Operator: | Good morning. My name is Carmen and I will be your conference operator today. At this time, I would like
to welcome everyone to the Stone Energy Corporation First Quarter 2008 Earnings Conference Call. All
lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be
a question and answer session. If you would like to ask a question during this time, simply press star
then the number one on your telephone keypad. If you would like to withdraw your question, press the
pound key. Thank you. |
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I will now turn the conference over to Mr. Welch. Please go ahead, sir. |
David Welch: | Thank you, Carmen. Good morning, everyone and welcome to the 2008 First Quarter Conference Call. Im
joined this morning by Rich Smith, our Expiration Vice President and Ken Beer, our Senior VP and CFO. Ken
will be discussing some of the financial highlights of the quarter followed by my general comments on our
future activities and then well take your questions. So with that, Id like to turn it over to Ken.
Ken? |
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Ken Beer: | Thank you, Dave. Let me start with the forward-looking statement. In this conference call, we may make
forward-looking statements within the meaning of Security Act of 1933 and the Securities Exchange Act of
1934. These forward-looking statements are subject to all of the risks and uncertainties normally
incident to the exploration for, and the development, production and sale of natural gas and oil. We urge
you to read our 2007 Annual Report on Form 10-K for a discussion of the risks that could cause our actual
results to differ materially from those in any forward-looking statements we may make today. |
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In addition, in this call we may refer to financial measures that may be deemed to be non-GAAP financial
measures as defined under the Exchange Act. Please refer to the press release we issued yesterday, which
is posted on our Web site, for a reconciliation of the differences between these financial measures and
the most directly comparable GAAP financial measures. With that, once again, rather than go through the
financials in great detail, well assume everyone has seen the press release and the attached financials.
Accordingly, Ill just try to focus on the few highlighted areas. |
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First, there really were no unusual items in the first quarter. It was pretty vanilla overall. Our
quarterly net income totaled $62 million or $2.22 per share and discretionary cash flow was just over $150
million. Both earnings and cash flow were well above the first call estimates. Production for the
quarter came in at 185 million cubic feet with the equivalent in the middle of our 180 to 190 million a
day guidance for the quarter. |
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For April though, our volumes were above the 200 million a day level as we completed a couple of
exploitation wells at Ewing Bank 305. As noted in our |
guidance section, we expect second quarter volumes
to be in the range of 195 to 210 million equivalents a day. |
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Oil and gas. Price realizations for the quarter came in at $95.72 for oil and $8.82 for gas. A very
attractive blended price for us of just over $12 per Mcfe and this was after a $4.00 per barrel
(inaudible) oil realizations due to oil prices being above our ceiling prices. As weve noted previously,
the price realization in the Gulf of Mexico is the hidden asset that tends to be overlooked when comparing
the reserve values to other areas. |
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Regarding hedging. We did put in some additional colors, swaps and put since the year-end call. As is
noted in the press release we put 2,000 (non-caller) of 20 million a day with an $8.00 floor and $14.30
ceiling. We have a 2,000 (non-caller) for 3,000 barrels a day with an $80 floor and a $135 ceiling.
Additionally, weve executed a 2,000 non-swap for 20 million cubic feet a day at $10.15 and $107.90 swap
for 2,000 barrels a day. |
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Finally, we put our purchase a $10 put on 20 million BTUs per day with a $0.52 per Mbtu cost for the
last six months of 2008. Some of this recent hedging activity was to lock in some of the projected
returns associated with the pending Bois dArc merger. The full schedule of our hedging program is listed
in the release. We would expect to continue to add price support to either caller swaps or puts over the
upcoming months. |
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Our LOE was slightly lower than we had internally projected as our operations grew continuously to show
efficiencies. However, its important to recognize that the first and fourth quarters have minimal major
maintenance associated with them so we would expect to see an absolute and a per unit increase in the
second and the third quarter to ramp up our maintenance activities. |
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Interest expense of $4.0 million was more than offset by interest income of $5.0 million which is what a
half a billion in cash will allow you to do. Our reported tax rate was 34 percent with about 57 percent
being deferred. This deferred number will continue to be difficult to estimate as there are a lot of |
moving parts in this calculation but we certainly do expect to pay some
cash taxes given the current price environment. |
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Our cap ex for the quarter was approximately $90 million and this may move up slightly in the second
quarter but were still projecting a $395 million cap ex budget. This excludes any impact from the
pending Bois dArc merger. Our cash position at the quarter end rose to $517 million despite during the
quarter making a $57 million tax payment in March. |
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And lastly, we have updated our 2008 guidance section to include our latest guidance forecast which do
include a couple of very minor changes but remember that this that our guidance does not include any
impact from the pending Bois dArc merger. |
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With that, I will turn it over to Dave. |
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David Welch: | OK, thank you very much Ken. As youve heard this has been a quarter for us as we once again its strong
cash flow driven by solid production performance, good commodity pricing and cost control. On the
production front we hit exactly in the middle of our first quarter guidance of 180 to 190 delivering 185
million cubic feet equivalent per day. As noted in the press release this was below last years first
quarter which was almost entirely due to the sale of our Rockies production last year and the sale of some
non-core Gulf properties in the first quarter of this year as we continue to try and improve our
portfolio. |
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Our operations and exploitations group continued to deliver stable production and their work along with
portfolio improvements are keeping a lid on inflation as we were able to reduce our lease operating
expense at the same time. These results are underpinning our strong earnings and cash flow. We expect
with an increase in production in the second quarter as these new volumes Ken mentioned from Ewing 305
exploitation drilling have already been placed on production. The first two wells were successfully
completed or contributing combined rates slightly in excess of 20 million cubic feet per day. |
Although these wells and our production are expressed in gas equivalents, these two wells are primarily
oil wells and our overall production profile was
actually slightly balanced or biased to oil as a result of preferentially
focusing on oil during todays commodity price environment. Were presently
producing 51 percent oil on a BTU basis and 75 percent oil on a current price
basis. |
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In addition to Ewing 305, were also active on our self-(inaudible) of 23 major
rig work over program as our continuous push on well work, compressor upgrades
and production up time are the key factors in delivering our production builds.
