Synergy Resources' CEO Discusses Q1 2013 Results - Earnings Call Transcript

Jan. 9.13 | About: Synergy Resources (SYRG)

Synergy Resources Corporation (NYSEMKT:SYRG)

Q1 2013 Earnings Conference Call

January 09, 2013, 12:00 PM ET

Executives

Edward Holloway - President and CEO

Monty Jennings - Principal Financial Officer

William E. Scaff Jr. - VP, Secretary and Treasurer

Craig Rasmuson - VP, Operations and Production

Analysts

Irene Haas - Wunderlich Securities

Kim Pacanovsky - MLV & Co.

Welles Fitzpatrick - Johnson Rice

Joel Musante - C.K. Cooper & Company

John Malone - Global Hunter Securities

Jared Lewis - Northland Securities

Robert Young - Wm Smith & Co.

Jeffrey Connolly - Brean Capital

Richard Dearnley - Longport Partners

Jon Jung - Trailhead Asset Management

Steve Emerson - Emerson Investment Group

Operator

Good morning, everyone, and thank you for joining us to discuss Synergy Resources’ First Quarter Results for the period ended November 30, 2012.

With us today are Synergy Resources’ Executive Vice President, William Scaff, Jr.; and CFO, Monty Jennings, and Vice President of Operations, Craig Rasmuson. Mr. Ed Holloway CEO and President will not be joining us as he is under the weather, but might join us for the Q&A session.

Following the prepared remarks, we’ll open the call to your questions. Then before the conclusion of today’s call, I’ll provide the necessary precautions regarding forward-looking statements made by management during this call. I’d like to remind everyone that today’s audio conference call will be available for replay through February 9, 2013.

The webcast replay will also be available via the company's website at www.syrginfo.com.

I would now like to turn the call over to Executive Vice President, Mr. William Scaff. Sir, please proceed.

William E. Scaff, Jr.

Thank you, Ron, and good morning, everyone. Thank you for joining us today. We issued a press release this morning announcing our financial results for our fiscal first quarter that ended in November. We will follow the Form 10-Q shortly which will be available in the Investor Relations section of our website and on www.sec.gov.

As we reported in the release, we continued to successfully execute on our vertical and directional drilling program in the Wattenberg Field of the DJ Basin driving strong growth and production and revenue for the quarter. Revenue increased 86% over the year-ago quarter totaling 8.3 million. Operating income was up more than 119% to 3.5 million and net income totaled 2.2 million or $0.04 per share.

Fiscal Q1 2012 did not include any income tax expense while fiscal Q1 2013 included a deferred tax expense of 1.3 million. Keep in mind that's equivalent to $0.03 per share. The year results reflect an 89% increase in oil and gas production over the same year-ago quarter to 150,909 barrels of oil equivalent or BOE. This equates to an average of 1,658 BOE per day during the quarter versus the daily average of 876 BOE per day a year ago and a daily average of 1,270 BOE per day during the quarter ended August 31, 2012.

Sequential production growth on a quarterly basis was 29%. We continued to grow rapidly in the face of lingering high line pressure within the existing gathering and processing systems. As operator, we drilled 25 vertical directional wells and brought 15 into production during the quarter. In December, we drilled two more wells. This increased the total number of wells we have drilled since inception as an operator to 134 with 112 brought into commercial production so far. And as of December 31, 2012, the remaining 22 were being completed. Unless we experience weather problems or unforeseen delays, the wells in progress should commence production during the second quarter.

As of the end of December, our overall well count including operated wells, non-operated wells and producing wells acquired from our other owners included 250 gross production wells which equates to 197 net wells and 23 gross wells in progress. This productive activity has led to an increase in our estimated proved reserves. We currently estimate proved reserves of 5.2 million barrels of oil and 33.6 billion cubic feet of gas as of November 30, 2012. The estimated present value of these reserves before tax and discounted 10% is 160 million. Our next completed reserve analysis will be prepared with an effective date of February 28, 2013.

I'd like to now turn the call over to our CFO, Monty Jennings, to take us through the details of our financial results for the quarter.

Monty Jennings

Thank you, Bill and good morning everyone. Thanks for joining us today. Now turning to our income statement, as Bill mentioned, our revenues totaled $8.3 million in the first fiscal quarter of 2013. This represented a sequential increase of 23% from the previous quarter and an 86% increase from the same quarter a year ago.

The year-over-year improvement was due to the 89% increase in production that Bill discussed. This increase was primarily attributed to 73 new wells that have come online over the past year which was partially offset by a 2% decrease in our realized average selling price per BOE.

