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| CWEI > SEC Filings for CWEI > Form 10-Q on 10-Nov-2008 | All Recent SEC Filings |
10-Nov-2008
Quarterly Report
The following discussion is intended to provide information relevant to an understanding of our financial condition, changes in our financial condition and our results of operations and cash flows and should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and in our Form 10-K for the year ended December 31, 2007.
Forward-Looking Statements
Certain information included in this quarterly report contains forward-looking
statements that are based on management's current expectations. Forward-looking
statements include statements regarding our plans, beliefs or current
expectations and may be signified by the words "could", "should", "expect",
"project", "estimate", "believe", "anticipate", "intend", "budget", "plan",
"forecast", "predict" and other similar expressions. Forward-looking statements
appear throughout this Form 10?Q with respect to, among other things:
profitability; planned capital expenditures; estimates of oil and gas
production; future project dates; estimates of future oil and gas prices;
estimates of oil and gas reserves; our future financial condition or results of
operations; and our business strategy and other plans and objectives for future
operations. Actual results in future periods may differ materially from those
expressed or implied by such forward-looking statements because of a number of
risks and uncertainties affecting our business, including those discussed
elsewhere in this Form 10-Q and those discussed in "Item 1A - Risk Factors" in
our Form 10-K for the year ended December 31, 2007. We disclaim any intention
or obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
Overview
We are an independent oil and natural gas exploration, development, acquisition, and production company. Our basic business model is to increase shareholder value by finding and developing oil and gas reserves through exploration and development activities, and selling the production from those reserves at a profit. To be successful, we must, over time, be able to find oil and gas reserves and then sell the resulting production at a price that is sufficient to cover our finding costs, operating expenses, administrative costs and interest expense, plus offer us a return on our capital investment. From time to time, we may also acquire producing properties if we believe the acquired assets offer us the potential for reserve growth through additional developmental or exploratory drilling activities.
For most of 2008, the economic climate in the domestic oil and gas industry was suitable for our business model. Until recently, oil and gas prices were favorable and provided us with the economic incentives necessary to assume the risks we face in our search for oil and gas reserves despite higher drilling, completion and operating expenses.
During the third quarter of 2008, oil and gas prices began trending downward and are presently approximately half of their June 30, 2008 levels, while drilling, completion and operating costs have remained high, resulting in lower than desired profit margins on most of our previously planned drilling activities. The effect of declining product prices on our business is significant. Lower product prices reduce our cash flow from operations and diminish the present value of our oil and gas reserves. Both of these factors have an adverse affect on our ability to access the capital resources we need to grow our reserve base. Lower product prices also offer us less incentive to assume the drilling risks that are inherent in our business. In response to decreases in product prices and the resulting effect on our profit margins, we plan to reduce capital spending during the remainder of 2008. We are currently evaluating our capital spending options for 2009. If the economic climate in our industry does not improve, our capital spending levels for 2009 could be significantly lower than 2008.
Key Factors to Consider
The following summarizes the key factors considered by management in the review of our financial condition and operating performance for the third quarter of 2008 and the outlook for the remainder of 2008.
· Our oil and gas sales for the third quarter increased $43.7 million, or 52%, from 2007. Price variances accounted for a $46 million increase and production variances accounted for a $2.3 million decrease.
· Our oil and gas production for the third quarter of 2008 was 9% lower on an Mcfe basis than in the comparable period in 2007. Our oil production was 30% higher than the third quarter of 2007 which was more than offset by a 32% drop in gas production compared to the 2007 period. These production variances were affected by the sale of properties in South Louisiana early in 2008 and production curtailments during the third quarter of 2008 related to Hurricanes Gustav and Ike.
· We recorded a $132.7 million net gain on derivatives in the third quarter of 2008, consisting of a $36.8 million realized loss on settled contracts and a $169.5 million gain for changes in mark-to-market valuations. Since we do not presently designate our derivatives as cash flow hedges under applicable accounting standards, we recognize the full effect of changing prices on mark-to-market valuations as a current charge or credit to our results of operations.
· During the third quarter of 2008, we increased borrowings under our revolving credit facility by $73.3 million from $50 million to $123.3 million in order to partially finance additions to property and equipment of $111.1 million and to deposit $25 million in a money market fund backed by United States Treasury obligations.
· At September 30, 2008, our capitalized unproved oil and gas properties totaled $137.8 million, of which approximately $61.8 million was attributable to unproved acreage. Unproved properties are subject to a valuation impairment to the extent the carrying cost of a prospect exceeds its estimated fair value. Therefore, our results of operations in future periods may be adversely affected by unproved property impairments.
