Rodney Waller – SVP, Chief Compliance Officer and Assistant Secretary
John Pinkerton – Chairman and CEO
Roger Manny – EVP and CFO
Jeff Ventura – President and COO
David Kistler – Simmons & Company
Marshall Carver – Capital One Southcoast
Ron Mills – Johnson Rice
Michael Hall – Stifel Nicolaus
Jeff Hayden – Rodman & Renshaw
Range Resources Corporation (RRC) Q3 2008 Earnings Call Transcript October 23, 2008 1:00 PM ET
Welcome to the Range Resources third quarter 2008 earnings conference call. This call is being recorded. All lines have been placed on mute to prevent any background noise.
Statements contained in this conference call that are not historical facts are forward-looking statements. Such statements are subject to risks and uncertainties, which could cause actual results to differ materially from those in the forward-looking statements.
After the speakers’ remarks, there will be a question-and-answer period.
At this time, I would like to turn the call over to Mr. Rodney Waller, Senior Vice President of Range Resources. Please go ahead, sir.
Thank you, operator. Good afternoon and welcome. Range reported results for the third quarter of 2008 posting our 23rd consecutive quarter of sequential production growth, with a dramatic swing in the reported mark-to-market of our hedge position from the second quarter. We posted on our website supplemental tables to assist you in understanding many of the numbers in the press release.
In the press release, we’ve furnished some non-GAAP statements, which allow you to compare our results to our historically reported numbers, which include the Gulf of Mexico operations that we sold during 2007. And in table five of the supplemental tables, we have presented a summary of reported numbers, which corresponds to the analysts' models taking out certain non-cash items.
On the call with me today are John Pinkerton, our Chairman and Chief Executive Officer; Jeff Ventura, our President and Chief Operating Officer; and Roger Manny, our Executive Vice President and Chief Financial Officer.
Before turning the call over to John, I’d like to cover a few administrative items. First, we did file our 10-Q with the SEC this morning. It is now available on the home page of our website or you can access it using the SEC's EDGAR system.
In addition, we have posted on our website supplemental tables which will guide you in the calculation of non-GAAP measures of cash flow, EBITDAX, cash margins and the reconciliations of our non-GAAP earnings to reported earnings that are discussed on the call today. Tables are also posted on the website that will give you detailed information of our current hedge position by quarter.
Second, as we mentioned in the press release yesterday covering the announcement on the launching of the first phase of the first natural gas processing facility in the State of Pennsylvania in Washington County, Range and MarkWest Energy Partners are co-sponsoring a meeting with investors in Pittsburg followed by a tour of the facility on Tuesday, October 28.
At the meeting, we’ll be revealing with investors all publicly released information about Range’s Marcellus development results and MarkWest’s present and current plans in the building infrastructure for the Marcellus Shale. Details of the agenda and sign-up for reservations can be found on the homepage of Range’s website. This is an exciting time for both companies to commence the initial significant production growths to come out of the Marcellus here in 2008 when most of the other anticipated results are projected to be several years in the future. We hope that you can join us to see first-hand the size and the scope of the operations and the plans that both companies have for 2009 and the future.
Third, we will be participating in several conferences in October and November. Check our website for a complete listing. We will be at the Platts Appalachian Gas Conference in Pittsburgh on October 29, Rodman Global Investment Conference in New York on November 12, the Bank of America Energy Conference in Key Biscayne, Florida on November 13, Credit Suisse Vertical Tour in Houston on November 19, and Houston Energy Forum on November 20.
Now, let me turn the call over to John.
Thanks, Rodney. Before I review the key accomplishments that we’ve made so far in 2008, I want to address a couple of comments I’ve heard from several analysts or investors this morning.
First, like every other publicly traded security, our stock price has fallen materially. We believe that the current trading level is well below net asset value even at low commodity prices. All of us at Range are affected as all of us are shareholders. That being said, we’re not deterred. During the past 30 days, no senior level officer at Range has sold one share of the Range stock. In addition, I recently acquired 78,088 additional Range shares by exercising stock options and holding all our [ph] shares.
I spent considerable time with our team and I can assure you that all of us at Range are focused on executing our capital budget and our business plan. I think this comes out loud and clear with the third quarter results we issued last night. Over the next several months, we are hopeful that the market will come back around with our stock price increasing accordingly.
Second, several investors have asked why we didn’t provide specific well results with our latest – regarding our latest Marcellus wells. A year or so ago, we discussed that once we move from the R&D phase to the development phase in the Marcellus, we would cease providing well results and turn to discussing production rates. The good news is that we are now at that stage and that we’re in the development phase and we have disclosed in the press release extra rates for 2008 as well as 2009.
With regards to our recent Marcellus wells, the initial rates are in line with the wells we drilled earlier this year, meaning we believe the reserves are in the three to four BCF range. As I have stated in previous conference calls, individual well results can be misleading, so I stress be careful how you use such information.
In summary, we are more confident about the Marcellus today than we were three, six, nine months ago, and we continue to make terrific headway. The bottom line is we anticipate exiting 2008 at 30 million a day and 2009 at 80 million to 100 million a day. To come out and provide this guidance, I will assure you, we have a high level of confidence in the Marcellus.
I will now turn to what we believe are the key accomplishments so far in 2008. First, year-over-year third quarter production rose by 19% beating the high end of our guidance. This marks the 23rd consecutive quarter of sequential production growth, and again congratulations to all of our operating team who did a terrific job especially in overcoming the hurricane curtailments.
The primary reason we were able to achieve production growth in the third quarter was the continued success of our drilling program. For the quarter, we drilled 157 production wells and undertook six recompletions. We continue to be extremely pleased with the drilling results and we’re generating attractive rates of return.
We currently have 23 rigs running, down 32% from the 34 rigs we had running this time last year. As Jeff will discuss, we’ve made terrific progress with regard to our emerging plays. Clearly, the foundation of Range’s consistent results is our drilling inventory combined, we’re continuing to generate new emerging plays.
A 19% increase in production coupled with a 16% increase in realized prices drove a 38% increase in cash flow. The $227 million of cash flow record is the second highest quarterly cash flow in our history. To put this in perspective, we generated more cash flow in the first nine months of 2008 than we did for all of 2007.
Cash flow per share rose to $1.44, up a whopping 33% over the prior year. Due to the increase in realized prices and keeping our unit cost in check, our operating margin for the quarter was $6.39, an 18% increase year-over-year.
As Roger will discuss in more detail, we continue to maintain a strong balance sheet. We have substantial liquidity and total debt is less than the next 24 months of cash flow at low commodity prices. This is exactly the environment where our hedging program will pay big dividends. For the fourth quarter of ’08, we have 69% of our natural gas production hedged and for 2009, we have – that was 69% for the fourth quarter of this year and 60% for 2009. As a result, we’re not totally distracted by the near term volatility in gas prices, allowing us to focus on driving up production and reserves.
Lastly, the completion of the first phase of our Marcellus pipeline and gas processing infrastructure three months earlier than planned is a watershed event for Range. We are beginning to make the Marcellus real to our investors and shareholders. I will talk about this in more detail later in the call.
All in all, I couldn’t be more pleased on how much we’ve accomplished so far in 2008. It’s a real testimony to the entire Range team.
With that, I’ll turn the call over to Roger who will review the financial results.
Thank you, John. The third quarter of 2008 was in many ways similar to the second quarter of this year as Range posted its second highest quarterly oil and gas sales, second highest quarterly EBITDAX and second highest quarterly cash flow in our history. Set against the backdrop of highly volatile oil and gas prices, equity prices and credit markets, our solid third quarter operating and financial performance is a welcome achievement.
