Bill Barrett Corp. (BBG) Bank of America Merrill Lynch Energy Conference Transcript November 13, 2012 10:30 AM ET
Scot Woodall - Chief Operating Officer
… almost $1 billion market cap and Scot Woodall, the Chief Operating Officer from Bill Barrett will be presenting. Scot?
All right. Thank you. And thank you guys for joining the Bill Barrett presentation. I’ll refer to the last couple of pages of the presentation for normal disclosure statement. And then we’ll jump right in a little bit into who are?
And we’ll start with a couple of things. If you look listed on the left side of this slide here, is the some of the pertinent data of the company. We are 1.4 Tcf company. We have production of about 330 million cubic feet of gas a day and I’m happy to report today that about third of that production is now coming from oil and NGL.
On the right is the map of our areas of focus and you can see we bring a whole lot more commodity down. We worked hard at changing this portfolio to bring more liquids in that portfolio and I think we accomplish that, and I think you’ll see that as we work through the presentation.
A couple of items here listed why you should invest in Bill Barrett and I’ll highlight couple here as well. One, over the last 10 years we’ve done excellent record of transitioning from oil -- from natural gas into oil. We have been able to deliver year-over-year growth in terms of production and in terms of reserves.
We really are bringing a lot balance into our portfolio. We have 100% of our CapEx is now focused on oil related properties. Our development programs which are really focused into two basins we are executing on and delivering very positive financial results.
Over the last several years we have demonstrated that we are low cost operator, delivering top tier cost performance in nearly all categories in terms of funding and development costs, least operating expenses, G&A, and gathering and transportation.
And then lastly, in terms of financial strength, we have ample liquidity to make this transition to oil and to fulfill our plan.
Listed on this slide is what I would really say is the bad moment of the company, when you start talking about proved reserves, production and EBITDAX. And I’m happy to report, if you look over the time period here the last five years, we have delivered double-digit compound annual growth in all three of these metrics. And really as we look forward to the next three years, is really going to be focused on continuing this execution.
Let’s talk a little bit about where the company fits financially, we have strong balance sheet and we have ample liquidity. We recently have done a couple of transactions that improved the liquidity of the company.
First, namely is, we did a least transaction for our mid-stream assets, we announced that in Q2, we suppose see to that, we are about $100 million. Most recently in Q3 we announced the sale of -- some of our assets, which I would put in the natural gas non-core, non-strategic assets.
Really it is an excellent business decision. I think we’ve got great metrics, if you look into the actual metrics on the flowing barrel, on the produced reserve basis. What that does is, it’s going to bring in a little bit more liquidity to fund our existing development programs, as well as paydown debt. We expect this closing to happen by year end.
I want to highlight just a second these two core development programs, I believe in the focus of the company in 2012, and those are namely the Uinta Oil Program and then the program that we have going into DJ Basin.
Production growth in both those areas has been outstanding in 2012. And the production in Uinta Oil play has risen 75% year-to-date and the DJ Basin oil product is up 150%. We have been able to add to our acreage position in of those plays in 2012, adding some 14,000 acres in the Uinta Oil play and nearly doubling our acreage position in DJ Basin by adding some 40,000 acres in 2012.
Each of them have significant amount of undrill locations. The Uinta Oil play being the most mature basin with nearly 1700 undrill locations. The DJ Basin is one of our newer asset. I expect growth out of both of these assets when you think about in terms of 2012 year end booking and year end disclosures in terms of locations to be drilled.
Each one carry significant amount of upside of other horizon down facing and opportunities that will be evaluating in the future. More to come on both of these project areas later in the presentation.
Let’s go back to kind of the theme that we’ve been talking about is, the Bill Barrett transition a little bit more to oil. And if you back up the 2008 and you look at where the company sat, we were 94% natural gas company.
And then you look at pro forma of where we think we are going to be yet 2012 we expect that our oil and NGL makes to be about 73rd, when you think about after the assets sales that we’ve heard to earlier is going to change in the first quarter of 2013 to about 25% oil and total liquids component to be in that 35% to 40% range.
And so I think that we have gone down the road quite a bit in terms of production volume. But also I would say, is that we also have the location inventory behind each of these two basins to provide additional growth beyond 2012 with nearly two thirds of the company’s inventory of locations are focused in oil assets.
