Atlas America, Inc. F2Q08 (Qtr End 06/30/08) Earnings Call Transcript

Atlas America, Inc. (ATLS)

Q2 2008 Earnings Call

August 8, 2008 9:00 am ET

Executives

Brian Begley – VP IR

Edward Cohen –President & CEO

Matthew Jones – CFO

Analysts

Wayne Cooperman –Cobalt Capital Management

Presentation

Operator

Good morning ladies and gentlemen and welcome to the second quarter 2008 Atlas America, Inc. earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today’s conference, Brian Begley, Vice President of Investor Relations.

Brian Begley

Good morning everyone and thank you for joining today’s call. Before we begin our discussion on Atlas America’s second quarter results, I would like to remind everyone that when used in today's conference call, the words believe, anticipates, expects, and similar expressions are intended to identify forward-looking statements.

These statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements. We discuss these risks in our Quarterly Report on Form 10-Q and our Annual Report also on Form 10-K, particularly Item 1.

I also would like to caution you not to place undue reliance on these forward-looking statements which reflect management's analysis only as the date hereof. The company undertakes no obligations to publicly release the results of any revisions to forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

With that, I'd like to turn the call over to our Chairman and Chief Executive Officer, Edward Cohen.

Edward Cohen

Thanks Brian. Once again I’m pleased to report excellent results for Atlas America. Only this time I’m speaking to you in the context of an economic and financial crisis which has adversely affected even the market prices of energy stocks, even those which have been achieving singular performances as I think our company has.

Though first I’m going to discuss the numbers and achievements of Atlas during the second quarter of 2008 and then I want to tell you about the actions that we plan to take to try to bring ATLS’ disappointing stock market price into a reasonable relationship with the company’s incredibly successful operations.

First our operations, for the second quarter of 2008 we achieved record pre-tax cash flow of $0.70 per basic common share, that’s an increase of $0.34 per common share or 94% from the prior year’s second quarter.

The second quarter 2008 pre-tax cash flow per share also represents an increase of $0.14 per common share or 25% from the immediately preceding first quarter 2008 which itself was an astoundingly successful period.

And in our case pre-tax numbers in fact will likely be the same as post-tax numbers. We expect not to be a taxpayer on a cash basis in 2008 and we anticipate a reduced cash tax liability or possibly no cash tax liability in 2009.

Revenues increased even more sharply. Excluding the affect of non-cash hedge expense and other non-recurring charges, total revenues in the second quarter 2008 were $660.9 million, an increase of $443.8 million compared to the second quarter of 2007.

And finally adjusted net income of $14.8 million for the second quarter 2008 compared with $11.3 million for the prior year’s second quarter; an increase of $3.5 million or 31%.

As a result of all this success ATLS will once again pay a cash dividend of $0.05 per common share for the quarter. Because many more shares are outstanding then last year at this time, the $2 million aggregate dividend represents a 50% increase from the prior year’s second quarter aggregate dividend.

And of course this dividend will not materially reduce our ability to make the investment which we deem the greatest opportunity for our company’s funds; the repurchase of our stock at its present, in my opinion, incredibly depressed levels.

Let me now recount some of the highlights of our consolidated success during the quarter regarding our pipeline and processing facilities first. Results for the second quarter were great as detailed in our APL conference call last week. All of APL’s divisions continue to prosper and expand.

Atlas Pipeline’s northern and central Oklahoma processing plants have been operating at full capacity through the second quarter and have been forced to bypass a continual excess of gathered natural gas. Appalachia is showing remarkable growth, an increase of 28% in gas throughput in the second quarter of 2008 as against the prior year period.

Gas transmitted on the Ozark system averaged 402 million cubic feet per day, an increase of 25% from 322 million cubic feet per day in the second quarter of 2007. Processed volumes in West Texas increased by 5% over the prior quarter. Even our smallest processing operation, Velma, historically less spectacularly successful then our other processing plants; Velma showed an increase of 1 million cubic feet per day in processed volumes as compared to the year earlier period.

And we expect Velma to show increases similar to our other divisions once we complete construction of the 70 miles of 16 high pressure supply pipelines between the Velma gas plant and Madill, Oklahoma. This project currently underway will enable Velma to access the [versioning] Ardmore Shale play and should vastly improve revenues and margins at Velma.

