GeoMet, Inc., Q1 2008 Earnings Call Transcript

| About: GeoMet, Inc. (GMET)
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GeoMet, Inc. (NASDAQ:GMET) Q1 2008 Earnings Call May 12, 2008 11:30 AM ET


Tony Oviedo – Vice President, Chief Accounting Officer & Controller

J. Darby Sere – Chairman, President & Chief Executive Officer

William C. Rankin – Executive Vice President & Chief Financial Officer

Philip G. Malone – Senior Vice President of Exploration

Brett S. Camp – Senior Vice President of Operations


Phil McPherson – Global Hunter Securities

Kevin Smith – Raymond James


Ladies and gentlemen, this is the operator. Today’s GeoMet first quarter earnings release conference call is scheduled to begin momentarily. (Operator Instructions) Thank you for your patience. Your lines will again be placed on music hold until the conference begins.

Good morning. My name is Julianne and I will be your conference operator today. At this time I would like to welcome everyone to the GeoMet first quarter earnings release conference call. (Operator Instructions) I would now like to turn the conference over to Mr. Tony Oviedo, Vice President, Chief Accounting Officer and Controller. Mr. Oviedo, please go ahead.

Tony Oviedo

Good morning and thank you for joining us. This morning GeoMet issued a press release announcing our first quarter operating results. If you need a copy of the release one is available on our website at 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 the forward looking statements, free discussion of 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 companies filing with the Securities and Exchange Commission.

The terms 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 EBITDA, Adjusted EBITDA and Adjusted Net Income. I’ll now pass the call over to Darby.

J. Darby Sere

Thank you Tony and good morning everyone and thank you for joining us today. We are pleased to welcome you to GeoMet’s first quarter earnings conference call. Net gas sales volumes for the company in the first quarter of 2008 were 20.6 million cubic feet a day, an 8.5% increase over the same period last year and a 2% increase compared to the fourth quarter of 2007. Net gas sales volumes for the company are presently running at approximately 21 million cubic feet a day.

In our Pond Creek field, net gas sales volumes averaged approximately 13.4 million cubic feet a day for the first quarter of 2008, up 13% from the prior year period and up 6% from the fourth quarter of 2007. Gas production during the first quarter was in line with our expectations. Net gas sales from Pond Creek are currently running at approximately 13.8 million cubic feet per day.

Our 2008 development program in Pond Creek includes the drilling and completion of 21 wells. During the first quarter we drilled three new wells in Pond Creek and connected two of these to sales. We also connected two wells that were completed late in 2007. A total of 220 wells were producing at the end of the quarter.

In the Gurney field on the Cahaba Basin our net gas sales average 6.1 million cubic feet a day for the first quarter or 2008, up 2% from the prior year period but down 4% from the fourth quarter of 2007. Production declines after early inclines in wells added in late 2007 and a lack of drilling during the last six months are largely responsible for this performance. This is consistent with our experience and first quarter results at Gurney were not unexpected.

Current net gas sales from Gurney are running at approximately 6.2 million cubic feet a day. Our 2008 development program at Gurney includes the drilling and completion of five wells. We did not connect any new wells to sales during the fourth – first quarter of 2008 and the total productive wells remains at 234.

We did however complete a second test well on the west side of the Cahaba River. Production testing of this well – the well completed in the fourth quarter of 2007 is currently in progress. If initial production rates continue to be encouraging and gas prices remain strong we are likely to increase drilling activity on the west side of the Cahaba River during the second half of 2008.

At our Lasher project located approximately 10 miles north of our Pond Creek field we continued production testing on three previously drilled wells. Additionally we have drilled three of the 15 wells that we plan to drill in 2008. Construction is in progress for additional well locations, water and gas gathering systems and the high pressure pipeline that will be used to transport the natural gas to market.

We expect to commence gas sales from Lasher early in the third quarter of 2008. As we have mentioned before, the Lasher field is in no way associated with our Pond Creek field litigation.

With winter behind us and spring break up under way activity at our Peace River project has picked up. All pipeline and well permits for our 2008 program have been approved and we have begun construction of facilities and well locations. We will commence drilling this summer and expect to have eight wells on production by year end and book initial proved reserves at this project.

At our Garden City Chattanooga shale prospect we had drilled five core holes and three production wells at the end of 2007. Since then we have drilled our first horizontal well in the prospect area and plan to drill two additional horizontal wells and one vertical well in 2008. We expect to connect three wells to gas sales this quarter in order to facilitate longer term testing.