In terms of growing oil and growing oil reserve as depicted on this slide, and you can see in terms of oil reserves, over the past four years, we’ve grown at pace of about 75%. In 2012, our target growth production oil has been 80% and I’m happy to report that we are on track to deliver that in 2012.
This slide is a little bit talking about realized pricing and the way you read this slide is the black line on this slide is the average CIG price and then the bar charts actually represent the price we received around -- at the company.
And you can see based on our hedging strategy along with bringing more and more liquids product into the portfolio, we’ve really been able to outpace the CIG index historically. On a go-forward basis, we will expect that trend to continue as we continued to improve our commodity balance mix and continue with our hedging strategy.
When you look at the hedging strategy on this next slide, shows what we have hedged for 2012 and 2013. In 2012, we have about 70% of our natural gas hedged and 65% of our oil hedged. In 2013, that mix is about 70% gas hedged and 45% of our oil hedged.
Our strategy over the last several years has remained the same, what we try to hedge about 50% to 70% of our production on a rolling go forward 12 month basis. And really what we are trying to accomplish by our hedging strategy is really just to put the cash flow for our development capital investments.
Now kind of turn to our assets and we’ll describe a couple of the assets in a little bit more detail. This map represents our four core development areas, each of them are in areas of resource concentration and provide repeatable results and having inventory of many years of drilling locations.
Depicted by the symbols there, you can see the various commodities represented by each of these basins and you see we truly are bringing a commodity balance to the portfolio now.
We have one drygas project that being the West Tavaputs field. We have one project in the Piceance Basin that is an oil, I mean, our natural gas, liquids and gas project. And then we have two oil projects that being the Uinta Basin and the DJ Basin.
The other good thing about this portfolio is nearly all of the acreage is HBP, which means that our drilling comments are based on financial rate of returns rather than just holding additional acreage.
I’ll talk a little bit reserves both 1P and 3P on this slide and if you jump to the bottom of the total on the right hand side of this slide, you can see the 1.4 Tcf approved reserve, little bit more than 3T or 3P reserves and then drilling inventory of locations of nearly 3,500 locations.
All of the 3P expansion that happen in 2011 was a result of our exploitation in our oil property with the oil proved reserves up 135% and 3P reserves up over 200%. I would expect in 2012 that all of our reserve expansion will come out of Uinta Basin and the DJ Basin that’s been the focus of the acreage positions that we have purchased in 2012, as well as receive a majority of the capital spending allocations in 2012.
So, I’ll move, we’ll talk a little bit about a coupe of the assets and we’ll start with the Uinta Oil Program and this is probably been our most mature asset in terms of oil to date. We have operated between three and five rigs in the Basin all of 2012. We have a significant land position with more than 120,000 acres in the play. Our current production is over 6,000 barrels oil today, you can see those reserves growth numbers there listed for 2011 with the 1P reserves up over 300% and the 3P reserves up nearly 250%.
It’s been a great asset. We’ve been executing the base program as 160 acre vertical development drilling and getting very strong financial results to date and that’s what the majority of our capital has been focused. We have attempted a number of upside measures, trying to improve the recovery of the basin.
You have to remember that we are only -- we cover about 6% of the original oil in place. We've attempted to do that by some horizontal test and as well as later this year beginning next year, we will attempt to do a couple, 80 acre pilot, all trying to drive the enhanced recovery of the field and trying to improve our overall recovery factors.
I think, the key takeaways that I want to emphasize really again is that the base program of 160 acre vertical drilling is working well. We’re executing well. We continue to improve on URs. We continue to lower our cost and are getting sound financial returns.
We move to the DJ basin. This is probably our newest asset that we hope becomes one of our key core assets going forward. Most of the acreage position that we have built has happened over the last 18 months. We have been able to double that acreage position in 2012 and I say, we have nearly 75,000 acres in the play today.
Our production is growing rapidly. We make over 2,000 barrels of oil a day here, which is up over 150% year-to-date. We have been testing number of concepts in the basin. We have drilled some single wells, horizontal wells, proving up some of our acreage as well we announced on the third quarter call our first four well pads where we drilled two horizontal Bs and two horizontal Cs with very favorable results.