Although results at APL for the second quarter were quite successful and distributions per unit continued to grow, I believe that the true level of Atlas Pipeline’s operating success in the second quarter 2008 has since substantially understated as a result of financial arrangements bearing no adherent relationship to our actual operations.

During the second quarter 2008 certain proxy hedges put into affect in connection with a partnership’s transformative acquisition of the Chaney Dell and Midkiff/Benedum systems in July 2007. These proxy hedges became less effective as a result of significant increases in the price of crude oil and less significant increases in the price of ethane and propane which we produce. These hedges cost APL approximately $33 million in cash flow during the second quarter of 2008.

But APL has now paid off about 85% of these negative contracts. As a result Atlas Pipeline’s future cash flow should more accurately reflect the revenues generated from its ethane and propane volumes produced in its natural gas processing operations.

This change should result in substantial increases in distributable cash flow and in distributions and most significantly for Atlas America shareholders in increased funds distributed through ATLS. The simple fact is that Bob [Firth] has been leading a tremendous effort, a tremendously successful effort and we’re really deeply grateful of Bob and his excellent staff for these incredible accomplishments.

But APL’s greatest achievement came at the end of the period and brought smiles to the faces of those who like me, believe that especially today cash is king. At a time when credit and equity markets have been frozen for virtually all companies, and quite cold even for energy businesses APL was able to raise in late June over $0.50 billion in additional long-term debt and equity financing.

APL was also able to obtain a further $80 million of increased bank commitments for its senior secured revolving credit facility and that increases the amount committed under that facility to $380 million. At June 30, only $20 million of this revolver was in use, leaving $360 million open for the company’s future use.

Success at our other principal subsidiary our E&P operating company, Atlas Energy Resources, ATN was if anything even more spectacular during the second quarter 2008. For example distributable cash flow at ATN for the second quarter 2008 reached $53.3 million, an increase of $34.5 million or 183%. But of course all attention in the E&P area today focuses on the exciting Marcellus Shale play which some deem to be the most significant natural gas play in the whole of the United States.

There Atlas continues to expand its position as the leading factor in this development. For the Marcellus of all the companies rushing into Pennsylvania, only Atlas Energy starts with the complete infrastructure which allows development without costly delay and accordingly we continue to move forward in Marcellus with success and with dispatch.

We’ve now drilled 78 vertical Marcellus shale wells and one horizontal, with 69 already producing into a pipeline and we plan to drill at least 80 additional vertical Marcellus shale wells in the next 12 months and at least a further 24 horizontal Marcellus wells by the end of 2009. These future wells especially the horizontal wells which will be drilled for the company’s own account is part of joint ventures involving industry partners should contribute substantially to continued increases in Atlas Energy’s production reserves.

In fact our daily production from the Marcellus shale already exceeds that of any other company operating in this play. It’s approaching nearly 20 million cubic feet per day of gross production as of the end of the quarter including gas produced for our managed programs. With ATN [too] all divisions are booming. We’ve integrated without difficulty our large 2007 Michigan acquisition and continue to expand there.

Our Tennessee operations have come to maturity promising significant present and future profitability. We are in the process of obtaining sizable acreage positions in areas outside our present producing basins, [inaudible] we believe substantial future increases in future reserves and production.

And ATN’s direct placement, our syndication program, is breaking all records for scale and profitability. Our spring 2008 direct placement program raised $236 million, more then the full annual total in any year in our history before 2007 and we’re anticipating substantial expansion of our fall syndication program which should leave 2007’s record $363 million in investor monies far behind.

And for Atlas Energy it should be noted that the recent decline in natural gas prices has had and will have, relatively little affect on our actual near-term revenues from the sale of natural gas. Eighty percent of our present production is hedged at about $9 for the remainder of 2008 and through the whole of 2009 and 65% is hedged through the full year 2010.

However, in stark contrast with all this operating success if the disturbing recent phenomenon of our stock price falling in tandem with that of other energy companies. In fact, our E&P operations are far less dependant on natural gas prices then those of other companies because of our huge level of fee income; more than $20 million annualized resulting from our management of thousands of wells for tens of thousands of individual investors.

