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Executives

Jennifer Martin - Director of IR

Fredrick J. Barrett - Chairman and CEO

Robert W. Howard - CFO and Treasurer

Joseph N. Jaggers - President and COO

Analysts

Michael Hall - Stifel Nicolaus

Tom Gardner - Simmons & Company

Ray Deacon - Pritchard Capital

Jeffrey Robertson - Barclays Capital

Dan Mcspirit - BMO Capital Markets

Bill Barrett Corporation (BBG) Q3 FY08 Earnings Call November 5, 2008 12:00 PM ET

Operator

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bill Barrett Corporation Third Quarter 2008 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions].

Thank you. Ms. Martin, You may begin your conference.

Jennifer Martin - Director of Investor Relations

Thank you, Jessica. Good morning, everyone or afternoon to some of you, and welcome to the Bill Barrett Corporation third quarter conference call. Presenting today our Fred Barrett, Chairman and Chief Executive Officer, who'll open with an overview; Bob Howard, Chief Financial Officer, who will review financial results; Joe Jaggers, President and Chief Operating Officer, who will review operations and provide an update on our development, delineation, and exploration program, followed by closing comments from Fred Barrett.

I have a few items to mention before we get started. We have prepared a user-controlled slideshow that accompanies our discussion. It is available with the webcast or can be printed from the homepage of the website at billbarrettcorp.com. Look around on the left at the page under current events and click on the third quarter results earnings call slides.

In addition, our 10-Q should be filed either during this call or shortly thereafter this morning, and it will also be available through our website. I will also mention that we will be participating in the Bank of America 2008 Energy Conference where Bob Howard, will present on November 13th, at 2:30 Eastern Time. Please join us for that webcast event, which will also be accessible from our website for a live or a replay.

And do we need to remind everyone to read the forward-looking and cautionary statement disclosures on slide two of our presentation, which were also included in our press release today. During our discussion we will make reference to discretionary cash flow, which is a non-GAAP measure, reconciliation of the appropriate GAAP measure was also provided in the press release today.

With that I will turn it over to Fred Barrett to get started. Fred?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Thank you, Jennifer, and welcome, everyone. My introduction today will be brief, but we'll highlight three key relevant points as seen on slide number three. As you can see there exploration success, development performance and the financial health of Bill Barrett Corporation.

First as we mentioned in our press release, management is very pleased with the first two horizontal exploration wells that are Gothic Shale gas program and Yellow Jacket that's in the Paradox Basin of Southwest Colorado. We view this as a key discovery for the company and also believe this is a resource play of potentially significant size.

It's worth noting up front initial results from our too widely spaced wells in the Gothic Shale compared favorably and comparatively with published rates from the Barnett, Woodford, Fayetteville and Marcellus shale gas plays, but we also realize we have more comprehension drilling to do.

Bill Barrett Corporation is being building its drilling gas through position in Yellow Jacket for a number of years. The Gothic shale gas concept was internally generated, which carries with a key advantages cheap among them exposure to potentially significant reserves over the large acreage position at a relatively inexpensive cost.

For example, we've paid in the low 100s of dollars per acre range rather than in the 1000 of dollars per acre range. Very early on when we begin building our position in here, we were paying at acreage cost less than $100 per acre. To-date, we've assembled approximately 397,000 gross and 208,000 net end developed acres to the company in the Yellow Jacket region. The company has also been busy with the drill bit on a number of other exportation and delineation programs built simply with much of the same way as the Yellow Jacket.

Joe Jaggers will provide more information on these, as well as more detail on Yellow Jacket and other operational information later in our conference call. The second item to highlight, our third quarter operational performance speaks for itself, a record level of production, solid cash flows, a benchmark level of earnings for the company, and declining LOE reflect the depth and quality of our development programs and also our management team. Framing this execution has been sound strong, financial planning throughout 2008, the third item I would like to highlight.

Our 2008 financial strategies included building a sizeable long range production hedge position, opportunistically closing on a convertible debt deal with attractive terms earlier in the year, and most recently up sizing our borrowing base with a strong reliable syndicate.

Despite current market back drop the net result of our planning puts the company in a solid and secured financial position as we close our 2008 and finalize plans for 2009, which I will say more about in my closing remarks.

And with that said, I will hand it over to Bob Howard to expand on the financial status of Bill Barrett Corporation. Bob?

Robert W. Howard - Chief Financial Officer and Treasurer

Thank you, Fred. I'll echo Fred's comments in saying that we had a terrific quarter and our financial position continues to be very strong.

Slide four, presents certain highlights of our performance, and slide five summarizes results for the quarter. Our third quarter was also reflect continued production growth of record levels, continued operating efficiencies, and our abilities to sustain cash flows through our hedging program, despite a significant decline in Rocky Mountain regional gas prices.

Oil and gas production for the quarter was up slightly from the previous quarter at 19.6 Bcfe, but was affected by temporarily shutting in wells in West Tavaputs to conduct drilling operations on previously producing oil pads. Year-to-date production of 57 Bcfe represents growth of 30% over 2007, and we'll put us on track to deliver 77 to 78.5 Bcfe for the full year. This guidance midpoint is down slightly because of voluntary shut ins due to low gas sales prices, which have totaled approximately six-tenths of Bcfe to-date and delaying certain completions for a couple of months to better time initial production with higher seasonal prices.

