Edge Petroleum Corporation Q3 2008 (Quarter End 9/30/08) Earnings Call Transcript

Edge Petroleum Corporation (EPEX)

Q3 2008 Earnings Call

November 10, 2008 1:30 pm CT

Executives

Charles W. MacLeod - Acting Chief Financial Officer, Senior Vice President - Business Development and Planning

John W. Elias - Chairman of the Board, President, Chief Executive Officer

John O. Tugwell - Chief Operating Officer, Executive Vice President

Analysts

Joseph Allman - J.P. Morgan

[David Russell] - Private Investor

[Ron Bucks - Cortair]

[Charley Cheever - Cortair]

Presentation

Operator

Welcome everyone to the Edge Petroleum third quarter 2008 earnings conference. As a reminder, today’s call is being recorded. At this time I’d like to turn the conference over to C.W. MacLeod.

Charles W. MacLeod

Welcome to the Edge third quarter 2008 conference call. With me today on this call are John Elias, Edge’s Chairman, President and CEO, and John Tugwell, Edge’s Chief Operating Officer.

Before we begin this afternoon I need to remind everyone that we will be making forward-looking statements today. Statements regarding the proposed merger with Chaparral including the benefits, results, effects and timing thereof, whether and when the transactions contemplated by the merger will be consummated, Chaparral’s financing in connection with the merger, the listing of Chaparral common stock, regulatory clearances, common stockholder approval, the timing of the stockholding meeting, shareholder value, change in and/or continuation of current business plans, cash flow, financial conditions, forecasted production, derivatives and effects thereof, reserves, estimated volumes as well as any other statements that are not historical facts in this release are forward-looking statements that involve certain risks, uncertainties and assumptions many of which are beyond Edge’s ability to control or estimate and are subject to material changes. Such risks, uncertainties and assumptions include but are not limited to the satisfaction of closing conditions for the merger, market conditions, availability of financing, Board and stockholder approvals, actions by third parties, Edge’s financial and operational results, the availability or insurance of any alternatives or transactions, uncertainties, costs and delays relating to transactions, prices for oil and gas including natural gas liquids, drilling and operating risks, risks relating to exploration and development, uncertainties about the estimates of reserves, and other factors detailed in the Risk Factors and other sections of Edge’s most recent Form 10K, Form 10Q and other filings with the SEC. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those indicated. The specific terms, resource potential or 3P reserves is not meant to be the equivalent of SEC definition of proved reserves.

With that I would like now to turn the call over to John Elias.

John W. Elias

As I’m sure you’re aware, our annual shareholder meeting on Thursday, October 23, was officially called to order and after handling a few procedural matters in accordance with Edge’s Bylaws we adjourned the meeting until 9:00 a.m. on Thursday, December 4, 2008. The reconvened meeting will again be at the Hyatt Regency Hotel in downtown Houston. The adjournment will allow us to distribute supplemental proxy information to our shareholders and the common shareholders will have additional time to review the material on the matters to be considered before their vote is counted when we reconvene the shareholder meeting on December 4.

On July 14, 2008 we announced that we had reached an agreement for Edge Petroleum Corporation and Chaparral Energy to merge. No doubt we all recognize the turmoil and uncertainty in the US as well as the global financial markets and the overall economy in general. However Chaparral is working diligently with its bankers on a refinancing of their existing $600 million borrowing base revolver to $1 billion and a $150 million preferred equity infusion from a private equity firm, Magnetar Financial.

At the present time we see no reason not to continue to push forward on a merger with Chaparral. Let me briefly remind you what the merged combined entity will look like. The combined entity will have representation in multiple core areas, each capable of standing on its own merits.

It will have a 1.1+ bcf equivalent proven reserve base. The proven reserve base is split about 45% to 55% between gas and oil, reserve by profile of 18+/- years and there is no concentration reserves in any one well or field, 2008 production averaging 160+/- mcf equivalent per day, a large low to moderate risk prospect inventory from which to grow reserves and increase production, an experienced workforce capable of executing a successful program, and some noncore assets that might represent opportunities for future growth or perhaps be candidates for sale to improve the balance sheet.

