Rosetta Resources Q3 2008 Earnings Call Transcript

Rosetta Resources Inc.(ROSE)

Q3 2008 Earnings Call

November 10, 2008 11:00 am ET

Executives

Randy Limbacher - President and CEO

Mike Rosinski - CFO and EVP

John Clayton - VP, Asset Development

Jim Craddock - VP, Drilling and Production operations.

Analysts

Neal Dingmann - Dahlman Rose & Co.

Joe Magner - Tristone Capital

Mark Lear - Sidoti & Company

Presentation

Operator

Good morning, everyone, and welcome to the Rosetta Resources Third Quarter 2008 Conference Call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise.

If you're not able to participate in the conference call, an audio replay will be available from 2 O'clock PM Central on November 10th, 2008 through 12 O'clock AM on November 17th, 2008, by dialing 888-203-1112, or for international, 719-457-0820, and entering the confirmation code of 8351425.

A replay of the call will remain online at www.rosettaresources.com for 60 days after the initial call. To access the replay, click on the Investor Relations section of our website and select Presentations and Events.

Our speakers this morning are Randy Limbacher, Rosetta's President and Chief Executive Officer and Mike Rosinski, Chief Financial Officer and Executive Vice President. Also present on the call today are Mr. John Clayton, Vice President, Asset Development, and Mr. Jim Craddock, Vice President, Drilling and Production operations.

At this time, I’d like to turn the call over to your host, Mr. Mike Rosinsky. Please go ahead sir.

Mike Rosinski

Thank you and good morning. Thank you all for joining us for our Third Quarter 2008 Conference Call. Before we proceed, I will read Rosetta’s Safe Harbor statement.

All statements other than statements of historical fact included in this presentation are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on current expectations and are subject to a number of risks, uncertainties and assumptions, which are more fully described in Rosetta Resources' annual report on Form 10-K, and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.

These risks, uncertainties and assumptions could cause actual results to differ materially from those described in the forward-looking statements. Rosetta Resources assumes no obligation, and expressly disclaims any duty to update the information contained herein, except as required by law.

By the way, please note that Rosetta filed its third quarter 2008 10-Q last Friday, November 7. It can be accessed via our website under the investor relations tab. Our call agenda for today will include a review of the third quarter of 2008, as well as an outlook for the remainder of the year and into 2009.

I will provide a review of the third quarter results and then turn the call over to Randy for some comments on outlook, as well as our priorities and our goals as a company. After our prepared remarks, we will go to the Q&A session.

Now we’ll proceed with the third quarter review. First a reminder, Rosetta's revenues and production for the quarter do not include consideration of non-consent properties, as defined in this transaction with Calpine that closed on July 7, 2005.

The third quarter was one for the ages, between a major hurricane and exhaustive push to resolve the Calpine lawsuit; and historic downturn, it was dramatic. Rosetta put together another good operational performance, but our headline financial performance reflects a sharp turn in fundamentals versus the first half of 2008.

We posted a loss of $99.4 million down compared to net income of $12.7 million in the third quarter of 2007. This quarter’s diluted earnings were a loss of a $1.96 per share. These results included the after-tax impacts of a previously announced charge of a $129.1 million or impairment of oil and gas properties.

As was also previously announced, the impairment charges includes the impact of lower relative prices [during] with the quarter as well as the impact of downward reserved revisions of between 50 Bcfe and 60 Bcfe. These revisions were identified as a result of detailed field study that Rosetta commissioned during the year.

Excluding the impairment charge, cleaned earnings for this quarter would have been $29.7 million or $0.58 per diluted share.

Production in the quarter averaged almost a $140 million a day, up 11% from the $126 million a day reported for the comparable period of 2007. Volume performance included the unfavorable impact of storm-related downtime at Sabine Lake and Offshore.

