Arena Resources Inc. Q3 2008 Earnings Call Transcript

Nov.24.08 | About: Arena Resources, (ARD)

Arena Resources Inc. (ARD) Q3 2008 Earnings Call November 6, 2008 11:30 AM ET

Executives

Tim Rochford - Chairman of the Board

Phil Terry - President and CEO

Randy Broaddrick - VP and CFO

David Ricks - VP, Operations

Analysts

Neal Dingmann - Dahlman Rose

Mark Lear - Sidoti & Company

Jeff Hayden - Rodman & Renshaw

Noel Parks - Ladenburg Thalmann

Derrick Whitfield - Canaccord Adams

Operator

Greetings and welcome to the 2008 Arena Resources operating results conference call. (Operator Instructions).

It is now my pleasure to introduce your host, Mr. Tim Rochford, Chairman of the Board for Arena Resources. Thank you, Mr. Rochford. You may now begin.

Tim Rochford

Thank you, operator, and I'd like to welcome all of the listeners to our third quarter and nine months financial and operations conference call for Arena Resources.

Again, my name is Tim Rochford. I serve as Chairman of the Board. Well, along with me this morning on the call is our President and CEO, Phil Terry; our Chief Financial Officer, Randy Broaddrick; and Vice President of Operations, Mr. David Ricks.

Before we begin, I would like to make reference that any forward-looking statements which may be made during the call are within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. For a complete explanation, I would refer you to our release that was issued this morning. If you do not have a copy of that release, one will be posted on the company website at www.arenaresourcesinc.com.

Now today, we're going to cover the financials and the operations for the third quarter and for the nine months ending September 30th, 2008. We'll also review and give a little result and insight to our current progress so far for the fourth quarter of 2008. At the conclusion of the quarter overview, we'll get back to the operator and open it up for any questions that you folks may have.

And at this time, I am going to ask our Chief Financial Officer, Randy Broaddrick, to review the three and nine-month financial results. Randy, if you would, please?

Randy Broaddrick

Thank you, Tim. For the three months ended September 30th, 2008, the company had oil and gas revenues of $68.4 million and net income of $26.9 million as compared to revenues of $26.7 million and net income of $11.4 million in the third quarter of 2007. This represents an increase of 156% in revenues and 136% in net income.

For the nine months ended September 30th, 2008, the company had oil and gas revenues of $175.9 million and net income of $70 million as compared to revenues of $65 million and net income of $25 million in 2007. This represents an increase of 171% in revenues and 180% in net income.

On a diluted basis, the earnings per share for the three months ended September 30th, 2008, were $0.69 or $0.72 per share excluding a $1.8 million non-cash charge for stock-based compensation. This compares to $0.32 or $0.34 excluding $956,000 in non-cash stock-based compensation in 2007.

For the nine months ended September 30th, 2008, earnings per diluted share were $1.87 or $1.95 excluding $5.1 million in non-cash stock-based compensation. This compares to $0.76 or $0.81 excluding $2.5 million in non-cash stock-based compensation in 2007.

Net cash flow from operations, adjusting for changes in operating assets and liabilities, for the three and nine-month periods ending September 30th, 2008, was $54.5 million or $1.40 per fully diluted share and $140 million or $3.73 per fully diluted share. This compares to $22.2 million or $0.62 per fully diluted share and $50.7 million or $1.54 per fully diluted share in 2007.

Additionally, we exceeded $458 million in shareholders' equity.

Our production costs for the three and nine months ended September 30th, 2008, were higher than those for the three and nine months ended September 30th, 2007.

Similar to recent quarters, the increase is a result of a variety of factors, including increased rates for essentially all of our services, materials, equipment and labor. Specifically, chemicals and electrical services are two specific line items that we've seen significant increases in.

Additionally, we still have to truck water while waiting for permits to convert wells to water disposal wells, which we did not have to deal with as extensively in the same period of 2007. However, we have had more permits approved and more wells converted. So these costs should decrease further in the future.

We did see a further increase in oil and gas production taxes for both the three and nine months ended September 30th, 2008, when compared to the same periods in 2007. Most production taxes are based on values of the oil and gas sold. So our production taxes per BOE increased with the commodity prices and will continue to move up and down with the commodity prices.

