Bill Barrett Exits 2Q 2009 Financially 'Well-Positioned'
Bill Barrett Corporation has reported second quarter 2009 operating results highlighted by:
- Production of 22.1 Bcfe, up 15% from the prior year period and flat sequentially
- Discretionary cash flow of $102.8 million, or $2.28 per diluted common share and $4.65 per Mcfe
- Net income of $10.6 million and adjusted net income of $15.4 million, or $0.34 per diluted share
- Acquisition of 90% working interest in 40,300 undeveloped acres in the Cottonwood Gulch area of the Piceance Basin in western Colorado
- July completion of $250.0 million Senior Notes offering, increasing current liquidity to $473.5 million
Chairman and Chief Executive Officer Fred Barrett commented, "We continue to realize strong results despite difficult market conditions. Through a combination of increasingly efficient operations, substantial and attractively priced hedge positions, shortened drilling times and reduced service costs, our team is executing on all fronts. Further, the acquisition of the Cottonwood Gulch acreage in the prolific Piceance Basin is an exciting opportunity and natural fit for the Company, and we look forward to initiating responsible development of this substantial resource.
"We are well-positioned financially. In early July, we completed the offering of $250 million in senior notes, increasing our liquidity to $474 million. In addition, we have hedges in place to regional sales points covering 70% to 73% of second half 2009 estimated production at an average floor price of $7.64 per Mcfe. We are on track to complete our development and assess our exploration programs as planned, and we are financially capable should additional opportunities emerge. As a result of strong year-to-date performance, we have revised our full year guidance to include: increased production; lowered LOE costs; reduced G&A expenses; and, maintained capital expenditures before acquisitions at $350 million."
Second quarter 2009 natural gas and oil production totaled 22.1 billion cubic feet equivalent (Bcfe), up 15% from 19.2 Bcfe in the second quarter of 2008 and flat sequentially with 22.1 Bcfe in the first quarter of 2009. For the first half of 2009, production totaled 44.2 Bcfe, an increase of 18% compared with the first half of 2008. Despite a significant decline in natural gas and oil market prices in the second quarter of 2009 compared with the second quarter of 2008, the Company was able to realize strong production revenue through its effective hedging program. The Company's commodity hedging program increased its second quarter 2009 natural gas and oil revenues by $75.3 million, more than doubling the average per unit price received. Including the effects of hedging activities, the average sales price realized in the second quarter of 2009 was $6.64 per Mcfe, down from $8.31 per Mcfe in the second quarter of 2008 and down from $7.70 per Mcfe in the first quarter of 2009.
Discretionary cash flow (a non-GAAP measure, see page 12) in the second quarter of 2009 was $102.8 million, or $2.28 per diluted common share, down 9.3% from $113.4 million, or $2.50 per diluted common share, in the second quarter of 2008. While the Company benefitted in the second quarter of 2009 from higher production and lower per unit cash operating costs, this was more than offset by a $1.67 per Mcfe decline in realized prices and a $4.3 million increase in cash income taxes. Of note, cash operating costs in the second quarter of 2009 were reduced by lower per unit lease operating costs at West Tavaputs and lower production tax expense as a result of significantly lower wellhead prices. (See per unit metrics on page 8.) Discretionary cash flow for the first half of 2009 was $237.5 million, or $5.30 per diluted common share, up 7% compared with $221.7 million, or $4.90 per diluted common share, in the first half of 2008.
Net income in the second quarter of 2009 was $10.6 million, or $0.24 per diluted common share, compared with $33.3 million, or $0.73 per diluted common share, in the prior year period. Net income included a $7.9 million unrealized commodity derivative loss (principally related to basis only hedges), a $0.4 million addition to the production tax benefit discussed last quarter and a nominal loss on property sales.
Adjusting for these items, tax effected, adjusted net income (a non-GAAP measure, see page 12) was $15.4 million or $0.34 per diluted common share. For the first half of 2009, net income was $37.0 million, down from $63.8 million in the first half of 2008, and adjusted net income was $57.7 million, down from $66.6 million in the first half of 2008. Net income for the second quarter of 2009 and first half of 2009 also included $9.4 million in dry hole costs for five wells (four described below plus the Rocktober well in the Big Horn Basin), or approximately $5.6 million after tax.