This downtime accounted for about 9 million a day shortfall in average rate for this third quarter. Six of that was to hurricane Ike and three was related to downtime for hurricane at Eduardo and Gustav. With the exception of East Cameron 88/89 and High Island 442, our offshore properties along with Sabine Lake are back on production.

There was currently 8.4 million a day of shut-in production associated with offshore. We are working on repairs and expect to have production restored by the end of the year.

The average realized gas and NGL price for the quarter was 947 per Mcfe, including the effect of hedging. And realized oil prices averaged about $120.66 per barrel.

Revenues for Rosetta totaled $130 million, including a hedge loss of $12.1 million. Total revenues were up 45% from the prior year's third quarter, but down 16% sequentially, reflecting weaker prices and storm-related shut-in volumes.

Total lease operating expense, which includes Direct LOE, workover expense, ad valorem taxes and insurance, was $12.9 million or $1 per Mcfe; about 3% lower on a unit basis compared with the third quarter of 2007.

Direct LOE was $8.8 million or $0.68 per Mcfe, which is about $0.04 per Mcfe lower than last year's third quarter. This variance is attributable to lower LOE in the Lobo, Rockies and Gulf of Mexico regions, as well as the impact of higher volumes.

Workover cost in this quarter was $1.1 million or $0.09 per Mcfe for the period. Ad-valorem taxes were $2.8 million or $0.22 per Mcfe; insurance was $200,000, which is $0.01 per Mcfe. Production taxes were $2.3 million or $0.18 per Mcfe and treating, transportation and marking charges were $2.6 million or $0.21 per Mcfe.

Depreciation, depletion and amortization were $47 million, based on a DD&A rate of 365 per Mcfe. This was consistent with the guidance we provided in our last quarterly call.

In addition, as already mentioned, Rosetta took a pre-tax charge of $205.7 million for the impairment of oil and gas properties.

General and Administrative costs including non-cash stock compensation expense of $1.4 million were $15.4 million for the third quarter, compared to $12 million in the third quarter of 2007. This quarter’s G&A included $4.5 million in costs associated with the Calpine losses, compared to $0.8 million for the same period last year.

Adjusting out the Calpine cost and non-cash stock compensation in both periods, G&A was $0.74 per Mcfe compared to $0.89. Net cash provided by operating activities was $91.3 million for the quarter, and capital expenditures were $52 million. This resulted in operating free cash flow of over $39 million. Taking that all the way to the balance sheet, Rosetta ended the third quarter with over $135 million of cash on hand.

We expect to book the impact of the Calpine settlement in the fourth quarter. That will reduce cash by about $97 million, but will leave us in a strong position financially.

On that note, I will also add that we are targeting to keep our borrowing base at $400 million. We are in the process of affirming the base now and will update the marketplace if the situation changes.

We believe our relatively low leverage and strong balance sheet provides a real advantage in the current environment. Randy will talk a bit more about how we intend to maximize this advantage during his upcoming comments.

That's a recap of the financial results for the quarter. While it was a challenging quarter, we are in good shape financially as a company.

Now for some operating highlights. During the third quarter we drilled 41 gross and 35 net wells, with an 88% net success factor. Our year-to-date, drill well accounted 112 gross and 95 net wells, with a success rate of approximately 86%.

We expect our capital spending for the year to be about $290 million, which is unchanged from our budget. This estimate now includes nearly $65 million of property acquisitions for the (inaudible) San Juan Basin and the non-consent property associated with the Calpine settlement.

Next I’ll do a quick tour of the asset areas beginning with California. Production in the Sacramento Basin averaged 14 million a day for the quarter. Our drill bit program targeting intermediate depth in fuel and extension opportunities from the Capay and Martinez got underway and late in the second quarter and continued into the third quarter. This is a continuation of our extension program to the South.

We drilled four wells all of which were successful. Two of the wells were offset to early discoveries, and we continue to try to build an inventory of these lower risk opportunities. In addition, during the quarter, we performed a workover on [typecast], low contract zone that is continuous throughout the field.

