Tony Oviedo - Vice President and Chief Accounting Officer
Darby Sere – Chairman, President and Chief Executive Officer
William C. Rankin – Executive Vice President and Chief Financial Officer
Phil Malone - Senior Vice President of Exploration
Bret Camp - Senior Vice President of Operations
Phil McPherson - Global Hunter Securities
Mark Lear - Sidoti & Co
Kevin Smith - Raymond James
GeoMet Inc. (OTCQB:GMET) Q2 2008 Earnings Call August 11, 2008 11:30 AM ET
Good morning, my name is Lorie and I will be your conference operator. At this time, I would like to welcome everyone to GeoMet Inc. Second Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remark there will be question-and-answer session. (Operator Instructions).
Thank you. I will now turn the call over to Tony Oviedo, Vice President and Chief Accounting Officer. Please go ahead.
Tony Oviedo – Vice President and Chief Accounting Officer
Good morning and thank you for joining us. This morning GeoMet issued a press release announcing our second quarter operating results. If you need a copy of the release one is available on our website at www.geometinc.com. Today you will be hearing from Darby Sere, GeoMet’s Chairman, President and Chief Executive Officer and Bill Rankin our Executive Vice President and Chief Financial Officer.
Also present today are Phil Malone, GeoMet’s Senior Vice President of Exploration and Bret Camp, our Senior Vice President of Operations. After remarks from Darby and Bill, we will have a question and answer session.
Statements made today regarding GeoMet’s business which are not historical facts are forward looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated by forward looking statements. Free discussion of the risk and uncertainties which could cause actual results to differ from those contained in the forward looking statements. See forward looking statements and risk factors in the company’s filing with the Securities and Exchange Commission.
The terms adjusted lease operating expenses EBITDA, Adjusted EBITDA and Adjusted Net Income are non-GAAP measures. Please refer to our website or this morning’s press release for a reconciliation of these non-GAAP measures to GAAP measures.
I’ll now pass the call over to Darby.
Darby Sere – Chairman, President and Chief Executive Officer
Good morning everyone and thank you for joining us. As we announced today, GeoMet reported record gas sales, cash flow and adjusted net income in the second quarter, because of development drilling opportunities exist in all of our projects, we are increasing our 2008 capital expenditure budget by $6 million to $57 million which should accelerate growth in reserves, production in cash flow in the second half of 2008 and thereafter.
Net gas sales volumes for the company in the second quarter of 2008 averaged 20.4 million cubic feet per day, an increase of 5% over the same period last year and essentially flat compared to the first quarter of 2008.
Sales volumes for the current quarter were approximately 5% below our expectations. Net gas sales volumes for the company are presently running at approximately 20 million cubic feet per day. This decline in current sales volumes compared to the second quarter average is a result of the agreed conveyance of our overriding royalty interest in the White Oak Creek field. Bill will discuss these production matters along with updated production guidance later in the call.
I our Pond Creek field, net gas sales volumes averaged approximately 13.4 million cubic feet per day for the second quarter of 2008 up 10% from the same period last year and flat compared to the first quarter of 2008. Because of delays in getting drilling permits only 5 wells were drilled at Pond Creek in the first half of the year. This resulted in a decision to move the drilling rig to our Lasher field 10 miles through the North. Of the 26 wells to be drilled in Pond Creek this year up from 21 wells in our original budget, 16 will be drilled in this third quarter. Net gas sales from Pond Creek are currently running at approximately 13.5 million cubic feet per day. We drilled 13 of the 15 planned wells in our Lasher project during the second quarter. We will drill and complete the remaining two wells in October. Construction of our water and gas gathering systems is substantially complete. However, the tapping to the Columbia Interstate Pipeline has just been completed and their metering facilities are being fabricated and will not be completed until September. We now expect to commence gas sales from the first 16 wells at Lasher in late September.
In the Gurney field in the Cahaba Basin, our net gas sales volumes averaged 6.0 million cubic feet per day for the second quarter of 2008 flat compared to both the same period last year and the first quarter of 2008. This flat production is reflective of the fact that only one well has been drilled in Gurney during the first half of the year and only six wells have been added to sales over the last nine months. Current net gas sales volumes from Gurney are running at approximately 6.2 million cubic feet per day. We currently plan to drill until the 13 wells at Gurney this year up from 5 wells in our regional budget. I would like to note the two high water producing wells on the east side of the river have recently experienced significant increases in gas production. We have been expecting to see gas production increases from these high water producing wells for sometime and we are encouraged. We expect to see positive response from additional high water producing wells in the second half of the year.
