Helen Baud - Wall Street Analyst Forum
Michael Coffman - President and CEO
Panhandle Oil and Gas Inc. (PHX) Wall Street Analyst Forum September 9, 2008 11:50 AM ET
Good afternoon everybody. My name is Helen Baud from the Wall Street Analyst Forum and I am the host in this room for today.
I would ask at this time, if anyone has any cell phones, BlackBerry, hand-held device to please turn it off or turn it into the silent position so as not to disturb the presentation. Also as a reminder, the University Club does have a very strict policy regarding cell phone use in the building and they do enforce their policy quite strictly.
The next company we have presenting today is Panhandle Oil and Gas. The majority of Panhandle Oil and Gas Incorporated's revenue are derived from the production and sale of oil and natural gas. The company's oil and gas holdings, including its minerals, acreage and its interests in producing wells, both working interests and royalty interests are centered in Oklahoma.
Panhandle does not operate any of its oil and gas properties. Exploration on and development of the company's oil and gas properties are conducted in association with operating oil and gas companies, primarily large, independent companies. The company has been an active working interest participant for many years in wells drilled on the company's mineral acreage and in third-party drilling prospects.
A large percentage of the company's drilling participation continues to be on properties in which the company owns mineral acreage, and in many cases already owns an interest in producing wells in the unit. This increased density drilling has accounted for a significant part of the successful oil and gas wells completed during recent years and has added significant reserves for the company.
The company is very active in gas resource projects on its mineral acreage in Southeast Oklahoma and Arkansas. Activity in these projects is expected to substantially increase in fiscal year 2008.
Presenting today is Michael Coffman, the President and CEO.
Yes it is good afternoon now. She gave a pretty good summary of Panhandle. I think we would move on after that. Here is our normal forward-looking statement. So what I would do today is give you a brief summary of Panhandle's history. A lot of you probably are not aware of Panhandle.
I will give you a little bit of idea of where we are at with our financial statements etcetera and then probably spend the biggest part of the talk on where we are drilling and what our current operational activities are.
Panhandle Oil and Gas changed its name from Panhandle Royalty Company effective April 2 of 2007. We made the name change for two basic reasons; one, we were continually being confused with being a royalty trust, which we never have been.
Also in 2006 we made some very significant changes in the strategies of the company going forward, operational strategies and we wanted to get the royalty out of the name and the oil and gas into the name. We are not a royalty company anymore. We have made the shift away from that. Our stock is traded on the New York Stock Exchange.
We just moved over from the AMEX in July of this year. We have 8.4 million shares outstanding, whereas our stock closed yesterday at $30.39 a share. We have not had any secondarily offerings. We have not deluded our shareholders any since going public in 1979. We have had several stocks splits since that time and we are in the midst right now of finalizing a stock repurchase. It will be our second repurchase that we have done since June and we are going to purchase about $5 million worth of our shares.
Panhandle is a very unique company compared to most oil and gas companies. What we do is we are a mineral acreage owner. We own about 255,000 net mineral acres in perpetuity. We like to leverage the use of those mineral acres into working interest and wells that are drilled on those properties.
The laws in the States where we operate allow us to be able to take a working interest in the wells that are drilled on those properties by paying our share of the cost. We are a non-operator as was mentioned.
We do drill wells with a lot of the very large independents we will go over some of those little bit latter, but we think it is a very good business plan and allows us to maintain a very low overhead. We have 18 people on staff right now and we will do somewhere little bit above $60 million in revenue this year.
We also use those mineral acres, as I mentioned both to participate in wells with a working interest and if we do not like the economics or the geology of the particular prospect, we will just take a mineral interest in wells that are drilled on our properties.
We like to drill on our mineral acres, because it increases the rate of return on our drilling. When you drill on your own mineral acres, the people that are having to go out and lease acreage from third parties have to pay a royalty to the other mineral owners. Being a mineral owner our self, we get to keep that royalty. So our rate of return is higher than the operators that are drilling wells.