We believe a merger with Chaparral provides the best opportunity for us to recapture some of the shareholder value that has been lost as well as offering the potential over the next two to four years to restore most if not all of the lost value our shareholders have experienced over the last 18 to 24 months. Consequently we remain committed to ultimately bring a closure to a successful merger of our two companies.

Before John Tugwell and C.W. MacLeod review our third quarter operating and financial results, I would like to comment on two or three other items.

First, our capital expenditures for the full year are still projected to be approximately $68 million. We are on target as we mentioned on our last conference call to drill and/or spud 27 to 30 wells by year end and our full-year production is still projected to be in the range of 17.2 to 17.9 bcf equivalent.

As we have previously mentioned, while we have been fully engaged in our strategic alternative evaluation process, we have been operating on what we refer to internally as an interim budget. Although our drilling results this year have been about as expected, our capital expenditures have not been at a level where we could reasonably expect to be able to grow reserves and increase production over the prior year. This of course will have an impact on our existing $250 million credit facility.

Our lead bank, UBank, along with the other nine banks in our credit facility are currently in the process of reviewing our operating and financial results prior to establishing what we expect will be a lower volume base for the company. At the present time our debt is $239 million and we have agreed not to exceed a $240 million borrowing level until our borrowing base has been redetermined by our bank group. We expect to receive feedback as to what our new borrowing base is prior to reconvening our shareholder meeting on December 4.

Although we are not certain as to what our new conforming borrowing base level will be, we have been looking at various scenarios as to how we will get in compliance with the conforming level in the time allotted which we expect will be within a six-month period.

John Tugwell will now address our current operations and plans for the balance of the year.

John O. Tugwell

This afternoon I’ll focus my discussion on production and our ongoing operating activity.

Estimated production for the first three quarters of 2008 was 13.7 bcf equivalents or an average daily rate of about 49.9 million cubic feet equivalents per day. Production during the third quarter is estimated to be 4 bcf equivalents or an average daily rate of about 43.5 million cubic feet equivalents per day.

This includes the effects of Hurricane Ike which resulted in an average curtailment of approximately 1.1 million cubic feet equivalents per day during September. The primary cause of these shut-ins was power outages and pipeline shut-ins with no significant damage to any of Edge’s facilities. Some limited production remains shut-in due to damage to a third party gas plant in Southeast Texas which is expected to return to operation in early 2009.

Disposition of properties late in the first quarter resulted in a loss of about 2 million cubic feet equivalents per day. Current expectations are for full-year 2008 production to average approximately 47 to 49 million cubic feet equivalents per day despite operating at a reduced capital expenditure level and the negative effects of Hurricane Ike.

Year-to-date we’ve logged 24 wells with 21 apparent successes, two dry holes and one well waiting on tests. Current expectations are to drill in the range of 27 to 30 wells by year end. Our most active area has been in our Flores/Bloomberg field in South Texas where we’ve drilled 13 wells to date and currently have one rig running drilling our Bloomberg #76 well. This well is drilling at 8,700 feet and has a proposed TD of 11,000 feet.

During the third quarter we drilled three wells in this field with working interests ranging from 31.2% to 50%. These three wells came on line at initial rates of 2 to over 4 million cubic feet equivalents per day. Completion operations are ongoing on one of these wells, the Bloomberg #68 well, where we logged five apparent play sands in the Vicksburg. The first sand was completed flowing at an initial rate of approximately 4.3 million cubic feet equivalents per day and we are currently performing the second stage of the completion.

Also in South Texas currently plans are to spread our El Fortunado prospect, a 13,200 foot high potential exploratory well, in late November. This [deep frio] prospect has estimated gross unrisked resource potential of 16 to 36 bcf equivalents. Edge will participate in this well with a 50% working interest.