Looking forward, we anticipate our lease operating costs to be in the range of $8 to $8.50 per BOE. We will see a decrease in our oil and gas production taxes, given the decline in commodity prices, likely closer to $4 range give or take. However, as I mentioned previously, oil and gas production taxes are directly affected by commodity prices. So this item will fluctuate with commodity prices.

We continue to see an increase in our depreciation, depletion and amortization for both the three and months ended September 30th, 2008, as compared to the same period in 2007. As has always been the case, depletion of our oil and gas properties is the primary contributor to DD&A.

A gradual increase in depletion cost is expected as we continue to develop our properties. This gradual increase is the result of our adding capitalized cost as we develop our properties and add future development cost as we add additional reserves.

As we discussed during our previous calls, the acquisitions made during 2007 contributed to a further increase in our depletion rate, as with each acquisition, we add our acquisition cost to the depletion base as well as the future development costs related to the reserves are added.

Although our DD&A per BOE was $13.71 per BOE for the nine months ended September 30th, 2008, we anticipated increase in the fourth quarter to ultimately average approximately $15 per BOE for the year, excluding the impact of any additional acquisition or the result of yearend reserve analysis.

Our G&A increases are the result of increasing payroll as we continue to add more new employees in order to sustain our growth as well as significant increases in our stock-based compensation expense as we grant options in order to entice new employees as well as to retain those new and old employees. Management believes that this is necessary to continue to add quality personnel with the experience and knowledge that we need.

Stock-based compensation increased from approximately $956,000 for the three months ended September 30th, 2007, to approximately $1.85 million for the three months ended September 30th, 2008. Similarly, stock-based compensation increased from approximately $2.48 million during the nine months ended September 30th, 2007, to approximately $5.1 million for the nine months ended September 30th, 2008.

We anticipate a gradual decrease in our stock-based compensation amount in the fourth quarter and going forward into 2009 subject to increases resulting from additional option grants.

Lastly, as we discussed during the second quarter conference call, we now have two hedging components in place. We have one column running through yearend 2008 and another running through yearend 2009. As a result of these hedging components, we had a realized loss in quarter of $2.18 million after-tax or $0.06 per diluted share.

However, we showed an unrealized gain of approximately $7.8 million after-tax as other comprehensive income, which did not affect our earnings. For the nine months ended September 30th, 2008, the realized loss was $5.68 million after-tax or $0.15 per diluted share and the unrealized gain was $4.97 million.

With that, I'll turn it back over to Tim.

Tim Rochford

Thanks, Randy. I appreciate that. And now, I'd like to ask Phil and of course then David to give us a recap on our third quarter operations and some current activity overview. Phil?

Phil Terry

Thank you, Tim, and welcome to all that are listening to us this morning.

First of all, in the third quarter, we drilled 69 new wells at our Fuhrman-Mascho properties in Andrews County, Texas. This brings the total new wells drilled in the first nine months of 2008 to 176. In addition, we performed 10 refracts during the period, and we continue the improvements and upgrades to our leasehold infrastructures and systems.

Also, in the third quarter, our sales as a result of production were 618,835 BOEs. This is a 54% increase over the same period in 2007 and an 11% increase over the second quarter of 2008. Our average net daily production increased to approximately 6,726 BOEs per day.

The average commodity prices received in the third quarter were $115.41 per barrel of oil and $13.71 per MCF of gas. The average sales price per BOE received in the third quarter was $110.55. That is less than a 1% decrease from the second quarter of 2008 and a 67% increase from the third quarter of 2007.

I should point out to you at this time that the $13.71 received per MCF is attributable to liquids associated with the Fuhrman-Mascho gas. In certain areas, particularly the areas of the abnormally thick Grayburg, we have a very high BTU content in that gas. And as a result, there are considerably greater volumes of liquids derived from the process. And those liquids are then added back to the MCF price or to the gas price.

For the nine months ended September 30th, 2008, our sales as a result of production were 1,694,361 BOEs. That is a 51% increase over the prior year. The average commodity price received for the first nine months of 2008 were $109.42 per barrel of oil and $11.51 per MCF natural gas. The average sales price per BOE we received in the first nine months was $103.81 compared to $57.78 in 2007, which is an 80% increase.