During fiscal Q1 2013, our average sales prices were $81.03 per barrel of oil and $4.27 per Mcf of gas as compared to year-ago prices of $83.03 for oil and $5.23 for gas. Our operating income increased 4% from the previous quarter to 3.5 million and increased 119% from the first quarter of last year.

Net income increased 15% from the previous quarter totaling $2.2 million or $0.04 per basic and diluted share and increased 38% from the first quarter a year ago. Although we do not have any income taxes currently payable the recognition of deferred income tax expense has become an important component of net income. We record an estimate of taxes that will be paid in the future after we use our net operating loss carry forward of $34 million. We use a tax rate estimate of 37%, which is based upon current tax law. Our estimated tax rate would change if new tax laws are enacted.

Adjusted EBITDA, a non-GAAP term, increased 20% from the previous quarter to $6 million, which represents 73% of revenue and an increase compared to one year-ago. Please refer to our more detailed discussion about our use of adjusted EBITDA and its reconciliation to GAAP in the earnings release, which can be found in the news section of our website.

We continue to remain focused on being a low cost producer in the D-J Basin while continuing to maintain strong production growth rates that we believe will drive impressive EBITDA growth and margin. G&A cost have continued to decline on a per BOE basis. We currently have 14 employees and expect to add only one or two additional employees over the foreseeable future.

Now briefly turning to the balance sheet. We continue to deploy capital in a measured and consistent manner with a focus on driving strong production growth. As of November 30, 2012, we had cash and equivalents of $12.5 million as compared to $19.3 million at August 30, 2012.

During the quarter, we increased our access to capital by expanding our credit facility with Community Banks of Colorado. This facility provides a world class source of funds with a maximum interest rate of LIBOR plus 3.25%. We expanded credit facility as a total borrowing commitment of $150 million limited to a borrowing base derived from the present value of our reserves. The initial borrowing base is $47 million based upon the August 31, 2012 reserve report. The borrowing base is scheduled for semiannual re-determination by the participating banks as Ryder Scott updates our reserve report.

Over time we believe we will be able to access the flow line as required to fund our drilling program, feature acquisitions and leasehold expansion. For example, the assets acquired from Orr were not included in the current determination and will be added to the February 28, 2013 analysis. To comply with certain terms and conditions of the enhanced bank credit facility, we have initiated a hedging program. Effective January 1, 2013 Synergy entered into a commodity swap for 58,000 barrels which approximates 15% of oil production for the next 24 months as shown in our reserve report.

Synergy will pay the monthly average price per barrel for West Texas intermediate based on the New York mercantile exchange price and will receive an average payment from the counter party of approximately $91 per barrel. Starting in the second quarter both realized and unrealized gains and losses from the swap will be reported in the following income statement. We will increase our hedging position within the next two months. The terms of the credit facility required a hedge position of at least 45% of our estimated rolling 24-month production.

In summary, between our cash generated from operations and access to the enhanced credit facility, we’re well positioned to fund the remaining portion of our 2013 CapEx program.

I’d like to turn the call over to Craig Rasmuson who’ll provide more insight into the operational aspects of our business.

Craig Rasmuson

Thank you, Monty. Looking back over the first three months of our 2013 drilling program which began September 1, 2012, we have drilled 25 vertical directional wells. These 25 wells drilled represent the number we had set forth for the entire 2013 vertical directional drilling campaign. This means we’re well ahead of schedule on our current drilling trail ground. With our vertical drilling program completed early, we can now focus entirely on our operated and non-operated horizontal drilling program as well as integrating the recent acquisition of Orr Energy.

We have plans to drill our first four horizontal wells in the second half of fiscal year for our own accounts of 2013. In addition to these four, we have received notices on 16 horizontal wells as a non-operator. Our working interest in these wells would range from 3% to 50%. We plan to proceed carefully in adding horizontal wells to our program as the drilling and completion technology is evolving rapidly and the ROIs continue to improve with each new horizontal well drilled.

For longer term, the majority of our wells will be drilled and completed horizontally as the Wattenberg Field proves to be responsive to this type of drilling activity. In addition to the strong progress within our organic drilling program, we've closed the Orr Energy acquisition on December 5. The Orr acquisition expanded our position in the core Wattenberg Field and Northern extension of the field, including 36 producing wells in the Wattenberg Field with an average daily production of 360 BOE.

It also included leases on 3,196 net acres comprised of 2,191 in the core Wattenberg and 1,005 in the Northern extension of the field located in Grover, Colorado. We expect the daily production of the 360 BOE a day could be improved and we are currently evaluating methods to stimulate incremental production from these existing wells. We will also be again reviewing the existing seismic data of the Grover acreage to determine a plan to begin drilling there as soon as the fourth quarter of our fiscal year.