Also we get exposure to many drilling opportunities with larger companies that we would not be able to generate being the small sized company we are. We will talk about some of those in a few minutes. We have also begun to purchase leasehold increased interest in wells that we participate in, we are drilling a couple of projects just on leasehold now and not on our mineral acres.
As I mentioned, the shift away from just the royalty company mentality, about 75% of our revenue now is from working interest in wells, not just royalty interest only now accounts for about 25%. Our mineral acreage holdings are in good oil and gas States; Oklahoma, New Mexico, Texas, Arkansas, most of our leasehold is in Oklahoma.
As I mentioned, in 2006 our former President retired from the company. We decided, after looking back over the prior three to five years in the company's history, we had been working pretty hard drilling a lot of wells, but with a very small interest and we really had not made any significant increases in our reserve or production base during those past three to five years.
We decided that; we wanted to move the company forward, we wanted to increase our reserve base, increase production, and we knew the only way to do that was to significantly increase our capital expenditures. We could have taken one or two tracks, either spend more money drilling wells or go out and buy additional oil and gas properties.
We decided, because of what was happening, particularly in a couple of unconventional gas plays in Southeast Oklahoma and in Arkansas that we wanted to spend the money drilling wells, and to do that we were going to have to increase the working interest that we were taking in new drilling.
We also said that we needed to develop some new prospects internally, which we will go over a couple of those, to give us areas to continue to drill wells; we obviously will continue to explore the legacy assets or mineral properties; I think we are doing a good job of that as we will see in a few minutes.
Our fiscal year end is September 30. So when we made those strategy changes in mid '06, we only had about a half a year to operate under the new strategies. Our first full year of operation under our new strategy has ended September 30, '07. As you can see from this slide we increased our reserves 22%, we increased our production 19%, we replaced all of our production by 232%. Our finding cost were $2.10 mcfe.
As I mentioned earlier we did that often drilling, we did not have any acquisitions during the year and another important point, is we were able to finance that basically from cash flow. In other words, cash flow from the new drilling that we were doing was coming on line fast enough to finance the additional drilling that we were doing. We did have a very minimal increase in debt, we will look at that in a minute, but I think for a company our size our debt level is very small.
Our reserves, fiscal year end September 30, '06-'07 and then in mid-year March 31st, '08 you can see we have had a significant increase in our proved reserve volumes. You can see most our reserves are natural gas, most of our reserves are proved producing. We only have 20% of our reserves that are proved and developed reserves.
Financial highlights for our fiscal year ended September 30, '07 versus '06. You can see we have been a very profitable company throughout the years. Our cash flow from operations continues to increase, capital expenditure increased significantly from '06 to '07 you will see in '08 that number has significantly increased again. Our production as I mentioned earlier, increased 19% year-over-year.
We were able to have that increase in revenue even though our average sales price pre mcfe reduced about a dollar, because our production increased.
Yearly production profile, the idea of this chart is to show you that we began our change in operating strategies in mid '06. You can see that we have got the curve in the upward direction and looks like it will continue that way for the next several years based upon our drilling inventory.
For the nine months ended June 30, 2008, very significant increase in revenues. Net income cash flow from operating activities, 50% increase in our expenditures for oil and gas activities and mcfe production increased 34%.
So the changes in our strategies are working. We are significantly increasing in '08 versus '07, both production, I think when our reserves come out at year end, you will see another significant increase in reserves this year.
This is quarterly production profile. We have some ups and downs, since we do not operate wells; we do not really get to schedule when the drilling has started when it is completed. So you will see some blips in our production from quarter-to-quarter, but the main thing to notice there is the trend is in the upward direction. We will continue that way. So do not be concerned if you see a quarter that is down a little bit over the prior quarter.
Balance sheet, as you can see, we only had $10 million of debt at June 30, 2008. I think when I left Monday morning we had paid that down to $7 million. So we are maintaining a very solid balance sheet while we are increasing our spending, the increase in production obviously has helped.
