Jun 3, 2008
Executives
Fred L. Callon - Chairman and Chief Executive Officer B.F.
Weatherly - Executive Vice President and CFO Terry Trovato – Head of Investor Relations
Analysts
Philip Dodge – Stanford Group Company Joseph Beckman – Howard Weil, Inc.
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Callon Petroleum Company first quarter 2008 results conference call. (Operator Instructions) As a reminder, this conference is being recorded Thursday, May 8, 2008.
I would now like to turn the conference call over to Mr. Fred Callon, Chairman and Chief Executive Officer.
Fred L. Callon
Thank you and good morning. We appreciate you taking the time to call in to our first quarter conference call.
Before we begin the formal portion of the presentation, I’d like to ask Terry Trovato, who heads our Investor Relations, to make a few comments.
Terry Trovato
Thank you, Fred. We’d like to remind everyone that some of the comments made during this call will be considered forward-looking statements.
As such, no assurances can be given that these events will occur, that the projections will be attained. Please refer to the cautionary language included in our news release and in the risk factors described in our SEC filings.
We undertake no obligations to publicly update or revise such forward-looking statements. It is also important to note that the SEC permits us in their filings with them to disclose only proved reserves that we have demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.
During today’s discussion, we may use terms like reserve potential and probable reserves that the SEC’s guidelines strictly prohibits us from using in our filings with them. These estimates are by their nature more speculative than estimates of proved reserves and accordingly are subject to a substantially greater risk of being actually realized by the company.
Finally, today we will be discussing 2008 cash flow which is considered a non-GAAP financial measure. Reconciliation and calculation schedules for the non-GAAP financial measures were stated in our first quarter 2008 results news release and could be referenced there on our website at www.callon.com for subsequent review.
Fred L. Callon
Thank you, Terry. First, I’d like to provide an update on operations and then Bob Weatherly, our CFO, will discuss the results of operations for the first quarter of 2008.
Then we’ll conclude with a guidance for the second quarter and the remaining of this year. Before I discuss the first quarter operations and production from our existing property base, I’d like to make a few comments regarding our strategy over the past year and current status of our Entrada project.
As most of you know, Entrada Field is our single largest asset and we’re working diligently to bring it online. Once producing, Entrada has potential to double our production and our cash flow.
Since the milestone of acquiring BP’s 80% working interest in Entrada in March of 2007, bringing our interest up to 100% and taking over as operator, we quickly focused on managing the liquidity to preserve the funds necessary for developing producing our reserves in Entrada. Last year, we decided to use our capital expenditure program to committed projects only.
Although, this temporary reduction in investments impacted our reserve for 2007 and currently having a short-term impact on our daily production, it was the right move for preserving our ability to execute our Entrada development plan and increase our long-term shareholder value. We’re currently on track for achieving first production from Entrada during the first quarter of 2009, less than a year from now and two years from our acquisition of BP’s interest and taking over as operator.
Since the BP acquisition, we have achieved a #of milestones for bringing Entrada to first production. Immediately after acquiring BP’s interest, we fast tracked the engineering and development plans and ordered all the long lead items.
We signed a critical production handling agreement with Conoco Phillips and Devon Energy to produce through their Magnolia TLP, which significantly reduced the total capital required to bring in [inaudible]. We secured a rig slot with Diamond Offshore semi-submersible rig, the Ocean Victory.
And then we initiated and completed the search for a financial partner to reduce our capital costs nor to fully develop the Entrada Field on a timely basis and help manage our financial risks. In addition, during December 2007 we sold for $61.5 million non-core royalty and mineral interests which further improved our liquidity.
Each milestone was accomplished all in time and we’re currently on track for initiating first productions from Entrada in the first quarter of 2009 as planned. Here’s a quick update on Entrada operations: Our long lead items for Entrada had begun to arise.
Our mooring equipment is ready and an anchor boat is scheduled to install our preset anchors by the end of June. We’re scheduled to begin laying the flow lines in July and we anticipate spudding the first of the two development wells in August.
We’re excited about what we’ve accomplished so far and we look forward during the next several months as activity begins to increase. As most of you know on April 8th we completed the sale of 50% working interest in the Entrada Field to CIECO Energy, a subsidiary of Tokyo-based Itochu Corporation for $175 million with $155 million paid at closing.