And because of the state of the current credit markets and investor concerns over liquidity and capital resources, I would like to spend some time walking you through the state of our balance sheet and liquidity position before taking you through the third quarter financial numbers.
Let’s start with our hedging position and our hedging counterparties. Range has approximately 69% of its remaining 2008 gas production hedged at a floor price of $8.84 per MMBtu. And as John said, approximately 60% of its 2009 gas production hedged at a floor price of $8.31 per MMBtu. These hedges are spread across 14 different counterparties, 12 of which are secured lenders in the Range bank credit facility and the 12 bank counterparties enjoye the benefit of our loan collateral which is cross collateralized with the hedges. Because of this, none of our agreements with these banks require Range to post margin when they are exposed to our risk.
Likewise, our funded bank credit facility with these banks helps offset exposure when Range is exposed to them. Our two non-bank group counterparties are J. Aron and Mitsui & Company. As of quarter end, J. Aron holds mark-to-market basis swap exposure to Range of $618,000 and Range owes Mitsui $14.3 million on some of our out of the money oil hedges.
Range hedges its production using simple price swaps and colors. We do not utilize complex derivatives such as knockout, free ways, or extendables. While our bank credit agreement allows us to hedge out to five years, we've historically limited our hedges to less than three. Range views its hedging program as a component of our operating strategy as opposed to our financial strategy. The goal of our hedging program is to provide stable cash flow for our capital program, not to attempt to beat the market.
Range has adopted a similarly straightforward approach in managing our balance sheet as we have our hedging program. The Range balance sheet is very simple, senior secured bank debt, subordinated unsecured tenure notes, and common equity. We have no volumetric production payments, no second lien notes, no sale leasebacks, no MOPs [ph], no preferred stock, et cetera.
Likewise, our accounting policies are transparent and conservative. No capitalized interest expense, seismic expense, or G&A expense. And our only off balance sheet liabilities are simple operating leases on our office space, copy machines, and other similar small dollar items.
Listeners will recall that Range’s balance sheet was substantially strengthened earlier this year through the sale of an East Texas oil property for $64 million cash. The refinancing of $250 million of our bank debt for 7.25 % tenure subordinated notes, and the issuance of 4.4 million common shares which generated $282 million in proceeds.
Our debt-to-cap ratio at the end of the third quarter is 42%. This compares to 40% at year end '07 and 40% at the end of the third quarter last year. Given our long reserve life, low level of capital spending commitments, and our strong hedging position, we remain very comfortable with our current leverage position. Our earliest loan maturity is our four-year bank credit facility which matures in October of 2012 and our first bond maturity is in July of 2013, almost five years from now.
We’ve previously stated that we will tailor our 2009 capital spending to available cash flow. This means that going forward, the primary use of our liquidity will be to fund of our working capital needs. We issued a new release earlier this month discussing several key facts about our bank credit facility that are important in this environment and I’d like to provide you with some additional details to complete your understanding of how our bank credit facility works and how we manage our bank relationships.
Our bank credit facility has been crafted over the years specifically to address this type of credit environment. Most of Range’s senior management lived through the 1980s when the State of Texas was once home to six of the top ten performing bank holding companies in the US. All six of these banks were extinct by 1990. Add to this our experiences with the traditional cyclicality of the oil and gas business and you can understand why Range has such a simple balance sheet and a large bank group.
Our bank group consists of 24 commercial banks. While we have many valued investment bank relationships, we’ve never allowed investment banks into the Range bank credit facility. Of the 24 participating banks, by design 12 are domestic banks and 12 are foreign banks or wholly-owned US banking subs of foreign banks.
Care is taken to avoid having too much exposure to any one country and no country accounting for less than 2.1% of world GDP is represented in the group. No bank, even the aged [ph] bank has more than 5.31% of the credit facility. And what that means is that you have some of the largest banks in the world with relatively small Range credit exposures. For example, J.P. Morgan and Bank of America each hold a maximum committed credit facility exposure of $53.1 million, Deutsche bank has $41.3 million, Credit Suisse has $35.4 million and Barclay’s has $29.5 million.
U.S. banks are well-capitalized highly-capable and experienced energy lending banks that you don’t read or hear much about but nonetheless has paid consecutive dividends every year since 1863, that’s 145 straight years. They hold only $41.3 million of our facility. So my point is that there are quality institutions in our group with long track records of lending to our industry that hold very low exposure levels for banks of their size.
Managing the bank group so that participating banks have lots of available capacity, that’s only part of the story. The other part of the story is the size of the credit facility relative to our borrowing capacity.
Just last week, we announced that the Range bank group had reaffirmed the existing $1.5 billion volume base using our agent bank's oil and gas reserve pricing assumptions. According to our agent bank, based upon the redetermination we just closed, oil and gas reserves and capital structure would support up to a $2.2 billion borrowing base. Because we have no intention at this time of increasing the borrowing base above its current $1.5 billion level, we essentially have the $700 million cushion built into our credit capacity to absorb bank collateral price declines or potential changes in bank underwriting practices before our borrowing base would be affected.
Our bank facility is structured as an accordion facility. That’s where the commitment level in our case is currently $1.0 billion and it sat below the $1.5 billion borrowing base to minimize fees to Range and capital utilization by the banks. Should Range elect to increase the commitment amount, which we did six months ago, Range tenders notice to the banks and they have 20 days to allocate the increase among the 24 banks and establish an appropriate upfront fee for the increase. As the $1.5 billion borrowing base has already been approved by the banks, the bank may elect not to participate in the increase, but a bank may not block the increase or retrade the credit facility terms.
Clearly, in the current market, there would be banks in our group that would elect not to participate should we increase the commitment. However, as previously mentioned, there are many well-capitalized banks holding very low exposure levels in the Range facility such that an increase becomes more of a pricing decision than a credit decision.
Now regarding this pricing decision, we employ a relationship-based model with our banks as opposed to a transaction-based model. Range has been very deliberate in its use of the bank group for ancillary products and services. For example, we’ve used banks in our group for everything from public debt underwriting to commodity derivates, even dental insurance from (inaudible). Our most recent senior subordinated note issuance had 19 institutions on the cover and 18 of them were banks in our credit facility.
Over the past five years, we’ve paid over $17 million in high yield bond underwriting fee alone to our bank group. This fee more than doubles when you include equity underwriting fees, commodity hedge income, and other ancillary business. So while the current credit market carries no guarantees, I hope this closure helps convince you that Range has built a high degree of resiliency into its bank group and has managed its liquidity and bank relationships in such a fashion that although we don’t anticipate needing it, should we desire additional liquidity, Range will be toward the front of the line to receive it.
Now looking from a moment at our capital budget, I’d like to recap our capital spending program for ‘08. Our 2008 capital budget excluding acquisitions was $1.3 billion and it appears that we will under-spend this 2008 amount by about $25 million.
We’ve also spent approximately $310 million on Barnett Shale acquisitions announced and closed in the first quarter of this year. And as we stated when we raised equity in May, we will spend approximately $225 million of the proceeds on high-graded Marcellus acreage acquisitions offsetting our successful wells there. Now when the dust settles on 2008, we expect to spend approximately $1.8 billion and that’s our total program with both the base capital program and acquisitions combined.
Now, I’ll turn to our third quarter financial performance. Oil and gas sales including cash-settled derivatives were $322 million less than $400,000 short of our record quarterly owned gas sales figure from the first quarter. EBITDAX for the quarter was $254 million and cash flow came in at $227 million.
Revenue and EBITDAX were 38% higher than the third quarter of last year and cash flow was 37% higher. Production of the third quarter this year was 19% higher than last year and realized prices were 16% higher than last year. As I mentioned, third quarter '08 cash margin was $6.39 per Mcfe, $0.02 higher than the second quarter of this year, and $0.98 higher than the third quarter of 2007.