We'll have additional comments during the Q&A. But at this time, I will introduce David Ricks for an operational update review.

David Ricks

Thank you, Phil. In the third quarter, we drilled 69 wells at Fuhrman-Mascho and refracted 10 wells, giving a total of 176 wells drilled and 32 refracts for the first nine months. This number of wells drilled was up compared to 52 wells in the second quarter due to the addition of a fourth rig used throughout the third quarter.

Of those 69 wells, 40 of those wells were 10-acre locations with remainder being 20 and 40-acre locations. Of the 40 10-acre locations, there were 10 wells that contained the abnormally thick Grayburg on top of the sand. This is in our enhanced fairway of production and reserves. Those wells performed quite nicely, and a good number of our remaining wells will be drilled in that fairway.

We currently have four wells drilling at Fuhrman-Mascho One rig is on the last wells of its contract and will be released when finished. The other contract rig has three more wells remaining on its contract before being released. We will finish the quarter drilling with our two company-owned rigs and anticipate drilling 49 wells in the fourth quarter, giving a total of 223 new wells in '08.

We continue to have good success with our refracts at Fuhrman-Mascho. We have refracted 10 wells in the third quarter and plan on performing three more in the fourth quarter for a total of 35 for the year. We have spent most of our capital at Fuhrman-Mascho and production continues to increase as a result of our efforts.

We continue to develop our waterflood plants. We are fairly close to finalizing our plans. And after a review of our engineering study, we would be ready to approach the Railroad Commission of Texas to start permitting procedures and hearings to form our waterflood unit. We hope we will be able to get our waterflood on the docket with the Railroad Commission early next year for approval.

The other activity at Fuhrman-Mascho involves infrastructure improvements, including laying new flow lines and increasing our handling capabilities. We continue to convert wells to disposal, which has helped with our operations and will reduce our operating cost. We are continuing to experience power interruptions from our electrical provider, and we are exploring options for making power more reliable.

We have utilized generators in areas where we have had excessive problems, which has added to our LOE. And we are performing engineering studies to build our own power substation in the near future.

We are waiting on the start of Aspen Pipeline to finalize the scheduling of our Yates gas project, which will involve the preparation of shut-in and temporarily abandon wells for re-completion to the Yates. Aspen reports that delivery of the pipeline material is anticipated in mid-November with construction beginning soon thereafter. We will drill four Yates gas wells in the fourth quarter of '08 in advance of the pipeline to provide better evaluation on reserves and volumes in the Yates formation.

In the Mexico, we scheduled for the fourth quarter drilling 26 new wells on various leases in Lea and Eddy County. This work will be postponed and rescheduled in 2009. We are currently permitting these 26 locations and will continue to obtain permits to be prepared for drilling these wells in '09. Also postponed until '09 will be the conversion of three producing wells to water injection at our East Hobbs and Andrews unit.

However, at East Hobbs, we are in the process of converting one producing well to injection, and we will drill four new PUD wells by yearend.

At our Phillips Lea and Hale State leases in Lea County, New Mexico, we have seen production increases as a result of well repairs and maintenance work. These properties were acquired in the second quarter of '08. We will drill one well at the Hale State and one well at the Phillips Lea in the fourth quarter of 2008.

Additionally, we have rescheduled the work planned at our Y6 lease in Fisher County, Texas, for 2009. This work includes drilling two additional PUD locations performing refracts on existing wells and converting wells to water injection.

This concludes my review of our property activity, and I'll turn it back to Phil.

Phil Terry

Thank you, David. Some additional comments about our operations, particularly in Fuhrman-Mascho.

We continue to be very pleased with the results that we are seeing from the 40, 20 and 10-acre development programs that we have underway. We have done an in-house review of the reserves, and we are very encouraged by those reserves and particularly the new wells that we have drilled.

What we continue to see is that the new wells drilled on 20s and 10s produce at or greater than reserves attributable to the original wells. Again, that substantiates what we have said all along that there is no drainage that has resulted from drilling wells on 40s and having them produced for 50 years. We are seeing that the 20-acre wells will produce greater volumes than the original 40s. And 10s will also produce great volumes than the original 40s. So we continue to be very pleased with our results.