We’re very excited to have CIECO as a partner. At closing of this transaction we were paid a $200 million bridge loan facility arranged by Merrill Lynch, which significantly de-levered our balance sheet and reduced our cash interest expense going forward into 2008.
Our debt to book went from 58% at year end to 40% proforma at the end of the first quarter. Our debt to enterprise value has gone from 51% at year end to 32% currently.
Additionally, as part of the CIECO transaction, CIECO will finance $150 million of our share of the cost to develop the Entrada Field from this point to first production. This part of the deal is significantly as it secures our share with development capital required to bring Entrada online to radically reducing our cash interest expense and strengthens our liquidity position.
Combined, the three factors of having secured the required financial resources for Entrada, having zero borrowings on our [inaudible] line of credit and expected cash flow from operations during the year, we now have capital available for increasing near term production as well as balancing our asset portfolio. Our Board of Directors has approved our strategy of moving forward to explore opportunities to increase our 2008 capital expenditures budget.
This we intend to do with attractive short-term turnaround drilling opportunities as well as looking at sensible property acquisitions. This will allow us to increase our reserve base and any production rates, even in advance of what we anticipate to be a significant increase in our production rates in early 2009 once Entrada is online.
We’ll keep you advised as we move forward with this initiative. Now let me read the status of our major producing properties.
Medusa is currently producing 12,400 barrels of oil and 11.6 million cubic feet of natural gas per day. We are currently completing the Mississippi Canyon 538 #5 development well with first production targeted for mid-June at rates of 8,000 barrels of oil and 7 million cubic feet of gas a day.
We enforced only 15% working interest in the Medusa Fields and Murphy Oil operates. Our current production from Habanero field is 7,500 barrels of oil and 9.6 million cubic feet of gas a day from our two wells, both producing from Mohave 52 oil reservoir.
We own 11.25% working interest in the #2 well and a 25% working interest in the #1 well. Shell is the operator.
The West Cameron Block 295 field is producing at a rate of 22 million cubic feet of gas a day and 140 barrels of oil per day. The #3 well is still producing 5 million cubic feet of gas per day from a secondary sand below the maintain sand.
Once its own depletes we will recomplete the well and production should increase to approximately 20 million cubic feet of gas a day. Additionally, another well may be drilled in 2009 depending upon well performance.
The #2 and #4 wells are operated by Mariner, while the #3 well is operated by Cimarex. Our High Island Block A-540 #1 well was producing at a rate of 7.2 million cubic feet of natural gas and 400 barrels of oil per day before were shut in due to a [inaudible] in the flow line and from the subsidy well to the host platform.
Operators are attempting to correct this problem and depending on this remedy that will have to be used, the well will be shut in for several weeks and up to three months. We have 60% working interest and Walter Oil & Gas is the operator of this block.
Production from High Island Block 165 field is currently 16.8 million cubic feet of gas and 150 barrels of oil per day. From High Island 130 #2 well, which produces from the Gyro K-2 sand, we’re planning to recomplete the 130 #1 well to a Rob L sand later this year and expect to have an intro production rates of approximately 10 million cubic feet of gas a day.
We own 16.7% working interest in the Rob L and 11.7% in the deeper sands which are operated by Mariner. We’ve drilled and are in the process of completing our North Pronghorn prospect.
First production is expected in the third quarter of 2008 at a rate of approximately 10 million cubic feet of gas and 200 barrels of oil a day. [Inaudible] will operate after first production.
We have 42.5% working interest in this well. Now, Bob will review the results of operations for the first quarter and update you on guidance.
B.F. Weatherly
Thank you, Fred. For the first quarter of 2008, we reported net income of $7.6 million or $0.35 per diluted share, which was over the estimate of $0.09 per diluted share.
Our daily production rate for the first quarter of 2008 was 42.1 billion cubic feet equivalent per day. Natural gas and oil production were within our guidance ranges of 2.1 billion cubic feet and 290,000 barrels respectively.
Oil and gas revenue for the first quarter of 2008 totaled $45 million. Average realized oil prices for the first quarter were $86.65 per barrel, which was a significant improvement over $55.53 for the same quarter last year.