We do pay a dividend. We have paid a dividend for over 50 years in a row. We did increase the dividend in 2007. As I mentioned several times, we have increased our capital expenditures significantly, and we have a $50 million debt facility in place with Bank of Oklahoma. We have kept the borrowing base small at this point discount them on an as-needed basis, so we do not have to pay the non-use fee to the banks.
We do hedge part of our gas production. We do not hedge any of our oil production. About 80% of our production is natural gas. We have had collars in place throughout this calendar year; the collars that are still in place, we had about 40% of our gas hedged through the summer months and a little over 20% hedged in the final calendar quarter of '08.
Obviously at June 30, the prices for natural gas look significantly different than they do now. We took a pretty good write-down on our mark-to-market at June 30. The write-down will flop around and be positive for us in the fourth quarter of '08. We are in the money on some of our hedges here for September.
Significant areas where we are drilling right now: Most of our money is being spent in Oklahoma and Arkansas. We also drill some wells in Texas, little bit in Kansas, just development the field, its been there quite a while, and then a little bit money spend in New Mexico. These are our significant areas right now.
The Woodford Shale in southeast Oklahoma, the Woodford Shale is an unconventional gas play that is horizontally drilled. We own about 10,000 net mineral acres in the play, 6,200 of those acres are in the core area, what we consider to be the core area of the play.
You see a lot of companies talk about the horizontal unconventional shale plays, the Woodford Shale in Oklahoma, I think is right up there in a class with any of the other plays throughout the country. Our 6,200 acreages are contained in 185 sections of land in the Woodford area.
Our average interest in a well out there will be 4%, which means if there are eight wells drilled per section, which is what it looks like the development will be eventually. We have the potential to be involved in 1,400 wells, just in our 6,200 acres. Very significant increase for us, lot of drilling to be done over the next several years.
Today we have taken a working interest in a 110 wells in the Woodford, 57 of which are already producing. Working interests have ranged from anywhere less than 1% of the 42% and those interests are disproportional to the mineral acreage that we have in the section that is being drilled.
The average interest has been about 8% in the 110 wells that we have committed to you so far. We also have 16 royalty interest wells that we have an interest in and the Woodford is producing about 6.3 million cubic feet per day in net to our interest.
Again I will mention, our rate of return is going to be better than those who are operating these wells. We are drilling on our minerals. We get to keep the royalty interest whereas the operators have had to go out and lease other royalty owners to drill the wells.
As you can see from the land slide here, our acreage is the lavender color spread throughout the four county areas. As you can see from the well spots, we have had wells drilled all over our acreage and you can see that our acreage except down in the Atoka County, which is really out of the play at this point, is pretty well spread throughout the four county area.
We asked DeGolyer & McNaughton to give us reserve estimates on our probable and possible reserves in the Woodford. This was done a while back, actually December 31,'06. We asked them just to look at the 6,200 net acres in the core area. They considered the average well to be 2.5 bcf, which I think if you talk to most of the operators now, they are going to say 3 bcf to 4 bcf is going to be the average well.
So I think this is a conservative case and then the 80 acre density would be eight wells drilled per section. Our calculation from DeGolyer gave us probable and possible reserves of a 130 bcf, that is about 2.5 times multiple of our current reserves. So as you can see this area will be a very significant area for Panhandle going forward. DeGolyer is working on updating those reserves as we speak. Probably sometime in October we will have a press release out for our year-end proved reserves as well as our probable and possibles.
The principal operators that we are drilling with, as I mentioned earlier, we drilled principally with large independent companies, Newfield probably drills well over 50% of the wells that we are involved in, in the Woodford. Chesapeake has now sold their interest to BP and XTO, so we know both those companies have plenty of money to be drilling in the Woodford. We are excited about that, and then Devon is the other operator that we are involved with in the Woodford.
Fayetteville Shale in Arkansas, the same type idea; we own 9,000 net mineral acres in Arkansas, we did lease those acres to Chesapeake in 2005 just as the Fayetteville was beginning to look like it was going to be a world class gas play, but we did retain the right to participate in 67 of the sections that we leased with a working interest. We actually buyback those leases from Chesapeake in those sections and are able to participate with the working interest in wells drilled on those sections.