As for net income, I wish I could say that things have settled down from last quarter's landslide of non-cash mark-to-market charges from our hedging program. But this quarter has seen a raft of non-cash gains from essentially the same hedge positions as those that generated the losses last quarter. As oil and gas prices have decreased, we've posted $299 million in non-cash mark-to-market gains from derivatives and hedges, as our positions have become more valuable compared to where they were at last quarter end.
We hedge primarily to reduce the volatility of our cash flow available for investment. We lament the fact that it sometimes has the opposite effect on our earnings. Now another peculiar mark-to-market entry this quarter is a $37.5 million non-cash deferred comp plan gain due to the declining price of Range shares held in the employee deferred comp plan. It's difficult to comprehend that the "income" generated by this expense credit exceeded each of the direct operating interest and G&A expense categories for the whole quarter.
These non-cash income and expense items, on top of near record oil and gas sales, contributed to a record $285 million in GAAP quarterly net income. The quarterly earnings, as calculated as analysts do, totaled $80 million, or $0.51 per fully diluted share. This is $0.02 higher than the analyst consensus estimate of $0.49.
Please reference our website for additional reconciliation of GAAP income to this adjusted figure. Cash flow per fully diluted share was $1.44, exceeding the analyst consensus by $0.04. Again please reference the Range website for reconciliation of all these non-GAAP items to GAAP.
Moving up from the bottom line for a minute to the various expense categories, cash direct operating cost for the third quarter was $1.00 per Mcfe. That’s $0.05 less from the second quarter this year but $0.08 higher than the $0.92 figure from the third quarter of last year. We’re pleased with the reduction in unit cost operating expense from last quarter, and the reduction would have been larger except the third quarter, like the second quarter this year, had $0.10 per Mcfe of workover expense, and workover expense typically averages about $0.05 or $0.06 per Mcfe, which it was in the third quarter last year at $0.06.
Also, hurricane-related production volume curtailment hampered our direct operating cost performance as shut-in wells still require continuous oversight and maintenance. We continue to believe that cash direct operating expense will run in the high $0.90 range going forward.
General and administrative expenses, adjusted for non-cash stock comp was $0.54 per Mcfe in the third quarter of '08. This was $0.05 higher than last quarter and $0.10 higher than the $0.44 per Mcfe from last year's third quarter. There were several unusual nonrecurring items in the G&A unit cost total during the third quarter. First, Range has sold for many years a relatively modest volume of its Midcontinent oil production to Seminole Pipeline which was unfortunately involved in the SemGroup bankruptcy filing.
So we've established a bad debt reserve of $450,000, or about 50% of our total SemGroup exposure, which we took to G&A in the third quarter. Second, the ramp-up of the Marcellus Shale project prompted quarterly relocation expense of approximately $400,000. Third, legal and miscellaneous expenses associated with the construction and startup of the Marcellus gas plant also added about $400,000 to G&A in the quarter.
So, like direct operating expense, G&A unit cost comparisons suffered in the third quarter also due to production curtailment because cash G&A expense should likely return to the high $0.40 range for the rest of the year. Third quarter interest expense was $0.71 per Mcfe. That is $0.05 higher than the quarter of last year. Our decision earlier this year to refinance a portion of our bank debt with long term fixed rate subordinated notes has caused our interest expense to increase. However, in the current credit market, this decision has proven extremely wise.
Investors should continue to expect our interest expense per Mcfe to run in the low to mid $0.70 range for the remainder of '08. Third quarter exploration expense excluding noncash comp was $18 million, level with the second quarter this year. While the dry hole cost component of exploration expense was below $100,000 this quarter, seismic expenditure timing resulted in an unusually high $14 million in seismic expenses for the quarter.
It is anticipated that quarterly exploration expense, including non-cash comp, will approximate $19 million to $21 million for the rest of the year depending, as always, upon our drilling success and the timing of our seismic expenditures. Depletion, depreciation and amortization per Mcfe for the third quarter of '08 was $2.27. This compares to $2.24 last quarter and $1.90 in the third quarter of last year.
The $2.27 figure is composed of $2.01 in depletion expense, $0.12 of leasehold impairment and $0.14 of depreciation and accretion. Our core depletion rate has been running in the $1.95 range for most of the year but it increased to $2.01 per Mcfe in the third quarter due to slightly higher rates and changes in our production mix. Production mix changes were largely brought on by production curtailments associated with hurricanes.
The fourth quarter of each year is when we recalculate our core depletion rate based upon the year end reserve report. So while depletion rate will likely increase going forward due to higher industry costs, we do not expect the increase in our depletion rate for the fourth quarter to be significantly different than prior years. Looking at nine month results for a minute, year-to-date 2008 oil and gas sales plus cash settled derivatives totaled $956 million. That is up 42% from '07 which came in at $672 million. EBITDAX year-to-date in '08 totaled $763 million, also up 42% from last year. And cash flow increased to $688 million year-to-date, again 42% higher than in '08 compared to '07.
Let me close by highlighting the real story of the quarter. Record production and earnings, coupled with the second best quarter for oil and gas revenues, EBITDAX and cash flow. While we have spent much effort over many years preparing Range for challenging times like these, we have not forgotten what you have really hired us to do is consisting add net asset value per share through a low cost structure and per share growth in reserves and production. The third quarter of 2008 delivered upon this promise.
John I'll turn it back to you.
Thanks Roger. With that I'll turn the call over to Jeff Ventura to talk about our operations.
Thanks John. I'll begin by reviewing production. For the third quarter, production averaged 388 million per day, a 19% increase over the third quarter of 2007. This represents the highest quarterly production rate in the company's history, and the 23rd consecutive quarter of sequential production growth. Let's now review three of our key projects.
First, I'll start with the Marcellus Shale play in the northern part of the Appalachian Basin. The good news is that the processing plant came online this week. As with all new plants, we are currently going through system stabilization and optimization. Prior to starting up this new facility, all of our Marcellus production was going through a temporary facility that had a maximum capacity of 13 million per day.
This temporary facility will be decommissioned. Our oldest vertical well has now been online for almost four years, and our oldest horizontal well has been online for almost a year and a half. We have many wells shut in which will be coming online as the new facility allows. We'll be ramping up and anticipate exiting this year at a rate of about 30 million per day net to Range.
We are currently working through our budget process for 2009, but at this time, we are estimating running up to six horizontal rigs in the Marcellus Shale and our expectation is that we will exit 2009 at 80 million to 100 million per day net to Range. The fact that we believe that we can reach 80 million to 100 million cubic feet per day net, and only have to run five or six rigs, speaks to the excellent quality of the wells that we are drilling and anticipate to drill next year. This is on par with the better areas in the Barnett Shale.
We believe that the Marcellus Shale has excellent economics. Previously we've stated that we are estimating reserves per well to be 3 to 4 Bcfe in the areas that we are drilling, and the cost to drilling complete in the development mode to be $3 million to $4 million per well. Assuming the midpoint of both ranges and $7 per Mcf NYMEX gas price, the rate of return is 80% and the cost to find and develop is $1.07 per Mcfe. Even at $6.00 per Mcf NYMEX, the rate of return is 64%. Assuming the same reserves and costs, NYMEX could drop to $3.25 per Mcf and these wells would still have a 20% rate of return.
Our acreage position in the Marcellus fairway now stands at 900,000 net acres which equates to more than 15 to 22 Tcfe of net unrisked resource potential. Of that, 10 to 15 Tcfe are located in the southwest part of the play with the remainder in the northeast. Range's net cost per acre for the 900,000 net acres is $404 per acre.