If we move and kind of zoom in a little bit more on Northeast Wattenberg area, this is where the majority our focus has been. It’s our largest acreage position. Currently, we have the three rigs that are all drilling in this Northeast Wattenberg area and we’ve been very encourage so far to date.
We continue to de-risk that acreage by drilling a number of four well pads as well as some single horizontal test across this acreage in the fourth quarter of this year. We are also very encouraged by the activity as going on around us, testing additional upside measures.
There's a number of other operators here that are also testing the Niobrara B but had done testing the Niobrara A, the Niobrara C, the Codell horizon as well as the extended rich lateral and as well as down spacing. All this should benefit our acreage and continue to de-risk our acreage going forward.
I think in the next three to six months, we’ve a lot more information about this basin. And like I said, we’ve really anticipated it will become the next key core area for the company.
We’ll talk briefly about the little bit of exploration activity that's going on in the company. This map shows our three exploration areas of focus. I will start in the North and the South Alberta basin. This is a basin in which we have recently acquired a 3-D and we have drilled and completed our first well up there and the results are still pending on that activity. But we are encouraged at least some initial results today.
We’ll talk a little bit about the Powder -- the Powder River. In Q1, we announced the results of a horizontal Shannon test that will continue to meet our expectations. On the third quarter call, we announced the early results of the Sussex test and that will as also have been on line for about 30 days and continues to meet our expectations.
We are currently drilling and completing two horizontal Niobrara, excuse me, two horizontal frontier tests that should be done by the end of this year and perhaps will drill one more Sussex test by the end of this year.
And down in the San Juan basin, we’ve accumulated an acreage position there as well. We’ve just recently acquired a 3-D and plan to drill one or two test in the near future horizontally there as well.
So if we move to closing here a little bit, there is a couple of key points that I want to make or I can’t leave you here with. First off, there is a development program on meeting our expectations.
We are delivering -- we’re executing and everything is going on schedule and on plan. And we are rapidly growing our oil production and we’ve seen that increase. We’re on track to meet our 80% targeted production growth for 2012, which I think it exemplifies that we’ve done a great job of rebalancing, rebuilding and reallocating our portfolio.
In our measures, our cost are in line or trending downward whether that be capital cost or lease operating expenses, and we’re on target to meet all of our operating cost metrics and guidance. We do have an expansive location inventory in our core development project that should be able to fuel our growth for the future over many years to come.
And lastly, in terms of financial, we will exhibit financial discipline on a go-forward basis. We’re going to protect our balance sheet and deliver value to our shareholders.
With that, take the floor.
Thank you, Scott. Just as you’ve started financial, I was wondering like if you could just tell us a little bit more on like on the Niobrara bench B and C and then, I know you said you have potential in Cordell. So I was wondering if you can go ahead and kind of pile up the formation of the cross and what differences or similarity you see between the -- across the benches?
Sure, I would think that the Niobrara B is present across all of our acreage and it will be the primary target. The Niobrara C looks interesting on logs across portion of our acreage and so we have tested it like I said in two full well hedge now. We released the results of one. I think it’s going to be interesting to see if that’s treated as one horizon or two different horizon and then what the spacing is.
The way we drilled it is we drilled four wells in a section and alternated to drill two Niobrara Bs and two Niobrara Cs. So you can look at it as the Bs on 320 spacing or the Cs is around. The entire reservoir is around 160 acre spacing.
And so far those results, those on two, those four wells seem like they are performing about the same. We’re not really seeing much difference between the B and the C. And so I think there is more to come. The other pad, we did similar to that. We have not ventured out and tested the Niobrara A or the Codell yet. And I think those would probably more of the 2013 or later event.
Just to add on like, so in terms of drilling efficiency from the pad wells, right now you are earning four pads. So using that kind of increases, they are like, maybe, is going into the next year or so?
Not very far from us, I would probably say within a couple of miles. There has been one operator that has drilled 16 wells in the pad and did alternating Bs and Cs. So there again, you can think about it as the entire reservoirs on 40 acres spacing, you did the Niobrara B on 80s and the Niobrara C on 80s. And I think they're claiming very positive results and performance from both the Bs and the Cs there.