In the other acreage, we will have a royalty interest in all the wells drilled. So in the 7,800 acre core area of the Fayetteville our average interest is going to be about 2% in all the wells drilled in the 284 sections where we own minerals. That means potentially if Fayetteville's are drilled per section we will have an interest in somewhere around 2,200 wells in the Fayetteville.
To date we have agreed to participate with the working interest in 45 wells in the Fayetteville, 25 of which are producing. As you can see there we also have 61 royalty interest wells currently producing, our average working interest in the Fayetteville is somewhat smaller than in the Woodford, it is averaged about 5%. We will not have any of the large interest wells like the 42% wells that we will have in the Woodford here in the Fayetteville.
Consequently our interests are smaller. We are only producing about 1.4 million cubic feet a day, net to our interest write-down out of the Fayetteville, but there are additional wells going online each month both in the Woodford and in the Fayetteville. So that productive rate will be going up.
Again I will throw out one more time; we are drilling on our minerals here. Our rate of return is better than the those who talk about the rates of return the operators in the Fayetteville and in the Woodford.
Again just the acreage map, as you can see our acreage is about 65% of it. I believe is the number is right in the middle of the play in Conway, Van Buren, Faulkner and Cleburne County. We have had wells drilled all the way out of the [five] county to the east of the play which we did not even consider to be in the core area of the play that looks like we have got a nice play going over there that Chesapeake is developing.
Again we had DeGolyer & McNaughton look at our probable and possible reserves as of July 1, '07, they were very conservative on the Fayetteville and only gave us 0.8 bcf average well throughout all of our acreage in the 6,200 net acres in the core area. They estimated, they thought eventually nine wells would be drilled per section and that gave us a little over 40 bcf, which again is equivalent to our current reserves. We are updating as I mentioned these reserves will have those out hopefully later part of October.
Principal operators we are participating with in the Fayetteville, Southwest Energy and Chesapeake, again very large independents we know they are going to spend money, we know they are going to drill additional wells. We are going to be involved in it.
Dill City is a project in western Oklahoma that we actually began in-house. We bought two old producing wells and the land surrounding those wells. We sold that half interest in those wells to a local company in Oklahoma City we have done business with in the past to be the operator. We formed an area of mutual interest went out and bought some additional leasehold in the area. I will show you a land map in a minute.
We have now got an interest in I believe around 25 sections of land. We own an average interest of about 15% throughout the acreage in this play. When we originally bought those two old wells, our idea from our in-house geologist was to drill some additional granite wash wells. We drilled a couple of granite wash wells.
We are very under whelmed by the results and decided to drill the third well to the Atoka. We got a very nice well, we drilled the fourth well to the Atoka, got a great well the Thomas 1-7 that you see here has been on production since March of '07. It is made over 2 bcf of gas and well over a 112,000 barrels of oil. We have got a working interest of 32% in that well. It is still producing at a very high rate.
We are developing this project, we will look at the land map in just a second. Our current production from Dill City, it is about 2.5 million cubic feet of gas a day and 126 barrels of oil per day. We have got two rigs running out there right now and we expect to have two rigs running for about the next 12 months, drilling increased density wells and a few wells to hold some acreage.
As you can see from the acreage map here, the percents in there are the percent that we own; we will have a working interest in each one of those sections. Section seven, there is a Thomas well located in, we have now offset both to the North and the South; got two nice wells from that, not quite as nice as the Thomas, but good production.
It looks like at this point probably the western part of the project is going to be a little better than the eastern part; but we are going to be drilling some wells in the eastern part of the project as well as really drilling increased density wells for the next few years in the western part of the project.
One of the things I mentioned when we talked about our strategy changes, is we wanted to continue to develop some in-house projects that we could be drilling for the next several years. This is a project that we developed in-house.
One of our geologists actually set some wells that were drilled out here in the 80s. He remembered drilling through the Woodford Shale with a vertical well. As we have all seen throughout the years, vertical wells and the Woodford Shale are not that great, but when you drill at 3,000 to 5,000 lateral in the Woodford, the results turn out much differently.
