Bill Barrett Rides High with Yellow Jacket Discovery, Strong 3Q Results
Bill Barrett Corporation has reported third quarter 2008 operating results highlighted by:
- A significant shale gas discovery at the Yellow Jacket prospect in the Paradox Basin in southwest Colorado.
- Production growth, up 33% from the prior year period to 19.6 billion cubic feet equivalent (Bcfe).
- Discretionary cash flow growth, up 93% from the prior year period to $105.6 million or $2.34 per diluted common share and $5.39 per million cubic feet equivalent (Mcfe) of production.
- Net income growth, up significantly from the prior year period to $36.1 million or $0.80 per diluted common share.
- A $126 million increase in the revolving credit facility to $593 million, completed subsequent to quarter-end.
Chairman and Chief Executive Officer, Fred Barrett, commented, "Our Company is very excited about the initial results from the first two horizontal Gothic shale gas wells at the Yellow Jacket prospect in southwest Colorado.
"The Koskie well produced for 17 days, averaging 4.5 million cubic feet per day (MMcf/d) of natural gas over the final ten days and completed the testing period at a rate of 5.7 MMcf/d. The second horizontal well, the Neely well located 14 miles north of the Koskie discovery, is currently testing early in the flowback stage at 3.1 MMcf/d natural gas. Due to the encouraging results from the wells drilled to date, in 2009 we will operate a continuous program to evaluate the area and will begin construction of infrastructure. This is a widespread but shallow (5,500 to 6,500 feet) resource play where the Company has built a 397,000 gross acre position over the past four years.
"Execution of our development programs continues to deliver growth. During the third quarter, we achieved a record level of production, maintained cash flows consistent with the second quarter 2008 despite a 30% decrease in the average regional natural gas price, and ended the quarter posting the highest quarterly earnings ever in our corporate history.
"2008 is proving to be a very successful year and will position us well for 2009. As the broader market environment presents challenges going into 2009, we will continue to focus on our operating strengths while managing to a disciplined capital program. We will enter 2009 with a strong balance sheet, ample liquidity and a substantial hedging program, all to ensure financial stability and cash flows that support our exploration and development plans."
Production for the quarter ended September 30, 2008 was 19.6 Bcfe, representing a 33% increase from the third quarter of 2007 and a 2% increase sequentially. For the first nine months of 2008, production totaled 57.0 Bcfe, representing a 30% increase compared with 44.0 Bcfe in the first nine months of 2007. Rocky Mountain regional natural gas prices and oil prices peaked early in the third quarter, then declined significantly. Regional natural gas prices tend to be lowest in the months of September and October due to lower demand as a result of mild seasonal weather. Including the effects of all of the Company's hedging activities, the average sales price realized in the third quarter of 2008 was $7.86 per Mcfe compared with $5.58 per Mcfe in the third quarter of 2007.
Discretionary cash flow (a non-GAAP measure, see page 13 for explanation and reconciliation) was $105.6 million in the third quarter of 2008, or $2.34 per diluted common share, up 93% compared with the third quarter of 2007. The year-over-year increase was primarily the result of the 33% increase in production and a 41% increase in the average realized price, partially offset by higher per unit gathering and transportation expenses and production taxes. For the first nine months of 2008, discretionary cash flow was $327.3 million, or $7.24 per diluted common share, up 83% compared with $178.4 million, or $4.01 per diluted common share, in the prior year period, also due primarily to increased production and higher commodity prices as well as lower per unit lease operating expenses.
Net income was $36.1 million, or $0.80 per diluted common share, for the third quarter of 2008 compared with $0.2 million, or $0.01 per diluted common share, in the third quarter of 2007. The increase in net income was primarily a result of higher production and a higher per unit profit margin, including reduced per unit depreciation, depletion and amortization expenses. For the first nine months of 2008, net income was $100.8 million, or $2.23 per diluted common share, up from $24.3 million, or $0.55 per diluted common share, in the prior year period, also as a result of higher production and a higher per unit profit margin.
DEBT AND LIQUIDITY
At September 30, 2008, borrowings outstanding under the Company's revolving credit facility were $174.0 million, and the Company also had outstanding 5% convertible senior notes in the amount of $172.5 million. Subsequent to quarter-end, the Company increased the borrowing capacity on its revolving line of credit to $592.8 million from $467.0 million, providing pro forma availability of $418.8 million at quarter-end. The Company is comfortable with its available financing and the status of all of its credit metrics.
Production, Wells Spud and Capital Expenditures
Capital expenditures totaled $196.8 million in the third quarter of 2008 and $423.8 for the first nine months of 2008. The Company expects its full year 2008 capital expenditures to range between $590 and $610 million, a reduction from previous guidance of $625 to $650 million, as a result of adjusting fourth quarter activity towards lower levels now planned for 2009. The Company continues to expect that expenditures will be allocated approximately 80% to development projects at its key assets in the Uinta, Piceance and Powder River Basins and approximately 20% on delineation of prior discoveries and new exploration. The Company has 12 rigs currently drilling and anticipates participating in the drilling of 465 to 470 gross wells for the full year 2008, including approximately 240 coal bed methane (CBM) wells.
Operating and Drilling Update
Uinta Basin, Utah
West Tavaputs -- Current net production is approximately 71 MMcfe/d. Production during the quarter was reduced by the need to shut-in certain wells while drilling on previously producing well pads. During the third quarter, the Company operated three rigs in the area and is on track to spud nearly 60 wells at West Tavaputs in 2008. The Company expects to exit 2008 at a net production rate of approximately 76 MMcfe/d. As the Company prepares for its 2009 capital program, the number of active rigs will be gradually reduced from three to one by year-end 2008.
