Goodrich Petroleum Corporation (GDP)

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Goodrich Petroleum (GDP)

Q4 2012 Earnings Call

February 21, 2013 11:00 am ET

Executives

Walter G. Goodrich - Non-Independent Executive Vice Chairman, Chief Executive Officer, Member of Executive Committee and Member of Hedging Committee

Robert C. Turnham - President, Chief Operating Officer and Non-Independent Executive Director

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

Analysts

Michael Kelly - Global Hunter Securities, LLC, Research Division

Ryan Todd - Deutsche Bank AG, Research Division

Brian M. Corales - Howard Weil Incorporated, Research Division

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Ronald E. Mills - Johnson Rice & Company, L.L.C., Research Division

Dan McSpirit - BMO Capital Markets U.S.

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Michael S. Scialla - Stifel, Nicolaus & Co., Inc., Research Division

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Joseph Patrick Magner - Macquarie Research

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Goodrich Petroleum Corporation Earnings Conference Call. My name is Kim, and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Gil Goodrich, Vice Chairman and Chief Executive Officer. Please proceed, sir.

Walter G. Goodrich

Thank you, Kim. Good morning, everyone, and welcome to our year-end 2012 earnings call. With me here this morning is Pat Malloy, the company's Chairman of the Board; Robert Turnham, our President and Chief Operating Officer; Mark Ferchau, Executive Vice President, Engineering and Operations; and Jan Schott, Senior Vice President and Chief Financial Officer.

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

During 2012, we continued our transformation from a company with reserves and production dominated by natural gas towards a more balanced portfolio of assets and a company with maximum flexibility that would allocate capital to high-return projects in either crude oil or natural gas. While we still have considerable progress to be made, we achieved the vast majority of our corporate objectives in 2012.

As we entered last year, crude oil, on an Mcfe basis, averaged just under 15% of total production. In the fourth quarter of 2012, crude oil volumes grew by 12.5% sequentially over the third quarter and equated to 30% of total production on an Mcfe basis. On an absolute basis, net crude oil production was 1.1 million barrels in 2012 or a 70% increase over 2011.

For this year, we have -- are again forecasting another 40% to 60% increase in crude oil production volumes. The increase in crude oil volumes are driving a further expansion of our operating cash margin, which increased to 75% or $7.35 per Mcfe on adjusted oil and gas revenue, including our realized gains on derivatives of $9.83 per Mcfe in the fourth quarter of last year.

The increase in oil volumes and cash margin expansion led to a company record in EBITDAX of just over $50 million and discretionary cash flow of approximately $40 million in the fourth quarter.

As we have stated before, we do not believe current natural gas prices justify drilling for dry natural gas reserves, and as such, all of our 2013 drilling plans are associated with our oil-rich Eagle Ford and Tuscaloosa Marine Shale plays. While we are making good progress in our transformation to a much more balanced reserve mix, we are still a company with a majority of our reserves in natural gas at year-end 2012. As such, the SEC trailing 12-month natural gas price of $2.85 per MMBtu impacted SEC proved reserves, where we incurred negative reserve reversions, almost exclusively associated with low natural gas price and undeveloped dry gas reserves. As a result, proved reserves under the SEC pricing declined to 333 Bcfe after giving effects to the reserve revisions as well as the sale of our South Henderson assets, which occurred in the third quarter of 2012.

However, looking forward and using current 5-year strip prices of $4.17 per Mcf and $90.13 per barrel, year-end proved reserves would have been 442 Bcfe, with a present value discounted at 10% of $530 million.

The low natural gas price environment also impacted our income statement at year end, where we incurred a onetime noncash charge or impairment of approximately $47 million primarily associated with property in East Texas and related to the Haynesville Shale.

In the Eagle Ford Shale, our drilling team again turned in impressive results in total average feet drilled per day. In the second half of 2012, our team achieved what we believe are industry-leading drill times and spud to rig release of approximately 10 days per 10,000 feet. These results are allowing us to increase wells per -- drilled per rig and reduce overall completed well costs.

In addition, we believe the lessons we have learned in the Eagle Ford will be very valuable as we increase our activity in the Tuscaloosa Marine Shale play and work to reduce cycle times and total completed well costs in this new emerging oil play.

In addition, in 2012 -- our 2012 Eagle Ford activity, where we drilled 33 gross, 22 net wells and invested approximately $173 million, was the primary driver behind our 70% increase in crude oil production during the past year. As I previously stated, we expect crude oil volumes to grow again in 2013 by approximately 40% to 60% over 2012, and our planned Eagle Ford activity will play a meaningful role in this year's oil production growth.

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