The other thing that I will point out to you is, as of yesterday afternoon, our purchaser of oil in West Texas had a posted price for West Texas in a remediate of $61.80. That is for WTI sweet or WTI sour, which is the price that we received. That index is $58.05 or a differential of $3.75. That $3.75 per barrel is down somewhat compared to historical averages. And as the price continues to be compressed, that differential should also compress as well.

I will turn the presentation back over to Tim for his final comments.

Tim Rochford

Very good. Thank you, Phil, and thank you, David. In summary, we are now drilling our 461st well at our Fuhrman-Mascho field since starting our development program back in 2004. In addition, we have refracted another 139 wells at Fuhrman-Mascho.

Also, in addition to opening our new office in Andrews, Texas, which now serves as headquarters for our growing company, we have just opened up a land office in Midland, Texas. And as most of you know, as announced earlier, we have reduced our capital expenditure for the remainder of the year. As a result, we released or about to release two of the contract rigs at our Fuhrman-Mascho properties, leaving our two company-owned rigs to continue our San Andrés development.

Also, at the Fuhrman-Mascho, our Yates project as mentioned earlier will see four new wells drilled and tested during the fourth quarter and construction should begin on the pipeline during the quarter as well. Our East Hobbs properties in Lea County, New Mexico, will have four wells drilled in the last quarter and two additional properties, as David just mentioned, in New Mexico will each see one well drill in the fourth quarter.

Also budgeted in the last quarter is drilling of one well on our Gaines County project or I should say Gaines County Texas project that was just recently acquired earlier this year. All in all, we should see approximately 58 to 60 wells drilled company-wide during the last quarter.

We were also the successful bidder at the recent University land auction, adding an additional 6,400 acres to Fuhrman-Mascho area. That's bringing our total acreage position now at Fuhrman-Mascho to approximately 32,000 gross acres.

And finally, as we finish 2008 and prepare to look forward into 2009, we feel confident that as we manage our development activities to our cash flow that at very minimum we will see growth and production increase by 20% to 25% and reserves growing at a minimum of 10% to 15% net of production.

Also note that given reasonable increase in the price of oil that we're prepared to step up activity with very, very little effort. And we will continue to look for acquisition opportunities, specifically in areas that compliment our current operations. We're in an excellent position to take advantage of opportunities that are bound to come.

This concludes the company's portion of the 2008 third quarter and nine months financial and operational review. I'll now turn it back over to the operator. And operator will open up for any questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from the line of Neal Dingmann with Dahlman Rose. Please proceed with your question.

Neal Dingmann - Dahlman Rose

Good morning, guys. Excellent quarter.

Tim Rochford

Thank you, Neal.

Neal Dingmann - Dahlman Rose

Say, Phil or Tim, could you just, I guess, in this environment kind of walk through again the economics, especially now if you're going to let two of the contract rigs go? Just would like to walk through again the economics of the firm and as you've seen both in sort of that sweet spot as well as in the other areas just wondering how similar it is on the 10 versus when it was on the 40s, kind of what you are seeing as far as economics, IP's cost, et cetera?

Tim Rochford

Phil, why don't you address the latter and then I'll finish it up with a comment or two myself?

Phil Terry

Certainly. We continue to use $647,000 for our completed well cost, Neal. Those numbers reflect the casing and tubing prices at their highest point. We are seeing some relief by the way in the form of decreasing casing and tubing prices. But for the sake of budgeting and going forward, we use $647,000 per well.

Those costs will be slightly lower for our two company-owned rigs just because of the fact that we are doing with company-owned rigs. We could probably reduce that $647,000 by about $23,000 for each well. And as a result of that, we will see those prices remain at or near current levels.

But hopefully, we'll see the casing prices come down as we move forward. And we're also going to negotiate with some of our providers of goods and services to really fine tune our cost structure.

The average well continues to be, on a overall acreage basis, about 150 barrels per day. We see that number higher in the area where we have the Grayburg. And again, that number is generally north of 200 barrels per day for the thicker Grayburg fairway.

