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Rosetta Resources (NASDAQ:ROSE)

Q4 2012 Earnings Call

February 26, 2013 11:00 am ET

Executives

Don O. McCormack - Chief Accounting Officer, Treasurer and Vice President

Randy L. Limbacher - Executive Officer

James E. Craddock - Chairman, Chief Executive Officer and President

John E. Hagale - Chief Financial Officer and Executive Vice President

John D. Clayton - Chief Operating Officer and Executive Vice President

Analysts

Welles W. Fitzpatrick - Johnson Rice & Company, L.L.C., Research Division

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

Irene O. Haas - Wunderlich Securities Inc., Research Division

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

Michael Kelly - Global Hunter Securities, LLC, Research Division

Operator

Good morning, welcome to Rosetta Resources Fourth Quarter and Year End 2012 Conference Call. Joining us this morning from Rosetta are the following individuals: Randy L. Limbacher, Chairman, President and Chief Executive Officer; and Jim E. Craddock, Chairman, President, and Chief Executive Officer elect; John E. Hagale, Executive Vice President and Chief Financial Officer; John D. Clayton, Executive Vice President and Chief Operating Officer; Don O. McCormack, Vice President, Treasurer and Chief Accounting Officer. Today's conference call is being recorded. [Operator Instructions] If you're not able to participate in the conference call, an audio replay will be available from February 26, 2013 at 2:00 pm Central, through March 10, 2013 at 11:59 pm, Central by dialing (855) 859-2056 or for international, (404) 537-3406 and entering conference code 92761133. A replay of the conference call may also be found on the company's website, www.rosettaresources.com. To access the replay, click on the Investor Relations section of our website and select Events.

At this time, I'd like to turn the call over to Don McCormack. Mr. McCormack, you may begin your conference.

Don O. McCormack

Good morning, and thank you for joining our 2012 fourth quarter and year end conference call. As a reminder, there are slides that accompany our presentation today available on the homepage of our website, www.rosettaresources.com. You can access the slides by logging into the webcast or clicking on the link that takes you directly into the slides. I would also remind you that certain statements included in this morning's presentation may be forward-looking and reflect the company's current expectations or forecasts of future events based on the information that is now available. Please refer to the forward-looking statements in our earnings release for more information.

With that disclaimer, let me review our agenda for the call. Randy Limbacher will open with remarks about the organizational changes announced in the press release distributed earlier today. Jim Craddock will then review our overall performance in 2012 and expectations for 2013. Next, John Hagale will provide a brief financial review of the periods, followed by John Clayton who will discuss our operating results. Jim will then open the lines for Q&A.

Let me now turn the call over to Randy.

Randy L. Limbacher

Thanks, Don, and good morning to everyone. As we announced earlier today, I have elected to resign from Rosetta. When I took the job in 2007, my commitment to the board was to lead the company for 5 or 6 years, and I feel that the timing is right for a transition. I have a very positive working relationship with our board and my decision to step down has been amicable and part of a normal succession plan that we've mapped out over the years. Consistent with that plan, we have made the decision to transfer the leadership of the company to Jim Craddock. Jim, along with John Hagale, our Chief Financial Officer, and John Clayton, in his new role as Chief Operating Officer, form an executive team that will lead Rosetta to the future growth that we have all envisioned. I'm leaving the company's future in great hands with a management team that has been with me every step of the way as we built Rosetta into a leading unconventional resource company that is poised for even greater growth. I plan to remain a large shareholder of Rosetta stock, and I'm excited about the prospects of the company. I want to take this opportunity to thank all of our employees and investors for their support and dedication over the years. We had a great year, and I do not want today's announcement to overshadow our call or take time away from the Q&A section. We will begin the leadership transition today, as I turn the call over to Jim and open the next chapter in Rosetta's valuable growth story. Jim?

James E. Craddock

Thanks, Randy. Good morning, everyone. We appreciate you joining us this morning. [indiscernible] of thing that has been [indiscernible] Randy and work here at Rosetta and in the past. While we will greatly miss him, the legacy of his leadership will be the continued execution of our strategy and business plan with the great assets and employees that we've assembled to build substantial value for our shareholders. Randy, you leave behind a company that's been transformed. Rosetta is both well positioned and well respected in our industry. On behalf of everyone at Rosetta, I want to thank Randy for his leadership and wish him well.

Let me now turn to the business at hand as we look back on 2012 and what was accomplished. Once again, we demonstrated the merit of our unconventional resource strategy and our ability to execute an aggressive exploration and development program in one of the most active energy basins in the United States today. We believe that our results were impressive from almost every perspective.