Additionally in South Texas we’ve begun line clearing and are planning to begin the acquisition phase of our planned 120-square-mile El Sauz 3-D seismic survey in January of 2009. We currently have 15,800 gross acres or 5,600 net acres under lease or option and are working to acquire the surface and mineral permits required to execute the 3-D acquisition. We have a 50% working interest in this project and are operating the seismic acquisition phase of the project.

In Southeast New Mexico we’ve completed our South Lovington #1 well in the Strawn and have tested the well at a rate of 360 barrels of oil per day and 0.6 million cubic feet of gas per day. The well is currently shut-in waiting on a pipeline and a field designation before we can begin production. We currently expect to bring this well on sometime in December. Edge operates this well with a 56% working interest.

Also in Southeast New Mexico we are just beginning completion operations on our Southeast Lusk 27 #1 well where we’ve just fracture stimulated one of the Brushy Canyon intervals over the weekend. Several additional apparent log pay zones remain behind pipe in this well. We have a 33% working interest in this well which we operate.

Completion operations are also ongoing on the non-operated High Lonesome 26 #1H well, a horizontal well with a lateral section of about 3,300 feet which targeted the Wolfcamp interval at a depth of about 7,300 feet. Current plans are to perform an eight-stage fracture stimulation on this well which we have a 6.3% working interest in. This is our first exposure to this emerging play where we control about 9,450 gross or 3,800 net acres in Southeast New Mexico.

Lastly in Southeast New Mexico we plan to participate for our 18.75% working interest in two non-operated wells in the fourth quarter in our Red Lake project area targeting the shallow oil-bearing zones in the Yeso, San Andress premier, Grayburg, Queen, Seven Rivers and Yates intervals. We expect development activity to continue in this area where we have 30 to 60 additional potential drill locations in our inventory.

Now to make a few comments on the industry. The rig count continues to drop with the recent significant drop in commodity prices but we have yet to realize any significant drop in day rates. As always there’s a lag and we would expect to see some reduction in rates in the near future which should have a positive impact on the cost structure of future wells given that we are not exposed to any long-term drilling contracts.

With that I’ll now turn the call over to C.W. MacLeod.

Charles W. MacLeod

Oil and natural gas sales in the third quarter prior to any derivative activities were approximately $43 million compared to $42 million in the same period a year ago. The third quarter results were negatively impacted by an impairment of our oil and natural gas properties of approximately $130 million pre-tax and approximately $84 million net of tax.

About 87% of the decrease in the present value of our future net revenues attributed to proved reserves was the result of declines in commodity prices from June 30, 2008 of $13.10 per MMBtu and $140 per barrel of oil to $7.12 per MMBtu and $100.64 per barrel of oil at September 30, 2008.

Additionally third quarter results were also affected by outstanding derivative contracts. We recorded noncash net unrealized pre-tax derivative gain of approximately $76 million and had about $12 million of cash settlements paid to counterparties during the third quarter. Year-to-date our noncash net unrealized pre-tax derivate gain was about $8 million and the realized cash settlements paid have totaled approximately $31 million. While current commodity prices are below our hedge positions, it is difficult to determine the future impact to our derivative settlements due to the large price volatility swings in the market at present.

Our natural gas hedge position in the fourth quarter, October, November and December, was adjusted to 30,000 MMBtu per day down from the previous 40,000 MMBtu per day with a floor of $7.50 and a cap of approximately $9. Oil hedges for November and December were also adjusted from 1,500 barrels per day to 700 barrels per day. The oil hedge consists of a swap at $66 per barrel.

Our 2009 commodity hedges consist of natural gas collars for 20,000 MMBtu per day with a floor of $7.75 and a cap of approximately $10 and oil collars for 300 barrels per day with a floor of $70 and a cap of $93.55.

The individual components of our cost structure are detailed in the press release. Pro form net loss to common stockholders excluding the after-tax noncash impairment charge and after-tax impact of noncash unrealized derivative gains was $7.1 million and the reported net loss to common stockholders was $42.1 million for the third quarter. The greatest impact to the loss is attributable to the noncash impairment charge, the impact from derivative losses as well as the decline in production due to our reduced capital spending program.