The frac is currently cleaning up and we are stuffing other candidates to test over the next couple months. Randy will talk more about this in a moment.

In the DJ Basin we increased our drilling activity during the third quarter. We drilled 18 wells with a 94% success rate. Third quarter production in the Rockies increased 7% from the second quarter and averaged $12 million a day.

Production is up over a 100% compared with same quarter last year. We expect to drill another 18 DJ wells prior to year-end and are ramping up in the San Juan Basin.

In the Lobo area during the third quarter, we drilled 16 gross wells, 13 of which were successful for an 81% success rate. Production from Lobo averaged 48 million a day, which an increase of 2% in the same period last year. We plan to drill an additional 12 wells this year.

In the Perdido area, we drilled one well that was successful during the quarter. Production averaged about 7 million a day, a decrease of 4% from the previous quarter. Our operator has experienced some mechanical drilling problems this year, so the programs is behind pace. However, production is expected to increase from the area with four wells to be drilled in the fourth quarter.

Our non-core properties in Texas State Waters and offshore averaged $11.3 million and $9.6 million respectively. As previously mentioned, these properties suffered storm damage during the quarter. Given that they are non-core to Rosetta, we are moving to divest them as previously mentioned.

That's a quick review of our third quarter operational program. Despite the storm impact, it was a strong performance and keeps us in line to deliver our full year guidance. I'll wrap up my section with a very quick update on fourth quarter guidance and hedging.

With one quarter left in the year, we are on track to achieve our 2008 volume target. Although we expect to be impacted by storm related downtime for about [14] million a day quarterly average in the fourth quarter, we believe that we will comfortably achieve our stated range of 140 million to 150 million a day for 2008.

We expect cash cost for the fourth quarter to be in line with this quarter's results. Somewhat higher workover cost for storm repairs would be offset by lower legal cost, post-Calpine settlement. Depletion, Depreciation and Amortization costs are expected to average 365 Mcfe to 375 per Mcfe.

The company’s hedge position is unchanged. The company has fixed price hedges as follows: 68 million a day is hedged for the balance of this year at an average price of 775. For 2009, 52 million a day is hedged at an average price of 765, along with 10 million a day for 2010, at an the average price is 830.

Additionally, the company has entered into costless collar transactions for 5 million a day for 2008 and 2009 with an average floor price of $8 at an average ceiling price of $10.15.

We’ll continue to monitor the market for additional hedging opportunities, but we believe we have a full complement of hedges at this time.

And now it’s my pleasure to turn the call over to Randy.

Randy Limbacher

Thanks Mike, and good morning. 2008 has been a transformational year for Rosetta. I’m pleased with what we’ve achieved, and I’m looking forward to accelerating our progress as a company post-Calpine.

For many months, I’ve been very clear that our number one priority as a company was to settle the Calpine lawsuit. Not only was it a distraction to senior management, but it was a significant constraint on our ability to execute our business plan. And even though we always considered the lawsuit a frivolous one, we were limited in the extent to which we could execute aspects of our strategy, without knowing the outcome of the litigation.

As of three weeks ago, our number one priority for the year was achieved. Although settlement requires the approval of the bankruptcy at court, we don’t see that as a major obstacle, and we expect to obtain final approval before the end of the year.

I trust you are very familiar with the terms of the settlement which were released to the marketplace on October 22, so I’m not going to repeat them. But suffice it to say, we’re very pleased with the outcome.

For Rosetta, the cash outlay just attributable to the settlement portion will amount to over $12 million to settle $400 million lawsuit. So the cash settlement is less than our ongoing legal cost would have been to defend the suit, in our view a very good payout.

It was a difficult and long process to get to this point, and as you know, there some hiccups along the way, notably the previously mentioned reserved write-downs. These were identified in the course of studying our assets partly in conjunction with the lawsuit due diligence. However, if there is a silk lining in those findings, it is that we are embarking on our next phase as a very clean slate.

