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Executives

Larry D. Pinkston - CEO

Brad Guidry - Sr. VP of Exploration

David T. Merrill - CFO and Treasurer

Analysts

Marshall Adkins - Raymond James

Pierre Connor - Capital One

James Rollyson - Raymond James

Andrew Coleman - UBS Securities

Unit Corporation (UNT) Q3 FY08 Earnings Call November 4, 2008 11:00 AM ET

Operator

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

This conference call contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act. All statements, other than statements of the historical facts including in this call that address activities, events or developments that the company expects or anticipates will or may occur in the future are forward-looking statements.

A number of risks and uncertainties could cause actual results to differ materially from these statements, including the productive capabilities of the company's wealth, future demands for oil and natural gas, future drilling rig utilization and day rates, the timing of completion of drilling rigs currently under construction, the ability to contract new rig additions to its fleet, projected additions and date of service to company's drilling rig fleet, projected growth of the company's oil and natural gas production, the ability to meet its consecutive quarterly positive net income goals, oil and gas reserve information as well as the ability to meet its future reserve replacement goals, anticipated gas gathering, and processing rate and throughput volumes, the prospective capabilities of the reserves associated with this company's inventory of future drilling sites, anticipated oil and natural gas prices, the number of wells to be drilled by the company's exploration segment, development, operational, implementation and opportunity risks. And other factors described from time-to-time in the company's publicly available SEC reports. The company assumes no obligation to update publicly such forward-looking statements, whether as a result of new information, future events or otherwise.

Mr. Pinkston, you may begin your conference.

Larry D. Pinkston - Chief Executive Officer

Thank you, Kevin. Welcome everyone and thank you for calling in the Unit Corporation's third quarter 2008 conference call.

With me today, are David Merrill Unit's CFO; Brad Guidry, our Senior Vice President of Exploration for Unit Petroleum, John Cromling, our EVP of Drilling Operations and Bob Parks, President of Superior Pipeline Company.

We released our third quarter report to the public this morning. I'll spend a few minutes recapping Unit Corporation's third quarter and year-to-date results versus 2007. Brad will provide details for E&P operations. David will discuss, key financial facts and figures, and he will also provide you with our unit drilling and midstream operations. We'll take questions after our comments. Before I begin to talk specifically about third quarter results, I'd like to cover just a few points.

The company is on very good fitting, operationally and financially. We will set several new milestones for Unit 2008. And while, I'm less certain about how 2009 will turn out, I do know we have the experienced people and the assets to whether just about any storm.

As many of you know, we have always had a strong emphasis on our balance sheet. This industry has always been volatile, sometimes more volatile than others. This current cycle we seem to be headed into the primary reason, we have always stressed the low debt, maintaining our low cost structure and diversity among our three business segments.

This strategy avails us more flexibility during these cycles, and hopefully allows us to exit this cycle with a stronger and even more efficient operation. Although many of you are very focused on the overall markets, we are too. But we're also very focused on all components of our operating segments. Third quarter was a very good operating and financial quarter for all the units businesses and for our shareholders. Unit Corporation's third quarter revenues of $375 million were an all time record and 31% stronger than the third quarter 2007.

Despite problems associated with hurricanes Gustav and Ike, and commodity prices have dropped quickly as the quarter were on. We recorded 2% more revenues this quarter than in the second quarter of 2008 and 17% more revenues than the first quarter of 2008.

Quarterly net income of 92.3 million, was the company's second highest recorded net income figure and was 44% higher than third quarter of '07. Net income per diluted share of $1.96 was higher about 43% compared to the same quarter of last year. For the nine months ended September 30, 2008 net income was $5.61 per diluted share or 35% better than $4.16 per diluted share recorded for the same period in '07.

The nine months per share figure is only $0.10 less than our full year 2007 net income per diluted share of $5.71. Cash flow from operating activities for the third quarter of 2008 which is a GAAP calculation was $204.7 million, an increase of 27% from the second quarter of 2008. Corporate CapEx including acquisitions for the quarter was $348.8 million.

EBITDA for the third quarter of 2008 was $209 million up from the $152 million posted in the third quarter of '07. Year-to-date 2008 EBITDA was $597 million or 33% higher than the 2007 EBITDA of $449 million.

During the third quarter we were forced to shed in approximately 400 MMcfe in production as a result of damages caused by hurricanes Gustav and Ike. The damages where the third-party operated pipelines processing plants. Without these shut ins our production would have been 16.3 Bcfe, a 2% increase over the second quarter of 2008 and a 16% increase over the third quarter 2007, this shut in production was back on line early in October.