The benchmark oil price for the period measured by the average closing price of NYMEX contracts for the delivery of WTI averaged $97.90 per barrel. As discussed in previous conference calls, the spread between benchmark oil price and our average realized price is due primarily to quality adjustments incurring the sale of our oil production from Medusa and Habanero, which combined, accounted for 89% of our oil production in the first quarter of 2008.
Please refer to our news release for a reconciliation of our realized oil price to the average NYMEX price. In addition to these quality adjustments, previously established [crudo] hedging positions decreased our average realized price by $6.34 per barrel for the three month period ended March 31, 2008.
Natural gas price realizations averaged $9.50 per Mcf for the first quarter of 2008 and this is an increase of 19% compared to the same quarter last year. On the expense side, fleet operating expense for the first quarter of 2008 was $5.2 million or $1.35 per equivalent Mcf of production and was in the middle range of guidance of $5 to $5.5 million.
G&A expense for the first quarter of 2008 was $2.7 million or $0.69 per equivalent Mcf of production. This was at the low end of our guidance range of $2.6 to $3 million.
Interest expense was $9.9 million and below the guidance range of $20.8 to $23 million for the first quarter of 2008. When guidance for the first quarter was issued, we assumed we would close the CIECO transaction in the first quarter.
However, the transaction did not close until April 8 and will be reported in our second quarter results. Depletion depreciation and amortization for the first quarter totaled $15 million which was within our guidance range.
Discretionary cash flow for the first quarter totaled $29 million or $1.34 per share. Discretionary cash flow is a non-GAAP measure and in our news release, we provided a reconciliation to cash provided by operating activities.
Cash flow for the quarter was used to fund capital expenditures and abandonment obligations. Our current borrowing base for our Union Bank of California led credit facility is $50 million.
Presently, there are no outstanding draws on this line but availability is $35 million due to an outstanding letter of credit of $15 million. Following is a summary of the guidance for the second quarter in full year of 2008, which was also provided in our news release: For the second quarter, we are projecting daily production rate of 36 to 40 million cubic feet equivalent per day and we are confirming our original guidance for the full year of 2008 at 41 to 45 million cubic feet equivalent per day.
Approximately half of the projected production is oil. Lease operating expense should be approximately $5.2 million to $5.8 million and $21.7 million to $24.5 million for the second quarter and full year of 2008 respectively.
G&A expense should be between $2.6 million to $3 million for the second quarter and $10.9 million to $12 million for the full year of 2008. Interest expense should range between $4.9 to $5.5 million for the second quarter and $26.8 to $28.2 million for the full year of 2008.
As previously mentioned, we closed the CIECO Energy transaction on April 8th and which time the $200 million credit facility arranged by Merrill Lynch was fully repaid. We incurred early extinguishment of debt expense of approximately $12.5 million as a result of this repayment and this will be reported in the second quarter of 2008.
With regards to DD&A, we are projecting ranges of $12.5 million to $14 million and $57 million to $65 million for the second quarter and full year 2008. For the second quarter, we have 825 million cubic feet of natural gas hedged in the form of collars with a $10.15 savings and $7.68 floor.
For the remainder of the year, 2.5 billion cubic feet is hedged using collars with an average savings of $10.15 and a floor of $7.68. Most of our production is sold in the general area of Henry Hub, which is comparable to Miramax.
We have 135,000 barrels of oil hedged for the second quarter. Of this total, 45,000 barrels are swapped and 90,000 barrels are collars.
The average swap price is $91 with regards to the collars, the seeding price is $81.50 and the floor is $65. For the year, we have 405,000 barrels of oil hedged, 135,000 barrels of swapped and 270,000 of collars.
The average swap price is $91. The collars have an average ceiling price of $81.50 and floor of $65.
Just a reminder that realize all prices will continue to be effective by quality differentials and transportation costs. We anticipate transportation costs should average about $1.20 to $1.25 per barrel.
With that, I guess we’re ready to take questions.
Operator
The first question comes from the line of Philip Dodge from Stanford.
Philip Dodge – Stanford Group Company
Morning everybody. Thanks for the comments.
Let me ask you with little more money available this year from what money that originally been expected, what properties in your portfolio would be the priorities to take a look at earlier?
B.F. Weatherly
Sure, Phil. The kept priorities is kind of coming off of opposing trends of CIECO and then just a Board meeting and my comments earlier, of course we’re just stressing the fact that we really last year has been pursuing a strategy of focusing liquidity.