With that I would like to open up the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Joseph Allman - J.P. Morgan.

Joseph Allman - J.P. Morgan

I think this one’s for you C.W. On that impairment the price is on September 30 I guess you cited 712 and just over $100. Those prices aren’t a whole lot different than where the prices were at year end ’07. What’s the big difference that caused the impairment? Is it the realized prices at the wellhead or could you talk some more about that?

Charles W. MacLeod

I think it’s a combination of the realized prices at the wellhead and then the revisions that you saw or will see as we move forward and the capital costs going into the wells that we had.

Joseph Allman - J.P. Morgan

One issue is the wellhead prices and then the capital costs. Are the capital costs greater than what you had estimated with year-end ’07 reserve report?

John O. Tugwell

As you know the costs have continued to go up through the course of the year. I would hope that we could maybe adjust some of those back down as commodity prices have fallen and the cost structure out there maybe comes back into equilibrium with where prices are right now. But that is part of it. The costs have gone up dramatically since the end of last year.

Joseph Allman - J.P. Morgan

Besides the 87% of it that was that factor, were there some performance related issues anywhere in particular on top of that?

John O. Tugwell

I don’t think anywhere in particular. There were a few kind of spread out amongst different areas just in some of the base decline rates on a few wells out there. Nothing really concentrated in one area.

Charles W. MacLeod

I think that what you’ll see is as we down space in the Flores/Bloomberg some of those revisions associated with that but we’ve got infield drilling that we were able to do and will recapture those reserves with new wells on the infield drilling schedule.

Joseph Allman - J.P. Morgan

Given where we are with costs right now and given pricing, what would you say in your portfolio are the more marginal properties that you had been working on this year but maybe just really aren’t looking too good economically at this point?

John O. Tugwell

I would say that Flores/Bloomberg is still a very strong project from an economic standpoint. We have a very good rate of return there on the wells we’ve drilled. There may be a few of the wells at Chapman Ranch that as prices come down get a little more marginal based just on what we have proven, but we’ve also got some upside to what we have as a proven volume there. That’s probably about it as far as what’s in the proven areas right now. Of course in the non-proven areas as prices come down the shale gas plays get very marginal at today’s prices and lower. But we really don’t have anything significant in the proven category there.

John W. Elias

Following up on John’s comment in the Chapman Ranch, the resource potential there is still very attractive but cost of drilling and completing the wells in there we’ve not got that under control because of the pressure systems, the movement in the formations as hydrocarbons are pulled away and leaks that have occurred and casings that have been filled in the holes, and then we even had an underground blowout and an underground floor in another well. So if we can drill the wells the way we originally expected to in there, the economics would be okay but we haven’t been able to do that as yet and are still trying to unravel that particular problem.

Joseph Allman - J.P. Morgan

What was your cap ex in the third quarter?

Charles W. MacLeod

We spent approximately $13.9 million.

Joseph Allman - J.P. Morgan

Your credit facility I think you have the conforming borrowing base which is $225 million and I think you were last redetermined in May so is it this month when you get redetermined again and is the big issue that the banks are looking at a lower price deck at this point or is there some other difference between May and today just because you’ve slowed up some activity? Is that a factor as well?

John W. Elias

The actual last redetermination was in September of last year initially; then relooked at in May; and then we had a waiver from the banks when we started on the strategic alternative evaluation process to extend that redetermination to October 31 of this year. We have met with them and are going down dual paths and a reassessment of our financial and operating results and also agreed as I mentioned in my comments that we wouldn’t borrow more in aggregate than the $240 million. We currently stand at $239 million.

Before the meeting on December 4 we expect to have feedback from them as to what the new borrowing base will be and what the conforming level is. Of course we have been looking at a variety of different scenarios based on different price decks as to how we will get in compliance depending on what that number is.

Operator

Our next question comes from [David Russell] - Private Investor.

