Goodrich Petroleum Corporation (GDP)

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Goodrich Petroleum Corporation (GDP)

Q2 2008 Earnings Call Transcript

August 7, 2008 11:00 am ET

Executives

Gil Goodrich – Vice Chairman and CEO

Rob Turnham – President and COO

David Looney – EVP and CFO

Analysts

John Freeman – Raymond James

David Heikkinen – Tudor, Pickering, Holt & Company

Ron Mills – Johnson Rice

Scott Wilmoth – Simmons

Kim Pacanovsky – Collins Stewart

Richard Tullis – Capital One Southcoast

Dan McSpirit – BMO Capital Markets

John Healy [ph] – Forest Investment Management

Presentation

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2008 Goodrich Petroleum earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Gil Goodrich, Vice Chairman and CEO. Please proceed, sir.

Gil Goodrich

Good morning, everyone, and welcome to the second quarter conference call. We are anxious to get started, but let me first begin with an introduction of the executive officers and directors that are on the phone with us this morning, beginning with Pat Malloy, the company’s Chairman of the Board; Robert Turnham, our President and Chief Operating Officer; David Looney, our Executive Vice President and Chief Financial Officer; and Mark Ferchau, our Executive Vice President and Director of Engineering and Operations.

We’ve put out a detailed press release after the market close yesterday detailing our operational update and earnings for the second quarter. If for some reason you did not get a copy of that and would like one, you be feel free to call my assistant, Becky Delatin, at 713-780-9494. She will be happy to fax or e-mail you a copy. And you can also access it on our website at www.goodrichpetroleum.com. As is our practice, we’d like to remind everyone that there may be comments that we may make and answers to questions that we may give during this teleconference, which may be considered forward-looking statements that involve risks and uncertainties and we have detailed for you in our SEC filings.

During all of the recent market volatility we have remained focused on the execution of our strategy for building long-term value for our shareholders and we believe this quarter results illustrate the progress we are making and the success of our strategy. Through our aggressive Cotton Valley trend development activities, which reached a record pace of drilling during the quarter with conducting operations on 46 wells during 2Q, net production volumes grew at a very rapid pace. Our net production volumes exceeded the high end of our internal estimates and averaged just over 67 million cubic feet of gas equivalent per day representing a very strong sequential growth of approximately 16% when compared to the first quarter of this year.

Very strong net realized prices, which averaged $10.62 per Mcfe during the quarter coupled with the excellent production growth led to record revenue with just over $65 million. In addition, our cost control efforts were [ph] total operating expense were down by just over $1 per Mcfe on a unit basis compared with the prior year’s period and down 7% sequentially from the first quarter of this year has allowed us to effectively leverage off of our robust production volume growth and consequently operating income for the quarter expanded dramatically to approximately $16 million.

As you are aware, natural gas prices and the future strip increased significantly during 2Q and resulted in a correspondingly significant increase in the liability of our forward hedge position, resulting in a loss on derivatives in the quarter of approximately $49 million. After reversing out this predominantly non-cash charge, we would have reported positive net income for the quarter. With the recent declines in the natural gas market since the end of the quarter, a significant percentage of our mark-to-market hedging liability has been reversed in the last 45 days. And although we would love to report an expanded liability at the end of 3Q, which would mean that our gas markets had regained momentum and increased, we would likely see a reversal and a gain associated with our hedging position in 3Q.

Cash flow, a very strong indicator of our ability to fund a larger percentage of our capital expenditures through our operating activities, also increased dramatically in the quarter with EBITDAX reaching in excess of $46 million. Operationally, we not only continued with the very active development of our core Cotton Valley Trend reservoirs, but also made great progress in further delineating the Haynesville Shale across our acreage position in Northwest Louisiana and East Texas.

We have now drilled eight vertical Haynesville Shall wells in the Bethany-Longstreet, Caddo Pine Island, Beckville and Minden fields, and are currently drilling on two additional vertical Haynesville tests. The eight wells across the acreage have encountered (inaudible) thicknesses for the Haynesville Shale ranging between 120 feet and 275 feet of thickness with initial production rates from the shale in six wells, which we’ve given test information on it ranging between 1 million cubic feet of gas per day and 2.6 million cubic feet of gas per day.

Finally, with the closing of our joint venture with Chesapeake Energy on July 15 and our follow-on equity offering closing on July 14, we’ve brought in a combined $265 million and are extremely well positioned to take full advantage of the deep inventory of opportunities currently in front of us and we are excited about the initiation of the horizontal development of the Haynesville Shale, which will begin later this month.

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