And I want to take a moment to thank those of you out there who stuck by Rosetta during the seemingly very long process. We appreciate your patience and support, and I also want to credit the Rosetta team that worked so diligently on this matter. It’s great to get this chapter behind us.

Now that Calpine is resolved, we will proceed to implement our business plan and affect our desired goals. We have greater control on latitude over the critical activities needed to build momentum for our strategy, and we know the question on all of your’s mind is, so where is Rosetta headed and how is it going to get there? Today, we will layout some of the answers to that question.

As we’ve discussed all year, Rosetta has been in the process of shifting our emphasis and strategy toward an unconventional resources business model. Throughout the year, we’ve been on a path to deemphasize high decline rates, conventional programs in the Gulf of Mexico and Texas State Waters, while focusing on building positions and programs in unconventional onshore domestic basins.

Our envision plan is to pursue both organic and inorganic opportunities to meet Rosetta’s criteria for funding, particularly inventory potential, core area focus, and attractive financial returns.

We made significant progress at putting the pieces in place to begin implementing this strategy. We've hired and retained a great team of experienced professionals, we are building our technical and back-office capabilities, and we are actively attempting to build an inventory of unconventional resource opportunities to drive our future.

I'll recall, we said that our goal is to identify and possibly test four to five ideas per year from either existing or new positions. And I want to focus my comments this morning on a review of some of the new unconventional resource opportunities we've identified as well as our capital funding priorities for 2009.

In 2008, we initiated several studies to evaluate and advance organic, unconventional concept scenarios where we currently have assets. While the recent write-downs are disappointing, they mass what we believe is an enviable set of core properties. Our assets are concentrated, improving in prolific hydrocarbon basins like the Sacramental Basin, DJ, San Juan in South Texas.

The goal of our study is to identify possible upside and inventory by analyzing these existing assets through an unconventional resource lens. These assets have multiple pays, but have historically been exploited selectively in only a few targeted zones.

We have high working interest in operatorship and many of these areas, so we have control over technical evaluations and program pace in many of these areas. If our field study and test are successful, we will accelerate inventory generation on existing positions as well as creating advantage and expanding our positions through leasing and Bolt-on acquisition.

Now, I'll go through some of these emerging ideas; starting in the Sacramental Basin. We already mentioned that we have evolved our program away from structural amplitude plays because they were not repeated, it did not yield sufficient inventory.

We have field studies underway to identify additional inventory from the 16 stacked pay intervals. In addition to the lower risk extension program that Mike discussed earlier, we are also undertaking a low-risk workover program using idle wellbores throughout our operations. It’s a very inexpensive way to test new concepts.

We’re initially targeting six sections of low contrast zones that are contiguous throughout the area. The tests consist of re-entering idle wellbores and fracing the hind pipe laminated plays that were not fraced in the past. So the workovers are going to cost us about $500,000 to $700,000 a piece, and we recently completed the first of these frac tests.

Now we are not declaring victory, but we’re very encouraged by the results. We hope to get a few more re-completions tests this year to set up a workover program for 2009. We have over 100 idle wellbores throughout our operating area.

If this program is successful, we have running room on the workover program itself. But as importantly, we could set up later new well drilling programs that target new resource inventory.

Also, in Sacramento Basin as part of the Calpine settlement, we picked up 13 billion cubic feet equivalent and 4 million cubic feet equivalent per day of production, representing a larger interest in our existing fields. So clearly, that was a good piece of business, especially now that we are testing some new concepts, and we will have a bigger share of the upside potential we hope to generate.

So moving to our Rockies area; in the DJ Basin we did studies this year that added about 300 locations to our inventory so far. We should exit the year with no less than 500 identified locations, which represents only a portion of the inventory we believe we could generate based on 40 acre spacing on our 115,000 acre position.

In addition, we have recently completed the technical work and completed initial drilling operations to test 20 acre infill drilling in this DJ basin. If successful, this could prove up significant additional drilling inventory.

