Production was 22 Bcf, or 244.8 MMcf per day, for the first quarter of 2009, or 38% more than the 15.9 Bcf, or 174.4 MMcf per day, for the year-ago quarter.
J. Brett Harvey, chairman and chief executive officer, said, CNX Gas continued to achieve outstanding results, despite the weak economy and its effect on spot gas pricing. Our production in the first quarter showed significant quarter-over-quarter gains. Net income was very strong, thanks to our robust hedging program and higher production. Most importantly, our employees continued to work without a lost-time accident. We remain excited about our unfolding exploration success in our Marcellus Shale play. Based on the cumulative impact of these results, we are raising our 2009 production guidance from 85 Bcf to 87 Bcf.
The average price realized for the company’s gas production was $7.37 per Mcf for the first quarter of 2009, or $0.86 lower than the $8.23 per Mcf received for the year-ago quarter. The average realized price for the just-ended quarter included 10.7 Bcf hedged at $9.85 per Mcf.
Unit operating costs for CNX Gas production, exclusive of royalties, were $3.29 per Mcf in the just-ended quarter, or 6% lower than the $3.49 per Mcf for the quarter ended March 31, 2008.
Pre-tax unit margins for CNX Gas production were $4.08 per Mcf for the first quarter of 2009, a decrease of 14% from $4.74 per Mcf in the year-ago quarter.
Unit production taxes were lower in the just-ended quarter because of the reversal of a $2.5 million accrual due to a pending litigation settlement. Unit production taxes would have been $0.11 per Mcf higher without the reversal. Lower gas prices in the March 2009 quarter also contributed to lower production taxes.
Firm transportation costs have increased $0.10 per thousand cubic feet due to acquiring additional capacity in the Northern Appalachian region.
Operations Update
During the first quarter, CNX Gas employees worked another quarter without incurring a lost time accident. This raises the cumulative time worked by employees without a lost time incident to over 3.7 million hours.
The temporary idling of Buchanan Mine at the beginning of March 2009 lowered production by 0.2 Bcf during the quarter. This also had a slight effect on unit costs because Buchanan production is very low cost.
The company has drilled 62 wells in its Virginia CBM Operations, excluding gob wells. CNX Gas anticipates drilling 175 wells in Virginia in 2009.
CNX Gas drilled 19 wells during the quarter in its Mountaineer CBM play. Unless a meaningful increase in pricing occurs later in the year, CNX Gas anticipates deferring further drilling in Mountaineer. The focus is on lowering unit costs, with major benefits already being realized. Permitting efforts will carry on, so that CNX Gas will be able to quickly respond when gas prices rebound.
CNX Gas drilled eight wells in the first quarter in its Nittany CBM play. After-tax rates of return for Nittany are economic at sub-$5 gas prices; however the company has chosen to defer further drilling until gas prices rise. CNX Gas has flexibility in regard to Nittany, and can quickly return to earlier levels of drilling, when prices warrant it.
In the Marcellus Shale, CNX Gas brought its second and third horizontal wells into production during the quarter. Both wells are still de-watering and have backpressure of about 1,100 pounds. The company plans to remove excess water from these wells, which may improve recent daily flow rates.
Consequent to the end of the quarter, the company brought its fourth and fifth horizontal Marcellus Shale wells into production. Within several days, the fourth well had achieved a 24-hour production rate of 5.5 MMcf. This well cost an anticipated $4.25 million, which was improved from the $4.7-$4.8 million cost of the second and third wells. The fifth well, GH10ACV, was concluded and turned in line on April 18, 2009 with an anticipated total cost of $3.8 million. This well is now producing at a daily rate of 4,900 MMcf.
J.Brett Harvey, chairman and chief executive officer, commented on the success, CNX Gas was able to quickly transfer its horizontal drilling expertise in coalbed methane to the Marcellus Shale. We’ve now drilled and brought into line five successful wells. I am proud of our Marcellus Shale drilling team for having accomplished so much in such a short time.”
“For much of our Marcellus acreage, we pay no royalty, we have no lease costs, and we have no drilling commitments. Our production in Greene County, Pa. has not had the butanes and propanes that other producers have had to remove from their Marcellus flows. As we gain more experience drilling in the Marcellus and we continue to lower our drilling costs, Harvey continued, we are reworking our Marcellus economics. We will continue to refine our techniques during this period of low gas prices and will likely add a rig when prices rebound.
In the Chattanooga Shale in Tennessee, seven wells were drilled. The latest well is flowing at 700 Mcf per day. The company plans to investigate 9-stage fracs for future wells.
Financial Update
CNX Gas continues to monitor and assess capital spending to make sure adequate liquidity and to preserve options for possible external investment. Regarding capital, CNX Gas plans to spend largely within its net cash from operating activities for 2009. Capital expenditures were $133.6 million during the first quarter of 2009.
CNX Gas ended the quarter with $80.4 million drawn on its credit facility. This is up $7.7 million from December 31, 2008, when it had $72.7 drawn on its facility.
The company also has outstanding letters of credit of $14.9 million.
Return on capital employed for the quarter was 14.9%, on an after tax basis.
Guidance:
The 2009 production guidance is increased from 85 Bcf to 87 Bcf.
As 2009 progresses, CNX Gas will determine if it wants to maintain its goal of producing 100 Bcf in 2010. The company will carry on re-investing in its core business providing it can earn a meaningful return on its cost of capital.
