Delphi Energy Corp. (DPGYF.PK)

Q2 2010 Earnings Call

July 29, 2010 11:00 am ET

Executives

David Reid - President and CEO

Brian Kohlhammer - VP Finance and CFO

Analysts

Brian Kristjansen - Canaccord Genuity

Kurt Molnar - Stifel Financial

Presentation

Operator

Welcome to the Delphi Energy Corp. 2010 second quarter results conference call. I would now like to turn the meeting over to Mr. David Reid, President and Chief Executive Officer of Delphi Energy Corp.

David Reid

Good morning everyone and welcome to our second quarter 2010 conference call. As mentioned, I am David Reid and I'm the President and CEO. I am joined today by Brian today by Brian Kohlhammer. He is our VP Finance and CFO.

We'll start the call with some general remarks on the company's progress, followed by some comments on the second quarter and the current gas price environment and provide some discussion around the outlook over the remainder of 2010, especially our capital program that we outlined in the press release. And finally, we'll open up the call to your questions.

Firstly, as always, please be advised that statements made in this call other than statements of historical fact may contain forward-looking information and I refer you to the forward-looking statements disclaimer in the MD&A attached to today's press release to inform you that this disclaimer applies to any forward-looking information disclosed in today's call.

Firstly, just a little bit of background on Delphi for those of you that are unfamiliar with us. We're predominantly a natural gas E&P company. In second quarter, we were 80% natural gas by production, with over 95% of our production reserves and 95% of our undeveloped land located in the deeper areas of the basin in northwest Alberta and into northeast British Columbia. We operate approximately 85% of our production and constantly operate about 95% of our field capital programs.

We view what was a very quiet second quarter as very positive on a number of fronts. From an operations perspective, the production performance from our Q1 drilling program has been very positive. In the press release, we've outlined the 60 and 90-day production performance of a number of our projects we did in the first quarter and are very pleased with those results and that performance.

Especially with regards to the horizontal wells drilled in the Cardium, which are outperforming a great number of the Cardium wells that have been drilled and have that kind of production history, as well as our Doe Creek light oil plant at Hythe is performing very, very well as is our Falher horizontal gas well and our Bluesky at Hythe.

The Q1 drilling success at Wapiti in the Nikanassin and Bluesky did prompt us to construct in the second quarter here a 15-kilometer $3 million pipeline, 100% owned by Delphi, that connects us more directly to the Deep Cut facility of Devon's, which we also have a working interest in.

Now, this pipeline will increase our total infrastructure takeaway capacity from the area to over 20 million a day with an average NGL content of about 18 barrels per million or in total about 5,000 BOEs a day, setting us up for a continued unimpeded growth like we've been delivering at Bigstone and Hythe. So we're very, very excited about the results that we've had in Wapiti.

And this positive performance gives us the confidence to continue to develop and move forward everything that was successful in the winter program, and that's reflected in the second half drilling program we've outlined. And we have a much greater confidence level in advancing a number of these scalable growth-oriented project types on the horizontal drilling front.

From a financial perspective, Brian will get into much more detail, but I'm very pleased with the strong cash flows, especially on a per unit base, despite AECO being $4 in the quarter. And part of that was certainly due in part to increasing oil and NGL component, but also our strong production.

Our operating cost reductions continue to play an important role in being efficient and economic in this environment. We saw our royalty rates increase slightly, but that's really due to our increased oil and NGL production. And Brian will talk more on that.

We continue to benefit from the strong hedge position, and we'll beat AECO again this time by 36%. So that continues to play a strong role in our financial strategies as well continuing to pursue greater components of oil and NGL in our mix.

So we remain very optimistic and confident in our ability to execute in what continues to be a challenging environment from a gas pricing perspective, but things are going very, very well.

So with that, I'll turn it over to Brian and he will provide some comments around the financials, and then I'll come back and talk about the second half capital program.

Brian Kohlhammer

Thanks, Dave, and good morning, everyone. From a financial perspective, we're focused on two primary objectives. One is maintaining our strong financial position, our balance sheet, with the strong position we've got there, and also having a recycle ratio of at least 2-to-1.

As we've talked about before, we're focused on generating an operating netback recycle ratio of approximately 2.4-to-1 and a cash netback recycle ratio of about 2-to-1. Generating recycle ratio of greater than 2-to-1 will provide us with the cash reserves to pursue our planned capital program to grow production and reserves and add considerable value to the company for our shareholders. At a minimum, we strive to achieve a cash netback of at least $20 per boe and planning and development cost of $10 or less for two key reserve additions.

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