The average well that we always talked about being 40,000 net BOE, well, that is still a good number. However, we are seeing that our numbers for the new 20s and new 10s may be slightly higher than that. That 40,000 was across the board and included all of the newly drilled wells, on the original 20s.

But now, we are seeing that the 20-acre wells in the thick fairway are better and also the thin acre wells are better than the originals. You can normally add about 20,000 net barrels to these Grayburg fairway wells. So we are very pleased. We see good results across the field and exceptionally good results in that Grayburg fairway.

We are obviously quite impacted by commodity price. If you look at our typical well, which is 150 barrels per day, declining to about 20 barrels per day after the first year, if you run those numbers at $75 a barrel and $10 gas, you achieve payout in generally about 10 months. And at the same point, your return on investment is north of three-to-one and your rate of return is north of 91.

You knock that price down to $50 and $6.50 gas, which again is very conservative; I don't think our gas price will fall to that. But at $50, that return comes down to less than two-to-one and the payout extends beyond two years. So, that is the primary motivation that directed us to cut back and work within cash flow from the two wells or two rigs that we have.

Tim Rochford

I'd just add to that Neal that if you want to focus on $50 crude for a moment that with the two company-owned rigs that will be running as we exit this year and as we enter into next year, if we were to remain at just the two company-owned rigs, there is no question that those two company-owned rigs will probably produce numbers somewhere in the neighborhood of 145 to 150 wells.

And at $50 crude, our cash flow that will spun from that will be more than adequate, probably by at least 20% to 25% more than adequate to provide the resources through our immediate cash flow for the company.

Operator

Our next question comes from the line of Mark Lear with Sidoti & Company. Please proceed with your questions.

Mark Lear - Sidoti & Company

Good morning.

Tim Rochford

Good morning, Mark.

Mark Lear - Sidoti & Company

I just noticed the gas prices were much higher than I've seen in the past. And I just wonder if you can kind of give me an idea how we should be looking at those going forward for modeling purposes?

Tim Rochford

Yes, I think Phil's earlier point on that justifies repeating. So, Phil, why don't you go ahead and respond to that?

Phil Terry

Certainly, Mark, the average gas price is higher as a result of increased liquids volumes attributable to these new wells in that Grayburg fairway.

Some of those wells or many of those leases and areas in that Grayburg fairway produce gas that has a BTU content of 1,500 to 1,600. And as a result of that high BTU content, the gas is very rich and the liquids that drop out of that stream after processing are increased volumes over the average of the field. And when you add the revenue that's attributable to those liquids back to the gas price, you get to that $13-plus number that we have.

As we move forward, historically speaking, since March of '08, we have been considerably higher than $10. In March, April and May, we were at $10.45, $10.74 and $12.01. In June, we are $12.41. And then in July, August and September, those numbers increased again as a result of these better wells coming on line and producing in that Grayburg fairway. But we have been north of $12. And in one month, we had $14.37 attributable to our gas revenue.

Mark Lear - Sidoti & Company

Thanks.

Phil Terry

You're welcome.

Operator

Our next question comes from the line of Chad Mabry with Rodman & Renshaw. Please proceed with your question.

Jeff Hayden - Rodman & Renshaw

Hi, guys, Jeff Hayden. A couple of quick questions; one, Phil, just a little clarification. When you're talking about the 10 and 20-acre well getting better in Fuhrman-Mascho, is that actually the San Andrés getting better or is that just kind of averaging through the impact of the Grayburg where you've got the sweet spot? Then I've got one other quick one.

Phil Terry

Okay, Jeff. When we speak of a Fuhrman-Mascho well, we include both Grayburg and San Andrés. The Railroad Commission deals with both zones as being a single zone, Grayburg-San Andrés. So, when I say that the 20-acre wells and the 10-acre wells are better than the 40s, that is a statistical analysis across the entire Arena acreage.

We attribute the increase to that fairway of thicker Grayburg. And we've seen those results to be fairly consistent in the fact that the initial potentials are north of 150 barrels a day. And generally you can say there are going to be 200 barrels a day or greater, and the anticipated recoveries from those wells will be 60,000 barrels compared to 40,000 barrels.

Operator

Our next question comes from the line of Noel Parks with Ladenburg Thalmann. Please proceed with your question.

