|
Article Excerpt
OPERATOR: Good morning, everyone, and welcome to the CNX Gas third-quarter 2008 results conference call.
I will now turn the call over to Dan Zajdel, Vice President of Investor Relations. Please go ahead.
DAN ZAJDEL, VP-IR, CNX GAS CORP.: Thank you, John. Good morning, everyone, welcome to the CNX Gas Corporation third-quarter 2008 conference call. With me today are Nick Deluliis, President and CEO and the CNX Gas management team. Before we begin, let me remind everyone that various that we make during this call, including the guidance we give and other statements that express a belief, expectation or intention, are forward-looking statements under the Private Securities and Litigation Reform Act of 1995. Actual results could differ materially from these forward-looking statements. Information regarding the factors that may cause such differences is contained in our Annual Report on Form 10-K, which has been filed with the Securities and Exchange Commission.
The SEC permits oil and gas companies to in their files with the SEC to disclose only proved results that acCompany has demonstrated by actual production or a conclusive formation test to be economically and legally produceable under certain existing economic and operating conditions. We use certain terms in this conference call such, as unproved resources or reserves, that the SEC's guidelines strictly prohibit us from including in filings with the SEC. We also caution you that the SEC views such unproved resource or reserve estimates as inherently unreliable, and these estimates may be misleading to investors under the -- unless the investor is an expert in the gas industry. After the remarks by Nick Deluliis, we will turn the discussion over to callers for a question-and-answer section with management. Now, I would like to introduce Nicholas Deluliis. Nick?
NICHOLAS DELULIIS, PRESIDENT & CEO, CNX GAS CORP.: Thanks, Dan. And welcome, everyone, again, to the CNX Gas third-quarter earnings call. If you have read the release or if you've even just had a chance to scan our headlines, you know that this is by far the best quarter that CNX Gas has ever had. And this now makes three consecutive quarters in 2008 where we posted record performance. Based on what we have done since our 2005 IPO, where we are today, and where we are going tomorrow, it is time to start discussing what we will refer to today as the inevitability of the CNX Gas investment thesis. And to illustrate this concept of inevitability, just look at the our scope of performance. Our record results cut across just about every operational and financial parameter that we measure; and this includes net income, production, growth in production, safety, returns on capital, and, of course, margins.
Furthermore, our outlook has never been brighter. We are raising production guidance once again, and that's for both 2008 and 2009. And at the same time, our wells have been coming in under budget, so we now expect 2008 capital expenditures of about $515 million instead of the previous estimate of $552 million. So let me repeat this, because this is an important point. We are raising production guidance, while at the same time investing less capital. That is, of course, a very good combination. Now this also could be the same story that we see for 2009. We have just raised production guidance for '09 to 85 billion cubic feet, and we estimate we can do it by spending less than $500 million in capital. If that weren't enough good news, we project that we can fund this '09 capital budget entirely from cash flow from operations based on what the current NYMEX is trading at for '09 and the amount of hedging that was done with our production book for '09. So how many companies and in how many industries can you find an entity such as CNX Gas that can self-fund 15% growth? My guess would be not many.
Let's also talk a little bit about liquidity and financial health, since those things are front and center with regard to the macro issues we are facing today. The news here is pretty simple and it's very good. We have no credit issues. We don't have accounts receivable issues, and we don't have counterparty issues. We have only $58 million drawn from our credit facility; and not only did our executive team not need to liquidate CNX Gas holdings due to margin calls, we effectively have been holders of this stock since the IPO. Finally, we do not see the threat of knockout hedges. On unit costs, we are still the lowest in the Eastern United States and one of the lowest in all of the United States in total. We lead the peer group on all end unit margins; and the production growth that I spoke about earlier, coupled with our low cost and high margins, that's going to lead us to be the highest return on capital employed for an unconventional producer in the Eastern United States. On the acreage footprint front, our footprint ran past the 4 million acre mark this past quarter. We're the largest Appalachian gas producer today by revenue, and I expect we will very soon become the largest by net sales production volumes as well.
And despite all these great results, here we are sitting with $20 stock price, which is just above the $16 we started with in August of '05. And I know we might not be the first management team to lament about the share price; but we feel the current situation is a compelling one. And to make that point, let's just quickly, if I can, allow -- to recap how far we have come. In 2005, we produced 48 billion cubic feet. Next year, we're going to produce 85 billion cubic feet. So if you do that math, that's an increase of over 75%. So in an industry where production growth matters -- and at times, we've argued it matters too much, perhaps -- we are delivering big time. And keep in mind that production growth is lower and lower in risk every day. The reduced risk is due to many reasons, but the net result is going to show itself in three consecutive record quarters for 2008 and two straight production guidance increases. Statistically, that is not an accident.
In 2005, our crude reserves were about 1.13 trillion cubic feet. If you look at the end of 2007, at year end they were up 19% to about 1.34 trillion cubic feet. And don't forget, we have increased the [weighting] of PDPs versus PUDs in those reserves, and that they also represent the most profitable proved reserves in the industry. Investors should be willing to pay a much higher price for our reserve base than the peer company, since our production is going to result in much higher income and returns. In 2005, our acreage count was 1.1 million acres. Today, it is over 4 million acres. That is just shy of a 400% increase. We have got the best footprint in Appalachia, and I think the best in the Eastern United States. We have locked up the coalbed methane rights from the two largest mining companies in the United States. We have an Eastern shale portfolio just shy of 1 million acres; and that portfolio cuts across the Marcellus, the Huron, the Chattanooga and New Albany plays. And on top of the CBM and shale footprints, we are sitting with a very valuable midstream portfolio of pipelines and processing infrastructure.
You go back to 2005 on the margin front, our unit margins were about $3.18 per Mcf all in. Next year, when you look at a $7 NYMEX for our unhedged production and about a $9.75 price for our hedge volumes, and you assume $4 all in unit cost, our all in unit margins should been $4.50 in Mcf.. That's over 40% higher than our '05 margins. So not only is production growing, but it's much more profitable on a per-unit basis than three or four years ago. So you combine the 42% higher unit margins, 75% higher total Company production, and you can see that shareholder value has increased tremendously since our IPO. Let me do the math for you. With the shares held constant at 151 million shares outstanding, it means that each share in 2005 effectively owned a pretax margin stream of 48 Bcf divide by 151 million shares times a $3.18 all in margin. This comes...
|