First of month CIG Rocky Mountain natural gas prices in the quarter averaged $5.90 per MMBtu compared to $8.48 per MMBtu in the second quarter. Our realized natural gas price of $7.57 per Mcf was 28% higher than the index price for a few reasons. One our

hedge positions increased our natural gas revenues by $8.6 million and reduced our oil revenue by $4.1 million is a net effect of adding $0.23 per Mcfe.

Two, our marketing group did a good job managing physical sales for the month of September when regional prices were particularly low due to capacity shutting on the Rockies Express Pipeline. We are able to receive better than first to month pricing for our daily gas sales.

Three, as a reminder we have high Btu content gas approximately 1.1 MMBtu per Mcf, which increases the Mcf sales price of our gas. Just to note, inclusive of oil sales our average realized sales price were $7.86 per Mcfe for the quarter.

Increased production and strong realized prices were the primary drivers behind discretionary cash flow over $105.6 million for the quarter. This is down slightly from the previous quarter due to $0.45 per Mcfe decline in our combined realized sales price. For the nine months our discretionary cash flow of $327 million has funded a significant portion of our capital expenditures for the period.

These higher production volumes and higher margins led the quarterly earnings of $36.1 million or $0.80 per diluted share compared to $34 million in the second quarter. Adjusted for non cash, mark-to- market commodity derivative gains, and property sales gains net income was $30.1 million for the third quarter or $0.67 per share.

Third quarter commodity derivative gain of $8.5 million is due to a small portion of our hedge portfolio that cannot be reported as cash flow hedges for financial reporting purposes. Netted in the derivative gain is $1 million of realized losses for settling a certain Mid-Continent hedges. This realized loss is reflecting the calculation of oil and gas sales prices for the quarter.

Our production expenses consisting of lease operating expenses gathering a transportation costs, and production taxes came into $1.85 per Mcfe, which is slightly higher than the second quarter due to well work overs and compressor maintenance. For the nine months our LOE was $0.57 per Mcfe, which compares very favorably to $0.75 per Mcfe for the first nine months of last year.

We are allowing a full year of lease operating expense guidance to $0.60 to $0.61 per Mcfe reflecting confirmed operating efficiencies, but anticipating potentially higher costs during the winter months.

Gathering and transportation charges, which reflect ongoing gas processing charges and from transportation commitments average $0.52 per Mcfe for the third quarter and for the year-to-date. We are slightly lowering our full year guidance to $0.52 to $0.55 per Mcfe.

Production taxes, which are assessed on physical well head sales prices were $0.69 per Mcfe for the quarter down $0.02 per Mcfe from the second quarter. The third quarter include approximately $2 million for true up to our estimated production tax rate for the year to revise estimate tax rate of 7.7% of well head prices.

Depreciation, depletion and amortization of $2.53 per Mcfe was comparable with the previous quarter. And general and administrative costs were comparable to last quarter but, we're updating guidance to $39.5 million to $40.5 million to reflect additional costs incurred to evaluate and represent our interest in production tax and regulatory initiatives throughout the year.

Capital expenditures for the quarter totaled $197 million, a record level of activity for the company. And for the nine months our capital expenditures were $424 million. We have modified our full year capital budgets to $590 million to $610 million, we just had, during the remainder of 2008 to become better aligned with expected 2009 cash flow. We continue to develop our 2009, capital expenditure budget, and provide more details in January.

We previously reported commitments under our bank line... bank credit facility have increased from $467 million to $593 million. As of mid-October that provided $419 million of availability to fund our capital.

Combining our liquidity with our sizable hedge positions going into 2009, we are very comfortable with our ability to generate adequate cash flow to fund our 2009 exploration development programs, and move into 2010.

Our earnings release and Form 10-Q provide the details for hedge positions, but it is worth reiterating that in 2009, we have 60 Bcfe hedged to local delivery points for an average funded core price of $7.17 per MMBtu for natural gas approximately $7.89 per Mcf, which is a very strong gas price and $81.79 per barrel for oil.

Further we are well within all bank covenants and are comfortable with our well diversified bank group and well diversified counter parties to our hedging program.

In summary, 2008 should be a great year for us delivering record production in cash flow despite the current difficulties in financial markets, our financial position, our hedge contracts, and flexible asset base allows to be very well-positioned to grow our production in reserves.

Now Joe will provide an update of our operating activities.

Joseph N. Jaggers - President and Chief Operating Officer

Thanks very much, Bob.

I will begin on slide number six with a discussion of activity around our Yellow Jacket discovery in the Gothic Shale. We've had a choice, we've chosen a brighter name for that horizon, but perhaps it's appropriate given this point the price cycle. Recapping 2007 winner partners Williams drilled and cored three widely separated vertical wells. Two of the wells were completed and produce gas and all three had very favorable core results.

Gas contents, thermal maturity, organic contents, and additionally shale composition were all very favorable and gave us the encouragement to drill horizontal wells this year. The first of these horizontal wells was the discovery well, the Koskie-Bromley 3H-27. It was completed in early August. It was stimulated in six stages along our 2,886 foot horizontal section and the well produced for a total of 17 days.

The average test rate over the final 10 days was $4.5 million cubic feet per day and the final rate is the well performance it was continuing to improve was $5.7 million cubic feet per day. Then the well has not had the stimulation sleeves drilled out or tubing run and it's presently shut in, awaiting processing and pipeline hook up.

