at our economic models we’re projecting out with current costs. But I can tell you in every play we’ve given our drilling completion guys a program, they’ve found ways to optimize. So we’re optimistic.
We saw this happened own in the Warwink area in West Texas. When we get an opportunity to put a program together it allows us to assimilate various cost efficiencies such as pad drilling or dual horizontals, finding ways that we can stimulate multiple wells on the same day and if we can get a program going here it’s obviously our focus to trim the cost because that has a very positive impact on our economics.
Larry Busnardo – Tristone Capital
What’s the breakout between drilling costs versus the completion cost of those wells?
It’s close to 50/50 if you include the tubulars and such.
Larry Busnardo – Tristone Capital
Looking at the overall program obviously you continue to have success, you’re seeing a ramp up on the production side of things. It’s kind of early but are we looking at reserve adds for this year? How are you feeling about that just in terms of what you’re going to be able to add, F&D costs and then is there going to be any different in the way you book reserves and increase in PUDs at all this year?
The way we’ve addressed those things in the past, we don’t comment on F&D costs until we report them at the end of the year. We don’t make projections about future additions to proved reserves and we’re unlikely to change our spots in the way we book proven undeveloped reserves and you will not hear us talk about probables, possibles, un-booked potential and other things like that.
There appear to be no further questions.
Thank you Barbara, thank you everyone for joining us today, we’re off to a good start in our first quarter reporting here and continue to look forward to updating you throughout the year on some of these plays that we have going and look again forward to talking to you. If you have any questions please give us a call and we’ll report back to you in the second quarter. Thank you very much.
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