We are continuing to expand our 72,000 gross acre lease old position in this area and plan to increase our capital spending from 5.4 million originally budgeted to approximately 10 million. Lastly, I want to update you on our lawsuit regarding the validity of an easement granted to us by the land owner which has been contested by CNX gas company.

Last November the Virginia Supreme Court accepted all points of error asserted by both GeoMet and the landowner and denied all motions filed by CNX in an appeal of a circuit court decision. The date for presentation of oral arguments before the Supreme Court has been delayed to the first week in June. We remain confident that we will prevail.

During 2007 we appeared before the Virginia Supreme Court three different times in connection with our CNX litigation. Each time the court held in our favor. I think it is important to point out, however, that even if we do not prevail in this matter the risk to GeoMet is manageable. We have multiple other alternatives that may be executed over a relatively short period of time.

At this time I will turn the call over to Bill to discuss our financial results.

William C Rankin

Thank you Darby and good morning everyone. GeoMet continues to have a strong capital structure, good liquidity and attractive hedges in place. At quarter end, bank debt net of cash totaled 98 million. Debt to total capitalization was 31%. Our borrowing base under our bank credit agreement remains at 180 million, return borrowings of about 100 million.

Even with planned increases in our capital budget which we will discuss we believe the recent improvement in natural gas prices will result in a borrowing base utilization unless it’s 65% at year end, possibly significantly less.

As set out in our press release we have approximately 12 million cubic feet per day of gas sales volumes hedged through December of 2009 and thereafter, approximately 6 million cubic feet per hedge through March of 2010. These hedges employ both swaps and three weight collars providing us with significant downside protection while retaining significant price upside.

The hedges in place over this period have an effective average floor price of approximately $8.87 during the winter months and $7.67 during the summer months. And effective average ceiling price of approximately $11.07 for the winter months and $9.83 for the summer months. We are pleased with our hedge position and will look for opportunities to expand or extend it.

The capital reported a net loss for the quarter of 2.1 million as compared to a loss of 1 million for the prior year quarter. Each of these quarterly periods was impacted by unrealized hedging losses resulting from the mark-to-market of our natural gas hedge positions.

The first quarter of this year we recorded an unrealized after tax hedging loss of 5.4 million as compared to an unrealized after tax hedging loss in the amount of 2.9 million in the same period last year. Excluding these unrealized hedging losses, adjusted net income was 3.3 million in the first quarter of 2008 compared to adjusted net income of 2.1 million in the prior year quarter, an increase of 63%. Please refer to today’s press release for a reconciliation of this non-GAAP measure.

Average natural gas prices adjusted for realized hedging gains and losses increased $8.79 per Mcf in the current quarter as compared $7.68 from the prior year period. Excluding the impact of hedges, the actual natural gas price realized was $8.33 per Mcf this quarter versus $6.95 last year.

EBIDTA for the current quarter was .4 million; however, adjusted EBITDTA, which excludes unrealized hedging losses and other non-cash charges was 9.2 million versus 6.2 million in the same period last year and 7.6 million in the prior quarter. Please refer to this morning’s press release for a reconciliation of this non-GAAP measure.

Transportation costs were 19 cents per Mcf for the quarter versus – transportation costs in the first quarter of 2007 reflect a 45% gathering fee we were previously paying to a third-quarter gatherer. Once we began using our own gathering line to transport our Pond Creek gas sales volume in the East Tennessee’s GeoRidge pipeline, this fee was eliminated, although to a small extent offset by higher operating costs and higher depreciation.

In addition, we were able to reduce transportation expense by laying off unutilized firm transportation capacity during the period. We expect to be able continue to lay off our excess FT through at least October of this year.

Depression costs were 37 cents per Mcf versus 38 cents per Mcf experienced in the 2007 period in 36 cents in the prior quarter. Lease operating expenses were $2.00 per Mcf, essentially flat, versus $1.98 in the 2007 period, a $1.96 per Mcf in the prior quarter. G&A expenses were 2.5 million in the current quarter as compared to 2.3 million in the prior year period and 2.3 million in the fourth quarter of last year.