Looking at just acreage acquired in 2008 to date, the average cost per acre is $1,300. In addition, of the shale acreage acquired in 2008, roughly half is already held by production. In addition to pursuing the Marcellus Shale we are starting the Utica, Burkett, Genesee, and Rinestreet shales. There's good potential for all of these horizons on our existing acreage position in the Appalachian Basin. The perspective areas of these unexploited shale targets largely occur within Range's core Marcellus acreage positions, thus allowing for stack pay opportunities and operational efficiencies and resource development. Range now owns a total of 2.7 million gross or 2.3 million net acres of leasehold in the Appalachian Basin.
Another very impactful low risk project for us in the Appalachian Basin is our Nora area located in Virginia. This project has the potential to double Range's reserves. There is significant upside to all three horizons in Nora; CBM, tight gas sands, and the Huron Shale. Range continues to drill successful CBM and tight gas sand wells in this field, and now has over 2,150 producing wells here. F&D costs net to Range continue to be around $1.00 per Mcf which is amongst the lowest in the country.
In addition, these wells produce very little water and have low lifting costs. Given its location in the Appalachian basin, these wells receive a premium to NYMEX. This, in conjunction with low F&D and low LOE results in a very good rate of return of about 60% at a $7 per Mcf NYMEX gas price.
Given the large number of wells to drill on current spacing, and assuming successful down spacing, there are approximately 6,000 wells left to drill. The latest development in Nora is horizontal drilling in the Huron shale. We know that the Huron shale has good thickness and gas content across our acreage because there are already 107 producing vertical Huron Shale wells on it.
Late last year, we began drilling horizontally to verify that horizontal drilling is an effective way to economically develop these reserves. So far we are four for four. These wells average an initial peak 24-hour rate of 1.1 million per day of sales, which is very good. By year end, we'll have drilled an additional four wells and completed three more. If the Huron wells continue to be successful, they will de-risk about 1.5 Tcf of net gas reserves to Range by year end.
The next idea we'll be testing at Nora is horizontal development in the Brea sandstone which we believe has excellent potential on our acreage as well. By year end we'll have drilled two horizontal Brea wells. These completions for the two wells will be early next year. Equitable has successfully tested horizontal Brea wells in this part of the basin. They have drilled and completed seven wells that have produced at an average rate per well of 1.5 million per day for the first 30 days.
The next project I want to discuss is the Barnett Shale play in the Ft. Worth Basin. Range currently has about 109,000 net acres in the Barnett Shale play. 42,000 net acres are in Tarrant, Johnson, Denton, eastern Parker, eastern Hood, northwest Ellis, and southwest Ellis counties. This is the proven part of the play and we still have over 700 locations to drill in these areas. That assumes 500-foot spacing which equates to about 40 acre spacing. It also assumes 15% of the acreage is developed on 250-foot spacing which may prove to be conservative. This represents 1.2 Tcf of net unbooked upside in the Barnett.
We also have 51,000 net acres in Hill and southwestern Ellis counties, which represent an additional 0.8 Tcf of upside. Combined, this is 2 Tcfe, which by itself can about double the reserves of Range. Currently, we have six rigs running in the Barnett and are drilling about 100 wells per year. Given our 700 locations in the proven core area, we have a seven year inventory in this part of the play.
I want to take a few minutes now to discuss Range's portfolio of properties. Range has a great portfolio of properties led by the three projects that I have just described, the Marcellus Shale, Nora, and the Barnett Shale. This portfolio has resulted in Range consistently delivering top tier organic production and reserve growth, with one of the lowest cost structures in the business. According to Bank of America's research, considering all-in costs which includes F&B, LOE, T&A, interest expense, and basin differentials, Range has the second or second lowest cost structure of the group of companies that they covered for the last four years in a row.
This is a direct result of our simple strategy of strong organic growth, a top quartile cost structure or better, and in addition consistently building and highgrading our inventory, coupled with one of the best teams in the industry. Range has more upside today and lower risk upside than at any time in the Company's history. Today, we have the opportunity to grow the company more than tenfold, primarily from the Marcellus Shale, Nora, and the Barnett Shale. Contrast that with Range's position five years ago when the upside was less than double the base.
Five years ago, one-third of Range's production came from the Gulf of Mexico. Since then, we sold off the offshore properties, sold marginal low-rate wells in Big Lake and Mills Strain Fields in West Texas, sold high cost, low rate production in east Texas, and divested Austin Chalk properties in Texas. We generated the modern Marcellus Shale ID in 2004, bought our initial interest in Nora at the end of 2004, and entered the Barnett Shale play in 2006. We've continued to grow and expand all three plays through new and innovative ideas that have resulted in great positions and opportunities that we have today. Excellent organic growth combined with an excellent cost structure, coupled with an upside ten times our base, will result in creating strong shareholder returns over time. Back to you, John.
Thanks Jeff. Terrific report. Now let's look a little ahead here and we'll look at what we see for the fourth quarter of 2008. Bottom line is we continue to see strong operating and financial results. We are looking for fourth quarter production to come in at 400 million to 405 million a day. So obviously, we'll break through the 400 million a day benchmark sometime this quarter, which is a big deal. If quarterly production comes in at that level, we will exceed our 19% growth target for the year, and we will record our 24th consecutive quarter of sequential production growth. No other E&P company in our peer group has achieved this level of consistent results.
Turning to prices, assuming current futures prices and hedges in place, we anticipate fourth quarter price realizations after hedging to be in the $7.80 per Mcfe range. This is $0.49 or 6% lower than the $8.29 per Mcfe that we realized in the fourth quarter of 2007. Because production volumes are anticipated to increase by approximately 19% versus 6% decline in prices, we again anticipate fourth quarter revenues, cash flow and earnings will be substantially higher than the prior year period. Due to higher volumes and prices, and stable cost, cash flow from operations for 2008 is anticipated to increase by roughly 30% over 2007.
For the year, we anticipate record production revenues, cash flow and earnings, while ending the year with a strong balance sheet and substantial liquidity. As you can see, 2008 is shaping up to be Range's best year ever with regard to financial and operating results. While focused on getting our wells drilled and hitting our quarterly production targets, we also continue to expand our drilling inventory and make tremendous progress within our emerging plays. In particular in the Marcellus play, we have moved from the R&D phase to the development phase.
This is vitally important for Range as we enter 2009. For the last several years, the Marcellus play has been a consumer of capital with very little tangible return. With the first phase of our pipeline and gas processing plant now online, the Marcellus play is now beginning to generate material cash flow. As a result, our capital efficiencies for 2009 will be enhanced further, reducing our already low cost structure. Importantly whereas the Marcellus gave us no material reserves in production in years past, in 2009 the Marcellus will lead the way in growing reserves and production.
As noted earlier, we anticipate ending 2008 at roughly 30 million a day, and anticipate exiting 2009 at 80 million to 100 million a day. This is precisely why we are confident in our disclosure in growing the company, why production in 2009 at 15% to 20% with a capital budget that is in line with cash flow and with no acquisitions. At the beginning of the year, my message to our team has been to "make the Marcellus real" to our shareholders. Putting the first phase of the infrastructure online three months earlier was extremely important in that regard and provides considerable momentum as we enter 2009. I'm confident we will exit 2008 at 30 million a day.
The next step after that will be to ramp-up to 80 million to 100 million a day and I am also confident in that. Based on the high quality of wells we have recently drilled, and the recent advances we have made on the technical team, my confidence level in the Marcellus has increased.
Like the Barnett and other shale plays, and assuming you have a large high quality acreage position, once you get to 100 million a day, going to 200, 300 and up to 500 million a day actually gets easier. This is clearly our focus and we have put much work into all that is required to get us there.