Many millions of dollars of [inaudible] to be generated for many years into the future from this source. As I’ve spoken of previously we have this enormous annuity which has no relationship to natural gas prices. In addition Atlas Energy receives hundreds of millions of dollars in fees annually from our new syndication projects. In fact, turning to Atlas Pipeline, Atlas Pipeline itself has surmounted the hedging losses which continue to devastate many energy companies caught on the wrong side of the incredible volatility afflicting petroleum and NGL prices.

But none of this has resulted in the kind of stock market performance we would like. So we as management are going to intensify, strongly intensify, our educational and outreach activities. We want to make sure that the hedge funds which have supported us in the past and the hedge funds which don’t even know of our existence, other investment sources, individual investors, all know that the Atlas story is quite a different story from that of other energy companies.

We share in their success but during the recent boom period as I tried to make clear and will try to make clear even more intensively our downside is much more protected. When things were booming there wasn’t much audience for our, maybe to some, boring reiterations of downside protection. But in the present situation perhaps people will be interested in learning about the favorable differences, between Atlas and virtually all other energy companies and of course we’ll continue to emphasize the fact that when it comes to upside, we can hold our own with anyone. And our past record and our present successes suggest that.

But beyond our educational efforts, we have a history of benefiting and benefiting our shareholders from judiciously timed cash buybacks of stock. Accordingly we plan to utilize our high level of cash, $75 million at quarter end and our continuing flow of free cash to take advantage through stock repurchases of ATLS stock.

To give you an idea of our continuing positive cash flow we will receive almost $30 million in free cash this quarter from our ownership of interest in our publically held subsidiaries, Atlas Energy, ATN, Atlas Pipeline APL and Atlas Pipeline Holdings AHD, and additional millions currently running at almost $2 million a quarter are being held for us by Atlas Energy reflecting the incentive payments that will actually be received by us when we complete 12 quarters of our required successful results at ATN.

We are now in the fifth quarter dating from Atlas Energy’s initial public offering in December, 2006. Now of course that $75 million in cash comes after our spending tens of millions of dollars already to increase our ownership in Atlas Energy and Atlas Pipeline and we intend selectively to take advantage of the complimentary depression in the stock price of Atlas Energy and Atlas Pipeline.

We’ve already protected our ownership position in both of these subsidiaries with relatively substantial recent private purchases of stock. In June 2008, ATLS spent $40.1 million to purchase 1,112,000 Atlas Pipeline units and 308,109 units of Atlas Pipeline Holdings in private placement transactions at per unit amounts of $36.02 and $32.50 respectively; prices far below their recent highs.

In May we spent $25.2 million to purchase 600,000 of Atlas Energy’s Class B common units in a private placement transaction at a price of $42.00 per common unit. Unlike the proverbial shoemaker’s children our children are getting attention, Atlas Energy and Atlas Pipeline, on stock price reinvestments.

Now ATLS has to be our primary focus and I believe that we will once again be proved correct in our opportunistic increase of our ATLS Holdings during unjustifiable declines, unjustifiable in my opinion at least, in our stock price.

Well Matthew Jones will now give you a more detailed and I hope perhaps less anguished report. But I felt that I had to speak from the heart and I’m sure Matthew will do the same but perhaps he’ll be more upbeat.

Matthew Jones

Thanks Edward, good morning everyone. I’ll quickly run through the financial presentation included in the press release and expand upon some of the highlights. Please recall that we consolidate 100% of the operations and balance sheet accounts of Atlas Energy Resources, Atlas Pipeline Holdings, and Atlas Pipeline Partners into our financial statements. Minority interest accounts on the balance sheet and income statement reflect equity interest held by unrelated parties in these companies.

First however I’ll summarize our equity interest in our key subsidiaries and for simplicity we provided a summary schedule in our press release which you may use for quick reference now and in the future. To summarize our ownership interest include the following.

In Atlas Energy we hold just under 30 million common units representing 46% of the total common units outstanding at that enterprise. We also own all of the Class A units outstanding totaling roughly 1.3 million units. These units represent the general management interest in that enterprise.

And 100% of the management incentive interest allowing Atlas America to receive the incentive payments that Edward had mentioned if certain threshold levels of distributions are achieved at Atlas Energy.