So what we did is we have gone out and acquired over 10,000 acres in this project. We have the same company that is operating the Dill city project, is going to operate this project for us. We think the first well will probably be drilled out here fourth quarter of this calendar year, some time in the November time range.
It is going to be a horizontal Woodford play, we think it will be a little more of oil-prone than gas-prone in this area. We sold our interest down to 22.5%. We have three other partners, one of which is the operator. We all roughly have about the same interest in the project.
I put this in here, because this is the type stuff that allows us to drill a lot of wells in one area. With our mineral holdings we talked about our 255,000 net acres, spread throughout the stage that we talked about. This allows us to concentrate our drilling in areas that we think, we can make some money in the next several years, a long-term project for us.
So I think if you go back and look at the strategy changes we talked about earlier, we are executing our strategies as we hope to. In fact, we probably are a little further ahead at this point than we expect it to be. We are participating with much larger interest in wells, most of the wells we drilled in the 90s and in early 2001, 2002 range, we would have 3% to 5% interest.
We had to drill a lot of wells to really make an impact on the company. We are able to make an impact now, both in being in good areas, drilling with good companies, but taking significantly larger interest in wells that we participate in.
We are aggressively participating in the unconventional plays. We have significantly increased our capital expenditures. As you saw 2008 is a significant increase over 2007 and 2009 looks like we will have another large increase.
When our reserves come out for September 30, 2008, you will see another significant increase in reserves and production. Again, we have done all this principally out of cash flow. We have increased our line of credit. Part of that increase in line of credit even has gone to buyback some of our stocks, so cash flow has been very significant for us from these properties.
So I think basically to sum it up, we have got the ability and the commitment to maximize our current and future drilling opportunities, I think the best days for Panhandle are ahead of it. Hopefully when I stand up here and the next few years, you will see that we have continued to have the growth we have had the last couple of years and accelerate that growth.
That is the presentation. She said we have got this room for a few more minutes. So if you have any questions, I would be happy to answer them at this time.
Unidentified Audience Member
For you on the internet, he asked why we bought back stock, how we rationalized buying back stock. We felt like our stock was a good buy, we looked at our reserves per share of stock; we just felt like that our stock was a tremendous buy in the market at that point in time and committed to make $5 million stock buyback in two tranches, if you will, and have that completed at this point.
I do not know if we will be doing any more buybacks at this point, but it is a potential that we could. Now some people have asked do we think that will. We do not trade a whole lot of shares on a daily basis if they think that buying back shares will hurt our daily trading volume. Actually since our buyback started, when we moved to New York Stock Exchange, I think our trading volume has more than doubled, and we have seen it continue to go up on a daily basis. So that is where we are at on the stock buyback.
Any other questions? Yes, sir.
Unidentified Audience Member
I am sorry, capital expenditures?
Unidentified Audience Member
Two or three years out? It is hard to say right now. It depends on how active some of the companies that are drilling in the Woodford and the Fayetteville get principally in the Woodford. We are seeing a significant number of new rigs being moved into the Woodford. Newfield continues to say that they are going to put more rigs drilling in the Woodford. BP obviously, and XTO did not buy into the Woodford from Chesapeake not to put more rigs in the field. So I suspect that our capital expenditures are going to continue to grow at a rate that we have seen from '07 to '08.
Is it going to double, triple? I really do not know that [Scott], we are at the mercy of the companies that operate the wells. I do think we are going to have the opportunity to continue to spend a lot more money in our projects. Also at the [Johnner] City project works that we talked about, very significant number of wells to be drilled there. That is probably you are looking at probably eight wells per section there also.
Obviously, we know we have got to spend money to make money, so we will be committing capital. Anything else?
I appreciate your attention. If you think of anything else, contact either me I will be around for few more minutes or [Dillon Wedale] our Investor Relations Consultant, we will be happy to answer any questions you might have. Thank you very much.
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