For example, we have made great headway on the infrastructure side and I am confident that the infrastructure is no longer a gating [ph] item for Range. We have worked tirelessly on the regulatory issues and have made tremendous progress as Marcellus drilling permits are now being routinely issued. We have secured sufficient water procurement and disposal to carry out our plans for the next several years. Our drilling team has made solid headway in reducing drilling costs, and we are focused on doing the same on the completion side.
In addition to the above items, we have increased our Marcellus acreage position by roughly 225,000 acres in 2008. Importantly, nearly all the new acreage acquired is in and around where we've had good drilling results. The average acreage cost for 2008 is roughly $1,300 per acre with nearly half the acreage already held by production and the remainder having a term of at least five years. The royalties range from an 8% to 15%.
When evaluating the various shale plays, it is important to realize that all shale plays are not created equal. Acreage cost, royalty burden, gas basis differentials, and drilling depths and cost have a material impact on rates of return. Because Range has aggregated nearly 900,000 acres that carry an average cost of $404 per acre, and average royalty of only 14%, a gas difference of that is positive to NYMEX, and vertical drilling depths of 6,000 to 8,000 feet, we have the potential to generate the very attractive rates of return that Jeff discussed. It's like starting a marathon race several miles ahead of the competitors.
In addition to this competitive advantage, we continue to drill very high quality wells. As mentioned, based on our body of work to date, we believe reserves will average 3 to 4 Bcf per well on our acreage. However like all shale plays, there will be better and poor wells. We have experienced that as well in the Marcellus. We have drilled poor wells in some areas that we now stand away from, and we have drilled some spectacular wells where the reserves can be far greater than the 3 to 4 Bcf range that we put forward. It is important to note that individual well results from only a handful of wells doesn't validate a play.
Over the last four years we have drilled over 100 wells and have taken a tremendous amount of technical work to develop our 3 to 4 Bcf average for our Marcellus acreage. Again, we are not saying the entire Marcellus play will drill out like that. Just like Erath County in the Barnett didn't drill out like Tarrant County. Like we said before, where the acreage is located is extremely important. All that being said, in the Marcellus, we are focused on making it real for Range's stockholders by aggressively driving up production rapidly over the next several quarters.
We are extremely excited about the progress we have made and look forward to updating you in the months ahead. Turning to the reality of the world that we live in today, this is clearly an unprecedented and challenging time. While we never thought we would see the magnitude of the financial dislocation, our management philosophy has been to plan for the downside and let the upside take care of itself.
As a result, Range is very well positioned as we enter 2009. I'll provide some of the reasons why we feel this way. First, from a financial perspective, we have a strong simple balance sheet. As Roger mentioned, no VPPs, no crazy convertible preferred stock, no crazy off balance sheet things. Just very simple, straightforward balance sheet. We have a very well constructed bank credit facility with a diversified group of 24 financial institutions.
Our reserve base supports a borrowing base substantially above our current borrowing base even at lower commodity prices. We have a very strong liquidity position. We have no debt maturities until 2012. We have a very strong hedging position with a diversified group of 14 counterparties. We have maintained conservative accounting policies, successful efforts versus total cost. We have not capitalized interest G&A or interest costs. We have no goodwill on our books, and we have consistently written off acreage over time.
From an operating perspective, we've maintained a long reserve life and a shallow decline curve. We have one of the lowest cost structures in the industry. At current commodity prices, we can keep our production flat using only one third of our cash flow. We have over 10,000 drilling locations in inventory in areas where we have drilled and operated for many, many years. Given our long reserve life, low cost structure and large drilling inventory, we can grow our reserves and production for many years with the properties we own today and without outside capital or with new acquisitions.
We have a diversified base of properties and we do not rely on one field or play to drive our growth. Given our Appalachian properties, we have one of the most attractive basis differentials of any company our size. We don't need to make acquisitions to grow, therefore we are extremely disciplined when it comes to acquisitions.
Finally, we are not required to sell properties to fund capital expenditures or pay down debt. When lining Range up against other companies, we believe this is a great place to invest your very precious capital. While we are confident and focused, we remain on high alert. Looking past the carnage, the future for natural gas is extremely bright. Over the long term, there is no reason for natural gas to trade at a 40% to 50% discount to crude oil on an energy equivalent basis. We think that over time, clean-burning domestic natural gas will be in high demand. We think Range Resources will be one of the companies that is well positioned to add value in the current environment and will do exceedingly well over the longer term.
With that, Operator, why don't we turn the call over to questions.
(Operator instructions) Our first question comes from David Kistler with Simmons & Company. Please state your question.
David Kistler – Simmons & Company
Good afternoon guys. Real quickly on your decision to live within cash flow, what portion of CapEx is going to be used to hold by production some of the acreage that you have out there and what portion is just going to be used purely on a developmental basis?
That’s a great question. The good news is we have less than 20 commitment wells that we have to drill next in 2009 to hold acreage. So the good news is we’re going to drill most of the wells. The prepondence of the wells in areas that we think we can hook up quick and we would do in respect with that. So again, not many commitment wells in that regard. And the good news is that the second step further is now with the Marcellus. First phase of Marcellus pipeline on -- essentially all the wells we’ll be drilling and there’ll be some we continue to delineate. Essentially all the wells will be -- when we drill them we’ll get to hook them up and get to see the production pronto. So, we’re in good shape and that’s one of the things that I’m so happy about in terms of getting the Marcellus on three months early. It really does make an enormous difference. As you enter 2009, it gives us just really tremendous momentum.
David Kistler – Simmons & Company
Great. As we look at 2009, you put a range out of about 15% to 20% on a production gross basis and I was curious what the major driver of that variation is? Obviously, very early on to be thinking about tightening that but I’m kind of curious what you guys are watching, which would take it to high-end or the low-end?
Well, obviously, let’s start from the basis. We’re staying in line with cash flow. One of the things that we’ve always done at Range is that we dialed up and dialed down capital based on what we’re seeing and we transferred capital between projects during the year. We don’t set a capital budget and everybody just runs off and does it.
For example, every AFP [ph] range over $200,000, even if the project’s been in the budget gets approved by Jeff and I and Roger during the year. So we see firsthand the returns based on what we -- or flat $6 price case plus what we see in terms of the other price case we use. So we change capital from time to time. And we’ll continue to do that in 2009, 2010, and beyond.
If gas prices -- if it gets cold outside and gas prices go up and we see -- and we can lock in some higher prices, we’ll tweak up our capital budgets slightly and we may tweak it down slightly. Until that, I think that’s really the range that you get to. The other thing is obviously we’re turning on a lot of Marcellus production and so in that number we’re obviously not going to be away on the wild side of what we expect. So we’re going to be more -- I wouldn’t say ultra conservative, but clearly we’re going to be fairly conservative in terms of what we expect out of that and make sure that we meet what we tell you we’re going to meet.
But I think the good thing is if you followed Range for anytime at all, typically what we do every single year is come out with a double-digit growth target in the 10% to 12% each and every year, and as we go along during the year and as we get our wells drilled and as we see the results, we have typically increased that through the year. I think the thing that’s really -- the thing that you all should look at is this year we’re coming out and saying right out of the box that we’re going achieve 15% to 20%.
Again, I think it tells you a lot in terms of having the Marcellus systems, the first phase of system on. It tells you a lot in terms of what we think we can do with like Jeff said just five or six rigs in the Marcellus. So it should give you a pretty good perspective in terms of that. It also tells you how good a job the guys in the Barnett are doing in terms of lowering cost and ramping up production there, and also in terms of Nora and some of the other areas that continue to be the energizer bunny within Range. So, all in all, I think -- especially given the overview of the fact that gas prices have fallen, the fact that we’re coming out of the box saying 15% to 20% and given my propensity not to give excuses for missing numbers, I think that’s a very bullish sign on our part.