Noel Parks - Ladenburg Thalmann

Good morning

Tim Rochford

Good morning

Phil Terry

Good morning

Noel Parks - Ladenburg Thalmann

Just wanted to ask on the cost side if you could just talk a little bit more about electricity issues. I know a quarter ago, you were hoping to get a sense of how to attack those. And maybe also you could talk a little bit about few more specifics about the water disposals and maybe just the timeline for maybe to turn (the corner) on getting those additional disposal wells on?

Tim Rochford

Sure, you bet. Phil, please.

Phil Terry

All right. What we are seeing there is relative to water disposal, and I'll talk about that first, we are handling more water now than we were a year ago. And, David, I believe you had mentioned that we were handling approximately twice as much water now than 12 months ago. Is that correct?

David Ricks

That's correct, a little more than twice as much.

Phil Terry

Most of that water can be attributed to some of the properties on the South end on our acreage block. One of our acquisitions that we made last year was the South Fuhrman-Mascho unit, and we are getting good results in terms of oil volumes, but we are also producing more water. And that is understandable, because that particular area has been under water flood for several years.

So our water volume has increased. And as a result of that water volume increasing our LOEs increase due to the handling cost and electricity associated with that handling and the increased cost of chemical added to treat that water. And as a direct corollary to that, Noel, is that, our cost of electricity also increases: one, just because you are moving more fluid; but two, David also did some research on the power cost for kilowatt-hour.

And, David, you might share that with the audience.

David Ricks

We are up 60% for the third quarter of '08 versus the third quarter of '07.

Phil Terry

And that increase was primarily due to fuel surcharges that are incumbent within the contracts that we operate within. And we expect that those numbers should come back down as that fuel surcharge deceases. But for the accounting period that we're talking about, the three that are most expensive, of course, are electricity, chemicals and labor. And the electricity and chemicals both increased rather substantially.

As we move forward, we are moving forward to reach a decision as to how to provide very stable power for our South Fuhrman and Fuhrman-Mascho units. We have overcome some of the problems that we had earlier and that we reported earlier, and those problems being interruptions in outages that occurred on a daily basis. We've been able to correct some of those problems on the South end of our properties, specifically the South Fuhrman-Mascho unit, but we are now seeing some overload situations on the North and Northeast.

We have a third-party engineering group that has studied the electrical requirements that we need to take into consideration for present and future, and we'll reach a decision very quickly about how we go about providing stable power. And I am going to say that in all likelihood, we will wind up building a substation, and we will probably start that in 2009 and relatively early in 2009.

Operator

Our next question comes from the line of Derrick Whitfield with Canaccord Adams. Please proceed with your question.

Derrick Whitfield - Canaccord Adams

Good morning, guys, great quarter.

Tim Rochford

Thank you.

Phil Terry

Good morning, Jeff.

Derrick Whitfield - Canaccord Adams

As you did on previous questions in this Fuhrman-Mascho with two rigs going forward, is it safe to assume that drilling will gravitate towards your sweet spots in the Northeast?

Tim Rochford

Phil?

Phil Terry

Derrick, yes. We will drill as many wells as we possibly can drill in the areas of the thick Grayburg. Obviously, those areas provide us with the greatest opportunities for increased reserves and increased production, and we'll continue to drill as many of those as we possibly can.

And I'll tell you that we have been successful in the recent few weeks in closing deals with property owners in and around that quarter, that Grayburg quarter. And in many instances, we've had offers outstanding for over a year where we've been trying to buy these leases and to buy producing properties. Within the last few weeks, we have had success in reaching agreement to purchase those acreages. So, the downturn in price has prompted some people to sell.

We have not yet closed on all of them, but we've picked up an another 600 acres plus or minus, directly offsetting some of our really good Grayburg fairway properties. And we feel like there are several others. We are very encouraged about the fact that we're seeing movement now. And that movement we think is going to become more frequent and that we're going to be able to close some of these deals before the end of this year. And we'll continue to work those very hard.

But as Tim mentioned, our current inventory is north of 32,000 acres in Fuhrman-Mascho. As a matter of fact, it's pretty close to 33,000. And then we'll pick up another 600 plus as we close these other two small deals. And if we're successful in closing all of the things that we have offers out on at this point in time, then we'll add a fairly nice acreage package in that Grayburg fairway area.

