Cabot Oil & Gas (COG) Q4 2011 Earnings Call February 21, 2012 9:30 am ET Executives Dan O. Dinges - Chairman, Chief Executive Officer, President and Member of Executive Committee Steven W. Lindeman - Vice President of Engineering & Technology Scott C. Schroeder - Chief Financial Officer, Vice President and Treasurer Unknown Executive - Analysts Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division Jeanine Wai - JP Morgan Chase & Co, Research Division Gil Yang - BofA Merrill Lynch, Research Division Pearce W. Hammond - Simmons & Company International, Research Division Biju Z. Perincheril - Jefferies & Company, Inc., Research Division Jack N. Aydin - KeyBanc Capital Markets Inc., Research Division Unknown Analyst Andrew Coleman - Raymond James & Associates, Inc., Research Division Presentation Operator
All right. At this time, we have many things to cover and expand on, particularly the press releases that were issued last night. I will briefly cover full year financial results, the results of our year end reserve analysis. I will discuss our outlook for Cabot, followed by a discussion of our operations in Pennsylvania, Oklahoma and Texas, including a brand-new takeaway project that we announced in the Marcellus. Before I go on the details of these topics, let me give you a couple of clip note of the 2011 for the company.We grew production, 43.5%; grew reserves, 12% absolute or 22% pro forma taken in consideration asset sales. All-in company-wide finding costs of $1.21 per Mcf, including an all-in $0.65 per Mcf Marcellus finding cost figure. We had doubled the level of proved reserves associated with liquids. 2010 Marcellus wells, we revised up to 11 Bcf from 10 Bcf. Undrilled cut percentage is 36%, flat with 2010. Net income exceeded $100 million for the seventh consecutive year even with the lowest natural gas price realized in that same timeframe. And our debt levels were reduced year-over-year. On the financial results. Cabot reported for 2011 clean earnings of $139 million with discretionary cash flow of about $549 million. The year experienced the lowest natural gas price since 2004. Fortunately, this was offset by the highest production growth recorded by Cabot. In terms of full year production, the company posted a 43.5% growth rate in 2011 compared to '10. This was driven by a 42.5% expansion in natural gas volumes, which was driven entirely by the Marcellus and a 68% growth in oil and liquid volumes. From our organic program and net of asset sales, Cabot had another stellar year adding reserves to surpass 3 Tcf mark, just 2 years after reaching the 2 Tcf mark. Our oil and liquids reserve bookings contributed by doubling between 2010 and '11. However, the main driver of this growth was the Marcellus effort and the continued strength of this drilling program. As we have highlighted in previous presentations, we have wells that ranked as the top performers, included -- including released last week by Pennsylvania, 8 of the top 10 for cumulative production during the last 6 months of 2011.
For 2011, the typical 15-stage well has been booked at 11 Bcf, while the 2010 Marcellus program EUR average was raised to 11 Bcf from 10 Bcf. Also of note is Cabot did book a couple of wells with EURs in excess of 20 Bcf, creating a high watermark for Cabot and, most likely, the industry.At the end of 2011, we adjusted our PUD portfolio removing the EUR in the Marcellus, moving the EUR in the Marcellus slightly higher to 7.5 Bcf for the representative 10-stage well. We also, once again, removed legacy PUD bookings throughout our portfolio, which were not in the queue for drilling, totaling 190 Bcfe. As result and as mentioned, our undrilled PUD reserves account for 36% of the totals with another 5% drilled but not yet frac-ed, and we have a 59% proved developed percent. In terms of economics, the Marcellus finding cost of $0.65 per Mcf is a standout for the 2011 program. And considering the oil and liquids efforts by the company, the $1.21 per Mcf oil source number is also very competitive. As you're aware, the oil dollars are converted 6:1. Let me also recap with our 2011 program, what we are able to deliver. Net of asset sales, legacy PUD removal and record production, which was about 600 Bcf, we had double-digit reserve growth, we had competitive finding cost and a debt-reducing program. Obviously, '11 being a good program, the question quickly moves to what are we going to do in '12 as an encore to '11? Before I go into the operations report, I think it would be beneficial to review our thoughts on the macro environment and also discuss our rationale for capital allocation decisions. We are all aware of the supply-demand imbalance that exist today for natural gas. Our industry is starting to make adjustments by laying down rigs, reducing capital allocated to natural gas plays and throttling back on production growth expectations. Once gas is as good as another on the short-term, midterm effects on supply and the resolved effects of value per Mcf. Regarding demand, we continue to see evidence of natural gas increases in use in power generation, transportation considerations with ongoing expectations and applications for export opportunity. We experienced a no-show for the winter this year, which has left storage at a historic high and lingering concerns for 2012 prices. The industry has made a statement that current market prices will not yield sufficient returns for further capital allocation. Active leasing for natural gas plays is virtually 0. Some companies have elected to allow fringe acreage to expire instead of burning capital. Virtually every company now discusses its desire to allocate capital to liquid-rich plays, and Cabot is no exception to that. However, Cabot does have a large acreage position area in the Marcellus that continues to yield excellent returns at the current market rate. As evidenced by the most recent release by the PA environmental protection on well data, it remains evident that Cabot has the most robust position in the Marcellus. In fact, our internal rate of return exceeds many areas in the Permian, Bakken and Eagle Ford. Even with these results taken in consideration, the efficiencies we have gained in our drilling and completion operations and the fact that we continue to manage our primary term acreage, we are able to reduce our capital allocation to the Marcellus by about 15% to 20% or $100 million and still maintain a top-tier growth program of 35% to 50%. Again, I will mention that we are going to maintain our acreage -- all our acreage in the Marcellus. We've taken our foot off the pedal somewhat. Our value-added growth allows us to maintain financial discipline and our cash flow. This will have the effect of bringing our investment to within $50 million to $75 million of anticipated cash. I might add, we do feel the market correction for the price of natural gas has begun. With that said though, the pace of recovery is uncertain. And our 2012 program, we'll be allocating 40% to 45% of our capital to our liquids plays. It is not insignificant that we increased our oil production by 68% last year, and we expect to yet again experience greater than 55% increase in our oil production in '12. Though we're in a soft market for natural gas, as I mentioned, we do feel the floor has been found. As natural gas continues to increase, its share of energy demand across the U.S. and the world, I do like our position and expect Cabot to regain the returns it has recently lost in the market. And regard to hedging, the company added new oil hedges. Since our last report, the company has 31 contracts for 2012 production, including 27 contracts for gas at $5.22 and 4 contracts for oil at $99.30 and 7 contracts in 2013, 5 gas and 2 oil. Read the rest of this transcript for free on seekingalpha.com