David Kistler – Simmons & Company
Yes, agreed for sure. Just following up on one thing with respect to the gas processing and pipelines and how impactful that is up in the Marcellus area, how quickly now can you turn wells to sales after completion and the ability to do that more rapidly? Is that increasing the ultimate recovery of those wells in terms of not having them sit completed for a bit before turning them to sales?
Well, one, and I think we’ve talked about it a little bit, we'll exit the year at 30 and I think Rodney’s described in pretty much detail a lot of these conferences why we’ll be ramping up and installing new capacity to bring on -- to produce more and more gas next year and it’s in our last press release as well when the cryoplant will finally be up and running in the rate. So, the pipeline and facilities job, we’re doing it -- our team is doing a great job of ahead of the drilling and completing things. So we’ll have the ability in most of these areas to literally produce a well and put it into a pipeline immediately. Like John said, there will be some delineations except that well, but a lot of the wells are going go right into the pipeline.
And in terms of the -- does that help a well or hurt a well? I think it’s early on and we’re studying all those types of things and we’ll see as we go into next year what that does for each particular well. What I can tall you about is -- the good news is the way we’re drilling and completing what we’re doing right we’re drilling a lot of great wells. Like I said, there are three to four Bs up per well and what the IPs that we've announced and our new wells are in line with the old ones. Those wells would be great wells in Tarrant County in the Barnett. So strong initial rates, strong reserves, doing what we’re doing, hopefully the team will continue to improve on how we drill and complete wells at the same time driving down the cost of drilling complete and I have confidence we’ll be able to do that.
David Kistler – Simmons & Company
Great guys. Thanks so much for that clarity. I’ll let somebody else hop on.
Our next question comes from Marshall Carver with Capital One Southcoast. Please state your question.
Marshall Carver – Capital One Southcoast
Yes. In Equitable’s press release this morning, they talked about some positive results with air drilling which lowered cost per well in the Marcellus. Have you all done any of that or do you plan to, any thoughts on that?
Yes. We think that’s a great idea and I applaud Equitable for that. And early next year, we’ll be trying air drilling as well. I feel confident even drilling on flood like we are now that -- and we said our well cost will be $3 million to $4 million per well. I think in the Southwest part of the state where our new plant is, where we’re coming on, where the Marcellus is around 6,500 feet. Even without that, I feel comfortable we’ll be at the low end of that range $3 million. And I feel in time that our team even has a good chance of beating that and I can get into the detail on the why air drilling is just another upside. It's a good idea, we'll try it. The other good part about the play now where Range came up with the idea initially and started it back in 2004. Now, you have good companies like Equitable and Atlas and Chesapeake and other people experimenting and doing other things and that’s just going to help accelerate technology and all that other stuff as well.
Marshall Carver – Capital One Southcoast
Okay. That’s very helpful. And in the decrease in rig count between last year at this time and now, where are the -- what areas are you running fewer rigs and do you see production in non-Barnett, non-Nora, non-Marcellus areas sort of trending down over '09 or do you see that holding flat?
A lot of the areas -- what we’ve done is we’re gone with time. Just like John said, we set a budget for the year, we continually look at it, and over the last couple of years or if you go back a year, we used to do a lot of drilling in the tight gas sands and Appalachian. I’m talking about in the Northern part of the basin, Clinton and Dyna [ph] wells. That would be one area where -- that’s HBP. The wells are good wells and have strong economics, but as we've continued to have success in the Marcellus and Nora in the Barnett, those projects were even better. They have lower cost to find and development.
You can grow rates quicker. Stronger rates of return and -- so we’ve focused our capital dollars in those areas. We're getting better capital efficiency and better rate efficiency. At the same time, there's other opportunities for HBP. The good news in some of those old fields is they’re fairly stable production. They have relatively low base decline rates. So we're able to still grow the company significantly and actually better and more efficiently by reallocating capital like we are.
Marshall Carver – Capital One Southcoast
Okay, thank you.
Our next question comes from Ron Mills with Johnson Rice. Please state your question.
Ron Mills – Johnson Rice
Good afternoon. Marshall just asked one question on the activity levels in terms of rigs. As you look out to 2009, should we expect at least on the Marcellus and the Barnett that kind of the 12 -- plus or minus 12 horizontal rigs is about the amount that you plan on running notwithstanding some sort of event that causes you to tweak like the storms or the Barnett downtime during the second quarter?
Yes. It would be roughly the same. We ran about six rigs in the Barnett this year. We’ll run about six next year in the Marcellus. We were at about three horizontal rigs this year and then we’ll ramp up to six next year. So in combined that would be 12 horizontal rigs. Then in addition, the Nora horizontal drilling we’ll be doing some of that as well there. But between those two places that you asked, it’ll be 12 rigs.
Ron Mills – Johnson Rice
And in the Marcellus, it sounds like in the Barnett you can drill roughly 100 wells with those six rigs in the Marcellus. Is it -- the drill time is roughly similar so you could drill a similar amount of net wells or --?
Let me say we’ll be ramping up to six rigs and we’re putting that together. What I can tell you, the good news is we continually drive down based on the well in Marcellus. Our last well, I believe, was 16 days. So we drilled a handful of wells now under 20 days. So we’re making a lot of headway in terms of the time it takes to drill our horizontal wells in the Marcellus.
Ron Mills – Johnson Rice
Okay. And then on the Huron, you had talked about the initial production rates and cost and you’ve mentioned that they were tracking your expectations. At what point if you end up to de-risking kind of that one and a half piece of opportunity set, is that also an area that in 2009 you could end up seeing a ramp up?
Yes. We’ll be ramping up drilling in 2009 and ramping up production. Nora has been a great area for us in terms of reserve growth and rate growth and should get even better next year.
Ron Mills – Johnson Rice
Do you see any issues in the Huron sale in terms of getting the production online? I know in some portions of the Huron there’s nitrogen-related issues that --
No. Not where we are and working together with Equitable. They're doing a good job. Our teams are doing a good job of building out that infrastructure ahead of the drilling again. So, I feel -- and really in all three of our key areas, the Barnett, the Marcellus, and Nora, the pipeline infrastructure facilities guys are going to stay ahead of the drilling team. So I’m confident, and we got firm capacity in a lot of those areas so I’m confident we’ll be able to move to gase as we drill and complete the other wells.
Ron Mills – Johnson Rice
And then one last one, and John, this is probably for you, the maintenance CapEx if you will is only roughly a third to maintain production, I think that should be one of the lowest in the industry. But as you look ahead to kind of your 15% to 20% production growth target with your hedging program and your production expectations, are you all expecting somewhere in the kind of $900 million to $1 billion type cash flow in order to achieve those targets?
Well, it's on the lower end of that.
Ron Mills – Johnson Rice
It's on the lower end of that. And again, we'll -- I think, at least in my view of it is I think it's important that capital budget's (inaudible). But we arrange. We kind of re-jiggle our capital budget every single day. So, we just look at it much differently I think than a lot of other companies, and I think if I can diverse a bit, I think that's really good for the shareholders and that -- what we do is we do a bottoms-up capital allocation process in this company. And what that means is that the divisions, each come up -- we give them very strict parameters in terms of rates of return, risk, finding and development cost, and what not. In terms of -- and they submit all the projects and I'll be -- that number for '09 was, I forgot exactly what the number was, but it was somewhere between over $2.5 billion worth. What Jeff and I's responsibility is to get there and look at all those projects, allocate capital, and try to find the projects that we think are going to weave the best both short term means from the long term aspects for the company. And I think that's what you want.
