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Cabot Oil & Gas (COG)

Q4 2010 Earnings Call

February 23, 2011 9:30 am ET

Executives

Scott Schroeder - Chief Financial Officer and Vice President

Jeffrey Hutton - Vice President of Marketing

Dan Dinges - Chairman, Chief Executive Officer, President and Member of Executive Committee

Analysts

Michael Hall

Brian Singer - Goldman Sachs Group Inc.

Joseph Magner - Macquarie Research

Robert Christensen - Buckingham Research Group, Inc.

Jack Aydin - KeyBanc Capital Markets Inc.

Biju Perincheril - Jefferies & Company, Inc.

Raymond Deacon - Pritchard Capital Partners, LLC

Gil Yang - BofA Merrill Lynch

TheStreet Recommends

Amir Arif - Stifel, Nicolaus & Co., Inc.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc.

Presentation

Operator

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Previous Statements by COG
» Cabot Oil & Gas CEO Discusses Q3 2010 Results - Earnings Call Transcript
» Cabot Oil & Gas Corp. Q1 2010 Earnings Call Transcript
» Cabot Oil & Gas Corporation Q4 2009 Earnings Call Transcript

Ladies and gentlemen, thank you for standing by, and welcome to the Cabot Oil & Gas Fourth Quarter 2010 and Year-End Conference Call [Operator Instructions] I would now like to turn the conference over to Dan Dinges, Chairman, President and CEO.

Dan Dinges

Thank you, Beverly, and good morning. I appreciate everybody joining us for this year-end teleconference call. I have with me today Scott Schroeder, Jeff Hutton, Matt Reid, our VP and Regional Manager of South; and our newly elected VP of Engineering and Technology, Steve Lindeman. I want to state that the boilerplate language, forward-looking statements included on the press release do apply to my comments today.

At this time, we have several things to cover and expand on from the three press releases that we're issued last night. I will briefly cover the year-end financial results, the year-end reserve metrics and then on a more detailed discussion of our operations including our plan for 2011. I'll be brief and allow time for Q&A at the end.

Cabot did report its financial results for the year with earnings of just over $100 million and with cash flow from operations of $485 million. The company maintained our strong financial structure, raising over $200 million through asset sales in the fourth quarter to reduce debt and create more flexibility with capitalization ratio of 32%. From a clean earnings perspective, net income was basically the same as reported with selected items, which include gain on sale, impairments, stock compensation and a true-up of deferred taxes that net out.

Fourth quarter clean earnings were $20 million on the strength of record production levels. We do not normalize cash flow, both the quarter and the year were impacted by the cash taxes associated with the gains from the fourth quarter asset sales. This had approximately a $25 million to $30 million lowering effect on reported cash flow. However, I'd gladly take the $211 million pretax proceeds we raised in exchange.

From a value-added perspective, as we all know, a key metric to an organization's growth and value creation is its ability to stack up reserves at economic investment levels. Cabot once again accomplished that by growing reserves a record 31% year-over-year to a new established high of 2.7 Tcfe. Not only is this record performance impressive, it is equally noteworthy that we held our PUD level at 36%, the same percentage reported at the end of 2009. This booking translates into a proved developed reserve increase of 30%.

The value from this program has created for Cabot shareholders, as illustrated by the fact with only 13% increase in year-end SEC gas prices, Cabot realized a 100% increase in its SEC PV 10 to $3.2 billion. That is a good demonstration of value creation year-over-year. The company was able to add 651 Bcfe before production and revision adjustments for the year. This compares to 463 Bcfe added last year. With all of the 2010 increase coming from our organic drilling program, the corresponding all-source finding cost was $1.05 per Mcfe, a level not seen since 2002 when we had roughly a $100 million program. Excluding lease acts, this figure drops to $0.89 an Mcfe. The company replaced 603% of its production through organic growth at a very efficient finding cost.

As I mentioned a minute ago, Cabot once again managed its product portfolio for compliance with the five-year SEC rule. We look at our PUD profile as a balancing act with future capital needs, finding cost metrics over the long term and a realistic assessment of how much PUD drilling is prudent to execute in our program over the next several years. In light of the current natural gas strip, the dynamics of our Marcellus program and the South Region's oil program, we removed PUDs from our conventional inventory in West Virginia, Rocky Mountains, Mid-Continent, South Texas and East Texas. This high graded our overall PUD portfolio, which now only has 620 total locations, down from 948 at the end of 2009. All these PUDs can be drilled easily with anticipated cash flow. Even with this reclassification of P2 from PUD, the performance revisions from our Marcellus program provided us with an overall positive revision of approximately 137 Bcfe. Our investment program during the year for total finding cost purposes totaled $828 million, which included $131 million for new leases in the Marcellus and the Eagle Ford.

In terms of production, the company reached a milestone with a full year production number of 130.6 Bcfe, exceeding the high end of our full year expectation of 25% production growth. Our actual growth was 28.6% increase. This record-setting performance was achieved even after the restricted rates due to the slowdown related to the Lathrop compression station Phase II permitting approval process. I'll have additional comments on our Phase II work once I get to the North region.

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