And now with the CIECO transaction closed and looking at cash flow for the rest of the year, we certainly have the cash flow and I think the liquidity to pursue some yet new activities. And in coming out of our Board meeting though last week, quite frankly we’re in the process of prioritizing.
As we mentioned before, we do have a nice inventory of drilling prospects. To try to pursue the question is to priorities, the priority really is focusing on some opportunities where we could hopefully see production later this year.
We have some drilling prospects that we certainly like to pursue but realistically by the time we drill them and if successful, have them online, we’re looking at a longer time period. So we are looking at some opportunities, perhaps where we could pursue some drilling activities that would have the infrastructure where successful we could hopefully have them online certainly about the fourth quarter or going into the first quarter of next year.
We also, at least we’re taking a look at, perhaps some producing properties, acquisitions on some of the selective basis where we see that might fit into our current strategy. And so, that’s the reason we haven’t specified at this point.
Certainly we will be over the next several months but we haven’t actually identified some of the projects we want to pursue right now. But certainly the point is we’ve got significant cash flow here in the remaining half of this year and to work with.
So the focus is on drilling opportunities or perhaps producing property opportunities that could enhance the production in the near term.
Philip Dodge – Stanford Group Company
Maybe dropping the gun for easier measurements, can you accelerate on West Cameron 295 or the High Island fields that you mentioned?
Fred L. Callon
Certainly from our standpoint, and those two properties for example, we would like to see them develop and accelerate as soon as possible with respect to High Island 165/130. Of course, we are in the process of recompleting a well there in terms of West Cameron 295.
We have a new operator there with Mariner and I think we’re looking at possibility of an additional drilling out there but I think it’s going to take some time. And then certainly with perspective to current production, we’re going to need to obviously deplete the current reservoirs before you can actually go up and plug back and recomplete into zones up the holes.
So, it’s sort of hard to accelerate that. It doesn’t make sense to leave a reservoir until you depleted it and then move up the hole.
But I think in terms of near drilling opportunities, I think we’re going to see some activities either, as I said, on the drilling side or on the acquisition side. I think we will have opportunities here certainly in the third quarter and fourth quarter.
Philip Dodge – Stanford Group Company
Understood. Thanks, Fred.
Operator
[Operator Instructions] And our next question comes from the line of Joseph Beckman from Howard Weil.
Joseph Beckman – Howard Weil, Inc.
Morning, guys. Just had a quick question on North Pronghorn.
I guess on the fourth quarter call, you talked about it coming online during the second quarter. Just wondering what the delay was in the third quarter to its online date now?
B.F. Weatherly
I’m trying to remember what the delay was there. And you’re right, it was a delay and I think it had to do with maybe some changes to the production facility.
Sorry I don’t have the specifics with me right now, but there was some change there and all of sudden we go from 30 day, 60 day, 90 day delay but certainly nothing with respect to obviously the production what we anticipate. I’ll find out exactly what it was and be sure to get back to you on that.
Joseph Beckman – Howard Weil, Inc.
Okay, great, and then one last one regarding development costs for Entrada. You guys have talked about the $300 million gross range.
Has increase in steel costs or anything like that impacted that number or is that still a good number right now?
Fred L. Callon
Yes, I think right now we are in a process of still finalizing some of the costs but as you know, we certainly had ordered some long wait items and had locked in calls on most of the equipment and pipe. But the fuel cost is certainly something that is going up.
But certainly there’s nothing that we’ve seen that should have a major impact on that but we certainly are still in the process of finalizing some of the cost particularly with the modifications to the TLP at Magnolia. And so at this point no major changes but certainly from our standpoint everybody is working extremely hard to monitor cost and keep cost down and certainly within our initial plans.
So, not to say that there aren’t still some things that can push it up some but right now I think everyone’s working pretty hard to keep cost down. I think no major changes at this point.
Joseph Beckman – Howard Weil, Inc.
Okay, great. That’s all I had.
Thanks, guys.
Operator
There are no further questions at this time. Please continue with your presentation or closing remarks.
Fred L. Callon
Again, we do appreciate everyone taking time to call in and, as always, we’re available here to answer any questions. If anyone has any question, please don’t hesitate to give any of us a call.
Thank you so much.
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