And staying consistent with our desire to remain a low-cost producer in the Wattenberg Field, we do not anticipate any significant incremental G&A costs to integrate or manage the new Orr assets. As Monty indicated, access to an increased credit facility coupled with growing operating cash flow leaves us well positioned financially and we are currently ahead of schedule with our planned 2013 drilling program.

At this time, we were then committed to spending 82 million in our fiscal 2013 develop and drill our current acreage and pay for the cash component of the Orr acquisition. We have spent 12 million to drill 25 vertical wells so far and plan to spend approximately 17 million to drill four horizontal wells later this fiscal year. An additional 14 million has been estimated as our portion of the costs of vertical and horizontal wells in which we are planning to participate as a non-operator. We also are planning for recompletion costs of approximately $1 million for our existing wells.

Under our proposed acquisition program, exclusive to Orr Energy, acquisitions of undeveloped acreage and possible proved properties is expected to require funds of around $5 million. 30 million has been spent to fund the cash component of the Orr acquisition deal and CapEx spent year-to-date represents approximately 55% of our total 2013 CapEx budget.

Now with that, we'd like to open the call to questions, so back to you, Ron.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from the line of Irene Haas from Wunderlich Securities. Please go ahead.

Irene Haas - Wunderlich Securities

Yeah, can you hear me okay.

William E. Scaff Jr.

We can, Irene.

Irene Haas - Wunderlich Securities

Okay, two questions. Firstly, you're going on a sequential growth rate of 29% for this quarter. Is that a reasonable number that we should have in our head? And also considering that you'll be folding in some of the horizontal wells, maybe give us a little more color on it? My second question has to do with the oil and gas production mix. How should we look at this in the next quarter? What is the proportion of oil versus gas that you guys are budgeting?

William E. Scaff Jr.

Craig, you want to address that in terms of the production…

Craig Rasmuson

The oil and gas side of that Irene, we obviously as you know the story well, we're curtailed the last quarter of – extremely the last quarter of 2012. So obviously we saw a dip in our gas production and a great increase here – great – in the first quarter of ’13. That increase is due to a number of reasons. One, the curtailment is subsided a little bit as far as the gas line infrastructure being extreme and is still high to very high on certain days, but we’re through our compression and a vapor recovery unit we put out on one of our very, very strong recent pads or Aims/Greeley Country Club pad we’re producing a lot more gas with production coming on. Also with the horizontal wells, the Wake well that were in with Noble Energy, the Leffler wells with PDC Energy and the (indiscernible) wells had come online with Bill Barrett Corp., they’re very, very good oil and gas wells, but a very high level of gas so that’s moved – that’s more pointed a little bit on that when you valuate that.

William E. Scaff Jr.

Then Irene with regards to your first question, the 25 wells that we drilled in this first quarter all being completed and they’re all going to be brought on in the second quarter and then following up with a horizontal program. So we do see sequential strong growth as we go into the second, third and fourth quarters.

Monty Jennings

Irene, by way of comparison in the quarter that just ended we brought on 15 wells that we operate, but also eight wells that we participate in and two of those were two horizontals which are coming in strong and do have a little higher – seem to have a little higher gas mix in their initial phases. We’re going to bring on about the same number of wells in the second quarter and then in addition to that the revenues from the Orr acquisition will start to be recorded by us in December. So we will pick up a full quarter of the Orr acquisition.

Irene Haas - Wunderlich Securities, Inc.

Great. Thank you. This is fair again.

Monty Jennings

And to let everybody know Mr. Holloway is also been able to join us during this question-and-answer period.

Operator

Your next question comes from the line of Kim Pacanovsky from MLV & Co. Please go ahead.

Kim Pacanovsky - MLV & Co

Hi. Good morning and good afternoon everyone. Obviously, one advantage of being non-op in so many wells as you get to see first hand the capabilities of different rigs and what they’re doing to complete the wells. Can you just comment with – you don’t need to use company names at all, but can you just comment on some of those differences you’re seeing and how that might play into your decisions when you’re operator later on in the fiscal year?

William E. Scaff Jr.

This is Scaff. I think what we’re really noticing is, more so is that everybody is definitely going to pad drilling and drilling on multiple wells of a pad and that’s the most significant thing that we’re seeing. We’re also seeing a variety of what we call mid laterals and extended laterals and short laterals, so it’s all across the board on that. But the one definite thing is going off pad drilling and that’s one of the good things that we have is that, all – the vast majority of our wells are off pads, we own a majority of the pads that we do have, and we’re in very good position to execute on that side of the equation.