Let's briefly review what was achieved. We set all-time records in production, reserves and cash flow. We recorded double-digit growth in Eagle Ford production and reserves for all products. The transition to a greater percentage of higher value total liquids production continued with approximately 59% of our production attributable to liquids, including 26% to crude oil and about 33% of the natural gas liquids. We ended the year with a greatly expanded and self-funding Eagle Ford program, with operating positions in 4 different areas. We dramatically lowered our per well costs by about $1 million in all areas of the Eagle Ford trend. Also impressive from a cost standpoint was that unit total LOE declined 10% from the prior year. To handle our growing production base, we have secured multiple options for transportation and processing capacity, firm commitments in place to meet total planned production levels through 2014. We currently are in the process of securing additional firm capacity.

We successfully completed a $653 million capital program that drilled and completed a record number of new wells for the company. This included the construction of new infrastructure that will support our ongoing growth. In addition, we funded new venture opportunities both within and outside the Eagle Ford Shale. And all of this was carried out while maintaining a strong financial position, with low leverage and sizable liquidity.

The subsequent discussion will provide more color and detail around these accomplishments. As you would expect, we were pleased with our 2012 performance and our ability to meet the objectives that we set for ourselves, or better yet, Rosetta's poised to achieve comparable levels of growth in 2013. As always, our goal is to deliver sustained, long-term growth and top-tier results to our stockholders. We are targeting another year of double-digit production growth in the 30% range.

As you read in our earnings press release, we did update the 2013 capital estimate to a range from $640 million to $700 million, with more than 85% allocated to the evaluation and development of our Eagle Ford assets. John Clayton will discuss our 2013 update later in more detail.

In addition to assessing our untested acreage in the Eagle Ford, we continue to pursue growth opportunities in other areas with exploration potential, as well as producing properties that complement our portfolio and expertise. We plan to direct the balance of the budgets to those efforts. Our capital program will be funded from internal cash flow, supplemented by borrowing at our current credit facility if necessary.

During the fourth quarter, we strengthened our presence in the Eagle Ford Shale, with the acquisition of 2,000 acres in 2 other counties. And another 3,000 acres in our original portfolio also remains to be evaluated. Most importantly, we have only begun to realize the full value of our flagship assets at Gates Ranch and Webb County, with just 22% of identified well sites drilled and on production. Gates Ranch promises to be an integral part of our portfolio for years to come.

In addition, development activities are still on the early stages on our Briscoe Ranch and Central Dimmit assets. We have scheduled activity in the Briscoe Ranch area through the year 2016, and our development programs in Central Dimmit County are just beginning. During 2012, we were very active in the Karnes Trough area, drilling our inventory of 15 wells in the oil-rich Klotzman lease to take advantage of favorable oil classes. 7 wells were completed in the latter part of the fourth quarter. Operations are also currently underway on the oil weighted Dubose lease in the area. We look forward to another successful year as we build on the growth momentum established in 2012.

Before I turn the discussion over to John Hagale, I want to close by recognizing the individuals who make up Rosetta. Our performance in 2012 was a collective effort and reflects the talent and professionalism of our staff. I also wanted to express our appreciation to our investors and business partners for their ongoing support.

John will now provide a summary of our financial results, so I'll turn the call over to John Hagale.

John E. Hagale

Thanks, Jim. As a reminder to our audience, all of the information I'm reviewing today is contained in our 10-K, as well as our press release, both of which were filed with the SEC and are available on our website.

Net income for the fourth quarter increased to $42.3 million or $0.80 per diluted share versus net income of $32 million or $0.61 per diluted share a year ago. Adjusted net income, that's non-GAAP, increased for the quarter to $42 million or $0.79 per diluted share, when you exclude unrealized gains on derivative activities.

The fourth quarter results also include $0.14 per diluted share, that's an impact for higher stock-based compensation expense for the quarter. For the full year, we reported net income of $159 million or $3.01 per diluted share as compared with net income of $101 million or $1.91 for the same period a year ago. Adjusted net income, again that's non-GAAP for 2012, was $147 million or $2.77 per diluted share, and that compares to a comparable number of $1.90 in 2011. Growth in adjusted net income for both periods is primarily due to the increase in production and higher liquids mix.

Turning now to revenues. I would like to remind you that Rosetta reports condensate sales in its oil revenues. Recently, there's been some industry discussion regarding challenges in marketing Eagle Ford condensate that is forcing heavy discounts for some. Rosetta has a combination of long-term, mid-term and monthly sales agreement in place, and we are not seeing the levels of discounts that are being cited by some other sources. In fact, in our fourth quarter, average realized oil price, when you exclude all derivatives, was $90.52 a barrel and that compares to a WTI price of $88.18.