The DD&A rate for oil and gas properties increased to $1.25 per Mcf for the quarter versus $1.18 in the same period last year, and $1.25 per Mcf in the prior quarter. We affirm our previously issued guidance for the year: 13% to 17% growth in gas sales volumes as compared to 2007. However, as cash flow expectations have increased, we have increased our capital expenditure program for the 49 million previously budgeted.

We now expect CapEx for more than 51 million in 2008. Because approximately 3 million previously budgeted in 2008 was actually booked in 2007, this represents a $6 million increase in the amount directly related to exploration and development activities, an increase of 15%. If higher cash flow realizations continue, we may further increase our capital budget later in the year. With that, I will turn the call back to the Operator to arrange for any questions.

Question-and-Answer Session


Thank you. (Operator Instructions) Your first question is from the line of Phil McPherson with Global Hunter Securities.

Phil McPherson - Global Hunter Securities

Hey, good morning, guys. Great job.

J. Darby Seré

Thank you, Phil.

Phil McPherson - Global Hunter Securities

Just one quick question on the Chattanooga Shale. On the first horizontals done, I think you said, could you tell us how long that horizontal is, and what you will do differently or the same in the next two? Give us a little bit more color.

J. Darby Seré

Brett, you want to take that?

Brett S. Camp

Yes. The horizontal [inaudible] south on this hole is about 1,400 feet.

J. Darby Seré

We were planning for a longer lateral. We are limited by the spacing rules on wildcat fields in Alabama, but we were planning on a longer lateral and do plan on longer laterals the next two wells.

Phil McPherson – Global Hunter Securities

So the next two will be offset, so they won’t be dictated as being wildcats?

J. Darby Seré

No. I think that at least one of the next two will – is planned for the western portion of our prospect area. This one was drilled on the eastern portion. I think until we set up field rules, we will be restricted in our lateral length.

Phil McPherson – Global Hunter Securities

And then on this first horizontal, are you in the process of planning a frac job on it or –

J. Darby Seré

Yes, we are.

Phil McPherson – Global Hunter Securities

And then when do you think we will have kind of some news on this? You think this is – you going to wait until hook it up to the new sales line or –

J. Darby Seré

At least. And, obviously, we are still out there leasing, we are going to delay any announcements on the results as long as we can, until we solidify our lease position.

Phil McPherson – Global Hunter Securities

Okay. Great. Thanks, guys. Makes sense. Appreciate it.

J. Darby Seré



(Operator Instructions) Your next question is from the line of Kevin Smith with Raymond James.

Kevin Smith - Raymond James

Good morning, gentlemen.

J. Darby Seré

Hey, Kevin.

Kevin Smith - Raymond James

I just had a few questions on your CapEx. One, it looks like your run rate for this quarter was a little bit lower. I assume you guys are going to ramp it up in the next few quarters?

J. Darby Seré

Yes, definitely. We had planned a slower start this year, and we definitely are ramping it up.

Kevin Smith - Raymond James

Okay. And the other question, increase in CapEx, is that more due to the fact that you are liking some of the drilling results you are seeing? Or is it as well as maybe just higher commodity prices?

William C. Rankin

It is a little bit of both, Kevin. Most of the increase has been in the Garden City area. But we also have increased – have made an increase in the Peace River project, which is really more a matter of converting some costs that we thought were going to be in the form of operating leases into actual CapEx. And so those are the two major increases in the capital budget to date.

But depending – but there is several areas – it is probably an area – areas in each of the projects that we have that we could ramp up expenditures later in the year if cash flow continues to improve, and if the results that we are seeing continue also.

Kevin Smith - Raymond James

Okay. Thank you. Just one more question. Can you remind me, again, what you need to see on the west side of the Cahaba River before you are starting to increase and maybe drilling more wells there?

J. Darby Seré

Well, we need to se a little bit longer of production, like the production that we have seen in the early going. We have had one well on since December, and the other one on since January. And the performance is better – the average performance of those two wells and an offset operator’s two wells is better than on the east side. And we just need to have a little bit more time to convince ourselves that that is a legitimate test of the area.

And then we have a significant number of locations on the west side that we would pursue, more than likely, in the second half of 2008 if gas prices continue to be strong.

Kevin Smith - Raymond James

Okay. Thank you very much.


There are no further questions at this time. Are there any closing remarks?

J. Darby Seré

No. Thank you, again, for joining us, and we will talk to you next quarter.


Thank you for participating in today’s GeoMet first quarter earnings release conference call. You may now disconnect.

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