The variable between how many fracs per laterals keeps – between companies keeps changing. The other thing that we're noticing is, I don’t know if you’d noticed in our release that with Bill Barrett we did a B Bench and a C Bench. We’ve also participated with Noble on a Codell. We had several AFEs on some additional Codell’s. So, we’re really seeing a lot of them, a variation of different horizontal layings in different formations. People are really accelerating that side of it, and that’s really the accelerator for us as we go forward is that, with Noble and Anadarko pressing the envelop on spacing, it’s very exciting and now seeing C and B Bench Codell it just boards well for us in the future.

Kim Pacanovsky - MLV & Co

Okay, great. And I’ll just ask one more question. Can you give us an update on anything new you’ve learnt and your eastern acreage or that would affect your eastern acreage?

Monty Jennings

You know there really isn’t anything to date. We’re anticipating Apache some time first from possibly early second quarter moving in that area. We do know there's a quite a bit of seismic activity going on and the leasing activity has picked up to the north of us by Apache. So we're sandwiched between Apache and Kansas in Nebraska and then to the north of us in Nebraska. So I think they like what they're seeing but that's the best we can give you on that front.

Kim Pacanovsky - MLV & Co

Okay, great. Thanks a lot guys.

Operator

Your next question comes from the line of Welles Fitzpatrick from Johnson Rice. Please go ahead.

Welles Fitzpatrick - Johnson Rice

Good morning.

William E. Scaff Jr.

How you doing, Wells?

Welles Fitzpatrick - Johnson Rice

What percent of these notices typically translate into actual drilling? I mean do you think it will be the full 16? I guess another way to put it would be how many notices did you get in '12 that translated into those five non-op horizontals?

Craig Rasmuson

I think originally we were notified on 23 with seven of them we've already discussed in our in-production or close to production. The remaining 16 we feel will happen in 2013 whether it's our fiscal 2013 or calendar 2013, but we feel that all 16 of those will be drilled this year.

Welles Fitzpatrick - Johnson Rice

Okay. So that's not simply people getting ahead on permitting. Those are actually going to be drilled, okay.

Craig Rasmuson

That's correct.

Welles Fitzpatrick - Johnson Rice

And then if that pace continues or accelerates, would you guys pull an operated program or likely just increase the budget?

Craig Rasmuson

Probably increase the budget.

Welles Fitzpatrick - Johnson Rice

Okay. And then on the hedging, you talked about oil. Any desire or want on your bank's part to hedge on the gas side or do you guys not want to do that down here?

William E. Scaff Jr.

Yeah, we don't want to do it at these prices and there is no requirement within our bank agreement to hedge the gas side. It's strictly an oil requirement.

Welles Fitzpatrick - Johnson Rice

Okay. And then one last one a little bit more generic and you guys kind of hit on it on your comments at the top, but have line pressures continued to improve in kind of late December and in the new year or do we sort of get that large slug of weather-related improvement and maybe it's flattened out a little bit? Could you just talk to that?

William E. Scaff Jr.

I think it's a combination of really you just kind of address their wells. We did see improvement but it was improvement from extreme to high and we're still seeing blimps of extreme line pressure. We went straight from hot, hot, hot summer to just cold, cold, cold winter and we've got some freezes we're battling with, DCP has freezes they're battling out there as we speak. They still are working their loop line systems and according to them, I spoke with them recently, they're still on schedule for a July-August turn on of their LaSalle plant. But the gas line pressures when they were extreme were pushing over 300 pounds. That really, really curtails you to an extreme percentage.

Now they're ranging between 215 to 260 pounds of pressure which is still very high, but we'll have blimps of days in certain areas. Some will turn the horizontal well on or you'll have a freeze and that's in the same neighborhood where we have production and that will shut us in for an extended period of time. We've just recently had some well shut in that are getting ready to be turned back on because they corrected a freeze, but it's also an area that they did an 8-inch loop line that turns on next week.

So the [posy] continues to come and show up, but there is just so much production and so many new wells horizontally being turned on into this infrastructure that it's -- there's an ebb and flow to it, its one week. We'll feel really good about it. The next week, we're pulling our hair out again. But it's gradually, gradually slowly getting better.

Craig Rasmuson

The good news here, Welles, is we've been able to continue to grow in light of the high line pressure. If that high line pressure was off, we'd probably be up another 15% to 20%. So we hope to have some relief as these new facilities come on board in the early summer.

Welles Fitzpatrick - Johnson Rice

Okay, perfect. Thanks, guys. That's all I had and I hope you feel better, Ed.

Edward Holloway

Thank you. I do too.