For the fourth quarter, revenues were $178 million, compared to $136 million for the same period in 2011. Fourth quarter revenues, when you exclude realized -- when you include only realized derivatives, were $178 million, compared to $128 million the year before. For the fourth quarter, including the effects of realized derivatives, 53% of our revenue was generated from oil, compared to 43% a year ago and 28% from NGL sales as compared to 31% a year ago.

Total revenues for the year 2012 were $614 million, that compares to $446 million a year ago. Revenues for the full year, when you include only the effects of realized derivatives, was $594 million, compared to $445 million a year ago. Again, year-over-year growth in revenue was due to increased oil and NGL production and higher realized oil prices. Revenue attributable to the combination of oil and NGL sales for the year was 81%, compared to 63% a year ago. That includes realized derivatives.

Full year revenues from oil sales increased over 100%, $314 million, up from $156 million a year ago. In addition to the volume increase, we also saw a favorable price increase of $5.80 a barrel, again, including realized derivatives. For the full year, natural gas liquids, including realized derivatives, rose to $169 million or up 35% from the $125 million a year ago. The higher amount was attributable to a 69% increase in NGL production. NGL revenue for the full year, though, including realized derivatives, was offset by a price decrease of $9.56 a barrel from the prior year.

We continue to improve our cost structure as measured on a unit basis. Direct lease operating expense or LOE for the fourth quarter declined by 11% versus the third quarter of 2012. John Clayton will provide a little more color on LOE.

We also experienced a decrease of 5% in Treating & Transportation costs on a per unit basis from the third quarter. The decreased transportation costs were due to greater volumes coming out of our Karnes Trough area, where unit Treating & Transportation costs are lower.

Our expense guidance for 2013 was included in our press release and outlined again on Slide 5 of these slides you're seeing here today. These estimates are unchanged from the original guidance released in early December. We continue to add derivatives to our production. During January and February, we placed additional derivative swaps for 2013 and 2014 oil production. A detailed summary of these derivatives positions as of February 25 is included in the release.

At the end of 2012, our borrowing base and committed amount under our revolver was $625 million. On February 25, we had $225 million drawn on the revolver, with $400 million available for borrowing under the facility. And we ended the year 2012 with a debt-to-capital of 34%.

That's all I have for now. Let me turn the call over to John Clayton.

John D. Clayton

Thanks, John, and good morning, everyone. This morning, I will update you on our 2012 operational results, as well as share a few highlights for the year. I'm going to focus my remarks on 4 points: First, our operational performance on our Eagle Ford assets; second, where we stand on year-end proved reserves and Eagle Ford inventory; then a brief summary of our first exploratory well on the Pearsall shale; and finally, some comments on our outlook for this year.

2012 was another record year for Rosetta, as we achieved all-time highs in production, liquids production and proved reserves. We also successfully tested the Eagle Ford outside of Gates Ranch, and these areas are now under development.

During 2012, capital expenditures were $653 million. We drilled 85 gross wells and completed 64. Of that total, we drilled 80 gross Eagle Ford wells and completed 62. Our average daily production for the full year was 37.2000 Boe per day, up 35% from the prior year and another record level for our company. As a reminder, we also sold 1,200 Boes per day of noncore properties during the year. We exited 2012 at 47.3000 Boe per day. This number includes 13.4000 barrels per day of oil, 15.9000 barrels per day of NGLs.

Liquids production remains an important part of our overall growth strategy, and we averaged a record 21,800 barrels per day for the year or about 59% of total production. Oil production represented 26% of 2012 production, up from 18% in 2011, and we entered 2013 at 28% oil. For the month of January, total production averaged 47.4000 Boes per day, which is 7% higher than our fourth quarter average rate and slightly higher than our 2012 exit rate. Also, January liquids are roughly 63% of production, of which 29% is oil.

Please refer to Slide 7 in our presentation, which shows our historical quarterly production profile, and you can see how this asset has grown for us over the past 12 quarters since its inception.

Now let's talk operating expenses. Significant year-over-year production growth in the Eagle Ford more than offset the increased absolute operating expenses. On a unit basis, direct LOE decreased from $2.72 per Boe in 2011 to $2.42 per Boe in 2012, a reduction of roughly 11%. On an absolute basis, in 2012, direct LOE totaled $32.9 million, a 20% increase over 2011. Operating costs in the Karnes Trough area were higher due to increased oil production from that area and the associated handling. In addition to Karnes, we also had major growth in a number of producing facilities as we successfully delineated our assets outside of Gates Ranch.