Production testing on the Westside of the river continues to yield encouraging results and development of that area acreage is expected to commence in 2009. At our Peace River project in British Columbia we have commenced our 2008 drilling program which includes as drilling and completion of five new production wells. In July, we conducted a water injection test in a formation below the coals with very good results. This disposal well gives us the ability to handle near term water disposal and confidence we can also handle the long term water disposal requirements for the project. We expect to complete installation of the gas and water gathering systems for the five new wells and three existing wells construct and install gas treating and compression facilities, complete a pipeline interconnection and commence gas sales from eight wells before year end. We expect to book initial prove reserves in this project at year end 2008.
At Garden City, our Chattanooga shale prospect we drilled one horizontal well and one vertical well during the second quarter. The vertical well was frac in July and the horizontal well would be frac this week. We also refrac the two initial vertical wells drilled on this prospect using different frac techniques then we were previously implied. We’ve connected these two wells to sales and we will connect the horizontal well to sales after disfrac. We planned to drill two additional horizontal wells later in the year and we are exploring water disposal alternatives for the prospect. We have also begun the process to connect to sales the other two vertical wells drilled on the prospect. We currently control approximately 80,000 gross acreage in this prospect and based on results today, we will continue our leasing efforts.
We expect to book proved reserves in Garden City this year. As to our long running lawsuit with CNX gas regarding the validity of regarding the validity of an easement granted to us by the land owner of our property through which we constructed a pipeline to deliver our gas sales volumes from our Pine Creek field to market. The parties presented oral argument before the Virginia’s Supreme Court on June the 2nd. We are pleased with our argument the response of the judges and with nature and line of their questioning. A decision from the court is expected by September the 12th and we’ve remain confident in the ultimate outcome. Even in the unlikely event that we do not prevail on this matter, the risk to GeoMat is manageable. We have alternatives that would not be destructive to our valuation and we have the time necessary to execute these alternatives. We will communicate the decision as soon as it is issued.
At this time I will turn the call over to Bill to discuss our financial results.
William C. Rankin – Executive Vice President and Chief Financial Officer
Thank you Darby and good morning everyone. GeoMet’s capital structure strong with net debt and total capital price in the 31% at the end of the second quarter. Bank debt no cash bank debt net of cash totaled 95.5 million at the end of the quarter and the borrowing base under our bank credit facilities a 180 million. We expect our borrowing base utilization to be less than 65% at year end even after two increases on our capital budget this year. We have hedged 12 million cubic feet of gas a day through October 2009, 6 million cubic feet a day from November 2009 to March 2010. These hedges largely employ three weight collars which provide downside protection while retaining price upside.
The hedges in place at June 30th have an effecting average core price of $8.87 for the winter months and $7.76 for the summer months and effective average filling price of $11.07 for the winter months and $9.88 for the summer months. We are unlock due to hedge more for October 2009, we’ve planned to look for opportunities to expand and extend our hedge position thereafter.
The company reported a net loss for the quarter of 3.2 million as compared to net income of 3 million for the second quarter 2007. Each of these quarterly periods was impacted by unrealized hedging gains or losses resulting from the mark-to-market of our natural gas hedge positions.
In the second quarter of this year we recorded an unrealized after tax hedging loss of 8.7 million as compared to an unrealized after tax hedging gain in the amount of 1.1 million in the same period last year. Excluding the impact of these unrealized hedging gains or losses, adjusted net income was 5.5 million in the second quarter of 2008 compared to adjusted net income of 1.9 million in the second quarter of last yea. For the six months adjusted net income totaled 8.8 million as compared to 3.5 million in this first half of last year. Please refer to today’s press conference for a reconciliation of this non-GAAP measure.
Average natural gas prices adjusted for realized hedging gains and losses increased $10.35 per Mcf in the current quarter as compared $7.66 from the prior year period. Excluding the impact of hedges, the actual natural gas price received was $11.15 per Mcf in this quarter compared to $7.63 last year. We expect gas prices for the remainder of this year to be threading to high levels of volatility.
EBIDTA for the current quarter was negative 0.9 million, adjusted EBITDA, which excludes unrealized hedging gains or losses and other non-cash charges was 11.5 million compared to 6.7 million in the same period last year and 9.3 million in the first quarter. Adjusted EBITDA for the first six months of 2008 totaled $20.8 million as compared to $12.8 million in the prior year period. Please refer to this morning’s press release for a reconciliation of this non-GAAP measure.
Transportation costs were $0.14 per Mcf for the quarter compared to $0.37 in the same period last year and $0.19 from the first quarter this year reflecting the improved transportation economics of concrete, now there are gather loss in February. Depression costs were $0.40 per Mcf for the quarter flat compared to the same period in 2007 and $0.37 per Mcf for the first quarter this year.