Operator

Your next question comes from Joel Musante from C.K. Cooper & Company. Please go ahead.

Joel Musante - C.K. Cooper & Company

Hey, guys. Good morning.

William E. Scaff Jr.

How you doing?

Joel Musante - C.K. Cooper & Company

Pretty good. With regards to your two non-op wells that you plan to purchase (indiscernible), I believe it was the North Colorado extension area. How much of that acreage do you think could be de-risked from those wells? I believe you have about 13,000 acres in total in that area?

Monty Jennings

You know I’d really – I don’t think that those two particular wells we’re going to derisk a significant amount for us. It will give us a good opportunity to see how they’re attacking at [Creso] is definitely an extended reach well. And we do had some acreage in that area, but not to any great extend on a derisk basis.

Joel Musante - C.K. Cooper & Company

Okay. All right. And then on your – you alluded earlier that you might ramp – go to mainly a horizontal well program in the future, you’re drilling a lot of verticals now. I’m just trying to get a picture of what that horizontal program might look like, if in the future?

Monty Jennings

Well, it’s a process of you’re battling two things. We’re trying to HPP as all our acreage and the cheapest way to do that is vertically. So, now we designed a plan to really give us some data points for our horizontals, when we do that then it’s just a matter of the capital and how we wanted to put that capital to use within, get that tied away of production through horizontal production. It’s a process and we’re excited about it, but it’s still a capital intensive way to explore and we’re getting prepared for it.

Joel Musante - C.K. Cooper & Company

Okay. All right. And on the current operated program, what kind of a timeline should we expect for those four wells to come online?

Monty Jennings

Well as we spoke before, we’re really looking at line pressure and seeing how those things occur. We’re probably looking our later part of our third quarter into our fourth quarter. Really the question for us right now is we can drill four horizontals off a one pad, maybe two B Bench, two Codells or we can go all B Bench or we can go to singular or laterals in four different areas and really looking at which is the best way to go at this point in time and that’s really where we’re at right now.

Joel Musante - C.K. Cooper & Company

All right. And what would help you to determine that, the non-op program or you’re looking at something else?

William E. Scaff Jr.,

Well, watching what these other operators are doing or what the cost savings are. And luckily two other places we’re really looking at, there’s been some very successful horizontals. In fact all our horizontals have been very successful in production wise and [faring] out where we really want to attack it from our angle. We have the luxury that a lot of our horizontal we control 100%. We're in discussions with other companies on larger plans that they have going forward, so we’re in on top of exactly what they’re looking at and how the pad drilling really takes place. So, we’re at a pretty good position to really pick and choose where we want to go.

Monty Jennings

We’ve got a lot of choices Joel and we’ll be making those determinations over the next 30 days.

Joel Musante - C.K. Cooper & Company

Okay, all right. And on your – on the 16 non-op wells, what's the – kind of the net well count on that group? I don’t know if you calculated it earlier.

Monty Jennings

That would probably – whereas the range is from 3% to 50%, but we have a lot of them in the 12.5% range, so and 25% …

William E. Scaff Jr.

I really think our net is going to be right around 25%.

Joel Musante - C.K. Cooper & Company

Yeah. All right.

Monty Jennings

So, four net wells; three to four.

Joel Musante - C.K. Cooper & Company

All right. So most of your non-op budget would be horizontal wells?

Monty Jennings

Correct. Yes, correct.

Joel Musante - C.K. Cooper & Company

Okay. All right. And just to get an idea on the current production where were you at, where you ended the quarter, if you have kind of a benchmark there to go from?

William E. Scaff Jr.

We ended the quarter north of 2,000 barrels a day to our interest. That's just operated wells. That's not including Orr, that's not including non-ops. So we've certainly ramped that up and feel like we're obviously going to continue to increase that with maximizing the Orr, with bringing on more non-ops but also turn all these other wells that we've drilled since September 1 of '12 first quarter, all those will be turned on over the next 45 days, six of which of those get turned on tomorrow. So there is a phase in process there. So we feel like obviously those – that BOE a day to our interest of what we operate will continue to increase on into third quarter and then obviously at that point, we're starting our operated horizontal program, so we will kick that off equally and hopefully what we're doing on quarter-by-quarter now.

Joel Musante - C.K. Cooper & Company

Okay, well that sounds great. Well, that's all I had. I appreciate it.

William E. Scaff Jr.

Thanks a lot, Joe.

Operator

Your next question comes from John Malone from Global Hunter Securities. Please go ahead.