Now let's review our Eagle Ford activities. We ran 5 drilling rigs during the fourth quarter of 2012: 3 at Gates Ranch, one in the Karnes Trough area and one at Briscoe Ranch. We completed 19 wells in the fourth quarter. At the end of the year, 32 wells were drilled, yet awaiting completion. Rosetta plans to complete 15 to 20 Eagle Ford wells during the first quarter of this year and continue to operate 5 to 6 drilling rigs in the play.

During last year, we hit several milestones in our Eagle Ford program. We completed our 100th well. We made significant improvements with our drilling and completion cycle times as a result of our pad drilling operations. We chose a development well spacing of 55 acres at Gates Ranch. At Briscoe Ranch, we completed our first 3-well pad on the lease and are moving forward with full scale continuous development.

In the Karnes Trough area, we completed a newly constructed crude oil terminal to service those wells. Also, the Klotzman lease, one of 2 leases in the Karnes area, is our first to reach full development as we brought the last 7 of the 15 oil wells on production at the end of the fourth quarter. In our Central Dimmit County area, we drilled our first 7,000-foot lateral at Vivion, and we successfully drilled a discovery well on our Lasseter & Eppright lease. As you can see, we had a tremendous year of progress.

Now let's take a look at our Eagle Ford activity by area, starting with Gates Ranch. Well performance remains very strong at 55-acre spacing and as expected, we've seen no production interference. Our technical folks continue to monitor the down-spaced areas and evaluate the drainage patterns of the wells, but we do not see any concerns at 55-acre spacing. On last quarter's call, I shared with you some of the rate time analysis that supported the fact that we are not seeing interference in well performance between older 100-acre spaced wells and our newer 55-acre spaced wells. This still holds true. The decision that we made early to go to 55-acre spacing was a valuable one since we still have roughly 332 or 78% of the 428 plan well locations remaining to drill.

On the Briscoe Ranch and Dimmit County, 4 of the planned 68 well locations are on production and performing as expected against our type curve. At the end of the fourth quarter, 3 wells were drilled and awaiting completion. In Central Dimmit County last year, we successfully delineated our Lasseter & Eppright lease, one of the 3 leases in the area. Drilling activities are also underway on our Vivion and Light Ranch leases. Rosetta operates these 3 assets with a 100% working interest. In total, as of year end, we had an estimated 122 remaining wells to develop on our Central Dimmit County properties. At year end, 4 wells were drilled and awaiting completion in the 3 areas.

In the Karnes Trough oil area, drilling and completion operations continue, as shown on Slide 8. On the Dubose asset in Gonzales County, 3 locations remain to be drilled and 5 drilled wells are waiting completion. During the fourth quarter, we negotiated an acreage trade, which added 3 additional well locations to this asset. Ultimately, there will be 10 wells on production after full development of the Dubose asset is complete. This should occur in the first half of this year.

On the Klotzman asset, all 15 well locations have been drilled and completed, with 7 completions brought on production during the latter part of last year.

Looking at the Eagle Ford trend in general, drilling and completion costs continue to decrease during the second half of last year. This decrease was influenced by lower cost of services and materials and overall improvement in well completion design. As we reported in January, total well costs for Gates Ranch, Briscoe Ranch and the Lasseter & Eppright lease in Central Dimmit County are currently averaging between $6.5 million and $7 million per well. These well costs are roughly $1 million lower than our previous estimates.

On our other 2 Central Dimmit leases, Vivion and Light Ranch, total well costs are projected to be $5.5 million to $6 million per well. The additional savings on these leases are due to the differences in completion design based on sand proppant as opposed to the ceramic proppant, which is used in all of our other Eagle Ford development areas.

In the Karnes Trough area, which includes the Dubose asset where we still have wells to drill, well costs are projected to be down about $1 million per well and average between $7.5 million and $8 million.

During the fourth quarter, we successfully negotiated a farm-in agreement on roughly 500 net acres in Live Oak County, as shown on Slide 9. The Lopez lease will add 6 Eagle Ford well locations to our capital inventory in the liquids-rich section of the play. Rosetta will hold a 100% working interest and a 75% net interest in wells before payout and convert to a 65% working interest and 48 3/4% net interest after payout. Plans are going to be in drilling operations on this acreage in the first quarter of this year.

As of December 31 last year, we now hold approximately 67,000 net acres in the Eagle Ford, of which 53,000 net acres is located in the liquids part of the play.