Speaking of meeting threshold levels as Edward mentioned, the second quarter of 2008 represents the sixth consecutive quarter since its initial public offering that Atlas Energy has reported increased adjusted EBITDA. Because of continued growth in cash flow per unit importantly generated from Atlas Energy’s primary segments including natural gas and oil production and partnership management fee generation for the fourth consecutive quarter Atlas Energy achieved and continues to comfortably exceed the threshold level of distributions required to cause it to satisfy the first four quarters of the 12 quarter period test that must be met before distributions can be made under the management incentive interest.

Once the 12 quarter test is achieved, Atlas Energy will make a lump sum payment to Atlas America of the distributions allocated to the incentive interest during the 12 quarter test period and will begin to make cash incentive payments as they’re earned in all subsequent periods. So these cash payments will be allocated to us and ultimately paid to us upon the successful completion of the 12 quarter test period. The allocated managed incentive amount this quarter was $1.7 million and now totals $4.7 million cumulatively.

With respect to our common and Class A unit ownership in Atlas Energy we’ll receive approximately $19 million in distributions for the second quarter as a result of Atlas Energy’s distribution declaration of $0.61 per unit, a 42% increase compared to the second quarter of last year. At the same time Atlas Energy increased its coverage ratio to over 1.3x from 1.1x in the comparable period last year, $19 million in distributions this quarter compares to $12.9 million received in the second quarter of last year, a very healthy increase.

Moving do Atlas Pipeline Holdings, we hold approximately 17,800,000 common units representing roughly 64% of total common units outstanding. We also own 100% of the general partner of the enterprise. Based on increases in distributions received from Atlas Pipeline Partners in the second quarter related to Atlas Holdings common unit ownership interest in incentive interest and out of this pipeline Atlas Holdings declared a $0.51 distribution for the second quarter, a substantial increase compared to the 26% distribution paid in the second quarter of 2007. We’ll receive total distributions this quarter from Atlas Pipeline Holdings interest of $9.1 million. This compares to $4.6 million in the second quarter of last year, a nearly twofold increase.

During the quarter we acquired 1.1 million common units directly in Atlas Pipeline Partners. With Atlas Pipeline Partners declaration of the $0.96 distribution in the quarter we’ll receive cash distributions of roughly $1.1 million for these interest. In total then and excluding the allocated management incentive amount at Atlas Energy Resources we’ll receive approximately $29.2 million in cash distributions from our primary subsidiaries this quarter.

This represents a 15% increase compared to the first quarter of this year. Quickly moving to our income statement presentation, we’ve provided an adjusted net income calculation in order to reflect certain non-cash charges and non-recurring crude oil hedge termination charges of our two primary subsidiaries. The adjustments primarily include the non-cash mark-to-market hydrocarbon charge and non-recurring charges associated with the termination of crude oil hedges and the impact of a correlation decline associated with these terminated hedges at Atlas Pipeline and non-cash compensation expense.

Hydrocarbon hedges are entered into at Atlas Pipeline Partners and Atlas Energy in connection with their respective production of natural gas, natural gas liquids and [condensate]. Hedge arrangements entered into at Atlas Pipeline and Atlas Energy represent obligations of those enterprises respectively and are not obligation of Atlas America. The non-cash hydrocarbon charge relates principally to non-qualified hedges at Atlas Pipeline in our Atlas Pipeline subsidiary. Mark-to-market valuation changes of these positions relate to estimates of future period hydrocarbon prices.

The termination charge relates to the elimination of certain crude oil hedges at Atlas Pipeline and become less effective in mitigating price movements of the products the Atlas Pipeline produces. With the elimination of these positions at Atlas Pipeline we believe that Atlas Pipeline is reduced risk and created the opportunity for increased cash flow per unit in future periods.

Also with respect to our income statement the provision for income taxes in the quarter is composed entirely of deferred taxes that represent an estimate of possible future payments. As we have said in the recent past we do not expect to pay cash taxes in 2008 and we believe that cash tax payments in 2009 may be greatly reduced if not eliminated because of circumstances associated with equity offerings at Atlas Pipeline and Atlas Energy in 2007 and termination charges related to the crude oil hedges at Atlas Pipeline.

The G&A reported in the second quarter is largely attributable to our subsidiaries. Interest expense is entirely attributable to our subsidiaries. Of total general and administrative expenses included on our income statement roughly $2.3 million is related to Atlas America. The components of our G&A included $1.8 million of non-cash stock compensation expense and other items including audit fees, office and salary expenses, and director’s fees.