[David Russell] - Private Investor

Back to the credit facility for a moment, is the current conforming level $225 million or $240 million?

Charles W. MacLeod

The conforming level is $225 million with a capacity of $250 million.

[David Russell] - Private Investor

Clearly that number’s going to go down. Will there be a waiver granted most likely if the Chaparral transaction is proceeding towards the satisfaction of the banks?

Charles W. MacLeod

The simple answer to that is yes. We are working towards consummation of a merger with Chaparral and at that time we will be merged with Chaparral and then Chaparral will have a new credit facility in place.

[David Russell] - Private Investor

I know you can’t forecast with perfection at this point, but if Chaparral comes up with a new financing facility, is this transaction going to proceed or are they going to renegotiate the share count? Are they going to do a reverse split of their own stock to get the listing? Can you give us any color or visibility on how this transaction comes together? We’ve got a stock at $0.59. Can you give us any sort of lifeline or comfort about the transaction or if the transaction doesn’t go through that Edge is able to stand on its own?

John W. Elias

At the present time we haven’t negotiated any aspect of the merger agreement that we have with Chaparral and that merger agreement trading on the NYSE, we meet the criteria in one basis but we don’t on the market cap for Edge which needs to be $60 million which our stock would need to be trading slightly north of $2 to achieve that level. If that were to materialize and all the funding is in place, then obviously we would be in closure on the transaction and trading would begin immediately on that.

Charles W. MacLeod

We’re obviously looking at other alternatives as you may imagine but again the goal of both companies is to complete this transaction as disclosed.

[David Russell] - Private Investor

I’m not trying to be difficult. I have a significant personal stake, or I did anyway, in terms of dollars and I’m not trying to give anyone a hard time but if the stock has to trade north of $2 for this to close, there’s something I’m missing because I just can’t see us getting there in the current environment. If Chaparral does a reverse split so that each of their shares is worth more, then they can get listed and this can proceed.

But is there something I’m missing here? How do we get there from here? I understand there needs to be some I’ll say quiet on this transaction, etc. but I do think the shareholders in light of the beating we’ve all taken, insiders included, need to give us a little bit of visibility on how we get to a closing in a reasonable way? By the way, if it doesn’t close because Edge doesn’t get back to $2, do we collect a breakup fee or do we collect nothing?

Charles W. MacLeod

The first part of the question is that again we’re working on [inaudible] if you will trying to get to the completion of the transaction. As you cited, the Edge stock price market cap has to get to $60 million to be listed on the NYSE. That is the preference. It doesn’t necessarily have to happen that way but that is the preference that we would all like to see.

As far as your second question, there is a breakup fee for the financial if Chaparral does not get to the financing in the merger agreement but part of the merger agreement is also a listing on the NYSE. So the simple answer is that if we don’t qualify for the NYSE, there is no break fee.

[David Russell] - Private Investor

I thought it could be listed on the New York Stock Exchange that Chaparral had to have a minimum of $4 stock price and that that was the problem here that the backing out Edge’s stock price it needed to be above where it is now. But if they can get their price up, then they can get listed and this can move forward.

Charles W. MacLeod

As you know, they’re a private entity so therefore they don’t have a market value per se so the implied value is the Edge share price that needs to be qualified for listing on the NYSE.

John W. Elias

And we’re hopeful that with the financing and the credit facility in place and the announcement of that that the stock will rebound and we’ll end up qualifying for the NYSE. Then we will consider other alternatives to move this thing forward and close on it.

[David Russell] - Private Investor

I may listen to the Chaparral call either later or it’s already gone on but if they get that financing and what I’m hearing from you is that there’s some confidence that they will in the next 3.5 to 4 weeks that this will proceed.

Charles W. MacLeod

The assumption that we’re working under is that both companies are working hard in moving this thing forward and trying to complete the merger come December 4 or thereabouts.