So historically, we drilled about 60 wells a year on the DJ, so on that basis, you could see we have several years of inventory ahead of us. And given Rockies differentials, we are not compelled aggressively drill the DJ at this time. But we are very encouraged about the inventory potential we have as well as what could generate from a successful infill test.

Accordingly, we are in the process of permitting up to 270 wells in the DJ for next year. Now we don’t expect that we will budget all of them to be drilled, but our goal is to have the pipeline packed with real locations, so we can scale this program up or down as market conditions evolve.

So we got a lot going on with DJ, including the study of other unconventional resource opportunities from among the multiple plays in the basin. Also in the Rockies areas, we picked up in San Juan about 10 Bcf approved reserves with the second quarter Petroflow acquisition.

We’ve identified another 20 Bcf of upside potential based on 80 acre spacing of infill on the Petroflow properties. But in all, we have about 18,000 acres in the basin. So we think that we have running room and we reinitiated drilling in the early part of the fourth quarter.

In South Texas, we are very hard at work to identify inventory on a sizable acreage position as well as expand into other immerging plays. We have a two rig program planned for the rest of 2008, and we are also in the process of moving a third operated rig to the area.

The third rig will expand Lobo drilling outside of traditional Callaghan Ranch area, and will also test new unconventional concepts. We are continuing to build our position in South Texas. We picked up about 5000 more acres in the Lobo during the second quarter, which brings us to about 80,000 acres for the entire play.

We also picked up about 6000 acres in the Perdido during third quarter to enlarge our position there, bringing our total position in the Perdido to about 15000 acres. And two-thirds of that acreage has rights for other prospective zones that we expect to test going forward.

The new Perdido position will also allow us to operate for the first time in this play, which we believe is an advantage. We also identified opportunities on about 6000 acres outside the Lobo and Perdido plays during the quarter. So in South Texas, we now have two horizontal drilling ideas and one new vertical tight sand program idea to test in the months ahead.

Outside of our core areas, we've sanctioned three land plays during 2008 and new basins of interest for Rosetta. We are still in the process of leasing positions in these plays, which we hope to be able to discuss shortly. In one of these plays we are well down the path of securing a position, and we are waiting ministerial approval for an auction on about 200,000 acres.

Finally, I should mention that we are proceeding with the planned divestment of our non-core, offshore and Texas State Waters program. While we believe these assets have attractive remaining potential, they don't fit the asset criteria for Rosetta. We recognize that it could be a tough market for transactions, but we also believe these assets have appeal to several potential buyers and we've had a number of unsolicited inquiries about them.

I hope that discussion gives you some confidence that we have a number of things going on to generate inventory and develop our strategy. What I find exciting about our resource approach is that, Rosetta is of a size where one or two ideas per year can be very leveraging. Our goal is to have a pipeline of organic and inorganic opportunities at all times. And today I feel very good that we have 4 to 6 ideas that we’ll begin testing starting this quarter.

You can look forward to updates on our asset evaluations, new concept tests and possible new play entry as the next several quarters play out. Putting this all together, I believe we have a lot to show for the year. We moved the ball a long way down the field and I’m enthusiastic about 2009. Given our relatively low leverage and our balance sheet, we are in a very good position to accelerate our story.

Now I want to conclude my prepared remarks with some comments on how we’re thinking about 2009. We are currently developing our capital expenditures budget for ’09. From our prior discussions, I hope it is clear that we have more to fund that we can likely get to.

So, here’s how we are prioritizing; first, we will start with the premise that we expect to live within our cash flow, and at a minimum, we want to hold volumes flat, that would be on kind of a same-store sales basis depending on the divestiture success.

We think this may be somewhat differential, especially for companies our size, given the level of capital cuts we expect many will take. So at gas prices of about $7 per thousand or higher, we believe we can generate sufficient cash flow to not only maintain production volumes at current levels on or around 140 million a day, but fund the additional identified organic inventory ideas that I discussed earlier.