The second well that we drilled the confirmation well Neely 13H-7 and there is type on the slide. It's 13-7 well was stimulated here recently at eight stages along with 3,655 foot horizontal section. This well was produced for a total of only eight days as it cleaned up the final for these days that averaged 3.1 million cubic feet per day. And again this well is also shut in, awaiting processing, and pipeline hook up.

After we completed the Neely well, we moved the rig north nine miles and have drilled the East Doe number one which is a vertical well is a primarily to obtain core material. And the early analysis of the core indicates excellence gas contents and thicknesses similar to the other vertical wells that we've drilled in the Gothic on the order of 150 feet of thicknesses.

We would now move the rig down to 160 acres direct offset to the Koskie discovery well. They are drilling presently at the horizontal kick-off point. This will be our third horizontal well, and these results will be available by year-end.

During 2009 we plan up to seven additional wells to complete delineation of the area. We are also planning long-term production testing through temporary facilities that should be an operation by the end of the year. The gas that we've tested in the two horizontal wells is high heat content, it ranges from 1100 to 1200 Btus and requires processing before transport on Northwest pipeline south of San Juan basin.

Production through these temporary facilities will provide very, very important data on long-term production performance. We believe it is necessary for further planning of infrastructure in the area. Along with Williams, we are proceeding with the second phase of gas processing of 50 million cubic foot per day plan, which is planned for completion during Q3 2009.

By analogy with other shale basins primarily rate that also thickness in gas content, we expect the Yellow Jacket EORs to be in the 3 Bcf to 4 Bcf range. And estimate development well cost to some $4 million to $4.5 million. This favorable metrics combined with a large extensive acreage position make this a significant part of our future production in reserve growth.

We've often remarked as we've talked about our exploration projects that anyone of them have the potential to step change the size of the company, Yellow Jacket appears of this very early stage clearly capable of doing just that.

So we'll turn know to slide number seven, and continuing on the exploration theme, we will update other Q3 activity in our exploration program. Our other Paradox Basin projects the Green Jacket and Salt Flank projects continue to progress. We expect to drill our first Green Jacket well in the Hovenweep Shale during the fourth quarter of this year, as a reminder the Hovenweep Shale has just above the Gothic, and it has been caught in one our Gothic wells, during 2007 one of the early vertical wells with encouraging core results, gas content, and compensation again.

This new well will include a vertical pilot for additional core material in a horizontal leg for completion. The Salt Flank well reached total depth that was cased during October, unfortunately this was late in the available operating window and the well was not completed. The well did encounter mud gas shows and positive log results through the perspective zones, and we do plan to complete the well in seasonal restrictions are left it in mid 2009.

Moving up into the Uinta Basin, we've drilled and cored our first Manning Canyon shale well in the Hook area with again positive initial results gas contents are very encouraging. A horizontal Manning Canyon well is planned to be spud during the first quarter 2009. In addition we are presently drilling Juana Lopez shale well in the same Hook vicinity.

Moving now into the Wind River at Cave Gulch, we've completed the 31-32 well a deep test that we drilled earlier this year, it's been completed in the Muddy and the Lakota. The well is currently producing only a million cubic feet per day and is planned for re-completion up in the Frontier zone this month.

We are also drilling the Bullfrog 23-6 well and currently at about 15,000 feet drilling towards the planned TD of 20,000 feet. We expect that we'll have results from both of these operations, the re-completion of 31- 32 and the initial completion of 23-6, by year-end.

At the Circus project in the Montana Overthrust that we've completed the first of our four 2008 vertical wells, the well is today producing approximately a million cubic feet per day. So, some update from the slide which indicates 500 Mcf a day. And that's through five stages that we completed in the Cody shale. We plan to analyze results from this completion effort prior to initiating completion activity on the remaining three wells. So, they very well could slide into the 2009 for completion.

And the final explanation update, just a brief one is the Bighorn Basin where we plan to spud by the end of the month. This well will target sands at Fort Union level on feature that we've defined by an extensive 3D survey that we have acquired over to this unit.

Turning now to our development activity on slide number eight. I'll make a couple of general comments before we dive into the individual projects, but mostly of our 2009 planning as Fred indicated, we are planning 2009 capital at a level of cash flow as then as a result that you will see in each of these development projects we're pretty aggressively moving now to lower activity levels. And that's somewhat also explains the reduction in capital guidance for 2008.

As we do this we are continuing our efforts on permits, on infrastructure projects, on surface use agreements and all the other necessary pre-drill activity in order to facilitate hire activity later in the year if market conditions do improve. Also as we've continued to refine our 2009 plans, we have optimized them our activity and now believe that 2009 production will be comfortably above the 10% to 15% range which we previously indicated.

And as usual our full guidance will be available at the completion our planning cycle during late January.

At West Tavaputs moving along in the development projects in the Uinta basin we are currently operating three rigs and plan to be at one by year-end. Our EIS is now expected during January. And we continue to be assured by of the year end the pending resource management plans and environmental impacts statements are a priority to be completed during this administration.

And as in the slide our project continues to enjoy tremendous local support from the Governors Office down through the county commissions in the two counties we operate. And none of this was affected by the elections and supporters. It generally remained in place throughout the state. We're producing 71 million cubic feet per day. We forecast to be at 76 million cubic feet equivalent at year-end.