[David Russell] - Private Investor

Let me ask this. Let’s assume the worst case scenario which is that that doesn’t happen. Mr. Elias, do you believe that this firm has equity value if we don’t have a deal with Chaparral that there’s going to be a residual equity value for the common and preferred shareholders after taking into account the debt?

John W. Elias

On a stand-alone basis we will have some equity value but a lot of that is on what the new borrowing base is at various ranges that one could envision. We developed scenarios for each of those and of course there’s a jerconian drop in that volume base which we don’t think will go there but what that does is create a whole different scenario for us.

But we think what the eventual outcome will be will allow us to continue on in a stand-alone entity and hopefully extract the value that we see in this portfolio. As I said earlier and we continue to say that we think that the best thing for all stakeholders is for our two companies to merge and that’s why we’re working in conjunction with Chaparral so diligently to get financing in place.

[David Russell] - Private Investor

One last question. You mentioned that there were cash settlements of $12 million on these hedges during the third quarter. Under current prices essentially that wouldn’t be there so that that $12 million otherwise would have gone to reduce the debt. Is that right?

Charles W. MacLeod

That is correct. Under the current conditions as we see them today, we’re basically hedged neutral.

[David Russell] - Private Investor

So the progress I was hoping to see on the debt that didn’t come was largely because you were using your operating cash flow to settle hedges and that going forward that won’t be problematic?

Charles W. MacLeod

That is correct.

Operator

Our next question comes from [Ron Bucks - Cortair].

[Ron Bucks - Cortair]

I have a question about the leveraged post closing with Chaparral and whether you have taken another look at whether this is the prudent step for Edge to pursue given the major drop in commodity prices, energy prices, the difficulties in the credit markets, and is Edge walking into a potentially catastrophic situation via the merger with Chaparral having such massive leverage?

John W. Elias

We don’t think so. If you had a billion dollar line of credit, you should have $200 million of unutilized borrowing capacity but on a combined entity obviously you take stock in what the environment is, the commodity prices, the cash flow and you design an overall program that would be living within your cash flow and reserve and the excess borrowing capacity to capitalize on unforeseen opportunities that are truly not only the eyes of the internal insiders but outside on the street just to really add value.

Of course how long one might expect for commodity prices to be where they are here is problematic. Personally I don’t see prices staying low for the long term given the supply base here in the United States and the dependency on foreign oil and other sources to meet a growing economy that one expects to begin to materialize. Whether that’s a year or 18 months or two years I don’t know but I think the structure of the combined entity priorities will be set for capital investment and doing it in a prudent manner given the financial structure of the company.

[Ron Bucks - Cortair]

Has the Board considered in light of the credit environment and in light of the obvious uncertainty that this deal goes through the stand-alone option and what may be needed for the company in terms of additional capital or what the game plan would be?

John W. Elias

We have discussed with the Board various game plans. We have also been working with the banks and are waiting for what they will determine is our new borrowing base, and from that we’ll make a judgment as to what path to go down. Obviously cash flow to deal with the debt structure and an ongoing operation is one component of it, asset sales to get to conforming level, or to get rid of nonperforming assets that are nonstrategic and reinvest in other areas is part of that.

In today’s environment the question comes up, “Where will you get the kind of value for that asset that you think it is truly worth?” We know that some companies who put assets up for sale receive no bids at this point in time. We know of some companies that put assets up for sale and maybe had one bid and it wasn’t what they wanted and they backed off. Cash infusion from say mezzanine financing or additional equity which I think additional equity is very, very unlikely. But we’re considering all of our options as we go forward here and the Board discussed that but we haven’t come down on any one particular scenario at this juncture.

[Ron Bucks - Cortair]

Do you think that the current share price of $0.50 or so is a reflection of the concern of shareholders regarding the pending merger with Chaparral or do you think it’s more a reflection of a fear that the merger doesn’t go through?