DEBT AND LIQUIDITY
The Company ended the second quarter of 2009 with $299.0 million drawn on its revolving credit facility and had outstanding 5% convertible senior notes in the principal amount of $172.5 million. Subsequently, the Company closed on its previously announced offering of $250.0 million 9.875% Senior Notes due 2016, issued at 95.172% of par with a yield to maturity of 10.875%. All of the net proceeds from the offering of $232.3 million were used to reduce the amount outstanding under the revolving credit facility. Also as a result of the senior notes offering, the borrowing base on the credit facility was reduced by 25% of the principal amount of the senior notes to $537.5 million. Currently, there is $64.0 million drawn on the revolving credit facility, providing $473.5 million in available borrowing capacity. The Company has significant liquidity available from cash flows from operations and the credit facility to fund its planned capital program.
Production, Wells Spud and Capital Expenditures
Second quarter 2009 capital expenditures including the recent Cottonwood Gulch acquisition totaled $131.6 million. The Company plans to spend up to $410.0 million for capital expenditures in 2009, including $60.0 million paid for Cottonwood Gulch. Excluding the acquisition, capital expenditures are expected to be aligned with cash flows and allocated approximately 80% to 85% to development projects at its key assets in the Piceance, Uinta and Powder River basins and approximately 15% to 20% to delineation of prior discoveries and on-going exploration activities. The Company has three rigs currently drilling, all of which are operating in the Piceance Basin. As a result of improved drilling efficiencies, the Company anticipates participating in the drilling of 165 to 175 wells for the full year 2009, up from the previous estimate of 145 to 155 wells. This includes approximately 35 to 40 coal bed methane (CBM) wells.
Operating and Drilling Update
Piceance Basin, Colorado
Gibson Gulch -- Current net production is approximately 95 million cubic feet equivalent per day (MMcfe/d). The Company plans to operate three rigs in the area through the remainder of 2009 and, as a result of improved drilling times, expects to drill a 105 to 110 well program for the full year. All permits for the program are in place. In addition, improvements in water handling reduced lease operating expenses in the area for the second quarter compared with the first quarter. The Gibson Gulch program continues to be a key, low-risk, high growth development area for the Company and offers flexibility to adjust the number of active rigs dependent upon the Company's capital strategy.
At the end of the second quarter 2009, the Company had an approximate 96% working interest in production from 472 gross wells in its Gibson Gulch program.
Cottonwood Gulch -- In June 2009, the Company paid $60 million to acquire a 90% working interest in 40,300 undeveloped acres in Cottonwood Gulch, formerly known as Naval Oil Shale Reserve #1. The acreage is adjacent to the prolific Rulison and Parachute fields in the Piceance Basin, and the Company expects the acquisition to add more than 2 trillion cubic feet equivalent of probable and possible resources to its portfolio. The Roan Plateau Resource Management Plan is in effect and an environmental impact statement has been signed for development of the area. In order to initiate development in 2010, the Company is working with stakeholders to resolve remaining issues, including a lawsuit by environmental groups against the Bureau of Land Management (BLM) that challenges various matters related to the leasing and development of this area.
Uinta Basin, Utah
West Tavaputs -- Current net production is approximately 88 MMcfe/d. The Company completed drilling its 14-well program for 2009 with completions operations on six of these wells finished to date. The BLM is working towards completion of tasks necessary to issue a Record of Decision on the Environmental Impact Statement for full-field development at West Tavaputs and currently targets approval for the first half of 2010.
In the shallow development drilling program (Wasatch/Mesaverde), 40-acre density continues successfully at Peter's Point, and the Company continues to be encouraged by 20-acre density results at Prickly Pear. During the second quarter of 2009, the Company continued to drive operating cost savings in West Tavaputs with reduced water handling charges and plans a second salt water disposal well to further improve costs. The Company also identified a new and environmentally friendly method of dust suppression, which it expects will drive further cost savings on road maintenance.
The West Tavaputs program continues to offer low-risk growth in the shallow Mesaverde and Wasatch zones as well as upside opportunity through the Mancos shale.
At the end of the second quarter 2009, the Company had an approximate 97% working interest in production from 146 gross wells in its West Tavaputs shallow and deep programs.