John Malone - Global Hunter Securities

How you doing, guys? Just a couple of quick housekeeping questions. It looks like on a year basis, DD&A was up sequentially by about 30%. Is that more a function of last quarter or is there something going on in terms of a trend in DD&A that we didn't know about?

Monty Jennings

That was partially garbled. The question -- the DD&A rate was very constant between the fourth quarter and the first quarter so the increase in the absolute dollars was a function of the increase in production. As we forecast that number going forward, we do expect a little bump in the rate from the Orr assets. They'll probably come in a little higher than the $15 per BOE that we're currently reporting. But there was no real change in the rate between the fourth quarter and the first quarter.

John Malone - Global Hunter Securities

Okay, thanks. And then if you could just reiterate where the [slot] is structured. You said it's 58,000 barrels over the next 24 months and that represents 15% of what you think production will be. Did I hear that correctly?

Monty Jennings

That's 15% of what's in the reserve report. So if you use the reserve report as your forecast, that is correct.

William E. Scaff Jr.

PDP.

John Malone - Global Hunter Securities

Okay. All right, thank you.

Operator

Your next question comes from the line of Jared Lewis from Northland Securities. Please go ahead.

Jared Lewis - Northland Securities

Good morning, guys.

William E. Scaff Jr.

Good morning, Jared.

Jared Lewis - Northland Securities

Just a quick follow-up on the hedging, on the last question, 15% to the 45%, what kind of timeframe do you see that being implemented?

Monty Jennings

We'll get those in place during the next 60 days.

Jared Lewis - Northland Securities

Excellent. And then just a more general question on the 16 non-op on the horizontals, are you seeing any characteristics as far as the lengths, the B bench, C bench, any color you could give that you're seeing on those?

William E. Scaff Jr.

Well, we are getting more AFEs and we're just getting a variety of different lateral lengths and a lot of that depends on everyone's acreage position and where they're going. We are seeing quite a few 6,500 foot laterals. We have not seen many 9,000 foot laterals and we continue to get AFE on some 4,500. So we call them short lateral, mid lateral, long lateral, but we're seeing it as more mid in the 6,500 foot. And then we are seeing more (indiscernible) coming on line.

Jared Lewis - Northland Securities

Thanks.

William E. Scaff Jr.

The other thing I will tell you that we are seeing is getting AFE noticed and then getting change of plans and AFE noticed again that they're going to drill more and not less.

Jared Lewis - Northland Securities

What do you think is still driving that – you originally thought 10. Not too far after that conference call we're adding six.

William E. Scaff Jr.

Well, it's part of permitting title work and once it gets set up on a pad, we’re just seeing more efficiencies off the pads. There is one more success, yep.

Jared Lewis - Northland Securities

Okay. Success drive (indiscernible). And just real quick, acreage held by production, do you a have percentage?

William E. Scaff Jr.

Little over 8,000 acreage right now.

Jared Lewis - Northland Securities

Okay. Perfect. Thanks guys.

William E. Scaff Jr.

Thank you.

Operator

Your next question comes from Rob Young from William Smith. Please go ahead.

Robert Young - Wm Smith & Co.

Hi guys. Good morning.

William E. Scaff Jr.

Good morning, Rob.

Robert Young - Wm Smith & Co.

Is there any incremental change to margins as the horizontal program gain traction?

William E. Scaff Jr.

Just more production.

Robert Young - Wm Smith & Co.

Just more production, so margins are expected to still be in that kind of low 70 range?

William E. Scaff Jr.

You know we’re hoping to hold at there. We don’t see any reason why we can’t at this point of time …

Robert Young - Wm Smith & Co.

Okay.

William E. Scaff Jr.

…based on the current economics.

Robert Young - Wm Smith & Co.

Okay. Okay, great. Monty can you provide an update on the cash and debt levels to account for the Orr?

Monty Jennings

Yes. Since November 30th, we did close on the Orr transaction on December the 5th and that took a $30 million cash payment at that point of time. So we have at this – at the end of December we had drawn about $42 million on the line of credit and add a $5 million borrowing capacity.

Robert Young - Wm Smith & Co.

Okay. Okay, great. Regarding your -- the PV-10 that you, it’s a list I think there is about a $160 million or so, how much of that is horizontal driven?

Monty Jennings

Yeah, there is about – there is less than a dozen horizontal wells in that, but I couldn’t tell you just right up about. All I have to go dig that out. We did get some credit to the horizontals in this reserve report, not as much as you might think at this point of time. But I can dig that out, but I don’t have it with me at the moment.

Robert Young - Wm Smith & Co.

Okay. Great. And then lastly when you purchased the Orr assets, I think you guys gave some indication that there is quite a few vertical as well as horizontal wells that you could drill on at some future date. I was just wondering when that date might be?