John W. Elias

The shareholders that I have talked to have been very strong and supportive of the combined entity. But I think that many of them have concerns that the financing in this environment will not be there and as a result of that what position will be Edge be in on a stand-alone basis. I think that on a stand-alone basis there’s some element that think that survival may be a concern. We don’t think that’s the case but that’s a legitimate concern that they have out there and I think that’s all contributed to the price deterioration that we’ve seen in the market place.

[Ron Bucks - Cortair]

From my firm’s standpoint we think that the Board ought to reconsider this merger with Chaparral, take a look at a stand-alone operating Edge at least in the short term and take whatever steps may be needed to enhance shareholder value over the intermediate term. But walking into this exceptionally highly leveraged combination for us is an even bigger negative than we’ve seen to date in the stock price.

John W. Elias

We will certainly take that into consideration and appreciate your very thoughtful comments.

Operator

Our next question comes from Joseph Allman - J.P. Morgan.

Joseph Allman - J.P. Morgan

In terms of the timetable with the bank issues I know you mentioned it but could you just give us that again? What is the timetable going forward in terms of the bank redetermining your borrowing base?

John W. Elias

They’re in the review process at this juncture and they’ve got to pull the engineering together with their respective management team and carry it on up to their credit committees. We know that we’ll have something in advance of the December 4 meeting. We do feel that it’s appropriate to provide supplemental proxy material to our shareholders at least 10 days in advance of that meeting so our expectation is that we would be receiving something from the banks in that regard by at least the middle part of November at the earliest point.

Joseph Allman - J.P. Morgan

Maybe you covered this a little bit but besides costs increasing in terms of the assets, any problems with any of the pre-reserves? Any negative revisions you see based on performance of any specific assets that you can talk about?

John O. Tugwell

We normally don’t announce our reserves except the year-end timeframe. We’re in the process now of working through the quarter end and everything and going over it with the banks. As normal we’ve got positives and negatives through the portfolio. We do have a few performance adjustments through the portfolio but nothing that I’d characterize as hugely significant. That’s again something that we normally announce at year end once we go through the whole thing with our third party.

John W. Elias

Let me amplify on that just a minute. As you know we started out the beginning of the year and we produced about $13.7 million, somewhere in that neighborhood of production through the first three quarters of the year and we project $17.2 million to $17.9 million for the full year. So that comes off the beginning of the year number.

We expect to drill and/or spud about 2/3 of the number of wells that we would consider to be normal for us in a given year and we’ve met the expectations I think in terms of success associated with those wells going in there. Then in the field there’s been some positive performance improvement and there’s been some that has declined much more rapidly than one might have expected.

Therein lies one of the problems as a stand-alone company for us in that we have a short reserve life profile, eight years +/-. It keeps us on a treadmill. Today’s technology allows everyone to go in and complete wells and bring them on in a much higher rate than historically. But we have a higher decline rate that we’re faced with. You come in and put compression that bumps it back up and then it starts declining again.

So predicting the ultimate performance of some of these wells is a more difficult than I think we might have experienced 10 or 12 years ago. But all of those factors are there and we’re trying to deal with those. The cost structure that we have within our company is that we have no long-term commitments on any rigs so we ride the wave of those costs and the same thing with the services, tubular goods obviously have gone up, and we’ve had some difficulty at times getting those for operations but we’ve turned some back when we weren’t ready to drill a well. We think we can still get back in line.

But there’s a whole assortment of things that we’re trying to deal with to ensure that in this interim program we can meet the expectations that we’ve laid out for us. As I said it’s just unlikely and unreasonable to assume that with the capital expenditure that we have this year that we can grow our reserves and increase our production. Over the previous year that’s just not going to happen.

Joseph Allman - J.P. Morgan

I think John Tugwell you mentioned you’re drilling a [deep frio] well coming up pretty soon. Is there a need to drill that because the lease is going to expire? I would think that you would be just doing blocking and tackling instead of drilling high-risk wells so I’m thinking there might be some kind of expiration issue.