Recent Exploration and Developmental Activities
Overview
Most of our exploration and development efforts in 2008 have been directed
toward developmental drilling for oil. With oil prices on the rise during the
last half of 2007, we began a program to exploit our large inventory of lower
risk, developmental drilling locations, primarily in the Permian Basin and the
Austin Chalk (Trend) areas of our asset base. However, we remained committed to
our higher risk, higher impact exploration programs, particularly our deep
Bossier plays in East Texas and North Louisiana.
As discussed in "Liquidity and Capital Resources - Capital Expenditures," we incurred expenditures for exploration and development activities of $284.1 million during the first nine months of 2008, of which approximately 20% were related to exploratory drilling and leasing activities. In response to recent declines in oil and gas prices, we plan to reduce our capital spending for the remainder of 2008 and, accordingly, have decreased our estimates for capital expenditures in fiscal 2008 from $400.7 million to $348.5 million. Most of the reductions relate to developmental drilling in the Permian Basin and North Louisiana.
Permian Basin
The Permian Basin is a sedimentary basin in West Texas and Southeastern New
Mexico known for its large oil and gas deposits from the Permian geologic
period. Although many fields in the Permian Basin have been heavily exploited
in the past, higher product prices and improved technology (including deep
horizontal drilling) encouraged high levels of current drilling and recompletion
activities. We gained a significant position in the Permian Basin in 2004 when
we acquired Southwest Royalties, Inc. This acquisition provided us with an
inventory of potential drilling and recompletion activities.
We spent $120 million in the Permian Basin during the first nine months of 2008 on exploration and development activities, of which $110.2 million was spent on drilling and completion activities and $9.8 million was spent on seismic and leasing activities. We drilled 30 gross (26.5 net) operated wells in the Permian Basin and conducted various remedial operations on other wells in the first nine months of 2008.
Due to recent declines in product prices and lower profit margins on drilling, we plan to reduce capital spending in the Permian Basin during the fourth quarter of 2008 from $63.2 million to $27.5 million. The level of capital spending in 2009 in the Permian Basin will depend upon improvements in current economic conditions.
Austin Chalk (Trend)
Prior to 1998, we concentrated our drilling activities in an oil-prone area we
refer to as the Austin Chalk (Trend) in Robertson, Burleson, Brazos, Milam and
Leon Counties, Texas. Most of our wells in this area were drilled as horizontal
wells, many with multiple laterals in different producing horizons, including
the Austin Chalk, Buda and Georgetown formations. The existing spacing between
some of our wells in this area affords us the opportunity to tap additional oil
and gas reserves by drilling new wells between existing wells, a technique
referred to as in-fill drilling. These in-fill wells are considered lower risk
as compared to exploratory wells and until recently, offered more attractive
rates of return.
We spent $48 million in the Austin Chalk (Trend) area during the first nine months of 2008 to drill in-fill wells and conduct other well stimulation activities. Due to recent declines in product prices and lower profit margins on drilling, we plan to reduce capital spending in the Austin Chalk (Trend) during the fourth quarter of 2008 from $15.8 million to $2.2 million. The level of capital spending in 2009 in the Austin Chalk (Trend) will depend upon improvements in current economic conditions.
North Louisiana
In 2005, we began a drilling program in North Louisiana targeting the Cotton
Valley/Gray and Bossier formations. In this area, the Cotton Valley/Gray
formations are encountered at depths ranging from 8,000 to 12,000 feet, and the
Bossier formation is encountered at depths ranging from 11,000 to 15,500 feet.
We spent $59.8 million in North Louisiana during the first nine months of 2008 on exploration and development activities, of which $53.2 million was spent on drilling and completion activities and $6.6 million was spent on seismic and leasing activities. Due to recent declines in product prices and lower profit margins on drilling, we plan to reduce capital spending in North Louisiana during the fourth quarter of 2008 from $22.3 million to $10.3 million. The level of capital spending in 2009 in North Louisiana will depend upon improvements in current economic conditions.
To date, we have drilled 18 wells on our Terryville prospect and have completed 14 as producers, with one well currently being completed and a second well waiting on completion activities to commence. On our Ruston prospect, we have completed three wells as producers and currently have a fourth well awaiting completion operations. We do not plan to drill any additional wells on this prospect during the remainder of 2008.
In 2007, adverse drilling conditions forced us to abandon the David Barton #1, an exploratory well in the Winnsboro prospect in Richland Parish, prior to reaching the pressured Bossier formation. We are currently drilling the Claudia's Education Trust 33-1, an 18,000-foot exploratory well on the Winnsboro prospect in Richland Parish. This well is a 1,200-foot offset to the David Barton #1, and will target the deep Bossier formation. We have a 100% working interest in this well.
South Louisiana
Prior to 2008, we had drilled 75 gross (60.3 net) exploratory wells in South
Louisiana, of which 39 gross (30 net) were completed as producers.