Monty Jennings

It will just be put into our program as we go forward now that everything [measures] together. So it’ll be in our CapEx as we move forward. As I had stated earlier, probably going forward everything is going to be horizontal.

Robert Young - Wm Smith & Co.

Okay.

Monty Jennings

And they bring a lot of acreage that blocks up our current stuff that will allow us to expand that horizontal program.

Robert Young - Wm Smith & Co.

Okay. Okay, great. All right, that’s all I have. Thank you very much and congrats on the quarter.

Monty Jennings

Thanks, Rob.

Operator

Your next question comes from Jeffrey Connolly from Brean Capital. Please go ahead.

Jeffrey Connolly - Brean Capital

Hi, guys. Can you talk a little bit about the competition for leases in the Wattenberg and what acreage you guys are seeing and if there’s anything still available?

Monty Jennings

I’ll answer that kind of twofold. There are still pieces out there that we’re actively picking up. We’re adding to our portfolio on a monthly and definitely quarterly basis not nearly at the rate we were obviously starting out because it is pretty well picked over. What you have going forward though too is you’ve got things from the rush from two, two and half years ago that were three year leases with options and sometimes with options, sometimes with not that other operators other brokers somebody picked up trying to make worth for some operator and those are expiring and they’re in key places, we’re tracking those and we’ll continue to pick some of that stuff up that was part of the mad rush, but it’s not gotten – has not been developed and will not be held by production.

So, there’s going to be a second wave here I think and hopefully at a more realistic rate of lease that paid up bonuses when a couple of other big, big operators came into the base and got really crazy over the last two years, but they’re coming back to more of a reality that we can capitalize on.

Jeffrey Connolly - Brean Capital

All right. And you – I think you mentioned you had about $5 million budgeted this year for additional leasing?

Monty Jennings

Correct.

Jeffrey Connolly - Brean Capital

All right. Thank you very much guys.

Monty Jennings

You bet.

Operator

(Operator Instructions). Your next question comes from the line of Richard Dearnley from Longport Partners. Please go ahead.

Richard Dearnley - Longport Partners

Good morning. Could you give us some color on the C bench well that you're involved in? You said at one point all the horizontals are looking successful. How does that compare?

Craig Rasmuson

Well, we only have one C bench that we're involved in and it looks identical to the B bench well that we're involved in with (indiscernible) they're like twins. So we're very encouraged by that but that's all the color we could give you on this point.

Richard Dearnley - Longport Partners

Right. And in the first quarter, how much of the CapEx went to acreage acquisition?

Monty Jennings

The 12 million and the cash expenditures almost none of that was acreage. We did do a little bit of acreage acquisition in exchange for leases, I think it was about $0.5 million from memory.

Richard Dearnley - Longport Partners

Okay. And after the state lease sale in Nebraska, have you been able to acquire other acreage out there other than the lease sale?

William E. Scaff Jr.

We've acquired a few that have – we're basically block and tackling, throwing in our [voids] a little bit but we're not really that active outside of doing that.

Richard Dearnley - Longport Partners

Right, okay. And then on the 16 AFEs that you got, do you say you were – did I hear carefully evaluating them which would imply you may not go into some of them?

Craig Rasmuson

No, just evaluating them for our own due diligence. We'll be participating in all those. We just like to take the different AFEs from different companies and really dissect them and really see where – whose doing what and what cost frame do they have going forward, i.e. fracts, types of pipe, things like that.

Richard Dearnley - Longport Partners

Right, I got you. And then I haven't had time to work though this but on your hedging program if you're at 15% and you want to go to 45% for a 24-month period and if we just say for easy numbers if you're production is going to say double, you end up being 100% hedged now if you're trying to hedge 24 months out? That's not precise but in other words, you should be highly hedged for current production. Am I getting that right?

Monty Jennings

No, you're actually getting that backwards. We're 15% hedged off current production based on the reserve reports. So it's based on the PDP wells in the reserve report. So the new wells that get added into that in the future, they'll be picked up in a future redetermination but they are not currently in that 15%.

Richard Dearnley - Longport Partners

Okay, thank you.

Operator

Your next question comes from Jon Jung from Trailhead Asset Management. Please go ahead.

Jon Jung - Trailhead Asset Management

Good morning. Ed, Bill, Monty good quarter.

William E. Scaff Jr.

Thanks, Jon.

Jon Jung - Trailhead Asset Management

You've covered so much of this stuff, I just wanted to just see a little bit more information about what was going on out of the Eastern acreage and the last time I did some checking, the Apache crews were being maintained in a camp out there. They didn't let them go into town and talk about the results and so forth. It seemed that they were fairly active but not talking about anything locally. Have you heard any more information about what they found out there and whether that activity continues?