Adjusted lease operating expense was net 30 saltwater disposal revenue with a $1.85 per Mcf in the second quarter compared to $1.76 in the second quarter of 2007 and $1.85 per Mcf in the first quarter of 2008. Please refer to this morning’s press release for a reconciliation of this non-GAAP measure. G&A expense was $2.9 million for the current quarter as compared to $2.2 million the same period last year and $2.5 million in the first quarter of this year. Legal fees continue to be a key driver of high G&A level. The inflation rates for gas properties was a $1.26 per Mcf for the quarter compared to a $1.25 in the same period last year and in the first quarter of this year.
As Darby previously mentioned, last week the board approved a second increase in our capital budget for 2008 and additional $6 million. We now expect capital expenditures of $60 million to $70 million in 2008. This represents an approximate $12 million increase and the amount of the expenses directly in expiration development activities and increase of 40% from the original 2008 capital budget. The additional GAAP will be used to drill 13 additional development well in Pond Creek and Gurney.
Earlier Darby mentioned its second quarter production volumes were approximately 5% below expectation. This shortfall results from three factors. First, the Lasher field did not come on line its schedule due to delays by Colombian completing the interstate pipeline interconnection and the metered facilities. Secondly most of the drilling in the Pond Creek deal was deferred early in the year due to delays in permitting wells and this led the decision to move the rig through the Lasher field, only 5 or 26 wells plants for Pond Creek this year were drilled in the first half. Last week Gurney underperformed during the quarter partly due to the operational problem. It should also be noted only cob well has been added to sale this year and that well was added late in the second quarter.
Going forward we will no longer receive sales volumes of approximately $900 million cubit feet per day, 900 mcf per day from an override royalty interest in its White Oak Creek field. This override royalty interest will be conveyed to a third party effective July 1, 2008. This conveyance is responsible for the drop in current sales volumes from the end of the second quarter.
Guidance for full year sales volumes would be affected by the factors mentioned from second quarter and the conveyance for the vital creek override. Somewhat offsetting these negative impacts is the expected sales volumes from the new wells recently added to the capital budget however, these wells are not expected to come online until the fourth quarter. Factoring all of these inputs we are revising guidance for year-over-year growth and gas sales volumes to $0.07 to $0.10 as compared to previous guidance of 13% to 17%.
With that, I will turn the call back to the operator for questions.
(Operator Instructions). Your first question comes from the line of Phil McPherson of Global Hunter Securities.
Guys, how are you doing?
William C Rankin
Congratulations on a nice quarter. Just a couple of questions, I think it is pretty good news with these Pond creek wells the high water wells that you are talking about, can you give us little more detail in numbers and what you are seeing out there and how many more of these are we’ve got to look-forward to?
Brett, you want to take that?
I will, well we had two wells that we’ve been producing for several years that how water rates and recently we have been able to increase those rigs and the wells are basically making probably 0 to 50 mcf and we have seen upwards of 100 to 200 mcf in these well, and then have a few operational. I see the build and mentioned earlier, which is related to power averages. So once we get those straightened out these well should consistently will be doing like say 150 to 200 Mcf a day, and I would say you know, we’ve got another handful of wells likely for at least 5 that we’re looking at should contribute probably in the next six months.
And Brett these are wells that you’ve put larger pumps on it, you’re going back in and I think you’re spending was it $50,000 or $40,000 some like that on?
Yeah. That’s correct. Yes.
Over average is so significant at least how water wells. We are working like that and we will try to get pump down e when you have a average, I would say like up again you guys starting on over. So it’s been a issue we’re trying to deal with.
And what was the per average costs?
Just the main line coming into these well from just limits on some of the powers has been upgraded in the future, how to bring at us try down and some of it did do the summer months with lightening strikes and things like that.
Got you, great. Can you guys give us a little more data on the chart of newly stuff like maybe the length of the horizontal that you’re drilling or what you’ve seen as far as water production and initial rates and anything in that nature?
Well I would Brett take distances and we only drill one so far but the main thing we have not yet discussed rates on the two vertical wells that are in the sales yet and would prefer to keep that, acquire as wrong as we can before what we are leasing. But the horizontal wells have not yet been flat. So we have no information even internally or what that well is going to do. We’ve got high yields, but the two vertical wells are producing a certainly attractive rates where we are pleased with them after a refracs. Brett you want to take the horizontal plans?
Yeah, first horizontal is difference about 15 FC which was less than what it is on the plan, but the wells are limited by the unit size because these are still world wells, but we will add the next two wells we got permitted, one can be of course over 2000 feet and was been able to permit on a 320 acre unit which will be over 300 plus rate.