We spent $31.4 million in South Louisiana as of September 30, 2008 on exploration and development activities, of which $27.9 million was spent on drilling and completion activities and $3.5 was spent on seismic and leasing activities. We also completed two development wells on our Fleur prospect in Plaquemines Parish.
In late 2007, we entered into an agreement with an industry partner, under which they have committed to drill six wells on certain of our prospects in South Louisiana during 2008. The industry partner will operate the wells, and we will have a 15% before casing point working interest and a 50% after casing point working interest in each well drilled. To date, four wells have been drilled, three of which are productive, with one additional well planned for the remainder of 2008 and a sixth and final well to be drilled in the first half of 2009.
In April 2008, we sold all of our interests in 16 producing wells in South Louisiana to an industry partner for approximately $89.2 million, net of customary closing adjustments, and recorded a gain of $33.1 million in the second quarter of 2008 in connection with this transaction.
We plan to reduce capital spending in South Louisiana during the fourth quarter of 2008 from $10.3 million to $5.6 million. The level of capital spending in 2009 in South Louisiana will depend upon improvements in current economic conditions.
East Texas Bossier
We currently have approximately 145,000 net acres under lease in East Texas
targeting the prolific deep Bossier sands which are encountered at depths
ranging from 14,000 to 22,000 feet in this area. Of this acreage, approximately
70,000 net acres are held by production from existing Austin Chalk (Trend)
wells. Exploration for deep Bossier gas sands in this area is in its early
stages and involves a high degree of risk. The geological structures are
complex, and limited drilling activity offers minimal subsurface control. Deep
Bossier wells are expensive to drill, with completed wells costing approximately
$18 million each. Although seismic data is helpful in identifying possible sand
accumulations, the only way to determine if the deep Bossier sand will be
commercially productive is to drill wells to the targeted structures.
We are currently drilling the Sunny Unit #1, a 20,000-foot exploratory well in Burleson County, Texas targeting the deep Bossier formation. The Sunny Unit #1 is being drilled on a 3D-defined prospect that is 20 miles southwest of our Lee Fazzino #2 well which has produced 34.6 Bcf of natural gas since first production in 2001. The well is currently drilling at a vertical depth of 10,500 feet. To date, we have incurred drilling costs of approximately $5.4 million on this well (100% working interest).
Prior to drilling the Sunny Unit #1, we drilled two other wells targeting the deep Bossier sands in East Texas: the Big Bill Simpson #1, a 19,500 foot exploratory well in Leon County (70% working interest), and the Margarita #1, a 18,300-foot exploratory well in Robertson County (100% working interest). The Big Bill Simpson #1 is currently producing at minimal rates, and the Margarita #1 is currently producing at a rate of approximately 400 Mcf of gas per day from an upper Bossier sand. Based on geological and engineering evaluations, we recorded provisions for dry hole costs and impairment expense totaling approximately $50 million during the third quarter of 2008 in connection with these wells and other acreage impairments in this area.
Other
We plan to participate in the drilling of a 12,000-foot exploratory well, the
Lamb #1 in the Overthrust prospect (33% working interest) in Sanpete County,
Utah. The well will target the oil-prone Navajo sandstone formation and is
expected to spud in the fourth quarter of 2008.
Supplemental Information
The following unaudited information is intended to supplement the consolidated
financial statements included in this Form 10-Q with data that is not readily
available from those statements.