Quickly moving to our balance sheet total debt at the end of the quarter of $2.1 billion was attributable entirely to Atlas Energy and Atlas Pipeline and is not an obligation of ours. Atlas Energy and Atlas Pipeline fund their operations and growth in their operations from there respective balance sheets. Atlas Energy has no debt that matures before 2012 and Atlas Pipeline before 2013. For our company we had no debt outstanding at the end of the quarter.

We had approximately $75 million in cash at the end of the quarter after making roughly $76 million in additional investments in Atlas Energy, Atlas Pipeline Holdings and Atlas Pipeline Partners during the quarter. We of course look forward to receiving about $29 million in cash distributions from these enterprises over the next couple of weeks.

Our cash balances remain invested in US Treasury money market funds which invest solely in treasury bills and notes and provide us with overnight liquidity. We generated approximately $700,000 of interest expense during the quarter from these balance. Interest income is included in the category labeled other income on our income statement.

Also we remain optimistic about our investment in Lightfoot Capital Partners where we have committed to invest a total of $20 million and have invested approximately $11 million to date. Lightfoot intends to concentrate its investments in companies that control assets that generate income that qualify for inclusion in a master limited partnership. To date Lightfoot has acquired a central Appalachian coal producer and a refined products [inaudible] business.

Finally our pre-tax cash flow per share this quarter after allowing for the impact of a 3-for-2 stock split adjustment during the quarter came in at $0.70 per share. This represents a 25% increase compared to the first quarter of last year. That concludes my remarks and I’ll turn the call back over to Edward.

Edward Cohen

I think we are ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Wayne Cooperman –Cobalt Capital Management

Wayne Cooperman –Cobalt Capital Management

So we heard all this stuff before with all the different subsidiaries, I guess the question is does that list parent company—is there any reason it should be public and could you elaborate a bit more about share repurchase, how much share repurchase you may or may not do given our cash balance on our basically $30 million plus per quarter that’s coming in without us having to do much of anything at the parent level?

Edward Cohen

As to whether we should be public, of course one can’t help but be depressed at the stock price performance and I know it doesn’t help me any to recognize that our stock price performance in almost any period one looks at it, has been exceptionally good because we may be down less then other comparable companies and we may not have suffered the difficulties they have suffered, but nonetheless one does like to see a proper respect for amazing achievement.

So I’m not going to reach the conclusion that this company ought to be private although I can understand how some people may feel that if we’re not properly appreciated going private transaction should be considered. I’m not quite at that point yet because as I indicated, we’re going to re-intensify our efforts to get our story across. It is, we think, an incredible story. Its not the kind of story that’s conventional and I know that when I often go to energy conferences, which in my capacity I do quite often, in recent years, I’ve been amazed at how each and every company that gets up speaks favorably about their results because of course in the buoyant atmosphere that we’ve been in, how could one if you’re operating an energy company not report great results.

And we were always the one jarring note because I’ve always been concerned about downside and I’ve always been pointing out the downside protection that ATLS and its subsidiaries have. So now some people may think that energy is entering a less optimistic and successful period then previously and this should be a period when our downside aspects are coming to the fore. As far as what we indent to do specifically, I’d rather be reporting on that at the end of this coming period rather then at the present time because these are stock market transactions and we’d like to--

Wayne Cooperman –Cobalt Capital Management

Do we have a program in place and how much is that as of now?

Matthew Jones

About $40 million to $50 million under the existing program.

Edward Cohen

And of course we’re free to increase that as appropriate. So I think our continuing shareholders should be quite pleased with the results of our repurchase program and as I indicated we as corporate executives, are not new to repurchase programs and looking back over the opportunities we’ve had in the last decade, I think time has shown that we’re pretty good at assaying downturns and taking advantage of buying at very low prices such as ATLS is now suffering from.

Wayne Cooperman –Cobalt Capital Management

You’re certainly getting a better price now.

Edward Cohen

That’s absolutely true.

Operator

Gentlemen, there appear to be no further questions at this time.

Edward Cohen

Thank you all very much for participating and we look forward to reporting to you with similar successful operating results but hopefully with a more successful stock market report at the next conference call. Goodbye all.

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