Year-to-date we produced 46.6 Bcfe, 16% more than the 40.1 Bcfe produced during the first nine months of '07. In the last few days, our stock prices for mid-continent gas has being very weak, primarily as a result of the natural gas storage facility reaching near capacity and the lack of heating demand.

The stock price for natural gas in some cases in the mid-continent has dropped to less than $2 in Mcf. In certain situations we've been shutting in gas production rather than selling at these process. Although, this has not been a significant amount of gas production, thus far we may continue to shut in gas in the fourth quarter.

We still believe at this point a subject to these project shut ins not continuing, we have made our annual oil and gas production guidance of 62 to 63 Bcfe, a 13% to 15% increase over '07. Because of the weaker natural gas process, we reduced our anticipated exploration CapEx budget for the fourth quarter about $32 million to $438 million for the year. We now expect to drill approximately 275 wells for '08.

This is a good time to turn the call over to Brad, to discuss the E&P Groups highlights some fourth quarter plans.

Brad Guidry - Senior Vice President of Exploration

Good morning. The number of gross completed wells during the third quarter increased 14% over the second quarter with 82 new wells being completed for an 89% success rate. Through September, we have completed 211 gross wells and 103 net wells. We have 29 additional wells in various phases of drilling or completing. We anticipate in completing about 270 wells at year-end, which would be 8.7% increase over 2007. Here are some of the operational highlights.

Our Granite Wash and Morrow Play in the Texas Panhandle has been our most active drilling area in 2008. Net daily production for the third quarter 2008 increased to an average of 19.4 million cubic feet of gas equivalent or 10% increase as compared to the second quarter of 2008 and 131% increase as compared to the third quarter of 2007. We have continued that growth into October and achieved the company record net daily productions averaging 21.6 million cubic feet gas equivalent for the month. This is an 11% increase over the third quarter of 2008 average. We have first GAAP sales on 10 Granite Wash wells during the third quarter, and had drilled our first horizontal Granite Wash well. We're scheduled the fracture stimulate the horizontal well next week.

Prior to the GAAPs decline, we have five unit rigs working with claims to add six rig in December. We have modified that plan to run four unit rigs through the fourth quarter and reevaluate our plans for 2009 at the end of this year. We now anticipate drilling 43 Granite Wash wells in 2008 and an approximate net cost of $71 million. We have continued to increase our undeveloped to leasehold position and in the Granite Wash Play by adding 15,000 net acres during 2008, which should allows to maintain our drilling program into the future years.

And our Segno prospect area located in the Texas Gulf Coast, we have continued to increase our leasehold position in this Well COGS Play during the third quarter.

Our total acreage position in the Segno area is now approximately 85,000 gross acres and 66,750 net acres, which represents 5% increase over the second quarter of 2008. We are also actively pursuing several additional potential prospect areas along trend with our current Segno area. Three wells have been drilled in our Segno West extension area located adjacent to our Segno area.

One well is completed as a flowing oil well at approximately 100 barrels oil per day. And the other two wells appear to be productive from well logs and our waiting completion. We expect to drill 16 wells in 2008 between the Segno and Segno West areas at a cost of approximately $55 million net. Currently we have one unit rig drilling and plans to add a second rig in mid November.

Our Panola Field in Southeast Oklahoma, we have focused our 2008 drilling on low risk development wells, while testing deeper horizons and exploring for new production along the productive trend. Today, we have drilled eight gas wells and have two wells currently drilling. At the end of these two drilling wells we plan to temporarily delay any further drilling in Panola Field until well cost and oil and gas prices improve for this region.

To the East, the Panola Field our expansion area of the BP items number one well which we own 50% have steps to gas and is waiting on the gas pipeline to be completed. The well tested at a rate of 8 million cubic feet a day with 345 flowing pressure at the end of the two hour test before the well was shut in. We anticipate the well will be on sales by mid November to better test the productive capability of this expletory test.

The second phase of the 3D-seismic acquisition in the Panola expansion area should be completed this week and we anticipated having data by the end of 2008. Both through 3Ds that have been shot out there will be merged together would be available in summer of 2009.

As we talk about the Shale Plays... in the Marcellus Shale Play with continued increase our leasehold position and our initiating plans to begin the test this new acreage by drilling.

Our current plans are to expose approximately $50 million net to the Marcellus Play for leasehold acquisition. The leasehold will be divided between several different core areas will be approximately 200,000 gross and 55,000 net acres. We expect to drilling the commence on the Somerset County Pennsylvania block in January of 2009.