And our Uinta basin project, the Blacktail Ridge/Lake Canyon, we're operating one rig, we're producing now from 13 wells that have gross delivery capacity of some 1300 barrels of oil equivalent per day. In the Piceance, we're down from earlier rig count of 5, early in the third quarter to four. We plan to be at two operating at year-end our production has gone to $87 million cubic feet per day.

Our next large step-up in rates expected during this month as we commission additional compressor, but as $20 million cubic feet per day of gross capacity we've planned to exit the year at some 96 million cubic feet equivalent per day.

I'd note election wise in Colorado Amendment 58 which would have raised severance taxes was handedly defeated by a large margin.

Lastly our Powder River Basin operation, it has two rigs producing a 24 million cubic feet per day. We did establish new production at Pumpkin Creek during the third quarter and Willow Creek will begin production this month. We plan to end the year 27 million cubic feet per day.

So operationally it's been an exciting and fortunately a very fruitful quarter and as you can look forward to more results from these projects and activities by year-end.

Now I'll turn things back to Fred.

Fredrick J. Barrett - Chairman and Chief Executive Officer

Well thank you Joe. Again I would like to thank all our listeners today for your interest in Bill Barrett Corporation. A few closing thoughts before Q&A, first, as Joe mentioned, the excitement level at Bill Barrett Corporation is at an all time high.

Our grass root resource plays like Yellow Jacket do take considerable time and effort to assemble, drill, test and delineate. But the company is now in a phase where we're seeing tangible evidences of potential new long-term organic growth platforms above and beyond our current low risk element portfolio. Said in other way, we are now more than ever beginning to see the fruits of our labor and our exploration strategy from the past five or six years.

We are pleased with not only our Yellow Jacket discovery and the paradox and the early development phase of Blacktail Ridge in the Uinta but also look forward to the potential emergence of other resource plays within our portfolio as we continue to explore with the drill bit this immense gas resource base in the Rocky Mountain Region.

Secondly, we are in the final planning phase for 2009. While we have further exploration data to asses in the fourth quarter, the '08 operational results today give us a visibility on a number of fronts heading into next year. Naturally, we'll continue to execute on our low risk high return development programs and in parallel maintain focus on transitioning from delineation to early development on the key plays by Yellow Jacket and Blacktail Ridge.

We also expect to do follow up work on other projects warranted by encouraging 2008 exploration results and we also look forward to several exploration commitments as well.

Thirdly, let me highlight again our financial flexibility. Because Bill Barrett Corporation is very opportunity rich, we are planning accordingly. As I mentioned in my introduction, we are well positioned financially to execute on our core operational activities in 2009, including Yellow Jacket. We will be prudent with our capital deployment through the remainder of '08 and in our 2009 plans and in doing so we will sustain a significant financing provision throughout next year, giving us optimal flexibility, should we decide to adjust our capital of the investments accordingly.

As usual, our goal will be continued double-digit growth expecting 15 plus percent growth next year-end in parallel we will continue to heighten our visibility and increase our exposure to a substantial organic resource potential and long-term value creation for our shareholders.

Lastly, a few words on yesterday's general elections and I'll be brief here so we can get on to Q&A. I am sure like me everyone is relieved that the general elections are over with confirmation now on the Obama Administration we all look forward to further policies which will lead to economic recovery and growth.

We are also optimistic regarding energy policy and specifically the future of domestic natural gas under the Obama Administration. We believe the views of the administration embrace clean technology, reduced carbon emissions and energy independence, recognizing that natural gas is the cleanest of fossil fuels, is abundant domestically, and is the natural choice for a base load fuel source for a renewable program. We see tremendous opportunity ahead.

The new administration also supports improved permitting processes and infrastructure build out to increase our domestic energy supplies. Their approach if followed should bode well for our industry and our company. As such we look forward on a single portfolio of natural gas projects and recent discoveries like Yellow Jacket and one of the if not the largest, natural gas resource base in the U.S.

We look forward to sharing further details and updates on our operation in early 2009.

Thank you for listening and with that I'll turn it back over to Jennifer.

Jennifer Martin - Director of Investor Relations

Jessica let's go and start the question and answer session.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from the line of Michael Hall with Stifel Nicolaus. Your line is open.

Michael Hall - Stifel Nicolaus

Thanks. Congrats on a solid quarter guys. Talking about the Yellow Jacket prospect, a couple of questions; first off realizations, can you remind me what realizations look like in the Paradox? And they are meaningfully at all... meaningfully different than anywhere else in the Rockies?

Joseph N. Jaggers - President and Chief Operating Officer

I think... Michael this is Joe Jaggers. The Paradox currently there is not really a liquid point down there to judge what realizations are. What we expect to do through these temporary facilities is sale in the North West. So, we'll probably see a Opal/Piceance sort of price initially. The longer term if the project scale develops along the lines we potentially think it could, very likely we'll see a dedicated line from this area down to the Saint Lorene. It's only 60 miles.

And once you get to the Saint Lorene there are some facilities with excess processing so it could be constructed as a webbed system. And then of course we'd see Saint Lorene price.

Michael Hall - Stifel Nicolaus

Is it a stress to say relative to some other areas in the Rockies it may actually be easier to expand capacity of the Paradox if we are moving down South, as opposed to trying to move East?

Joseph N. Jaggers - President and Chief Operating Officer

We think it is very much easier just is that sixty miles is very manageable distance and when you get to the Saint Lorene of course you get two major pipelines with energy transfers and Al Paso and into this Arizona Southern California markets.