So to recap, these new concept tests will include two infill tests, that’s for DJ Basin on 20 acre spacing and San Juan on 80s; a Sacramento basin tight sands workover program, and horizontal wells in four new plays, three of which are in South Texas. This represents significant new upside potential for Rosetta, if only a portion of it works.

If prices are higher than $7 per 1000, we have the option to drill more DJ, which we hope to have permitted in advance or to accelerate our new concept ideas depending on the success of any of these initial tests.

I should also add, that we will continue to evaluate inorganic opportunities which depending on size, we can fund with our existing cash, our balance sheet or through sale proceeds. It would be remiss of me not to acknowledge that we’re operating in one of the most challenging business environments in recent history. Clearly, there are many factors that are adversely impacting the business environment.

While we intend to be prudent and cautious, we also believe that this is our time to differentiate our company in the absence of the Calpine overhang. All of us are very optimistic about the path we’re on, and look forward to updating you on our programs throughout 2009.

With that I will turn the call back to the moderator, and we’ll now take your questions. Moderator?

Question-and-Answer session

Operator

Thank you. The question-and-answer session will be conducted electronically today. (Operator Instructions). And we’ll take our first question from Neal Dingmann from Dahlman Rose.

Neal Dingmann - Dahlman Rose & Co.

Good morning guys.

Randy Limbacher

Neil.

Neal Dingmann - Dahlman Rose & Co.

Say, question on the Rockies first. It looks like I know it says last Friday that pricing that I was seeing was roughly around $4 at those levels. Wonder what you're seeing as far as the realized price, are you shutting anything in and what are the plans for the remainder for the year.

Randy Limbacher

Yes, I mean we are seeing the same thing you are. We are not shutting anything in currently. I mean starting and stopping these things don't make a lot of sense. A lot of it is tied to we think to [shoulder] month activity. Going forward, again this is one of those areas that we would probably swing off of.

So we are going to have drilling permits in place for 270 or so wells, but probably would start out due to the differentials you are seeing at much lower levels than that and again be willing to adjust depending on what prices actually do and what's signal we get throughout 2009.

Neal Dingmann - Dahlman Rose & Co.

Got it. Then there was some in the latest conference call one or two year periods, in that DJ mentioned that they were seeing somewhere around 76% success rate to [size] down a little bit, definitely a little bit lower than what we've seen historically. What kind of success are you currently seeing and what do you expect there?

Randy Limbacher

John, do you have this quarter's number on the..

John Clayton

DJ, I recall it's been pretty strong but ..

Randy Limbacher

We have John Clayton to answer.

Neal Dingmann - Dahlman Rose & Co.

It's historic by (inaudible) that's real strong, so that's why I asked.

John Clayton

Yes, we've been fairly successful out there. Just for the specifics, in the quarter, I believe we drilled 18 wells, 17 of the 18 were productive. We are in a very good position, the basin. We've got significant technical coverage over the areas we are in, and what we've been successful in is actually taking some of the lower resistivity pay, changing our stimulation techniques and making that commercial. And that's driven our success rate up.

Neal Dingmann - Dahlman Rose & Co.

Okay. Two more questions. I guess I was a bit surprised on the production guidance. Would you consider it a bit conservative for next year, given, you mentioned Randy, on the structural amplitudes in the Sac Basin plus all the additional locations in the DJ. Just wondered, is all that upside going to be up just offset by decline, or just wondering sort of your thinking behind the flat anticipated production year-over-year.

Randy Limbacher

Well what I’d say is, we've probably haven’t given guidance yet. What we’re talking about is that this is kind of a minimum. So, what’s our starting point is that we think even in a $7 world, we can generate a capital program that will at a minimum allow us to stay flat. If we see higher prices than that, then we would be willing to ramp up our program in the DJ or based on any successes that we saw in these other areas.

And we also would look at acquisition opportunities if they present themselves. But we’ve got a lot more opportunities to fund than we probably plan as a starting point. So, we kind of view that as a baseline.