Three Months Ended
September 30,
2008 2007
Oil and Gas Production Data:
Gas (MMcf) 3,920 5,750
Oil (MBbls) 755 582
Natural gas liquids
(MBbls) 39 58
Total (MMcfe) 8,684 9,590
Average Realized Prices (a):
Gas ($/Mcf) $ 9.88 $ 6.77
Oil ($/Bbl) $ 116.01 $ 72.10
Natural gas liquids
($/Bbl) $ 69.90 $ 45.64
Gain (Losses) on Settled Derivative Contracts (a):
($ in thousands, except per unit)
Gas: Net realized gain (loss) $ (7,190 ) $ 4,802
Per unit produced
($/Mcf) $ (1.83 ) $ .84
Oil: Net realized loss $ (29,324 ) $ (3,180 )
Per unit produced
($/Bbl) $ (38.84 ) $ (5.46 )
Average Daily Production:
Natural Gas (Mcf):
Permian Basin 13,536 15,469
North Louisiana 16,273 12,117
South Louisiana 4,320 25,406
Austin Chalk (Trend) 2,271 2,176
Cotton Valley Reef
Complex 5,832 6,811
Other 377 521
Total 42,609 62,500
Oil (Bbls):
Permian Basin 3,983 3,291
North Louisiana 392 228
South Louisiana 90 1,129
Austin Chalk (Trend) 3,659 1,589
Other 83 89
Total 8,207 6,326
Natural Gas Liquids (Bbls):
Permian Basin 174 200
Austin Chalk (Trend) 233 229
Other 17 201
Total 424 630
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Three Months Ended
September 30,
2008 2007
Exploration Costs (in thousands):
Abandonment and impairment costs:
Permian Basin $ 716 $ 332
East Texas Bossier 40,063 2,640
Other 2,257 15,830
Total 43,036 18,802
Seismic and
other 5,993 1,236
Total exploration
costs $ 49,029 $ 20,038
Depreciation, Depletion and Amortization (in thousands):
Oil and gas
depletion $ 24,881 $ 20,710
Contract drilling
depreciation 2,134 2,013
Other
depreciation 211 295
Total DD&A $ 27,226 $ 23,018
Oil and Gas Costs ($/Mcfe Produced):
Production costs $ 2.63 $ 2.17
Oil and gas
depletion $ 2.87 $ 2.16
Net Wells Drilled (b):
Exploratory
Wells - 2.2
Developmental
Wells 21.6 8.2
Nine Months Ended
September 30,
2008 2007
Oil and Gas Production Data:
Gas (MMcf) 13,645 15,228
Oil (MBbls) 2,142 1,702
Natural gas liquids
(MBbls) 138 161
Total (MMcfe) 27,325 26,406
Average Realized Prices (a):
Gas ($/Mcf) $ 9.83 $ 6.96
Oil ($/Bbl) $ 111.48 $ 63.56
Natural gas liquids
($/Bbl) $ 61.70 $ 41.12
Gain (Losses) on Settled Derivative Contracts (a):
($ in thousands, except per unit)
Gas: Net realized gain (loss) $ (18,361 ) $ 9,784
Per unit produced
($/Mcf) $ (1.35 ) $ .64
Oil: Net realized loss $ (65,578 ) $ (7,710 )
Per unit produced
($/Bbl) $ (30.62 ) $ (4.53 )
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Nine Months Ended
September 30,
2008 2007
Average Daily Production:
Natural Gas (Mcf):
Permian Basin 14,287 14,861
North Louisiana 15,169 6,629
South Louisiana 11,682 24,255
Austin Chalk (Trend) 2,313 2,211
Cotton Valley Reef
Complex 5,848 7,383
Other 500 441
Total 49,799 55,780
Oil (Bbls):
Permian Basin 3,683 3,174
North Louisiana 363 137
South Louisiana 393 1,213
Austin Chalk (Trend) 3,291 1,628
Other 88 82
Total 7,818 6,234
Natural Gas Liquids (Bbls):
Permian Basin 181 207
Austin Chalk (Trend) 249 250
Other 74 133
Total 504 590
Exploration Costs (in thousands):
Abandonment and impairment costs:
Permian Basin $ 716 $ 1,321
East Texas Bossier 40,063 -
North Louisiana 2,162 16,642
South Louisiana - 28,677
Other 2,325 6,786
Total 45,266 53,426
Seismic and
other 11,230 3,706
Total exploration costs $ 56,496 $ 57,132
Depreciation, Depletion and Amortization (in thousands):
Oil and gas
depletion $ 75,220 $ 50,589
Contract drilling
depreciation 6,533 5,258
Other
depreciation 720 889
Total DD&A $ 82,473 $ 56,736
Oil and Gas Costs ($/Mcfe Produced):
Production costs $ 2.39 $ 2.12
Oil and gas
depletion $ 2.75 $ 1.92
Net Wells Drilled (b):
Exploratory
Wells 2.7 11.4
Developmental
Wells 57.3 17.4
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(a) No derivatives were designated as cash flow hedges in 2008 or 2007. All gains or losses on
settled derivatives were included in gain (loss) on derivatives.
(b) Excludes wells being drilled or completed at the end of each period.
Operating Results - Three-Month Periods
The following discussion compares our results for the three months ended September 30, 2008 to the comparative period in 2007. Unless otherwise indicated, references to 2008 and 2007 within this section refer to the respective quarterly period.
Oil and gas operating results
Oil and gas sales in 2008 increased $43.7 million, or 52%, from 2007. Price variances accounted for a $46 million increase, and production variances accounted for a $2.3 million decrease. Production in 2008 (on an Mcfe basis) was 9% lower than 2007, despite significant additions from our developmental drilling programs. Oil production increased 30% in 2008 from 2007 and gas production decreased 32% in 2008 from 2007. The comparability of production between 2007 and 2008 was affected by two primary factors. Certain South Louisiana properties were sold during the second quarter of 2008 and South . . .
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