Michael Hall - Stifel Nicolaus

Great. And then in the past, talking about Yellow Jacket and Green Jacket yield has kind of seem like delineated the two acreage positions, may be around a 100 plus thousand net acres in the Yellow Jacket. It seems like you may be kind of lumping them back together. Is there any read into that or is that just for convenience sake for that?

Joseph N. Jaggers - President and Chief Operating Officer

Yeah. The Yellow Jacket region which was built based on a shale gas concept, one in the Gothic shale and the other in Hovenweep.

The two concepts overlap, combined they represent somewhere on the order of close to 3,000 square miles of potential shale gas potential. The Hovenweep looks very, very similar to the Gothic shale. If we were to split them out, Yellow Jacket, we've about 268,000 gross 122,000 net, Green Jacket we've a 126,000 gross and about 87,000 net at this point. But we see this as in general a regional shale gas program. We are going to drill one horizontal in the Hovenweep 2009 as Joe mentioned.

We... most of the federal and state tracks have been offered for the present. There is a significant amount of that acreage that is currently held under U.S. Forest Service land that we don't see in anytime in the near future. But those would be offered for leasing. But we view this is as a single large shale gas program for the company. We still have work to do in both areas and we've yet to drill our first horizontal in Hovenweep. But we'll share that information with the public when we get it.

Michael Hall - Stifel Nicolaus

Great, that's helpful thanks. And then finally, Joe you alluded to me, be it 10% to 15% was already looking conservative. And I was just wondering if you had any color as to what's driving the... the change in expectations in just the last couple of weeks?

Joseph N. Jaggers - President and Chief Operating Officer

Well, it's mostly run rigorous planning and execution on that limited number of wells. We are able to optimize our program, drill higher rate higher EUR wells and some of the completion activity that had been scheduled for Q3, Q4 has been delayed a little later into this year, and early into next year which also is helped on rates.

So, those two factors primarily, Michael.

Michael Hall - Stifel Nicolaus

Okay. So not any one particular region necessarily, just more like you said, optimization throughout the portfolio?

Joseph N. Jaggers - President and Chief Operating Officer

That is correct.

Michael Hall - Stifel Nicolaus

Alright great, thank you. Congrats.

Operator

Your next question comes from the line of Tom Gardner with Simmons & Company. Your line is open.

Tom Gardner - Simmons & Company

Hi guys. Referring to Yellow Jacket and with early indications to success if this is anything like other resource plays we see in a rapid increases in production. Can you talk about the facility constraints and your uptake considerations that are in play here? And I know you touched on it earlier but just essentially how far and how fast can year take this is it truly in terms after generally a lot of running room?

Joseph N. Jaggers - President and Chief Operating Officer

Tom this is Joe again. The situation there is pretty favorable when you consider that the basin is crossed by two major interstate pipelines. You got a trance Colorado and you got Northwest pipeline, now both of them currently run full to the Saint Lauren. Our initial phase I we're planning and there are far along in the permits and approvals and so on two taps in the Northwest pipeline.

Because the gas has to be processed, we've gone through are air permits situation, and we're in the process of constructing two plants and the two taps in the Northwest. Northwest though does run full, so we'll be selling into the pipeline to shippers that have capacity there. So, it'll be displacing probably Piceance gas as that they could have otherwise bought. So we are looking for prices around the Piceance level.

The next phase would be the plant that I mentioned. It's being planned for 50 million a day. Sort of centered in the Yellow Jacket project area. Again, it's going to process and go into Northwest. It's considered sort of the intermediate step here and as we continue to grow the third and final step would be the dedicated line to the Saint Lauren which really does it and open up the infrastructure situation, Roger.

Tom Gardner - Simmons & Company

And do you think the repeatability of a large scale resource play might, I guess greased away to that line, the visibility of growth so to speak?

Joseph N. Jaggers - President and Chief Operating Officer

I sure though don't want to get too far out in front of our headlights on this. We were pretty excited about two wells that we've completed but it is just two wells. You extrapolate those results across this basin and the numbers are here and they would easily justify a dedicated system out here.

Tom Gardner - Simmons & Company

And then just with respect to, you'd mentioned optimization and on that thought with respect to Yellow Jacket wells. Can you talk about the possibilities to optimize the completion from what you're seeing initially, where are you with the lateral links, where do you think it can go similar thought on stimulations size and horse power?

Joseph N. Jaggers - President and Chief Operating Officer

Well it is. Its early days, we got the two laterals in that I mentioned one is about 2900 feet one is 3700 feet. We haven't gone to the Commission and agreed with spacing and density is going to look like. I feel that'll somewhat dictate how long these laterals can be.

Our early thinking is that there would be no longer than sort of one section. So, you're kind of constrained to maybe a maximum of 4,000 to 4,500 feet across there. We've done similar stimulations, in shows similar stage links to what's been done in other shale's. It has worked well for us but we haven't... let me get the well counts or the experience to optimize here, pretty happy with what we've got. But there is... like all these place probably a few twists and innovative things that that will improve results down the road.

Tom Gardner - Simmons & Company

Thanks Joe. Good news.

Operator

Your next question comes from the line of Ray Deacon with Pritchard Capital. Your line is open.