And how big is the shale what you get in vertical now? And what’s your (Inaudible).
I think it varies, but it varies somewhere between about 30 and 60 feet over most of the project.
Great. I will let somebody else jump on and come back for more guys. Thanks.
Your next question comes from the line of Mark Lear of Sidoti & Co.
Good morning gentlemen.
I was wondering if you could maybe give me an idea of what kind of production you’re looking for Lasher as well as the Piece River wells that you’re bringing on in the back half of this year?
Well, I think last year we are probably expecting initial rates in 35, 40 Mcf initially, am I right Brett?
That would be correct. The watering leases maybe a little longer than Pond Creek so that will be right.
Yeah, we are seeing – we are testing about eight of them right now, and we’re seeing to be a little big higher water rate hanging around a little bit longer than Pond Creek, but I would say that we expect to be somewhat less than the Pond Creek wells which currently averaged about 75 Mcf a day, although Pond Creek has been for four, five years. Logistic has the coal fragrances less; we would expect a less rate as well. On Piece River, we expect in the exceed of either be a 100 or even higher 150, 200 Mcf a day initially there.
And then I guess in terms of modeling pricing from Canada, how – will it be the best way to look at that and I guess, royalty rates as well?.
Well we – the royalty rates in Canada for the first several years were probably be pretty much zero with – and you get certain credits for dealing in the summer and so forth so – for summer drilling so we believe that for maybe as much long as the five year period we will have no royalty, and over the life of the project where forecasting the royalty would be something less than 10%. Again those service factory in Canada, we have option of losing our gas there in Canadian market or now in the US border. In the first quarter I thin the Canadian border price was first half of summer like modes $0.44 it’s a little wider than that I think right now. We also would incur something like 60 sets of transportation to take on, we are down to the US border, we’re taking it to the Canadian market, and we would only require about two shifts of transportation. So we will be monitoring the orbritrize between Canada and the US as we go forward and have the opportunity to take a new deploy.
Understood. Thank you very much.
And with the Canadian dollar is strong, the Canadian market actually is the best alternative right now.
Got you. Thanks.
Your next question comes from the line of Kevin Smith of Raymond James.
Good morning fellows.
I can talk or a few questions about the Cahaba River, you know, it seems to me like you like what you are seeing right now. Maybe you can expand on that and also, I guess, there is some discussion about looking for a partner for joint development. You know, how much capital would you think it’s going to take to develop the plan, I guess this is why the joint development?
Well, in terms of joint development, I think you are talking about the west side of the river and the reason we are talking joint development is because the offset operating has about the equal amount of acreage as we do and we already have agreements in place with that operator to share water treatment costs, and an agreement in place to use their gas transportation line that takes the gas down to the Southwest into the ultimately into the Transco system. But it turns out that offset operator also is a little bit short of capital and so what our discussions have been around is us maybe paying a disproportionate share of the capital to develop the west side of the Cahaba in return for earning a portion of their interest. So, that’s the nature of it and we do feel like that west side is very attractive for significant reserve increases as we develop because most of the river as we developed because most of the reserves on the west side of the river on our acreage are classified, it’s probable.
Okay. And when you can expect the development commenced in 2009, is that going can be -- you know, how do you kind of layer that over through the year, just equal as far as drilling, are there any other sort of events you need to see before you green light that project?
I think we will be in the planning process for 2009 budget in the next couple of months and that will determine the timing of it, but if we don’t reach this joint venture agreement, we are certainly prepared to start developing our acreage alone. So, I would expect initiation of drilling on west side in the first quarter of ’09.
Okay. One other question, it seems like you’ve got a lot of things coming on maybe mid to late third quarter, connecting wells to sell. How should we be looking at that, is that really going to impact the third quarter or is it really going to be more of the fourth quarter kind of contribution.
I don’t think that that’s going to have much impact on the third quarter, because some of it is coming on late. Remember coal bed methane wells tend to come out at low rates and then in our experience have been achieved go up and achieve an early peak and then turn down. So, I don’t think it’s going to have a huge impact on the fourth quarter either, but it will start -- they will start having the cumulative impact as we go forward. I would expect that the exit rate at year end 2008 probably to be up a little more than maybe what our guidance is for the full year.
Okay, it was very helpful. Thank you.
(Operator Instructions). At this time there are no further questions. Are there any closing remarks?
Well, we appreciate your interest in the company and thank you for joining us. We’ll talk to you next quarter.
Thank you. That does conclude today’s GeoMet Inc. second quarter earnings release conference call. You may now disconnect.