John O. Tugwell

We’re actually drilling the well on a lease that we have HBP. There’s an offset lease that we have that’s still got some term left on it but on that prospect we think the risk to return there is very good right now. It’ll be one of the few kinds of pure expiration wells that we’ve even drilled this year. Most of what we’ve done this year has been block and tackle for the most part. We think it’s the prudent thing to do to get it drilled and we also have a carry on the well with our partner who’s carrying our 50%. They’re actually paying half of that so Edge’s exposure is pretty minor in the scheme of our program.

John W. Elias

We got a recoupment of half of the half a cent cost and seismic in the land as well as it carried position at least in a portion of the drilling of the well.

Joseph Allman - J.P. Morgan

Still on the operations side, any news recently on say the Fayetteville Shale or any other areas that would be helpful in terms of maybe getting some reserves back or just give me some optimism about going forward in operating some of your properties?

John O. Tugwell

There’s actually been a lot of positive information coming out of the Fayetteville. Some of the offset operators, the major players in the trend, have been drilling a number of wells around our position with improved fractured techniques and longer laterals. We’re seeing the initial rates really come up in those new wells around us which is very encouraging for our acreage position out there.

Also on our particular acreage position what we’re working on right now is to get a saltwater disposal well permitted and put in place out there. As you know we’ve got several wells that tested at very encouraging initial gas rates in the 1.2 million to 1.5 million a day but made substantial water production from a zone that is below the shale section that we fracced into. So our thought is that if we can get those wells back on line and dispose of that water, we could really have a positive impact out there. Right now we don’t have any value on the books for those particular wells that are shut-in.

That’s the other direction that we’re trying to pursue out there to add some value back to our position.

Joseph Allman - J.P. Morgan

C.W., anything on the hedging that you have for the rest of this year? You’re still hedged I think more than your production so what’s the implication or you in terms of cash out?

Charles W. MacLeod

We’re basically neutral to our production for the rest of the year. And obviously we had that swap at $66 on the oil so it depends on where the oil goes, how volatile it is here in November and December.

Joseph Allman - J.P. Morgan

Are you seeing any especially wide basis differentials and if you are, could you help us understand that a little bit better?

Charles W. MacLeod

No, we’re not seeing anything affecting us on the basis at all.

John O. Tugwell

Not in our main producing areas. We sell most of our gas on an index basis and we haven’t seen really anything out of the ordinary. I know the only place that I have heard that there is a large differential was up in Arkansas and our production there is real small so it really doesn’t affect our stream very much.

Joseph Allman - J.P. Morgan

Third quarter, what was your oil realized price pre-hedge and the same thing for natural gas? And taxes, current versus deferred?

Charles W. MacLeod

We’re going to have to get back to you on those numbers. I’ll send you an email.

Joseph Allman - J.P. Morgan

When are you going to file your 10Q?

Charles W. MacLeod

Today.

Operator

Our next question comes from [Charley Cheever - Cortair].

[Charley Cheever - Cortair]

This is for John Elias. I think I would reiterate my partner, Ron Buck’s opinion that we feel like we would be much better off as an independent company. We think also the opportunities in the next 24 months will be substantial to possibly expand the business provided that we can get additional financing and with the rates coming down, it’s getting cheaper to finance the revolver than it was let’s say a year ago.

The other opinion on this for most people who haven’t been around a long time is if you remember Chesapeake in 1991. They were in substantially worse shape than we are now as an independent. They drilled their way out of it and became the largest gasket in the US. For some of us who were involved in that or around that situation, it turned out well and they were on their backs without a lot of opportunity at that point.

So I think we’re in much better shape, we would much rather be an independent company, and if we have to we’d rather have a discussion sometime in the next couple of weeks on possibly doing a rights offering versus finding outside investors, etc. I want to keep that as an option as well.

John W. Elias

That’s one of the considerations.

Operator

I show no further questions or comments at this time. I’d like to turn the conference back over to the speakers for any additional or closing comments.

Charles W. MacLeod

Thank you very much for your participation in the conference call this afternoon. We look forward to speaking with you in the future.

Operator

That does conclude our conference for today. We thank you all for joining us.

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