Goodrich Petroleum Corp. (GDP)
Q3 FY08 Earnings Call
November 6, 2008, 11:00 AM ET
Patrick E. Malloy III - Chairman of the Board
Walter G. Goodrich - Vice Chairman and CEO
Robert C. Turnham, Jr. - President and COO
David R. Looney - EVP and CFO
Mark E. Ferchau - EVP and Director of Engineering and Operations
Subash Chandra - Jefferies
Ellen Hannan - Weeden & Co
Scott Wilmoth - Simmons & Co
Kim Pacanovsky - Collins Stewart LLC
Ronald Mills - Johnson Rice & Co
Sven Del Pozzo - CK Cooper & Co
Monroe Helm - CM Energy Partners
John Freeman - Raymond James
Dan McSpirit - BMO Capital Markets
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Walter G. Goodrich - Vice Chairman and Chief Executive Officer
Thank you Jen. Good morning everyone and welcome to our third quarter 2008 earnings conference call. I’d like to start by introducing the Goodrich Petroleum team members that are with us here today, starting with Pat Malloy the Company’s Chairman of the Board; Rob Turnham President and Chief Operating Officer; David Looney Executive Vice President and Chief Financial Officer; and Mark Ferchau our Executive Vice President Director of Engineering and Operations.
We issued a press release on the third quarter call yesterday after the close. Hopefully you’ve had a chance to review that. If you have not you can access one on our website at www.goodrichpetroleum.com or feel free to call my assistant Becky DeLatin [ph] at 713-780-9494.
As is our practice we would like to remind everyone that comments we may make and answers we may give to questions during this teleconference may be considered forward-looking statements, which involve risks and uncertainties and we have detailed those for you in our SEC filings.
This morning we are pleased to announce earnings and operational results. We believe the third quarter results and financial statements illustrate not only the success we have had in creating value for our shareholders but more importantly demonstrates the strength of our balance sheet and the significant amount of financial flexibility we currently enjoy, as well as illustrate our path to creating additional shareholder value in 2009.
Our reported record net income of $195 million was positively impacted by both the net gain resulting from our $172 million sale of undeveloped leasehold interests into a joint venture for the Haynesville Shale and the benefit of our strategic hedging position, which resulted in a non-cash gain of approximately $83 million in the quarter.
On closing the Haynesville Shale joint venture transaction and our follow-on equity offering of approximately 3.1 million shares in July, we paid off the entire amount of outstanding indebtedness under our senior credit facility, and ended the third quarter with approximately $224 million in cash and short-term investments; and a current net debt to capital ratio of just under 4%.
After the delivery of our midyear reserve report, our bank group indicated that our reserves at mid year which stood at 422 Bcfe of crude reserves would likely result in a borrowing base in excess of $200 million. However, given the current strength of our balance sheet, cash on hand and lack of expected borrowing requirements in 2009, as well as our desire to minimize unnecessary fees and documentation; we elected to maintain our current borrowing base at $175 million.
The full amount of the borrowing base will be re-determined by our bank group in the first quarter of next year after completion and delivery of our year-end 2008 reserve report. The combination of cash on hand and our existing borrowing base provide us approximately $400 million in available capital and liquidity. Consequently the strength of our balance sheet has us uniquely positioned to execute our strategy throughout 2009 and likely through 2010, without the need for any incremental capital.
During the quarter net production volumes averaged 69 million cubic feet of gas equivalents per day, which was near the low end of our previous guidance after adjusting for the estimated volumes curtailed in the aftermath of hurricane Ike, with such curtailment volumes meeting or slightly exceeding the high end of our original estimates.
Rob will provide you additional color on third quarter production and our outlook going forward in a few minutes. Additionally, David will provide a more detailed analysis of our third quarter revenue and expenses shortly. I would only comment that the incremental production growth we reported… with the increment production growth, we reported strong oil and natural gas sales which again exceeded $60 million in the period.
Third quarter operating income was $158 million, which includes the net gain from the proceeds received upon closing the Haynesville Shale joint venture. If we were to exclude the impact of the gain from the joint venture, operating income would have been approximately $12.1 million or $0.34 per basic share.
Operating income was also positively impacted by a meaningful decrease in per unit DD&A expense in the quarter. Our success with the drill bit in the first half of this year reduced overall refining and development costs, which were reflected in the mid year reserve report and resulted in a sequential per unit reduction in DD&A expense of 13%, when compared to the second quarter of this year.
The combination of production volume growth and our ongoing cost reduction efforts helped lower overall per unit operating expenses by approximately $0.73 per Mcfe compared to the year ago period.
Turning to cash flow EBITDAX, while down slightly due to lower commodity prices on a sequential basis compared to the second quarter of this year, grew robustly when compared to the same period a year ago to approximately $41 million, excluding the gain from the Haynesville Shale joint venture, which represents a 116% increase over the third quarter of 2007.