Q3 2003 Tom Brown Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good afternoon. My name is Stephanie, and I will be your conference facilitator. At this time I would like to welcome everyone to Tom Brown's third quarter 2003 results conference call. (Operator instructions) Mr. Lightner, you may begin your conference.

JIM LIGHTNER, CHAIRMAN & CEO, TOM BROWN INC: Thank you, Stephanie. Good afternoon, and welcome everybody. Thank you for joining our third quarter call. I would like to introduce myself and the others with me today. Jim Lightner, chairman, CEO and President of Tom Brown; Dan Blanchard, EVP, CFO; Tom Dyk, EVP, COO; Doug Harris, VP of Operations, and Mark Burford, our director of investor relations.

I do need to read a disclaimer. This conference call includes forward-looking statements. These statements are based on assumptions and analysis made by the company in light of its experience on general economic and business conditions and expected future developments, many of which are beyond the control of the company. Actual results could differ materially from those in the forward-looking statements as a result of many factors, including those that are described in the company's 2002 annual report and Form 10K as filed with the SEC.

It sure is nice to have drilling rigs in the air again, especially when multiple projects are producing good results. With are currently running 22 rigs, 14 operated and eight non-operated. Our year-to-date discretionary cash flow is 124 percent higher than last year and our earnings are 20 times higher than last year. I think our focus on establishing distinct core areas with dedicated, experienced technical teams has resulted in not only strong current performance but also in creating a very large portfolio of future drilling locations, and much of our day-to-day focus is on that portfolio of future drilling locations.

Our acquisition of Matador Petroleum Corporation which closed about June 27th provided us with numerous outstanding growth properties, very experienced and proven team of people and increased exposure to two prolific gas basins which have always enjoyed near NYMEX gas prices.

We continue to believe that diversity of portfolio is very healthy, and we are very proud of and confident in our current asset mix. Now that our Rockies drilling programs are back up and running, TBI stand-alone grew production 4 percent sequentially from the second quarter to the third quarter. That's really digging out of the momentum hole that we've talked about over the last year. And as many of you know, Rockies index prices, gas prices, have been hovering around $4 for the last several months, after averaging below $2 last year, which was obviously very painful for large Rockies producers.

We have been saying for several quarters now that the Rockies basis differential to NYMEX would fall from the very high and painful $1.70 basis differential in the first half of 2003 to something closer to the historic level of around 50 cents. I'd like to give you an example of what a difference 10 months can make. The CIG basis differential for all calendar year 2004 was $1.34 on January 8th, so back about 10 months ago on January 8th basis differential for 2004 was $1.34 and about a week ago, two weeks ago, it had fallen to 75 cents.

For calendar year 2005, so another year out, the basis differential was $1.13 on January 8th and fell to about 68 cents by late October. So these are the trends that obviously a lot of people were predicting and is obviously helping our company out tremendously. The significant Current River pipeline expansion, which doubled capacity and slowing Rockies production growth, I think, we think, probably account for the majority of these changes.

Looking at the nation as a whole, the latest estimates are that the U.S. gas production will fall approximately 2.5 percent this year, even with nationwide gas rig counts that have averaged about 855 for the first 10 months of this year, versus an average of 691 for last year. I think the most current rig count I've seen was about 940. So we have significantly increased the rig count as a nation, and production is predicted to be down about 2 percent to 2.5 percent.

On top of that, most of you may know this, but about 85 percent of our gas supply comes from the U.S., the other 15 percent comes from Canada. I've neglected about a 1 percent LNG in there, so correct the math, but about 15 percent comes from Canada. Canadian natural gas imports to the U.S. are down more than 10 percent year-to-date as of October 31st. So they are extremely challenged and most people expect it to continue to fall and we cannot count on their -- up until recently it was an ever-increasing supply of gas, but 10 percent is a strong number and that is through the first 10 months.

Gas storage in the U.S. is now near a five-year average level, after being extremely low at the start of the storage season, but it took serious, high-priced demand destruction which a lot of people are more aptly calling job destruction, to get it there. So most everyone that knows the business knew that the gas storage would get back up there because it has to because it has to, you have to have the storage to provide the gas to the burner tip, it just really is what kind of price it takes to destroy the demand and unfortunately, send jobs overseas.

So we are in the middle of a classic supply/demand squeeze, and for all of these reasons we remain bullish on Rockies and NYMEX natural gas prices.

I'd like to go through an operational update. In the Wind River Basin the company produced an average of 51 Mcfe/d in the third quarter, which is essentially flat with the second quarter. As we have previously discussed, we have not drilled wells on the Wind River Indian Reservation since mid-year 2002, due to finalizing some contractual issues with the tribes. We've had some good meetings recently and expect to resolve the issues in the near future. I do think though that it is a real testament to the quality and diversity of our programs that we can produce solid growth and earnings results without activity on the reservation.

Our activities have been in the Wind River Basin, our activities have been focused in Frenchie Draw field, where eight wells were drilled in the first quarter. The results from the shallow Frenchie Draw program have been very strong. Field production has increased from the first quarter level of about 19.8 Mcfe/d to the third quarter of about 26.1 Mcfe/d or 32 percent growth. So here is an older field that was challenged to grow and the teams discovered a new shallow play and we have experienced 32 percent growth in there which is helping offset the production decline from the Reservation because we are not drilling. …