Neal Dingmann - Dahlman Rose & Co.

Okay. And then last question. Let’s assume the minimum hits, just wondering maybe a question for Mike as far as LOE and/or G&A on a sort of margin basis. If in fact that production was rather flat, would those stay at about the same levels or would we see them maybe move down if you have now the personnel that you need?

Mike Rosinski

I think that you should expect that for next year, we’re going to be comparable to what you saw this year. You might see a modest increase on the LOE side, you might see a modest increase on the G&A side. Again, we have Calpine behind and obviously that’s going to help.

But I do believe that to the extent that Randy made the point about production being flat at a minimum to the extent that we do see some ramp up, you may see some improvement on a unit basis on the G&A side. But don’t look for major changes going to next year.

Neal Dingmann - Dahlman Rose & Co

Okay. Thanks guys.

Randy Limbacher

Thank you, Neil.

Operator

And we’ll take our next question from Joe Magner from Tristone.

Randy Limbacher

Hey Joe.

Joe Magner - Tristone Capital

How are you doing Randy? Congrats on getting that lawsuit behind, I am sure you guys are looking forward to spending your time on better things?

Randy Limbacher

Yeah, I agree.

Joe Magner - Tristone Capital

Just a few questions; any specifics on the production for the quarter on Gulf of Mexico, as well as the Texas State Waters? I think the balance with production was in there from the other regions; I am just curious whether that’s good?

Randy Limbacher

Yeah. I am going to let Jim Craddock address that for us.

Joe Magner - Tristone Capital

Good morning, Jim.

Jim Craddock

Yeah, I guess just a little bit of granularity on the production for the quarter. Obviously the big impact is the one that has been mentioned, about 9 million a day of storm impact in the quarter. We finished the quarter at $140 million a day.

Overall what we see is a little bit lower production in the low [boat], that’s a well timing issue. We had a new lease, after the courts' lease that we completed a number of wells during the third quarter. Due to some issues with mineralogy we delayed the fracs one as well. So there is the (inaudible) well un-stimulated and those fracs are delayed. So the timing issue, we'll get those stimulated on line in the fourth quarter.

And then California, we mentioned in our second quarter call that we delayed some activity there, and so we were about a 40 million a day in California, and so that’s down a bit quarter-over-quarter, and that’s just due to a delay in the well timing. We've drilled as was mentioned four wells out there. They are kind of difficult well timing and that we got it across the river, and so they will be coming on probably late in the year.

Joe Magner - Tristone Capital

Okay. And then I guess then the CapEx budget. Correct me if I am wrong, I didn't think non-consent property acquisition expense were in the previous budget; and if that's correct and may be it's not but, where we are seeing the other changes perhaps in some of the '08 plans or expectation?

Mike Rosinski

Joe when we set up the '08 plan, we had a base capital for doing our development program which was around $210 million. We have another 80 that we kind of unallocated and primarily for exploration and new opportunities. And as we worked our way through the year, again you recall, we did the Petroflow acquisition in the second quarter; that was about $30 million.

And as we moved again towards the end of the year, we saw if you will, running room, the Calpine transaction is a $32 million deal for those non-consent properties. In effect, we saw the opportunities to the extent that we had not allocated the exploration side of our original budget, to in effect all that Calpine non-consent transaction a long way of Petroflow into our budget.

Those two combined, $60 million against 290, and again we had 210 or so base development and then we had a [mass] amount of dollars for exploration type opportunities.

Randy Limbacher

It's about $20 million on new lands and new play entries.

Joe Magner - Tristone Capital

And then lastly I had, there were some discussions about the reserve review taking place on a portion of your properties. Can you provide any detail on what portion has been looked at so far and what the outstanding review might entail?

Mike Rosinski

Sure, Jim you want to take that.