And one of the things that drives me crazy and I'll get on this soap box a little bit and I'll get off is that I've heard some analysts talk about, well, you should invest in these much bigger companies that have all this excess cash flow. But the question I got to ask you is why do they have excess cash flow? Don't they have enough projects to spend that cash flow and generate high rates of return? We can generate 4% to 5% production growth with less than half of our cash flow, but that's a bad thing. What you want us to do is take our cash flow, spend it, adjust that in the Marcellus. We think at $3.25, we're getting 20% rates of return. That's a hell a lot better than paying down 5% bank debt.
So unless you don't think you're bank group's going to perform and we think ours is going to perform. So at the end of the day, and I know there's lots of carnage out there and everybody's going bananas, but I think you got to really peel back down and focus on what's really important. And that is driving up production and reserves at low cost on a consistent basis, and that's what our game plan was. Five years ago, four years ago, three years -- and what's going to be our game plan in 2009? Are we going to be more considerable given the financial outlook? Absolutely. Are we on red alert on everything that's going on in our business on the financial side? Absolutely.
With that being said, our operating, people, are going to be the same thing in '09 than it did in '08. Now, I am hopeful, like all of us that markets over time get better. I'm also convinced that it will get cold this winter and when it does, it is likely that gas prices will go up and when that happens, we should learn from what happened over the last 50 years. If our cash flow drops, we'll lock in some of those prices and when we find -- what we find when we go out and drill some spectacular wells, we run around, grab all the acreage that we can and then drill some more well around. And we're going to continue to do that.
The one thing we haven't said in this whole presentation, is we haven't promised you that's the only we're going to get to our capital budget is by selling the month's assets. I think this is going to be a crappy time to be selling oil and gas assets. It's too hard to develop them. Why sell them in a crappy period of time? We're going to use those assets, their shallow decline, they're held by production. We're going to use that cash flow to help fund our casual programs.
Over time, if prices bump back up, Marcellus just kicking booty, the other programs continue to do well, we'll sell assets just like we did in '05 and '06, and that was heaven. I don't think it's -- I don' think this is rocket science. And that being said, I do appreciate the fact that us and everybody else lost a lot of money in this industry. So we are high percentages with that. I'm the largest individual shareholder so I've lost the most of any individual. But I'm focused on the fact and I'm convinced of the fact that today, Rangers work more today than it was three months ago. That's why I buy stock and I didn't sell stock.
So I'll get off my soap box. Next question.
Ron Mills – Johnson Rice
Well, luckily you are the -- one of the bigger companies that has a good balance sheet that I follow. Anyway, congratulations guys. Thanks.
Our next question comes from Michael Hall with Stifel Nicolaus. Please state your question.
Michael Hall – Stifel Nicolaus
Thank you. Congrats on a solid quarter.
Michael Hall – Stifel Nicolaus
If I may kind of keep on a while or just down in terms of return profiles and the decision matrices. When you're looking at -- you're making your budget, what's the difference between the return profiles at the high end of that $2.5 billion opportunity set and then maybe at the low end, and where is that cut off? How you think about how you sort out the projects when you're building up your capital plan?
Well, we have kind of a minimum rate of return hurdle, and I -- so particularly want to go into all that because I think that some of the -- yes, I think that's proprietary summaries. But we have a minimal rate of return hurdle and I'll tell you this. It has two on the front ad it's more than one digit. So, and then we have some base prices in terms of -- base cases in terms of crisis. We test out there and so you've got some projects that are in I’d say in the low 20% range and you've got others that are in the 50% to 60% range. And again, what Jeff and I's job is to take all those submittals and at those low commodity prices and look at the risk associated with and the ability -- one thing is also the ability of those divisions to hit those numbers and do that. That's one reason why we don't pile everything under one division because we know that will likely -- if we did that, we'd likely have them screwing up -- it goes up, and we don't want to do that. So want to allocate capital.
It's like making a cake. You got to put a little bit of everything in it and then we go down. But as we go through the year, we've got Allen Parkinson [ph] and some of the other guys that we look all those results and if we see -- there's something maybe doing better and one day we're doing worse, well, I'll take back capital back and forth. So, on the low end we are taking $6, $7 gas holding flat, we've got some projects that are in the lower end of that. We just simply aren't going to drill those -- most (inaudible) production. So we'll just keep those projects and inventory and we'll focus on the ones that generate a higher rate of return. As prices go back up, which they will -- I will assure you gas prices will go back up at some point in time -- then unlock our cash flow and we'll spend some more of that. In the meantime, if they go up, and somebody wants to buy one or more of those assets that are more mature we'll be happy to sell it to them which, again, will help fund some of the other higher return projects. So that's the kind of way we look at it.
Michael Hall – Stifel Nicolaus
Very good, appreciate the color. Real quick on the hurricane impacts and kind of maybe -- what I might call swing production in terms of still getting the strong production rates this quarter in the face of the hurricanes, what regions are you making up that production growth? Is that really what's driving then the workover expense this quarter?
Yes. The workover expenses were really, one, is some of the stuff that got beat up by the hurricane, we had to fix. Some of the other stuff is just your normal run-in-the-mill workover stuff. And I do think, when prices get lower, I think it's human nature for your technical staff and your operating teams -- there are a lot of little things that you can do to increase production that require workover expenses and to the extent that they find those and they have 100% rates of return and very little dollars, that's money well spent, so we're going to do those things.
But like Roger said, I do think that those costs will come down a little bit in the fourth quarter and as we go forward. They were kind of high in the second and third quarter. A lot of this is because of the hurricanes and stuff. So I think you'll see those come down. The good thing at Range is that every one of our divisions is hitting their targets, save and except when they get beat up by the hurricane. The guys at Midcontinent are drilling some great Granite Wash wells, great St. Louis well that came on stream; the guys in the Barnett are doing a terrific job reducing cost and being able to drill more wells with six rigs than what they had estimated with eight rigs. So it's just a combination of a lot of little bitty things that gets us there every quarter.
As Jeff says and I say, it's really a testimony to really the quality of people that we have at Range. And I know other companies have high-quality people but the only ones I know about are ours. And I can assure you we've got some of the best people around, the Mark Whitleys and Greg Climers [ph], and Ray Walkers, and Steve Gross, and the rest of the guys -- and Steve Kerr [ph] that run our divisions. These are really, really high-quality guys that are just spectacular and they do great things. Jeff and I don't have to yell at them. They know exactly what they're doing. These are professionals. These guys are capable of running companies on their own. So again we got a great team and they continue to perform and I think third quarter was a classic example of that.
Michael Hall – Stifel Nicolaus
Okay. Good deal. I'll let others jump on. Thanks for the color, appreciate it. Congrats.
Thank you. Ladies and gentlemen, we have time for one more question. Our final question comes from Jeff Hayden with Rodman & Renshaw. Please state your question.
Jeff Hayden – Rodman & Renshaw
Hey guys. A couple of quick ones here. One, just wondering, you talked kind of 3 to 4 Bcf Marcellus wells on average. I wondered if you can give us some color on what the average IP rates would be that correspond to that range?
We've announced -- if you listened to our last call, I think the last ten wells were 4.9 average, something like that, and before that they were around 4.1, and the wells we've drilled recently are in that same slot. You are looking at wells that are 4 million, 5 million a day, call it 3 million to 6 million, if you want to widen the range or something like that out a little bit. And obviously those are averages. We talked about, like John said, some are higher, some are lower. But we've announced, almost the first 24 wells we drilled, we literally announced either each well individually or in groups of wells. So that's the kind of rates that we are getting. The reserves, we feel comfortable in that 3 to 4 Bcf range, which is rule of thumb would tell you that, but more importantly than that we've got over a year's worth of history on those wells so we've got that early part of the curve determined. And like John said, in total, we've drilled about 100 wells so we have defined a lot of our acreage geologically. So we've got some excellent quality acreage, and at the end of the day, like John said, it really depends on, where you are in the play really matters. And obviously in the Barnett, you want to be in Tarrant county or certain areas within it versus Erath, and the Marcellus is going to be the same way.