We plan to drill three vertical wells to test the Marcellus Shale and the Oriskany Sandstone and may drill three horizontal Marcellus Shale wells off the same path. In Wyoming County Pennsylvania drilling is expected to commence on two to three vertical tests in the first half of 2009.

In East Texas, we're currently testing our first vertical Bojer Haynesville well located in Shelby County which we own 60% working interest.

Sample number one is testing gas on an encouraging rate of 700 Mcf a day with 2,350 pounds of flowing casing pressure and we expect to have first sales on this well in early December. We're also near total depth on a second vertical Bojer Haynesville well in the same prospect area.

After evaluation of these two wells will formulate a drilling plan for that play that will most likely include horizontal drilling. We now have approximately 30,300 gross acres and 15,500 net acres in our core Bojer Haynesville areas in Shelby and Harrison counties Texas.

In addition, we have also recently acquired leases of approximately 15,000 gross acres and 3,700 net acres in Ross and Cherokee County Texas which is currently unproven but potentially perspective for the Haynesville Shale.

We're making plans to drill this acreage in early 2009. And the accommodates in the South East Oklahoma we're continuing to test our initial horizontal Woodford Well. The Crissure number 5H 12 well was currently producing at 450 Mcf a day and 280 barrels of load water per day.

Artificial wafers is being evaluated to help recover more of the 40,000 a barrels load water that is still remaining to be recovered with expectation with increasing the gas rate.

We're also drilling a second horizontal Woodford Well in a different area within the Arkoma Basin. After these two wells, we plan to temporarily delay the drilling of additional Woodford Wells pending the results from these two wells and an increase in the current gas prices.

In conclusion, we're pleased with results attained in the third quarter in the long-term outlook for our exploration and production program. However, during the fourth quarter we plan on delay drilling of some wells primarily in the mid-continent region until there is a combined improvement in our realized gas price and our significant reduction in drilling cost.

I'll now turn the call back over to Larry.

Larry D. Pinkston - Chief Executive Officer

Thank you, Brad. In our drilling segment, the third quarter was a great quarter. Our regularization increased from 105 rigs in the second quarter to 111 in the third quarter, a 6% increase. Our average day rates increased $754 a day to 18,600. Average, but more importantly our average operating margins increased $975 a day at 12% to 9300 and $14 a day.

As a result of a recent decline in natural gas prices in the turmoil with the credit markets, we received notifications from several operators if they would want to delay drilling wells beyond the well the rig is currently drilling. We received these notices on 16 of our drilling rigs. Thus far, we have contracted four of those rigs with other operators.

We previously announced plans of adding 11 additional newly built drilling rigs. The parts of those rigs is currently moving to its first well site in the Bakken, the second rig is near completion as scheduled to be working on our Rocky Mountain division. For the remaining nine rigs, we have suspended the construction of the one rig that our exploration segment was planning on using, we are currently having discussions with our customers on the additional seven rigs as to the possibility of substituting under the contracts one of our existing drilling rigs. It is purely yet to determine how many of the seven additional rigs that will be postponed.

We will still have the major components of the rigs that we defer construction in inventory, in order to react quickly as demand returns. We will finish the year with 132 rigs in our fleet. In our midstream segments, we continued to achieve strong and operational and financial results for the third quarter, moderated somewhat by the effects of the hurricanes.

Third quarter liquid volume sold was up 46% from the third quarter of '07 that flat to 2008 second quarter. During September, liquid production was curtailed by approximately 1 million gallons due to the effects of the hurricanes on the Gulf Coast liquid speculation of petrochemical facilities.

Entering the fourth quarter volumes processed and liquid gallons recovered are back to pre-hurricane levels, although there is a much lower price levels. We have successfully completed construction and startup for the new 20 million cubic feet per day processing plan in the Texas Panhandle construction of a new gathering system in the mid-continent commenced in the third quarter, the start of schedule for the fourth quarter.

Two additional mid-continent gathering systems and plant construction projects were in the final stages of negotiation and we are optimistic these negotiations will reach its successful conclusion. Business development efforts in Appalachian directed from our Pittsburg Pennsylvania office continue to perceive with multiple pipeline projects being evaluated. Most of these projects involve Marcellus Shale Plays, the CBM and other traditional production horizons are included in these efforts. Superior is on track to achieve 48 million in capital expenditures in 2008.

We'll now turn the call over to David Merrill, our CFO to cover the financial highlights.