So I’m not sure if we reached an upper limit there. But it sure looks like that it's trimming more than four and I guess what I would say is that all of the acreage purchases that we did over the last 18 months, the way we value the acreage was all based on four Niobrara B perception. So really it enhances the value, if it goes beyond that.
Just to add on your natural gas assets, I feel like at what price again, I think, similar kind of question, what price do you think you would start acting between the Piceance and the West Tavaputs?
I would think this in terms of natural gas prices had been something more than 450 but really in the Piceance Basin, it’s going to depend on what the NGL pricing is. And then I think it also, I guess, if natural gas prices go to 450 or greater, I don't think that we automatically go back to drilling our natural gas assets with all the inventory of locations that we have in our oil basins. If oil is still greater than $90 a barrel, I think the oil assets will still provide a stronger financial return and probably would still receive our capital allocation.
I think I didn’t quite answered your question but I think, right now, I think we are so much inventory rich and that we really have to look at all three commodities and just rank them comparatively since we don’t really have any drilling obligations.
We have not given any guidance on CapEx yet. Next year, that is typically something that we do late January along with our year-end reserve results. But we have somewhat guided to a little bit, I guess is that trying to direct people towards what our capital spend rate has been in the fourth quarter of this year and if you translate that into capital spending for next year.
So currently, we’re running eight rigs in the company, which equates to a spending level of that $45 million a month. And that’s kind of where we have guided people until we come out with official guidance in late January.
And then you mentioned that as long as the oil stays above the 90, you’re going to continue to develop. Can you kind of give me a sense as to how you rank your different basin based on say $5 gas and $95 oil.
I would think that probably the oil basins will exhibit stronger rate returns given that commodity mix, the pricing mix that you just said. The one kicker is probably the Piceance because if the NGL track the oil pricing, that basin becomes highly economic pretty quickly because we do recover an awful lot of NGLs associated with that basin. But probably $95 oil, I think the two core oil properties will deliver the highest rate of return.
Just clarify, the revise CapEx number for this year, is that net of the proceeds from the sale leaseback or is that the growth number?
Well, the sale leaseback was really a financing instrument today. It didn’t really affect the capital spent.
It’s been drag
Say that again.
The original, I think is $100 million or so for this year and infrastructure that was in the original capital budget. Is that correct original $800 million to $900 million?
No. We probably had something in about the $40 million range, is in the original capital budget in terms of capital outlay for infrastructure. The $100 million in proceeds is like a lease financing.
Could just go into the PRB oil exploration a little bit more? I know you had two fairly recent horizontal successful wells, as I think you're looking to do three by year-end. Maybe how that’s progressing and then what you think for next year?
Sure. I’d say we’ve done a Shannon test in Q1. We announce the Sussex test in Q3. We are currently drilling, completing two frontier locations of the same pad. And so we’ve drilled the first one and drilling the second one now. And then once, we finished the drilling of these two well frontier pads, we expect to move over and drill one more Sussex well, because that’s the activity that we have planned for this year.
In terms of activity for next year, I think we have to account and step back and look at the result and just figure out, if it fits into overall capital funding program for next year. But the well result themselves look very positive, and we are encouraged by them. And there is an awful lot of notes, not too dissimilar than our DJ Basin acreage. But there’s tremendous amount of activity by others around our acreage and help derisk that acreage.
Similarly, that's going on in the Powder River basin where there is a lot of other activity going on in and amongst the acreage position as well there is number of old vertical test that give you at least a little bit of comfort with the geology as well.
Looking towards the third slide, I think you mentioned some very preferred, maybe in the last earning call, the Blacktail Ridge, you can’t have horizontal roads and there are some of the verticals. Just want to see if what the permissions like, what made you decide that?
Yeah. We talked about some horizontal drilling on the earnings call. And we need to back up and let me kind of remind you again a little bit that the targeted section in the Utah oil play is about 2,000 feet thick. And so, that’s where I keep saying that the basic development program will be the vertical drilling on a 168 per spacing.
We attempted a couple of horizontals and like, a few hundred foot thick layers in that overall 2,000 feet column and kind of got mix results. The Uteland Butte wells we drilled last year, those seven wells continued to perform and meet our expectations. We drilled a Black Shale well and a Wasatch GR four well that really did meet our expectations.