Jeff Hayden – Rodman & Renshaw
Okay. So roughly a well could run a 5 million a day IP, and on average that probably gets me a 4 Bcf well?
That would be reasonable. Something like that. Putting it down for a 3 Bcf well.
Jeff Hayden – Rodman & Renshaw
And then just on the incremental acreage, looks like another 50,000 high graded, but you kept the upside at 10 to 15 for the Southwest. So should we assume an incremental 50,000 was in the Northeast part of the play?
No, it was in the Southwest. What we do is really like once or twice a year, we update our reserves like that. And that's why I said, if you listen carefully, if you go back and look at the transcript, I said more then. A lot of times we put a plus sign. We don't continually update our reserves. We'll do that some time early next year. Typically we do it once or twice a year, even as we add acreage. But it's a good point. You can calculate numbers that are a lot higher than the numbers we put out.
Jeff Hayden – Rodman & Renshaw
Okay. So it's now more kind of 550 Southwest and 350 Northeast to get to the 900?
Yes. And that' I think -- actually we've updated that on our web site or will have shortly, put all our slides out. We actually break it out that way on our web site.
Jeff, that's a good question. I think there's been a huge amount of discussion in terms of what's happened with acreage prices throughout some of these shale plays, and to me it makes absolute sense. I think when we all went on vacation in June to the beach, gas prices were $12, $13 and we were feeling all great. By the time we get our kids in school, they were less than $8 going down. So clearly what's happened is I think the industry responded in the way that you would think in that acreage prices have plummeted. I think the classic example is the Haynesville where you had complete hysteria, prices going up to $30,000 an acre for trend trend acreage which is unbelievable. I think a lot of those companies have shut down, and now you can get acreage in the Haynesville for $5,000 or less. And the same thing, not clearly that volatile, but in the Barnett, we see acreage coming down maybe as much to half or maybe even two-thirds as what it cost during the height of the land grab.
The good news is and we've gone out of our way to give you both what the cost was in 2008 so far and we continue to lease and what we got from inception, and the good news is that the Marcellus never quite hit those kinds of frothy prices. We've heard prices as high in the Marcellus as $5,000, $6,000, $7,000 an acre. We haven't paid that. We might have paid for five acres offsetting one of our drill sites, just to get somebody that was just being obstinate. But they've never really gone that high. The good news is that given the size of the Marcellus, there's still lots of acreage to pick up but we just got to be careful and we'll continue to be careful. We haven't bought any trend acreage, what we call just rank trend acreage in the Marcellus this year.
All the acreage we are buying we believe we have got geologic model that fits and that we feel pretty good about it. It's just not, well this is close to that or that's close to that, so it's got to be good. We have really quit doing that just because the place is so big that you will go bankrupt if you try to lease the whole thing. So we've taken a very disciplined view of that. We'll continue to be disciplined. We'll continue to buy acreage in the play but again, given what we are seeing in the financial markets, we have pulled in the reigns and we'll continue to. But we still have some money allocated in or around, and as we drill wells, it's obviously in our best interest and our shareholders' best interest to try to pick up the acreage around some of these very good wells we've drilled. So we don't want to spend all of our money.
We want to have something for the remainder of this year. We obviously want to have some money next year to continue to pick up acreage. So I think you'll see that. That being said, I think over time just like all these plays, there will be acreage, whatever it is, it can go up or down. If we drill some wells out and it didn't drill out exactly, then that number will reduce. But the good news is we've already done that, to a large extent. We've got, I forgot, somewhere in the 1.4 million to 1.5 million acres, and we flow high-graded down to 900, and we'll continue to do that. This play is going to take a long, long time to figure out where all the sweet spot, where all the Tarrant counties are.
The good news is that we clearly think we have found at least one Tarrant county. There are probably others, and there's some great companies in this play, but the good news is we found at least one and we are going to use that over the next few years. That is going to be our bedrock and our foundation for the Marcellus and then we'll expand away from that. And, again, I can't tell you, and I can't explain how important it is to have this facility on now versus in January because what that does for us is obviously lets us have a lot of momentum as we go into '09, but it also in terms of everything from year-end reserves to what's our production growth target for '09, it really allowed us to do what we normally do three months earlier. So I think that is really good news.
So I think that hopefully will give you some perspective of what is going on in terms of acreage prices and what not. It's still competitive like all plays are, all the shale plays are still competitive in terms of acreage. It's just that everybody has devalued the acreage because obviously gas prices roll. But the good news is we didn't buy any, we don't have a big acreage play in the Haynesville. We didn't get involved in that. We were late to that play, thank goodness, in terms of paying those kinds of prices. So we'll stick with paying $1,300 in the Marcellus, maybe a little higher from time to time, and continue to pick solid acreage up in the Barnett.
We just picked up a nice whole block the other day, what not. We'll continue to do that. We'll continue to plot away on that. But at the end of the day and again in the Marcellus, I think the key for us is and I'm the biggest proponent inside Range, show me the beef, and the beef is going to be can we get to 30 million a day by the end of '08 and we'll tell you that when we get there. Hopefully it will be November but as soon as we get there we'll tell you. And in '09 as we go through the year, we will tell you exactly where we are. That will be the real barometer of how we are doing. And the good news is we don't have to talk about well results now. We can talk about production rates because the Marcellus is real. It is going to have a big impact on '09 and it is going to have a big impact on our value as we go along.
Jeff Hayden – Rodman & Renshaw
All right. Appreciate it.
Thank you. This concludes today's question-and-answer session. I'd like to turn the call back over to Mr. Pinkerton for his concluding remarks.
I apologize for the call taking longer. I really wanted Roger to take some time and make sure that we gave you complete transparency in terms of the financial issues that we are all concerned about. Again, we are on heightened alert in terms of those issues. I got to commend Roger. He has done a tremendous job of getting us to where we are in terms of the financial side of our business. He should really be commended. We are focused at Range. My pocket book, it feels a little thinner, but I am completely focused on all the shares, plus 78,088 that I owned from the last conference call we had, and I'm excited to double, triple, quadruple the values of those in the market over the next months, quarters and years.
We have a great team. The Marcellus is real. We will tell you the results as we go along in full transparency as we have tried to do before. I know there are a few other people that would like to ask questions. We will be here the remainder of this week to answer those questions. Feel free to call us. We clearly have a lot of new shareholders based on the trading volume, so to the extent that you all have questions, feel free to call Rodney, David or Karen, as well as Jeff, Roger and I, and we would be happy to do that.
I would also, for those of you that want to go see what's going on in reality in real-time in the Marcellus, please come to Pittsburgh for our tour. That is going to be terrific. It will get all of us away from our screens and we can talk about what we are actually doing in the field. I think that will give you a lot of perspective of what is going on and the size and the scope and the scale of what we are considering here and I think it's neat. I've obviously spent numerous trips out there, walking around and talking to all the team. They've done an incredible job from Mark West -- if Mark West is on the phone, these are great guys. Buy their MOP units. This is a great company. They have kicked some serious behind on this deal, and I'm a unit holder. They really have done a great job.
The union employees, nonunion employees, everybody else that's worked on this just did a terrific job. With that, we'll end the call and hope to see you in Pittsburgh next week.
Thank you. Thank you for participating in today's conference. You may disconnect your lines at this time.
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