Blacktail Ridge/Lake Canyon -- Currently in the combined area, there are 16 operated wells with gross production capacity of approximately 3,200 barrels of oil per day (Bopd) and three wells waiting on gas gathering improvements before completion. The Company continues to shut-in most of its wells due to gas gathering constraints, which it expects will be resolved around year-end 2009. Current production averages approximately 950 barrels of oil equivalent per day (Boepd) gross, or approximately 500 Boepd net. As a result of infrastructure constraints, the Company has reached agreement with the Ute Tribe to suspend certain drilling commitments. The working interests in this area range from 19% to 100%.
Hook -- In the deep Hook prospect (50% working interest), the Company is targeting the Manning Canyon shale at a depth of approximately 8,000 feet. The Company drilled its first Manning Canyon horizontal well and expects to complete the well by September 2009. The Company also drilled two vertical test wells in the shallower Juana Lopez shale (100% working interest), at approximately 4,000 feet. Testing of the first Juana Lopez well drilled in 2008 was completed and was recorded as a dry hole expense in the second quarter of 2009. Completion of the second Juana Lopez well is planned for 2010.
Powder River Basin, Wyoming
Coal Bed Methane (CBM) -- Current CBM net production is approximately 36 MMcf/d and drilling activity will be re-started in August 2009 with the end of seasonal wildlife stipulations. The Company has reduced its 2009 drilling program for the area to participation in a total of 35 to 40 CBM wells. Development of this area requires dewatering of wells, which takes an average of six to 12 months. During 2009, the Company will continue to dewater wells with production expected to increase to approximately 38 MMcf/d in the fourth quarter.
At the end of the second quarter 2009, the Company had an approximate 75% working interest in production from 634 gross CBM wells.
Wind River Basin, Wyoming
Cave Gulch/Bullfrog/Cave Gulch deep -- Current net production from the area is approximately 21 MMcfe/d, including the Bullfrog 14-18 recompletion well (94% working interest) that continues to be a strong producer, currently averaging approximately 12 MMcf/d gross. Additional activity in this region remains postponed due to low natural gas prices.
Paradox Basin, Colorado
Yellow Jacket -- At the Yellow Jacket shale gas discovery (55% working interest), targeting the Gothic shale, the Company has drilled eight wells and continues to adjust completion and production techniques in an effort to avoid salt precipitation in the wellbore, maximize exposure to the shale formation and improve well performance. The Company has five wells on production. One well, the Oliver 13H, was expensed in the second quarter as a dry hole due to the impact on completion of a cross-cutting fault that encountered nominal H2S, a circumstance unique to this well. The Company has approximately 307,000 gross and 140,000 net undeveloped acres in the prospect.
Green Jacket -- At the Green Jacket prospect (100% working interest), targeting the Hovenweep shale, the Company completed its first horizontal well during the second quarter of 2009. The well did not encounter the salt issues that are present in the Yellow Jacket wells and is currently shut-in due to its distance from the pipeline and as the Company focuses its efforts on the Yellow Jacket well completions. The Company has approximately 150,000 gross and 110,000 net undeveloped acres in the prospect.
Montana Overthrust, Montana
Circus -- The Company began completion work and testing on three vertical wells that were drilled during 2008 targeting the Cody shale and is permitting a Cody shale horizontal well. Testing was completed on the Draco and Leviathan wells, which were drilled in 2007 and originally targeted structural features below 7,000 feet, and the remaining well costs were expensed as dry holes. Targeted zones in these wells were not related to the Cody shale currently being tested. The Company has a 50% working interest in this prospect.
Commodity Hedges Update
During the second quarter of 2009, the Company had hedges in place for 78% of its natural gas production volumes and 50% of its oil production volumes, which resulted in an increase in natural gas revenues of $73.4 million and an increase in oil revenues of $1.9 million. The net effect increased the average price received per Mcfe to $6.64 from $3.23.
It is the Company's strategy to typically hedge 50% to 70% of production through basis to regional sales points for the next 12 months on a rolling basis. Natural gas and oil hedging is intended to reduce the risks associated with unpredictable future natural gas and oil prices and to provide predictability for a portion of cash flows to support the Company's capital expenditure program.
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