And so it’s kind of mixed bag and what we were trying to say on the earnings call is that parts of the basin made lend itself to horizontal drilling in a particular member of that 2,000 foot section. It’s really trying to drive the recovery. And then another portion of the basin, it might be a different layer that is the more continuous navigable from a geologic standpoint, and also it’ll give you more production when you look at post backlog and that could vary across the basin.
And so if they are still, when you think about our activities this year, I think we drilled about 75 wells in the basin and they’ll probably be six or seven of those that are drilled horizontally.
And then, similarly, as I look forward to 2013, I would think that that mix would be about the same. So, I think what’s we are trying to focus on. I think sometimes people get excited by horizontal drilling and think this play is a make or break it in terms of economics based on whether you can flip it and make it a horizontal play.
And I guess what I’m trying to say is the base development program will probably always be a vertical program. We just attempt different things such as horizontal drilling and such as 80 acre down spacing, trying to improve those recoveries.
Can you give a little color on what you contain for acreage and kind of three exploration properties that you mentioned, South Alberta Bakken, San Juan Basin and the Niobrara?
I probably wouldn’t want to give those acreage numbers. They are still competitive and so, I wouldn’t want to disclose those. I think what you saw there, again, trying to give them leading indicators for 2013 budget. I think on our earnings call in Q3, which I did just put out and say that out of the capital budget of $900 million to $950 million, we spent nearly $150 million on, what I would view as somewhat one-time expenses. $38 million of debt, in terms of facilities’ expenses and the rest in acreage purchases in those three basins as well as the acreage adds that we did in the Uinta Basin beginning and in the DJ Basin.
Could you just tell us little bit more like Wattenberg, Niobrara creates, how much of that is HBP and you know what the funding process looks like in the Rockies there?
I’m not sure if I know, how much is the HBP. We have a few drilling commitments. All of them seem very manageable. So it’s not like a huge number. The way I think of the acreage position is we have about 75,000 acres in the play, about 20,000 acres that’s on the border between Colorado and Wyoming that I would clearly put more in the exploration basket. And we’ve drilled a handful of tests up there. We have more work to do to derisk that acreage.
The remaining 55,000 acres is split about 13,000 in the core Wattenberg area and the balance is in the Northeast Wattenberg area. And that's really that 50,000 plus acres is really where the focus of the company has been in on terms of derisking.
To go back to your original question of HBP, it's a modest number of locations that we need to drill to hold the leases, and I think that we will drill well beyond that number in the plans for 2013.
Just permitting in terms of Rockies, like how the permitting mission goes in there?
The Rockies is probably, continues to not be easiest place in the United States to get permit. We seem to be able to manage it I think quite well. When you look at the Uinta Basin, it is still a 6 or 9 month type of process to get a permit. But we already have all of the permits secured for our 2013 plan, and so you just have to kind of plan and get ahead of it.
The DJ Basin falls in the category where you can get drilling permits in 30 to 60 days, and so it’s a much, more easier manageable process. If you go to the place like the Powder River basin, its federal lands and it is something that is a six to nine month process to get a permit on federal land.
But really that’s kind of historically what our companies done well, held a lot of acreage in the Rockies and it had a lot of federal lands. And just have to kind of get your processes in place. It’s all very manageable, but it’s just something you have to plan for.
Have any last minute comments as far? If I ask you one last thing, I mean as you have projects, some of that got a little bit here and that. Is that occupied, how to ask you like, how do you rank them or you know how do you place their project one above other? How will go about?
The focus of the company is still on the Uinta Oil and the DJ. And I would expect nearly, if not all of the capital allocation for 2013, will go into those two place. When you look at those two plays, they each are different. Each bring, I think very solid rates of returns and we have to look at the capital allocation between those two plays, as we get more DJ result.
But if the DJ result, if we are able to mimic the result that you here other operators announce, I would think the DJ result will end up being the strongest rate of returns in the portfolio unless you would think we’ll get a higher capital allocation on a go-forward basis, once the acreage is all been derisk.
Okay. Thank you for hearing my stuff.
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