Ray Deacon - Pritchard Capital

Yes, hi. I had a question about the Piceance decision to scale back from five rigs to four. And I guess you said by two at year end. Was that driven really by just a desire to cut back on capital and keep your powder dry or is there a right gas price where the recons just don't look to go attractive to you and also maybe to follow up a little bit with a little bit lower activity do you think you can maintain the current LOE level which seemed a lot lower?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes Ray, this is Fred. I would... when you look at our the average realized prices this year and what we think we can expect next year given our head positions, we have a very sound, very strong average realized price base upon which to operate. And as a result of that, we maintain very, very good returns both in the Piceance lets put West Hovenweep area. And so, our decision moving forward really was one of prudence and discipline. We are... during times like this, we are simply going to be smart and disciplined about what we do and so as we move towards the '09 budget where we are going to align CapEx and cash flow that was an enlarged part of the driver line what we have done.

Ray Deacon - Pritchard Capital

Okay, all right.

Unidentified Company Representative

And to your secondary question Ray, about the LOE, yes, I think even at these levels we would be able to maintain similar LOEs.

Ray Deacon - Pritchard Capital

Okay, great. And just lastly what do you or do you have any further plans to drill deep wells and in West Tavaputs looking out at the back half for this year...

Unidentified Company Representative

During 2008?

Ray Deacon - Pritchard Capital

Yes, yes.

Unidentified Company Representative

No, no.

Ray Deacon - Pritchard Capital

Okay, great. Thanks very much.

Operator

Our next question comes from in the line of Andrew Gundlach [ph] with AFD. Your line is open.

Unidentified Analyst

Good morning. Two quick questions, with respect to Paradox in your comments on Northwest pipe. Is that related to the Williams Northwest pipe, Colorado Hub connection project, is that the specific project that you need to come on line to allow the take away?

Unidentified Company Representative

Andrew, no that I'm not even aware where their project is. But I'll takeaway, it's simply to temporary taps that were constructing in the vicinity of that Neely and the Koskie well that we are waiting on right now.

Unidentified Analyst

That will be funded by Williams?

Unidentified Company Representative

At this stage we're working with Williams as together, and they are providing the processing, gathering, and the tap service for fee.

Unidentified Analyst

And that could come on as early as mid '09?

Unidentified Company Representative

No we'd expect those two temporary taps to come on before the end of this year.

Unidentified Analyst

I see.

Unidentified Company Representative

And it's the larger plant, the 50 million a day plant that's Q3 '09.

Unidentified Analyst

I understand. My second question is a financial question. Over the past two months or six weeks your stock got down to levels that was half of your IPO price. Your convertibles traded down half of where they have been trading before 120 to 165 or so. Do you ever give thought to... you obviously didn't buyback any shares in the third quarter nor according to your Q in the month of October. And I am just curious did you ever give any thought to realigning some of your CapEx and using up some of your financial flexibility to buyback your stock at those prices?

Unidentified Company Representative

We certainly are aware where the prices are and aren't any happier with those prices than anybody else. But, as far as allocating our capital and putting at to work we feel the properties we have specially some of the exploratory projects were the best use of our capital right now and perhaps trying to expand in those areas for thinking long-term even if we need to think about buying some of our stock back with our credit facility as certain limitations where we can use with the money available into the credit facility, any type of distributions or otherwise repurchase of securities. But, that stays down for a long period of time. We certainly have discussions at the appropriate level of board and another levels, but at least for we're got to we think it was greatly oversold and we think the price especially with what we know and what we are able to communicate the day should be at a different level and proper use about running our business would be the focus on helping some of these exploratory place for long-term.

Unidentified Analyst

I see. Just to understand, make to understood what you just said about your bank facility, you do or you do not have the flexibility to use the portion thereof to repurchase stock order or converts for that?

Unidentified Company Representative

Yes, I need to look at for the exact terms Andrew, typically we have some limitation what we can use, and I can't say that we have looked out to that level of detail but, that certain on that stores we can use for those types borrow money from the credit facility.

Unidentified Analyst

I understand thanks for taking the questions.

Unidentified Company Representative

Sure.

Operator

Your next question comes from the line of Gordon Dusatt [ph] with Wachovia. Your line is open.

Unidentified Analyst

Hi good morning this is actually John Ragazinno [ph]. Congratulations obviously on the Amendment 50A all of us and Denver you did our part first of all, but a bigger picture question if I look at gas prices in the Rockies, I think that the general consensus is that you're looking at some of the disaster between now and call early 2011 when you have ruby. But, if you talk about the expansion of Rex, Bison and maybe current river expansions in 2010, and then another one point to these by 2011 with the ruby, how do you feel about the gas price situation out here, looking at the potential for expansion versus the growth and some of the shutting that you have seen know, with Rex currently running at somewhat like 60% capacity, most recently?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Let me make a couple of comments, and I'll see if Joe has some added color around that. As I mentioned it is an interesting time right now in the Rocky Mountain region, and when we look at '08,'09 and 2010, historically you tend not to be as worried during the winter timeframes, so we still maintain hedges to that timeframe but we also, maintain upside hedges that allow us to leverage into price issue they go $10 are higher in Rockies, which you probably not going to see.

But, and so as we look out there especially through the early part of this year, we expect things to get tighter in the summer and its older months, specially in October and September in a such we have hedged pretty significantly forecast, which show 65% to 75% of our production is hedged, so we feel good in terms of this company Bill Barrett Corporation protecting itself and assuring our shareholders good sound cash flow next year.