David T. Merrill - Chief Financial Officer and Treasurer

Thank you Larry and good morning everyone. EBITDA for the third quarter of 2008 was $209.5 million, essentially unchanged from 294...$209.4 million in the second quarter of 2008 and an increase of 38% from $151.8 million in the third quarter of 2007. With the third quarter of 2008 the oil and natural gas segment contributed 56% of EBITDA. Contract drilling contributed 40% and midstream 4%.

EBITDA for the quarter was consistent with the second quarter as I mentioned earlier. In spite of the 2% reduction in equivalent daily production volumes, a 7% decrease in equivalent Mcf price received and a 5% increase in operating cost for Mcf in the petroleum segment. A 5% and 1% decrease in gas gathered and liquid sold per day volumes respectively in the midstream segment and those decreases were offset by a 12% increase in per day operating margins for the contract drilling segment.

Our capital expenditures for the operating segment, excluding acquisitions for 2008 are estimated to be approximately $659 million, $32 million less than the $691 million budget we had discussed last quarter. The decrease comes from a reduction in fourth quarter drilling activity and the petroleum segment as discussed earlier in the call.

Larry previously discussed, third quarter day rates and margins for the drilling segment and some operating results for petroleum segment, I want to highlight our third quarter 2008 to second quarter 2008 expense trends.

Contract drilling operating cost per day for the third quarter of 2008 decreased 2% or $195 per day from the second quarter of 2008 to $8,034 per day. Late in the third quarter we had a labor increase for recruit personnel of approximately $450 per day which will be fully recognized in the fourth quarter.

Petroleum segment operating costs per Mcf equivalent before production taxes and work over expense was $1.22. Operating cost per Mcf equivalent were negatively impacted by the 400 million of production that we shut in due to the hurricanes as previously mentioned.

Adjusting for loss production from the hurricane's operating cost per Mcf equivalent before production taxes and work over expense would have been $1.20. Basis differentials in the mid-continent have been very large on the negative side, even with reductions in NYMEX prices from the high teen during the second quarter.

For the third quarter of 2008, basis differentials for our natural gas production averaged a $1.53 reduction from NYMEX, approximately 70% of our natural gas production is delivered at Center Point East and Panhandle East were differentials averaged to $1.97 reduction from NYMEX during the third quarter of 2008.

The basis deferential issue persists and for the month of October the average was a reduction from NYMEX of $2.71 overall and averaged $3.59 for natural gas productions delivered at Centre Point East and Panhandle East and is not yet showing signs of improving.

We have had approximately 35% of our third quarter 2008 average daily natural gas production for the balance of 2008 and for calendar 2009. And we have hedge 75% of our third quarter average daily crude oil production for 2008 and 15% for calendar 2009. More detail on our hedges is our form 10-Q being filed with the SEC today.

The effective income tax rate for the third quarter for 2008 is unchanged from the second quarter at 37% and as well we currently estimate for the year, the percentage of tax expense to be to deferred decrease from the second quarter primarily due to expected lower intangible drilling cost and we currently estimate the deferral rates for the year to be approximately 73%. Unit has a debt to capitalization ratio as of September 30, 2008 of 8% with $148 million in long-term debt outstanding. Unit's credit facility matures in May of 2012 and the borrowing base associated with our credit facility is $500 million based on the re-determination by our bank group completed just a few weeks ago on October 15, 2008.

The borrowing base reports the full $400 million facility in place however, in order to say commit these charges we have elected a current commitment amount of $275 million. Our working capital at the end of the third quarter was $36.9 million.

Kevin, we would now like to turn the call over for a question.

Question And Answer

Operator

[Operator's Instruction].Your first question comes from the line of Marshall Adkins. Your line is open.

Marshall Adkins - Raymond James

Good morning, guys. Couple of quick ones here. Your costs as you've mentioned Dave were lower sequential in the drilling side. Help me to understand where you see those going, and you mentioned a few things, I really didn't understand it. So, you might have to dug it down for me. Where we see those cost going Q4, and really more into '09. Likewise we've seen the rig count rollover a little bit. What do you see in kind of Q4 for the rig count, are we already started to see it pull back, pretty sharply already, we thought it maybe another month or two before you'd see it?

Larry D. Pinkston - Chief Executive Officer

Well, Marshall this is Larry. Yes, indications of our rig counts pulling back, I mean we've had these 16 rig or so that... we've been notified that there weren't be moving for the next well. Those will be, being stacked out over the next 15 or 20 days. And that have to move very quickly, so quickly that we haven't had time to pull out it. Market those rigs as quickly as it comes off. The cost side of the structure. I mean the payroll increase came through in the third quarter, most of that was taken in the fourth quarter as cost comes down, I mean as fuel cost comes down, even though we don't take fuel on the rigs. But, I mean we've drive a lot of miles and pick-ups and those kind of cost structure are going to be coming down, also they're not going to come down to offsets the increase that we had in the payroll. But... so most of the pay increase we had at the end of third quarter will stick. In the fourth quarter, depending upon day rates due payrolls, it goes up and goes down. But...