Craig Rasmuson

Well, what we do know is that they're continuingly leasing out there. We're trying to get as much information as everybody else, but everybody is keeping a fairly tight hold. But we do know that they continued – on a continued leasing program.

Jon Jung - Trailhead Asset Management

Do you know about what kind of money they’re paying for leases out there now?

Monty Jennings

Yeah, $300 to $500 an acre, three to five year leases.

Jon Jung - Trailhead Asset Management

Okay. So your leases look pretty good based on were you setting with longer lease periods and very attractive prices from when you picked them up?

Monty Jennings

Yeah. We’re in a very good position there, provided everything goes the way we think it’s going to go over in great position.

Jon Jung - Trailhead Asset Management

All right. Well we will continue to watch what happens out there with Apache. Thanks.

Monty Jennings

Yeah.

Operator

(Operator Instructions) Your next question comes from Steve Emerson from Emerson Investment Group. Please go ahead.

Steve Emerson - Emerson Investment Group

Gentlemen, congratulations. These are great results. Based on what it looks like a $49 million year CapEx program, ex the acquisition what kind of a range of debt or debt line will you have used by the end of the year everything else being constant?

Monty Jennings

We actually are projecting out and we will draw sometime during the fiscal year up to $50 million. But cash flow at that current pricing levels, cash flow has been allowed us to pay that down pretty quickly. So, we do – we would have a plan that shows us touching $50 million briefly, but then starting to bring that back down.

Steve Emerson - Emerson Investment Group

Then what would it be, let’s say August 31 based on the – this formula; so high point 50 would you end up at 40?

Monty Jennings

That’s probably – my gut feel is that would be a little aggressive pay down particularly as we’ve discussed already what looks like a pretty rapid acceleration of horizontal drilling by our partners. That’s one of the things we have to keep a close eye on. Its how – what's going to be the capital required to fund those? So, I would think that looks like a little aggressive pay down to me but greatly depending on what our non-operator obligations end up being.

Steve Emerson - Emerson Investment Group

Of course. Now what in carrying this forward you must have some idea now of what your reserve redetermination range would be at the end of February and what if so, what borrowing power that would allow you?

Monty Jennings

Yeah, we’re excited about the February redetermination because that will pick up all of the Orr assets, and we expect a pretty good bump from that. Kind of what we’re seeing, they don’t do it this way that they run through several formulas when the banks developed their borrowing base, but it’s about a 35% ratio. So, to the extent we can add some reserves from Orr and from these other wells, well I expect the borrowing base to go up by 35% of that number.

Steve Emerson - Emerson Investment Group

Excellent. Thank you.

Monty Jennings

Thanks, Steve.

Operator

At this time this concludes the question-and-answer session. I would now like to turn the call back over to Mr. Scaff for closing remarks.

William E. Scaff Jr.

Thank you, Ron. We remain encouraged with the progress we’ve made during the quarter and look forward to executing on our growth strategy into the foreseeable future. We continue to believe we are well positioned within one of the most prolific oil and gas producing basins in The United States. We want to thank each of you for joining us today. If there’s any questions that we didn’t get answered, please don’t hesitate to contact us directly. We look forward to speaking to you again in the near future. And operator, I’ll turn it back over to you.

Operator

Before we conclude today’s presentation, I would like to take a moment to provide important cautions regarding forward-looking statements made during this call within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. The use of words such as believes, expects, anticipates, intends, plans, estimates, should, likely or similar expressions, indicates a forward-looking statement.

The identification in this presentation of factors that may affect the company's future performance and the accuracy of forward-looking statements is meant to be illustrative and by no means exhaustive. All forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

Factors that could cause our actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the success of the company's exploration and development efforts, the price of oil and gas, the worldwide economic situation, any change in interest rates or inflation, the willingness and ability of the third-parties to honor their contractual commitments, the company's ability to raise additional capital, as it may be affected by current conditions in the stock market and competition in the oil and gas industry for risk capital, the company's capital costs, which may be affected by delays or cost overruns, the company's costs of production, environmental and other regulations as the same presently exist or may later be amended, the ability to identify finance and integrate any future acquisitions; and the volatility of the company's stock price.

I would like to remind everyone that today's presentation will be available for replay through February 9, starting in approximately two hours. Please refer to yesterday's press release for dialing instructions. A replay of the audio webcast will also be available via the company's Investor Relations section at www.syrginfo.com.

This ends our presentation. Thank you for joining us today. You may now disconnect.

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