But, given the current capacity situation in the Rockies it's interesting that to look at the strong likelihood that there is going to be substantial cuts and in CapEx.

I think virtually every rig operator I know of and I can't speak for every single one, but most of the ones I know are most of the major operators are cutting back significantly. You got to wonder how much of an impact that's going to have to additional well capacity really in 2009, and then you have the other more minor relief elements coming out to you, the 300 million a day on rigs and other additional capacity by way of NGL processing so on and so forth.

Now we come in to this quarter in the Rockies where rig activity has already moderated and it appears to be falling production is moderated and appears to be... if not moderated somewhat of a slight decline from August through the end of October. And so, the wild card then is the winner that I think is going to really tell a story for 2009. As it relates to the five clients I will hand it over to Joe here in just a second.

We are big believers in the pipeline projects being proposed in the Rockies. We support them. We supported Ruby. I think you are seeing the impacts of the economic crisis effects, the midstream markets coming out of the Rocky Mountain Region. But one thing is certain, there are two things that underpin the Rocky Mountain region, one is this big resource base and the other is there seems to be a lot of operators that need capacity, future capacity and the issue has been getting that organized to the point where you can find the commitments to substantiate a pipeline.

Al Paso did it with Ruby. So I think as you move forward it is a matter of organization, getting those operators together. I think it's a matter of the economic climate improving. And... but in the interim here it may not be as bad as people think given the CapEx cuts with one strong winner over the next two years. We may be in better position than people think. But having said, that I am going to hand it over to Joe.

Joseph N. Jaggers - President and Chief Operating Officer

I spread it. I think you covered it well. The only thing I wanted to add John is thanks for your vote on amendment to FDA.

Unidentified Analyst

Of course. That is all you got. One further question just kind of along the same lines. The recent pipe that was proposed I think it's the Rockies Alliance Pipe, any idea of further commitments to that trying to get that project through I don't know the details as well as I probably should before I get on and asked you guys, but it seems like a new topic and that will kind of alleviate further a situation that people I think are kind of thinking it's going to be worse and it may pan out to be in the next two years or so?

Joseph N. Jaggers - President and Chief Operating Officer

Well, John I do think it may be better than people think. Fred said it capital cuts in addition to some of these incremental projects. We were all disappointed to see Pathfinder not get the commitments it needed, because timing wise it seemed to fit very well with growing Rockies production.

The next one, the one you mentioned there the Alliance Pipeline to Chicago is one that we're currently looking at hard. We will almost certainly participate in whatever the most likely next project is after Ruby. And I think its important message that we're continuing to send of the other operators and producers here in the region as the industry just has to coalesce behind one of these pipelines to get it move and we can't continue to be fractured and see these things not get the levels of commitments, get further delayed.

Unidentified Analyst

That's great and I appreciate on the quarter guys. Thanks a lot.

Operator

Your next question comes from the line of Jeff Robertson with Barclays Capital. Your line is open.

Jeffrey Robertson - Barclays Capital

Thanks. Joe you talked a little bit about the air permit you needed for the initial work in the Paradox at Yellow Jacket. Can you talk about what will be needed for the 50 million a day plant in terms of environmental approvals or air permits or anything like that?

Joseph N. Jaggers - President and Chief Operating Officer

That's being handled by Williams at this point. But I understand there... well along that permits have been filed for all the necessary EPA and County Special Use Permits out there. So, I think that the critical timing on that plants are not likely to be permits, it's likely to be equipment deliveries and construction.

I would say that our land out there is 50% fee. And it's generally agricultural land, topography is not difficult in addition to the pipelines which go right through there. You get some major highways to go through there as well. So I think operations are going to be relatively simple particularly, if you compare them to some of the operational gymnastics we have to do in places like West Hovenweep sometimes.

Jeffrey Robertson - Barclays Capital

Okay. Thank you.

Operator

Your next question comes from the line of Dan Mcspirit with BMO Capital Markets. Your line is open.

Dan Mcspirit - BMO Capital Markets

Thank you gentlemen, good morning. In light of the crises in the capital markets and the credit markets today and the observation that the capital markets may in fact be closed for certain independence and the pricing situation in the Rockies today, have you seen much by way of distressed M&A activity or distressed M&A events at least urgent M&A events across your desk?

Joseph N. Jaggers - President and Chief Operating Officer

No. I mean I have seen... I mean there is A&D activity out there and they are transactions that it appear to have some sort of flavor induced by the current financial crisis. Have I seen an increase in activity? No. Every period a lot of chatter? Yes. I think everyone tends to look at these times as a time of opportunity. Some are saying that its just a matter of time before we really see this the activity levels that really began to click out.

But one of the reasons we maintain such high funding or financial cushion moving through '09 is we'll be prepared an opportunistic should anything come our way. It haven't not liquidity that look at certain types of opportunities and we'll be ready for those. But a lot of chatter out there.

Dan Mcspirit - BMO Capital Markets

Got it. And one more question, in your press release on the Piceance basin and referring to the Piceance basin reduced drilling activity there, reduced level of activity anyway, you refer to clinical new comprehensive Colorado rules. Could you give some greater texture on what do you mean by that or what is meant by that?