Marshall Adkins - Raymond James

Is your sense of that 16 rig so far that you've been notified. Is it more credit-market driven or is it gas price driven, or is there anyway to tell?

Larry D. Pinkston - Chief Executive Officer

It's more of gas price driven; I think it is the biggest question. We've been in this environment for the last 20 days and the basis are really flowing out in the mid-continent area. It got quite a bit, quite a few people's attention. If you look out into '09, the basis differential if you can lock in today and some around... somewhere around above twenty [ph] and if you can lock in on that mix price calendar '09 about $7. So markets, telling us if that's temporary basis blow out that you guys obtained into the lot of and [ph] you don't believe this temporary. But I think most the problem we're seeing that now, Marshall is, the huge differentials that we're seeing in probably Texas Panhandle in the markets.

Marshall Adkins - Raymond James

Well, that implies maybe you're thinking about putting more hedges certainly basis differential hedges in place, is that... will that be fair or you're kind of keeping this one-third of your production type?

Larry D. Pinkston - Chief Executive Officer

I think what you'll see as going up a little higher on the hedges. One of things that we're doing this year that not done in the past as we're looking at just to basis. We still believe very confidently and the NYMEX pricing for whatever reasons going through right now and they'll call a bit but if we can lock in a basis differential above 20 for '09, that's not a bad place to be.

Marshall Adkins - Raymond James

All right, last question, I'll turn it over to someone else. You gave us a lot of good detail on what you've lowered your E&P CapEx in '08 and the well count in '08 and you're still looking at pretty robust production growth.

Looking into '09 I recognizes it thoroughly and a lot of things could affect that but where do you see the CapEx and the well count going in '09?

Larry D. Pinkston - Chief Executive Officer

Well, we'll do the same thing this year that we've done for the last 15 years, partial or more than that. We'll take a look and that what our expected cash flow is going to be for '09 and then we'll build our budget around that.

And we will be putting our budget together in the next, over the next 15 to 20 days and yes we'll start off the year under premise which we can adjust as we've done twice this year.

Up and down, we can adjust it as the year progresses but we'll start off with what we think our cash flow is going to be and go from there.

Marshall Adkins - Raymond James

Fantastic, thanks guys.

Larry D. Pinkston - Chief Executive Officer

Thanks Marshall.

Operator

[Operator Instructions]. Your next question comes from the line of Thomas Escot [ph]. Your line is open.

Unidentified Analyst

Good morning fellows.

Unidentified Company Representative

Hi, Tom.

Unidentified Analyst

If you renegotiate those separate new bills with the customer, since you wind up putting them into an existing piece of equipment and you don't spend that might have built the new bills, would you save $100 million is that kind of delta for CapEx next year?

Larry D. Pinkston - Chief Executive Officer

Well it depends on how many of those contracts were able to do that. To build out the rigs from the port we are at now, you look in the range from $6 million to $9 million per rig depending on where that rig was supposed to end up there. We're pretty much top on those rigs where we are right now. So you'd be looking at $6 million to $8 million, $9 million of savings per rig. It's still too early to have a good feeling as to how many of those rigs, it won't be... that will be deferred and we'll have a better handle on that over the next couple or three weeks.

Unidentified Analyst

Now, you're able to build new bills for $6 million to $9 million not 12...

Larry D. Pinkston - Chief Executive Officer

No, I wish I could say that. But, the major components of those rigs will go ahead and take those major components and we'll have in the neighborhood of $3 million to $5 million and those major components again depending on where those rigs where, we're going to end up at and we will still, will take delivery of those components and have them in inventory. So, we'll have the six or nine month delay when the demand picks back up again to go out and build out the rigs. But the $6 million to $9 million is an addition to the $3 million to $5 million that we already have in the rig.

Unidentified Analyst

And there your attention then is to, if you have... like a three year contract for one is new bills is just to put that customer into an existing piece of equipment for another three year deal.

Larry D. Pinkston - Chief Executive Officer

Yes. Most of the contracts we have are most of them were two year contracts and our plans would be to take some existing equipment that we consider could become available under those in our fleet. We will be able to just walk those rigs out in the new contracts and the contracts stand as they are I mean it's you're going to have to give the operator something for doing that and where there it's on the day rate side or on the term side or combination of both. I'm confident that our customers thus far received the information pretty favorably. If there is existing equipment, so they can drill wells cheaper with. It does a lot for customer relations and et cetera, et cetera and saves us the CapEx money over the next six months.