This week we also (sputted) our main pass 72, our Cap Rock well and are
presently drilling this prospect which is another oil biased opportunity. Cap
Rock has no near term volume impact but its successful would be very good for
our reserves picture. We know that theres some oil in this reservoir and we
are presently delineating the opportunity to estimate its recovery opportunity
its recovery potential, identify the crude characteristics and determine if
the accumulation is commercially viable. We should have a good update on this
project by next quarters conference call. |
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We continue to make progress in both our deep water program and our Appalachian
efforts. Were still targeting to have two to three deep water wells active and
(sputted) by late 2008 or early 2009. We expect to participate in a few deep
water exploration wells each for the next several years. This initiative lead
by Rich Smith, our VP of Exploration that previously headed the deep water
effort at Dominion exposes Stone to significant reserve potential and will
provide an important growth vehicle for us in the future. |
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In Appalachia, weve continued to (assimilate) and presently estimate our
(Marcellas) shareholding to be approximately 27,000 net acres. We have several
focal areas within the Appalachian Basin in which were continuing to build our
position. Now that were merging with Bois dArc we need to increase the
acreage to hold the same relative impact on the company that we had before and
were actively trying to make this happen. Were not yet ready to discuss the
specifics of this play as the competition for acreage is increasing and our
position is not yet complete. |
We can tell you, however, that we have drilled two (Marcellas) wells today and
should spot a third later this month. Were presently (fracturing) and
completing the first two wells. We do not yet have any tested (foil) rates. We
do expect to have some results to report within the next couple of quarters and
also believe that (Marcellas) will be an attractive and key growth area for the
company in the future. Well also remind you that we still have 75,000 net
acres in the Rocky Mountain area. |
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Obviously, the biggest event for Stone this year is our merger agreement with
Bois dArc Energy. This transaction which was announced last week calls for us
to pay $13.65 in cash and 0.165 in Stone shares for every Bois dArc share.
Were very excited about this transaction, as it combines the exploration
strengths of Bois dArc with the exploitation of operations strengths of Stone.
It gives us a much deeper inventory of prospects to achieve from. Extending our
project inventory to five or six years. This should enable us to (inaudible)
our Appalachia and deep water areas in a more methodical manner. |
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An important feature of this merger is the Exploration Participation Agreement
between Gary Blackie and his exploration team and Stone. This three year
agreement creates mutual alignment and has the potential to provide us with
numerous exploration prospects generated by one of the top oil finding teams in
the Gulf. This is a strategic partnership which should be a win for every
involved. We very much look forward to working with Gary and his team as we
develop the strong sense of respect and admiration and chemistry within a short
period of time. |
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Were in the process of drafting the S4 Proxy document and hope to have this
transaction completed in the third quarter. We also created a strategic
exploration alignment alliance in the eastern Gulf of Mexico with Houston
Energy, another exploration team with deep experience in the main pass area. We
jointly bid on five and were the high bidder on two blocks in this area and
both recent federal re-sell from this partnership. |
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To balance out our exploration effort in the Gulf, we have our own three years
in the making; internal deep water exploration team headed by Rich. We have |
extensive long offset 3-D seismic data over most of the Gulf along with sand
deposition data, hydrocarbon migration pathway analyses and the teams recruited
from some of the best deep water explorers in the business. Later
this year, we will be ready to begin drilling some of the prospects developed by
our team. You can expect us to be opportunistic within any of our strategic
areas of focus which are the Gulf of Mexico, Eastern On Shore Gas and North
American Oil. |
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Now we will be happy to take your questions. |
Operator: | At this time, I would like to remind everyone in order to ask
a question, please press star then the number one on your
telephone keypad. We will pause for just a moment to compile
the Q&A roster. At this time gentlemen, Im showing there
are no questions. |
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David Welch: | OK. Thank you very much Carmen and thank you everyone. This
will conclude our conference call. Thanks for attending. |
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Operator: | This concludes todays Stone Energy First Quarter 2008
Earnings Conference Call. You may now disconnect. |