Joseph N. Jaggers - President and Chief Operating Officer

I'll give a little background. In the legislation in 2007 couple of bills were passed that required the commission to go rewrite rules that governed Colorado oil and gas activities with an eye towards a wildlife impact mitigation and public health and safety. Those rules have been in the process for the last nearly a year now we saw our first draft in November of last year.

The final rules have now been deliberated in front of the Commission. They are being refined, the exact date when now go into the fact is not established yet. It looks likely to be sometime during '09. But there is just a lot of things that the lower activity rate will allow us to do more handily, the record keeping aspects, some of the wildlife and culture survey work that has to be done. Just more regular around permitting and lower activity of just facilitate some of that.

Dan Mcspirit - BMO Capital Markets

Okay. And then a couple more questions, this time on the Gothic shale, if the molecules are to be priced at least initially of Opal and the Piceance, what has been the differential there of late or may be even historically? I ask in an effort to help determine an economic limit or economic breakeven on the play?

Unidentified Company Representative

Well I don't have a complete data set, but I do have just some very recent pricing and it looks like Bob's got some more a bit for November '08 for Opal, it is some very low prices CIG was 278, Opal was 275, and then NYMEX equivalent was 679 so you're looking about $4.00 differential for this month.

Robert W. Howard - Chief Financial Officer and Treasurer

On a forward basis at least the Rockies differential for 2009 last Friday its about two in the quarter?

Dan Mcspirit - BMO Capital Markets

Okay.

Robert W. Howard - Chief Financial Officer and Treasurer

Certainlyregional adjustments to that, but that was for all of 2009 and there is a seasonal little higher in the summer tip little higher one my dear.

Dan Mcspirit - BMO Capital Markets

Okay. Thank you. And then I guess follow-up question still on the Gothic shale with respect to operating costs again and then effort to get you an economic when on your economic breakeven on the play what can we assume in terms of operating cost on a full cycle basis namely that cost you to process the gas for transport?

Unidentified Company Representative

Well initially it's going to be high relative to the rest of the company's average LOE. we are looking at probably over $1 because we have very few wells out there low production rates and lots of distance between those wells, some water hauling that's required because we haven't installed a water management system out there, but I would expect those costs to dramatically improve as well density increases and we get scale in terms of number of wells and activity out there to probably for the long term a number that is very much like our average number for the company now.

Dan Mcspirit - BMO Capital Markets

Very good. Thank you.

Operator

[Operator Instructions]. Your next question comes from the line of Ray Deacon with Pritchard Capital. Your line is open.

Ray Deacon - Pritchard Capital

Yes. I just had a question on Blacktail Ridge you know, I know that you did the 3D there to try to figure out some of the complexity and I just was wondering what the most recent wells do you feel like you have come up with a type low and how did the economics look under that gas price for 2009, I guess is that something you night step up activity on if you've got more comfortable with the pricing environment? And also just any kind of comment you have on what you saw in the Hook well, how does the quality of the shale look relative to the other Paradox fleet, you talked about two Yellow Jacket?

Fredrick J. Barrett - Chairman and Chief Executive Officer

Yes, Ray let me just a couple of comments and then I'll hand over to Joe. Here we'll tag team on this one the 3D in the Lake Canyon area, actual the 3D turns out much for our activity today, reflect or it's actually lies north of that 3D seismic program. Now I would just... I would make the comment that as we look at how these wells perform and we're panic going for 220,000 barrels of wells. We also see a number of other upside elements such as number of shale gas intervals in Blacktail Ridge area and just to the south down in the Lake Canyon area, should that upside component begin to pan out will probably you would see as probably extend that 3D further to the north. But, we are doing fractural work with that 3D that we think is useful and will be useful further to the north.

Let me go ahead and just cover hook. And then I'll hand it back over to Joe, the Hook area, the well that we drilled in Manning Canyon. I was pretty surged. We saw good gas shows record about 400 feet in the Manning Canyon, again the Manning Canyon and Mississippi and equivalent to the Barnett more or less, the gas contents in the core are very encouraging 100 to 200 Scf per ton. But, we have more work to do, we shot 3D postage stamp 3D around that Hook well, and we'll use that 3D than to a follow-up horizontal in the Manning Canyon and another for second quarter 2009. With that let me hand it back over to Joe, back on Blacktail Ridge.

Joseph N. Jaggers - President and Chief Operating Officer

Just Ray the economics out there, the well costs in Blacktail Ridge is about $4.2 million, Lake Canyon run about 3.2 million little bit of shale down there. We are trying to proved to ourselves that we can be consistent with our results out there. We have had some variability although of late the well reserves had been much better. We are targeting an EUR of about 225,000 barrels or bellow. The economics there are sort of at this point rate... cost to capital rate of return. It's not great at these lower oil prices like we saw last year. And this year we are just going to continue to drill those obligation wells that we have associated with both of those projects, we've got 15 of those to drill, so your question of, would we increase activity, I don't think it's very unlikely at all for 2009 that would increase activity just continue to earn acreage out there and understand the play. Is Ray gone, anybody.

Jennifer Martin - Director of Investor Relations

Operator, I think that probably concludes the call. Do you have any further questions.

Operator

There are no more questions at this time.

Jennifer Martin - Director of Investor Relations

All right. Well thank you everyone for joining us, and as always and feel free to give us a ring if you have follow-up questions.

Operator

This concludes today's conference call. You may now disconnect. .

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Source: Bill Barrett Corp. Q3 2008 Earnings Call Transcript
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