Unidentified Analyst

So the transaction is same near the CapEx money then is it fair to say that this should help you try to hold the line regularization, 75%, 80% hopefully not really crunch below that type of thing?

Larry D. Pinkston - Chief Executive Officer

In any of those rigs, we're having those swap out that would help us on the rig utilization percentage side mostly from them.

Unidentified Analyst

Okay, thanks.

Larry D. Pinkston - Chief Executive Officer

Okay, thanks Tom.

Operator

Your next question comes from the line of Pierre Connor. Your line is open.

Pierre Connor - Capital One

Good morning, gentlemen. First question on the acquisition opportunities on rigs and that you're slowing obviously that potential new bills. So you did not in appetite to add at the moment. What do you see give it six months out things stayed kind of choppy. Is there anybody left out there that could become a little more desperate, or is it been enough consolidation that's not a real high potential area?

Unidentified Company Representative

Well on the E&P side I think we're going to see a lot more of opportunities maybe not for company acquisitions as much as joint ventures on existing lines, where they need some help to develop out those plays or those programs, ballparks [ph] is very optimistic about a lot of good properties becoming available, on the midstream business, on that... that capital is not going to be nearly as available in the industry where those pipeline positions that has been in the last couple of years.

And we think we'll see a lot of good properties there. On the rig side we're always on the outlook in our appetite for used equipment as I would say, we're not aggressively pursuing that by any means but, that might be some equipment coming along with rough price.

Pierre Connor - Capital One

Sure. Okay. I had a quick follow-up for Brad actually. A lot of good information there and we're just going fairly quickly. Want to just ask you again about your Haynesville well. So, that's a vertical well as I appreciate it. That is you're currently testing it and did you give us a rate on that, Brad?

Brad Guidry - Senior Vice President of Exploration

Yes. The rate we have here was 700 Mcf a day and 2,350 tons of a flown in case in pressure. It's early in the test right now. We think very basic calculation would probably put that up around $2 million to $3 million on a open floor calculation.

Pierre Connor - Capital One

Okay. And do you unloading fluids on that yet but still I mean this is very early, yes.

Brad Guidry - Senior Vice President of Exploration

It's about a week into it and yes, it is still unloading fluids. But we think the task we're seeing, it's been fairly stable.

Pierre Connor - Capital One

Okay.

Brad Guidry - Senior Vice President of Exploration

Likewise won't be in there for about another four weeks. So we had in on a pretty small choke here just to conserve the gas and when we test it here probably from another four five days and then we will be shut in wait for hook-up. And the second well is within that same prospect if that 3D, we'll probably login it here in the next week. And we'll attempt the same completion in that well and really based on what we see from those we'll look at a program that most likely includes some horizontal drills.

Pierre Connor - Capital One

Okay. Can you tell us a little bit about your completion technique in that well?

Brad Guidry - Senior Vice President of Exploration

We factored... we put about 120,000 pounds that actually screened out. We're trying to get more over 300,000 pound into. But it did screen out I mean it's the single stage frac when really indicating fancy.

Pierre Connor - Capital One

Okay.

Brad Guidry - Senior Vice President of Exploration

This is the initial test and there is certainly this is on a prospect that we have about 10,000 acres around there so. Well as move on down the road we'll certainly try to be a little more specific about of what we're doing at the completion techniques that we will attempt.

Pierre Connor - Capital One

Okay. Back over to Panola actually. So make sure I understand that the 3D-seismic that's for the expansion you expect to get the data in by the end of the year and then you get a merge of the existing will you look --

Brad Guidry - Senior Vice President of Exploration

Kind of what happened there is our whole East area was a very broad area and as you go to the further Eastern part of the block it had a lot of federal acreage in there which the permitting took longer than we expected, both the shoot and to two different parts and we've finished the shoot on the Western part of that expansion area last year. And then, we'll gift a date on the Eastern part of that data at the end this year and then those two datasets will be merged.

That's BP Adams well we talked about it's really the first well that we drilled utilizing the 3D into the expansion area.

Pierre Connor - Capital One

And that's the one that's tested in waiting on completion?

Brad Guidry - Senior Vice President of Exploration

Yes. I mean it was literally a two hour test and at the end of the two hours of 6.8 million.

Pierre Connor - Capital One

Very good rate.

