Goodrich Petroleum's CEO Discusses Q2 2012 Results - Earnings Call Transcript

Goodrich Petroleum Corp. (GDP)

Q2 2012 Earnings Call

August 7, 2012 11:00 am ET

Executives

Walter G. “Gil” Goodrich – Vice Chairman and Chief Executive Officer

Patrick E. Malloy III – Chairman

Robert C. Turnham, Jr. – President and Chief Operating Officer

Mark E. Ferchau – Executive Vice President

Jan L. Schott – Senior Vice President and Chief Financial Officer

Analyst

Ronald E. Mills – Johnson Rice & Company, LLC.

Ryan Todd – Deutsche Bank Securities

Mike Kelly – Global Hunter Securities, LLC

William Butler – Stephens Inc.

Chad Mabry – KLR Group, LLC

Subash Chandra – Jefferies & Company

Pearce W. Hammond – Simmons & Company International

Cameron Horwitz – U.S. Capital Advisors LLC

Kyle Rhodes – RBC Capital Markets, LLC

Dan McSpirit – BMO Capital Markets

Richard M. Tullis – Capital One Southcoast, Inc.,

Michael Hall – Robert W. Baird & Co.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Quarter Two, 2012 Goodrich Petroleum Corporation’s Earnings Conference. My name is Emily, and I’m your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to hand the call over to Mr. Gil Goodrich, Vice Chairman and Chief Executive Officer. Please proceed.

Walter G. “Gil” Goodrich

Thank you, Emily. Good morning, everyone. Welcome to our second quarter earnings call. I’d like to begin with introductions of the management team with us, first, with Mr. Pat Malloy, the company’s Chairman of the Board; Rob Turnham, President and Chief Operating Officer; Mark Ferchau, our Executive Vice President and Director of Engineering and Operations; and Jan Schott, Senior Vice President and Chief Financial Officer.

As is our standard practice, we’d like to remind everyone that comments that we may make and answers we may give during this teleconference conference call. Maybe considered forward-looking statements, which involve risks and uncertainties and we’ve detailed those for you in our SEC filings.

Approximately two years ago, with the acquisition of our Eagle Ford Shale position, we began a long-term strategic transition from a company whose reserves and production were 98% natural gas and 2% liquids, to a company’s assets, production, and reserves are more balanced between crude oil and natural gas.

While this transition has not always been as seamless and as quick as we may have desired, we are very pleased with the progress we have made. Crude oil, as a percentage of production on an Mcfe basis, has risen to just over 18% of production in the second quarter, and we are projecting will increase further in the fourth quarter of this year to approximately 23% of production.

Third quarter oil volumes will continue to grow and we’ve averaged approximately 3,500 barrels a day since the end of the second quarter. Due to the timing of the completion of five gross Eagle Ford Shale wells on two separate pads in September, we are projecting another meaningful increase in production as we enter the fourth quarter of this year.

Further, with a desire to both accelerate the early-stage delineation of the Tuscaloosa Marine Shale play and maintain financial discipline during this period by maintaining a $250 million CapEx budget, we expect some incremental volume impact associated with the transition of one rig from the south Texas area to the Tuscaloosa Marine Shale.

However, we continue to maintain our forecasted 2012 exit rate of approximately 5,000 barrels of oil per day. With continued success in the TMS, plus the non-core asset sale we announced last night. We believe we are very well positioned to run it multiple rigs in both the Eagle Ford Shale and TMS in 2013.

Our transition will continue, and we are confident further progress will be made over the coming quarters, as we will direct virtually all of our drilling and development capital expenditures to oil-directed drilling in both the Eagle Ford Shale and the Tuscaloosa Marine Shale. In the TMS, we significantly expanded our footprint and acreage position in the thick, high-resistivity portion of the play during the second quarter.

We exited the first quarter with approximately 102,000 net acres. We updated that position on May 23 to reflect the addition of 18,000 net acres, and we subsequently added another 12,000 net acres, during the second quarter, to bring our total net position to 132,000 net acres.

The agreements we have in place and the wells we have participated in, to date, provide us excellent insight into the development of the play, and we are pleased and encouraged by the early-stage well performance in the TMS.

As a result, we are increasing our capital allocation to the TMS during the second quarter of this year, with plans for further acceleration in 2013. At the core of our natural-gas-to-oil strategy is the rapid expansion of revenues, cash margins, and cash flow.

Our growing crude oil volumes, coupled with our excellent hedge position, are achieving the projected results. While production, measured on an Mcfe basis, declined by approximately 6% sequentially. Discretionary cash flow, led by sequential oil volume growth, grew by 16% over the first quarter of this year.

Both EBITDAX and cash flow grew to record levels as realized pricing, after giving effect to our realized crude oil and natural gas hedges, increased by 34% over the year-ago period to $7.58 per Mcfe.

Going forward, we have an outstanding hedge position to protect against price volatility during the second half of this year. We have recently added to our crude oil positions and, coupled with our natural gas hedges; provide us price protection on approximately 90% of our anticipated production in the second half of this year, at a blended average price of approximately $8.60 per Mcfe or $52 per BOE.

Turning to liquidity, we exited the second quarter with $158 million drawn on our senior credit facility, with a borrowing base of $265 million giving us unused borrowings plus cash on hand of approximately $109 million. In addition, we will deliver our mid-year reserve for a track block bank group in the near future, and expect to have a revised volume base near the end of the third quarter.

Finally, we are pleased to announce the execution of a Letter of Intent to sell our South Henderson assets for $95 million. This transaction, which is expected to close by the end of the third quarter, will further enhance our liquidity, allow us to efficiently redeploy capital from natural gas assets through the numerous oil development opportunities, in particular the early stage development of the TMS, which we are very fortunate to have in our inventory.

And with that, I would like to turn the call over to Rob Turnham.

Robert C. Turnham, Jr.

Thanks, Gil. Just to follow up on the South Henderson sale and East Texas for $95 million, we have an effective date of July 1 and an anticipated closing date of October 1. We expect definitive agreements in place in the near term. The sale of this non-core Cotton Valley asset will plug the hole in our CapEx budget for 2012 and provide additional liquidity in 2013.

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