The Company currently anticipates the Record of Decision on the Environmental Impact Statement for full-field development of West Tavaputs by the end of January 2009. This schedule includes a contingency time period for extended consultation with the State of Utah and cultural preservation agencies.
The West Tavaputs program continues to offer low-risk growth in the shallow zones as well as upside opportunity through the deep potential of the east and west structures and in the Mancos shale. At the end of the third quarter 2008, the Company had an approximate 97% working interest in production from 117 gross wells in its West Tavaputs shallow and deep programs.
Blacktail Ridge/Lake Canyon -- Following encouraging results in the Blacktail Ridge area, the Company has moved the infill program into the development phase and continues to drill extension wells to the southwest to determine potential expansion of the field. The Company plans to operate a continuous one-rig program through 2009.
Currently in the area, there are 13 operated producing wells with gross production averaging approximately 1,300 barrels of oil equivalent per day (boepd) for the month of October. The Company continues to optimize the producing wells testing the productivity of selected depth intervals, completion methods and geologic areas.
Hook -- The Company reached total depth at 7,585 feet with its first well (50% working interest) in the Hook prospect, targeting the Manning Canyon shale. Gas shows were encountered within 589 feet of Manning Canyon shale. More than 400 feet of core is being evaluated for rock properties and gas content. The Company plans to drill a horizontal well in this area in the first quarter of 2009. At the nearby Juana Lopez (Ferron coal equivalent) shale gas prospect, the Company has spud a 3,000 foot evaluation well.
Piceance Basin, Colorado
Gibson Gulch -- Current net production is approximately 87 MMcfe/d. Operations in the Piceance Basin continue to be executed as projected. The Company currently has four rigs operating in the area, down from five in October, including one purpose-built rig added in late August. Operations are on track to spud 130-plus wells in 2008 and to exit 2008 with a net production rate of 96 MMcfe/d.
As the Company prepares for its 2009 capital program, the number of active rigs will be gradually reduced to two at year-end 2008. The reduced level of activity in the Piceance will also accommodate a transition to the new comprehensive Colorado rules, some of which are expected to be effective in early 2009.
Drilling results on 10-acre density continue to be positive with 84 successful 10-acre wells drilled year-to-date. During August 2008, the Company added two compressors totaling 30 MMcf/d capacity at the Bailey station and is adding a third compressor having 20 MMcf/d capacity mid-fourth quarter. The Piceance program continues to be a key, low-risk, high growth development area for the Company.
At the end of the third quarter of 2008, the Company had an approximate 94% working interest in production from 390 gross wells in its Gibson Gulch program.
Wind River Basin, Wyoming
Cave Gulch/Bullfrog -- During the third quarter, the Company's prolific Bullfrog 14-18 Frontier well (94% working interest) continued to produce approximately 20 MMcf/d gross. In November 2008, the Company expects to recomplete a similar opportunity along the same fault block. This recompletion effort was delayed from its original September timing due to low natural gas prices.
The Cave Gulch deep drilling program currently includes the 31-32 well (46% working interest) and the 23-6 well (50% working interest at casing point election) each targeting the Frontier, Muddy and Lakota formations at 17,000 to 19,000 feet. The 31-32 well reached total depth at 18,731 feet, and the Company is producing a nominal 1 MMcf/d from the Muddy and Lakota formations. The Frontier formation will be completed later this year with results expected by year-end. The 23-6 well was spud in late September and is expected to reach total depth in December.
Paradox Basin, Colorado
Yellow Jacket -- The first horizontal test well, Koskie (55% working interest), is a natural gas discovery in the Gothic Shale that flowed an average of 4.5 MMcf/d of 1,200 British thermal units (Btus) per standard cubic foot (Scf) gas and yielded 20 barrels of condensate per MMcf during the final ten days of a 17 day test.
The well produced at a final rate of 5.7 MMcf/d prior to being shut-in and awaiting connection to sales, which are expected to commence in December. At the second horizontal well, the Neely, the Company successfully completed an eight-stage fracture stimulation along a 3,655 foot lateral. While early in the flowback process, the well flowed 3.1 MMcf/d over the final three days of a seven day test. Further, the Company drilled a vertical well nine miles north of the Neely well in order to obtain core information and to evaluate field extension and spud during the last week of October a third horizontal well, the 15H-27, an offset to the Koskie horizontal well.
The Company is planning a comprehensive delineation program for the area and production facilities and gathering infrastructure are being installed for sales later this year. The Company is also working with its partner and the pipelines in the area to determine long term processing and transportation alternatives. Both TransColorado and Northwest pipelines are located within the project area, which is approximately 60 miles northwest of the San Juan Basin. The Company has built a sizable acreage position in the area, which including the Green Jacket area is approximately 397,000 gross acres and 208,000 net undeveloped acres.
Green Jacket -- A 5,800 foot vertical well (100% working interest) to test the Hovenweep shale is expected to spud in the fourth quarter 2008. The Green Jacket area is located west of Yellow Jacket. The Hovenweep shale is similar to the Gothic shale yet at slightly shallower depths.
Salt Flank -- The Company reached total depth at 8,506 feet at its first Pine Ridge well (80% working interest), where good to excellent gas shows and porosity were noted in the targeted Cutler and Honaker Trail formations. Due to winter closures, testing of the well will be delayed until mid-2009.
Montana Overthrust, Montana
Circus -- During the third quarter of 2008, the Company concluded drilling four appraisal wells planned for 2008 to analyze and test the Cody shale. Two of the four wells were cored extensively, and the Company is currently completing and testing the first well, including collecting micro-seismic data on the fracture stimulations. The Company will continue further completion work in the area in 2009. Production from this area will depend on the discovery of commercial quantities of natural gas to support construction of infrastructure. The Company has a 50% working interest in this potential regional resource play.
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