Brad Guidry - Senior Vice President of Exploration

It'll probably come down from that. But we think it'll be a good well.

Pierre Connor - Capital One

So by, not by worsening but I'm assuming you will wait till the merge dataset before you really do anything further on that?

Brad Guidry - Senior Vice President of Exploration

Probably anything we do further outside of the structural interpretation the BP Adams was drilled on a structure for Spiro [ph] and the datasets we have for that, I think we can identify those prospects. When you look into the stereographic part of interpreting the data, yes, I think we'll probably wait till we get merge together. And the eastern part of that block was pretty perspective for some of the shale sands.

Pierre Connor - Capital One

Okay.

Brad Guidry - Senior Vice President of Exploration

For more control we have right now. The other thing on that right now with the gas price and Arkoma where that... we're not anticipate drilling in there certainly in the next up coming months, until things improve.

Pierre Connor - Capital One

Okay. Would that kind of carries over my next question which in most David or somebody would... I think mentioned Center Point, and that from what I'm reading its even worse this morning. Maybe that's really, really short-term but goodness you're giving it away. Just put in perspective of how long can you tolerate this relative to your production guidance and jumping in... this is something that we expect as soon as the first call snap comes those differential should improve and we can get more than a nickel? Or then your track with your guidance if for some reasons this last longer I'm just trying to put a bracket of what to watch relative to meeting those production expectations?

Larry D. Pinkston - Chief Executive Officer

Pierre, this is Larry. I mean it is very volatile currently. I mean it's... I mean the indications earlier this week was less than dollar in Mcf which as we showed in basically we're saying we could. Indications for tomorrow which we have just heard is the gas prices are going to be above $4.

So it's moving in those ranges very. I have no idea what they will be for Thursday [ph]. Right now I mean its moving in those ranges and it still I mean it is hard for us to figure out on a day-to-day basis what that's going to be. But at least its finally moving back in the right direction which we haven't seen that the last four or five.

Pierre Connor - Capital One

Need a mix indicator for the gas prices at Center Point. Thanks very much guys. Let me turn it back to you there is someone else in the queue.

Operator

Your next question comes from the line of George Gaspower [ph]. Your line is open.

Unidentified Analyst

Yes, good morning Larry and hello to everyone.

Larry D. Pinkston - Chief Executive Officer

Hello George.

Unidentified Analyst

Got a follow-up, of Toms question on rig... new rig construction on and I think maybe you had made a brief comment earlier about a rig movement to the Bakken. Have you actually delivered the new rig for their Bakken testing North Dakota and I know that you were constructing another rig for them. Is this one of the second rig is that going to potentially turn out to be an existing rig as opposed to a new rig?

Larry D. Pinkston - Chief Executive Officer

The one rig is in a process of moving right now George, and the second rig is going to be scheduled to be on a March delivery to them and that rig is as indicated codec [ph] they still not that the rig that and we're planning on delivering that rig in the March.

Unidentified Analyst

I see. So good tactics turnout to be a new manufacturer unit?

Larry D. Pinkston - Chief Executive Officer

That is the plan, yes.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Jim Rollyson. Your line is open.

James Rollyson - Raymond James

Hey good morning guys.

Unidentified Company Representative

Good morning.

James Rollyson - Raymond James

Just kind of one follow up, couple of follow ups. Regionally you talked about seeing some potential weakness in the rig count. Is it region specific, I mean with the basis kind of blowouts or you seeing it specifically in the mid-continent or are you seeing that kind of starting off in different places?

Larry D. Pinkston - Chief Executive Officer

About far as the majority, what we're seeing is mid-continent, Arkoma and Texas Panhandle where it is, the Rockies... Rock I mean its lot of people once they go down to get additional rigs but the rigs stayed very busy and no indication there is going to be a big reduction in the rigs up there and with Haynesville and East Texas their demand still staying,

James Rollyson - Raymond James

Yes, okay. That makes sense. And lastly kind of if you look at processing business, the gathering in processing business. You guys had a little bit of issues this quarter with a rated to the hurricanes. How do you see that playing out over the next few quarters in terms of the general economic picture, the shut in gas it's kind of even growing that this is pretty nicely over the last few years, just kind of what you're thoughts on looking forward.

Unidentified Company Representative

Just the ballparks with the reduction of commodity prices in the mid-continent, the slowdown in drilling will certainly affect our volumes that we get in process in the mid-continent. However, we have been focus recently more on the Appalachian Basin and Rocky Mountains that were still working very diligently but gathering in those basin which should not be affected as dramatically in mid-continent has been recently.