Tim Rochford

Derrick, also keep in mind that with reference to the two rigs that we're referring to, the company-owned rigs, and as we talk about minimum growth rates both in production and reserves, we're focusing with just the two rigs. So, we think that's a very conservative approach to next year.

Operator

Our next question comes from the line of Mark Lear with Sidoti & Company. Please proceed with your questions.

Mark Lear - Sidoti & Company

Hi. Just had a quick follow-up just about the acreage you added through the recent lease sale. Just wanted to know how much of that you would consider in that core Fuhrman-Mascho area versus what would be outside of it?

Tim Rochford

Yes, I think that's a good point, Mark. Phil, I know that a good portion of this is an area that our team thinks an awful lot about. How does that relate to some of the sweet spots, if you will?

Phil Terry

Mark, if you're referring to how much of it is in the Grayburg fairway area, most of it lies in areas away from that. The University blocks that we were successful in acquiring acreage on were South and West of the Grayburg fairway area.

But I should add that they are in areas that have been very rewarding for us both in terms of initial potentials and reserve potential. Some of this acreage was offsetting the South Fuhrman-Mascho unit where we've been able to determine that we do have good production potential.

We also have some acreage that we picked up a little further West in block 12 of the University land's acreage. And we feel very good about being able to extend some of our production areas on the South and West portions, which are not in the Grayburg fairway. But we also feel very good about those, and they may also have some potential for other producing horizons.

But of the 6,000-plus acreage that we just purchased, that acreage was removed from the Grayburg fairway. And on the question that Derrick asked just a minute ago, we are continuing to pick up small acreage positions in that Grayburg fairway and the two acquisitions that I mentioned were going to bring about 600 acres. Those are directly offsetting in the Grayburg fairway. And we have several other leases and producing properties in our target area that we are working very, very aggressively right now.

Tim Rochford

Mark, just also keep in mind that with the reference to that additional acreage, the 6,400 that was just acquired, that we do have rights to oil depths there. So, I know there are a number of horizons there that our teams are looking that time will tell, but could extend beyond just the San Andrés or potentially with the Grayburg.

Operator

Our next question comes from the line of Chad Mabry with Rodman & Renshaw. Please proceed with your question.

Jeff Hayden - Rodman & Renshaw

Hi, guys, Jeff again. When you think about acquisition, you guys have a nice [war chest] builds-up right now. How much you'd be comfortable spending on acquisitions next year? I mean would you be willing to possibly use up all your cash on hand and start eating into your credit facility a little bit or would you definitely want to keep any acquisitions kind of within sort of the cash you got on hand?

Tim Rochford

I think that's an excellent question, Jeff. And as you pointed out, we are sitting on a pile of cash. I would say that as we speak today, we are sitting on a little more than $70 million. And as I think most of the listeners know, our credit facility is at zero, and it's a $150 million base. We anticipate that, that base, by the way, will be increased, and we have had recent conversations with our banking group that would give us confidence that we will see that.

Now, as to the question directly, I don't think there is any question. I don't think there is any doubt that I think we all see that in the current environment that we are going to see some opportunities that may otherwise have come to the table.

And so, to the extent how much we've earned of our existing stack of cash, how much do we enter into our credit facility, we are prepared to do all the above, given the right opportunity, but we are going to move very patiently and very carefully. We will keep obviously a keen eye on commodity prices.

But we think that we have been posturing ourselves for the last six, eight, nine months that now the opportunities that are going to be on the horizon, we think we are in a great position to take advantage of those. So we'll just have to see how they come out, and we are certainly going to be prepared to pull the trigger on the right opportunities.

Jeff Hayden - Rodman & Renshaw

Okay. Thanks, guys.

Tim Rochford

Thank you, Jeff.

Operator

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments you may have.

Tim Rochford

Very good. Well, listen, thank you, operator, and thanks to all the listeners and the audience today for taking the time. We know there are a number of calls that are taking place. And for you to spend the time with us, we appreciate it. I thank management. And with that, you all have a good day.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect your lines at this time, and thank you for your participation. May you all have a wonderful day.

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