Jim Craddock

Sure. As we previously announced, one of the key areas that this revision impacted was the Emigh and Hamilton zones in California. We initiated some review work internally, as part of our resource assessments with our asset teams. In addition, we had some focus on these assets as a result of the Calpine lawsuit. That drove us to task Netherland Sewell to take a look at those properties this summer, and we got those results back in mid-October.

Basically, the Emigh and Hamilton are low pressure zones; they are probably the most prolific zones in the field. But the reservoir pressures are down in the 150 to 50 PSI range. There was about 31 Bcf of undeveloped reserves related to those two zones, and the main problem that Netherland Sewell and we saw was that those reserves required capital investment, either workovers or more prominently drilled wells to access the reserves.

With the low pressures in the reservoir, we've been observing unconsolidated sands and difficulty getting efficient completions. So for that reason, we felt it was prudent as well as now been sold to remove those reserves from the [proof] category, but basically we just moved into probables.

So, we’re going to keep working on the technical challenges associated with getting those completions, but we felt like it was probably reasonable to move them to probables. So that’s the story on Emigh and Hamilton.

We said there were some revisions in other properties including the Lobo. In the Lobo, each year we take a look at the performance year-to-date, as well as look back at prior years. In the course of doing that we took a look at average ultimate recovery from the drill program there.

Felt it was prudent to modestly reduce the EURs for the [PDD] wells going forward. And so we’ve made that change as well. We reduced it from Bcf per well to 0.7 Bcf per well. So that’s embedded in the revision as well.

Joe Magner - Tristone Capital

So the percent review [began].

Jim Craddock

I think. So, as far was percent review, if you just take Emigh and Hamilton and Lobo and look at that, that’s about 50% of our proved reserves. However, we’ve done a lot of internal work as a result of the all the intensive focus our assets teams have been doing on the different assets.

We feel like even though there is still quite a bit work for Netherland Sewell to do, they won’t be finished until year-end. We feel pretty good about the rest of the assets. So when we provided the range, the intent was to give everyone a range that encompasses what we felt like the exposure was.

Joe Magner - Tristone Capital

Thanks, Jim.

Operator

(Operator Instructions). And we’ll go next to Mark Lear from Sidoti & Company.

Mark Lear - Sidoti & Company

Good morning, guys.

Randy Limbacher

Hey Mark.

Mark Lear - Sidoti & Company

To listen to what some of your competitors have being saying about shale discoveries not too far from your areas. I was just wondering if you guys might have any exposure to the Eagle Ford or [Pearsol] or any of those current opportunities.

Randy Limbacher

What I would say is that, in that area we are very actively leasing and otherwise, since we've probably taken that about as far as we want, but we have one shale idea, we have the Perdido the horizontal idea, and then we have one tight sands horizontal idea. Those are the three ideas, and so we are kind of being careful about where.

Again these are untested and we are still accumulating lands, but there are actually several shale ideas in the area with the Eagle Ford just being one of them.

Mark Lear - Sidoti & Company

But does it extend it all down to your, I guess legacy, Lobo, Perdido, acreage at all or this would all be new acreage?

Jim Craddock

If you’re referring to like our Callaghan Ranch and Schwarz Rottersman area where Perdido is; if you look at the public regional maps on the Eagle Ford, it doesn’t quite get to those lease positions that we have. But the entire South Texas area is an area that's quite a bit of potential of unconventional plays and we are ripping apart all of them and practically leasing, like Randy said in three of them.

Mark Lear - Sidoti & Company

Gotcha. Thanks guys.

Randy Limbacher

Thanks Mark.

Operator

(Operator Instructions) At this time, we have no further questions in the queue. I would like to turn the conference back over to Mr. Randy Limbacher for any additional or closing remarks.

Randy Limbacher

Well, thank you. Again, I appreciate everybody's interest today. And we are going to be around if you have any follow up questions. So we look forward to [visiting] with you in the future and updating you on our progress. So again thanks for calling in.

Operator

And this concludes today conference. We thank you for your participation.

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