James Rollyson - Raymond James

So, net between the Q there's gathering volumes probably still flat up a little bit?

Brad Guidry - Senior Vice President of Exploration

I've said flat in the months going forward.

James Rollyson - Raymond James

In processing, was that just down simply due the reduce volumes from shut in this related to the hurricanes or does that also times all to what's been going on with the refining business just giving the power problems or would not?

Brad Guidry - Senior Vice President of Exploration

The processing was flat in the third quarter second quarter a most tightly due to the hurricane. It hit them all valued areas down eastern Houston which is we're half liquid from the country goes for fractionalization. We were curtailed as far as our ability to recover liquids from the GAAP and have a market for those liquids. So the hurricane hitting the Gulf Coast in fact in refineries petrochemical plant and fractionalization facilities call us just to recover less liquids on our existing client during the economy.

James Rollyson - Raymond James

Is that bounce back at all since?

Brad Guidry - Senior Vice President of Exploration

Absolutely it bounce back. It was really just about a two... it was three weeks phenomena from about September 12 when the hurricane Ike during the September and starting on October 1 we were back up and running full board.

James Rollyson - Raymond James

Great thanks.

Operator

Your next question comes form the line of Andrew Coleman. Your line is open.

Andrew Coleman - UBS Securities

Good morning.

Larry D. Pinkston - Chief Executive Officer

Hi Andrew.

Andrew Coleman - UBS Securities

I had a couple of questions here. Can you say was there a lot of Crissure left over in your full cost flow at the end of the quarter. It seems some are players out in mid-continent takes more write-downs. Was there any risk in that?

Larry D. Pinkston - Chief Executive Officer

It certainly has impact on the magnitude of the Crissure. You can imagine there was a large Crissure at the end of the second quarter. Given where commodity prices where and the Crissure was much less at the end of the third quarter. But we did end up with the Crissure and did not have a write-down issue.

Andrew Coleman - UBS Securities

Okay, fair enough. And on the separate issues, looking for the year end, there is at least a little better. I wouldn't think there is any reason to think I guess 20-yard year kind of history of reserve a placement... is that one down.

Larry D. Pinkston - Chief Executive Officer

Serving to the catastrophic pricing at year end, we're still pretty comfortable, comfortable with $5 gas pricing environment, $5.5 we start talking about $2 in Mcf/

Andrew Coleman - UBS Securities

Okay. Moving over to the rig count side. You guys saw about 25% on term of contracts and I guess if these kind of 15 to 20 auto rigs come down, I guess its fair to assume that those would be Aloe Vera kind of... of course I guess spot market rigs. What do you think that number would go to in terms on term?

Larry D. Pinkston - Chief Executive Officer

We will change dramatically, we'll be at on time contracts of course the end of rigs that we're still talking about, there are new rigs or there are existing rigs that we put on those contracts. All those will be subject to some version of a term contract. Our existing rigs though there won't be a hold on to change.

Andrew Coleman - UBS Securities

Okay. And looking at you said in the quarter at 84%. It was being used by major private companies. Do you foresee that kind of I guess trending upwards? I guess I'm asking is, are these people laying down rigs are they primarily smaller players?

Larry D. Pinkston - Chief Executive Officer

That percentage is probably not going to change a little long Andrew.

Andrew Coleman - UBS Securities

Okay. And then the last question is, looking at how you allocate your gas to bid versus soft market, how much flexibility do you have in changing that denomination percentages?

Larry D. Pinkston - Chief Executive Officer

We had option there whether we want to sell on the first of the month fix price or sell daily. If that's your question.

Unidentified Company Representative

But that's a monthly election that we have and that's what the exception of gas that we have hedge that first a month prices that we have to match up with the hedges that we have. But the balances of the gas as Larry was alluding to...we can make that election on a monthly basis.

Andrew Coleman - UBS Securities

Okay. So you're probably somewhere... it might trend down in over next couple of months as we finally go into winter, maybe see a little more on the spot market.

Unidentified Company Representative

All right, as we add more hedges, we would have west that would be doing gas daily probably.

Andrew Coleman - UBS Securities

Okay. All right fair enough. Okay, thank you.

Unidentified Company Representative

Thank you Andrew.

Operator

[Operator Instructions]. Mr. Pinkston, there are no questions in queue.

Larry D. Pinkston - Chief Executive Officer

Thank you Kevin. Just in closing I want to thank everyone for you attendance and you great questions. We will be presenting at Winchel Carl Fordson, New York [ph] next week and hope to be able to see you many of you there. I appreciate it and thank you.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now all disconnect. .

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