Despite continuing profitability with 3Q earnings nearly triple those of 3Q 2007, Equitable Resources is approaching continued development cautiously, given the current financial environment, pulling back on midstream projects to emphasize drilling wells to fill current capacity.
And while in ideal conditions Equitable would be looking toward 20% sales volume growth annually based on its success in its horizontal drilling program and completion of several important infrastructure projects, its plans now are to scale back spending to target 12%-plus sales growth because of the condition of the capital markets.
Scaling back midstream spending is "the least worst choice," Equitable Chairman Murry Gerber told analysts in a conference call last Thursday. "This is obviously where this [financial] crisis meets Main Street, right? We'd like both businesses clearly, but if you have to make a choice today, you put your dollar in drilling. Essentially, we're currently in the mode of filling what we already built."
Returns on drilling are higher with quicker payouts. Midstream returns have lower payouts and go on longer, Equitable executives explained. Also there is more flexibility in ramping up or ramping down drilling activity, while once an infrastructure project is started, it's more difficult to stop. "Should the capital markets return to some level of normalcy over that period, it is clearly in the best interest of the shareholders that we raise additional capital, bolster our liquidity and move toward the 20% plus growth potential in the asset base," said CFO Philip Conti.
Equitable is looking at capital expenditures of $1.4 billion in 2008, scaling back to $900 million to $1 billion in 2009. The plan will not require the company to access capital markets through at least the end of 2010. The company will be concentrating spending on drilling where midstream capacity has already been built.
Year-to-date the company has spud about 521 gross wells, including 290 horizontal wells. Equitable's current sales rate is 245 MMcfe/d, going toward between 255 and 260 MMcfe/d by the end of 2008.
Equitable's 3Q 2008 earnings per diluted share were 73 cents, compared to 27 cents in 3Q 2007. Operating cash flow was $203.1 million, a 186% increase over the $71 million reported in third quarter 2007.
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