Now I'd like to cover our year-end proved reserves and capital project inventory. At year end, total proved reserves were 201 million barrels of oil equivalent, a 25% increase over the prior year and another record level for the company. That total includes 44.4 million Boes of crude and condensate, 71.6 million Boes of NGLs and 509 Bcf of natural gas. Proved undeveloped reserves represent 63% of total reserves. Rosetta replaced 472% of production from all sources at a reserve replacement cost of $10.03 per BOE. The changes to our reserve base in 2012 included reserve additions of 65.6 million Boe, primarily in the Eagle Ford as we completed 37 new wells and added 54 proved undeveloped locations.

In total, our year-end 2012 proved undeveloped reserves included 155 PUD locations, up from 126 last year. A total of 148 PUDs are located in Gates Ranch. We also had 10.6 million Boe of reserves divested during the year and 1.7 million Boe of net down revisions, which were primarily related to lower natural gas prices.

The standardized measure of discounted future net cash flows from our proved reserves as of December 31, 2012 was $1.84 billion, an increase of 8% from the prior year. Keep in mind that this year-end's SMAB [ph] number did not include the impact of the recently announced well reductions.

Now let's talk inventory. At year-end 2012, our risk capital project inventory totaled 496 million Boe of net risk resources. During the year, we successfully converted unproved resources to proved reserves and also shifted PUDs to PDPs. Capital project inventory includes projects in the PUD category, which grew by 23% to 127 million Boe. We saw a more than 27% growth in our PDP reserves over the prior period as well. Both increases were driven at Gates Ranch, as well as new discoveries in other fields outside of Gates Ranch in the liquids-rich portion of our Eagle Ford acreage. To put the 2012 inventory resource estimate into perspective, it represents about 36x our 2012 production level.

I would now like to turn your attention to Slide 10, which shows our updated Eagle Ford inventory table. This table outlines the project location count by asset area. We have tracked this inventory publicly throughout the years to provide additional transparency on our Eagle Ford-only growth over the next decade. As you can see from this slide, we have built an exceptionally high quality inventory base of projects, most of which have been successfully delineated. At our current pace of development, which is 60 to 65 wells per year, this inventory represents 13 to 15 years.

Now let's briefly discuss one area of our active exploration program. In LaSalle County, we tested the Pearsall shale on our Tom Hanks acreage, which is a 3,500 net acreage track. Rosetta, as the operator, can hold the 100% working interest in the lease. The Tom Hanks's #1 well was successfully drilled horizontally in the fourth quarter of 2012. The well has since been completed and is currently awaiting a pipeline connection. Although we hold nearly 50,000 net acres of Pearsall rights associated with our existing Eagle Ford leases, we are currently leasing in areas where we believe will offer the best opportunities for repeatable liquids-rich development.

Finally, I have a few comments on the outlook for 2013. As we announced yesterday, we updated our 2013 capital and production guidance from the estimates we provided in early December. We adjusted our capital budget down from $700 million to a range of $640 million to $700 million to account for the lower Eagle Ford well costs that we are seeing. The anticipated well cost savings will provide us roughly $60 million of flexibility as we execute on our 2013 capital plan, as well as pursue new opportunities as they come our way. In addition to the well cost savings, we have also increased our production guidance for the year. Our new guidance range is now 47,000 to 51,000 Boe per day, up 1,000 Boe per day or roughly 2%. Additionally, we are not assuming any additional completions in those numbers.

The estimated year-end exit guidance has reaffirmed its 52,000 to 56,000 Boe per day. We've also reiterated our expense guidance, which you can find at the end of our press release. As always, I look forward to providing you guys future updates on our progress across our company. Before I hand the call back to Jim, I would like to take this time to thank our technical teams who have done a tremendous job to deliver solid results to our shareholders this past year, and they have positioned our company for continued growth in the future. With that, I'll hand it back to Jim.

James E. Craddock

Thanks, John. I'd like to take a moment to congratulate John on his appointment as our new Chief Operating Officer. John is a key contributor in our success at Rosetta, and I look forward to continuing to work with him. I hope our comments this morning have provided some perspective on our achievements in 2012 and what you can expect from Rosetta as we move into 2013. We are proud of our accomplishments and look forward to another exceptional year this year.

Let's now turn the call back to the moderator so that we can take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Welles Fitzpatrick of Johnson Rice.

Welles W. Fitzpatrick - Johnson Rice & Company, L.L.C., Research Division

Framing up the 47 to 51 in Boe guidance, if I remember correctly, you guys are producing 49 on January 24. Was that 49 rate the function of 1 that at the year end waiting on completion pads coming on or was it a sustained rate?

John D. Clayton

Welles, this is John. Yes. I think as we bring these production volumes on over time, there's couple of things to understand when you do your modeling. One is, they're going to be lumpy. And if you go back and look at our historical production plots, you can see the ups and downs and that's really tied to, as we move forward and complete wells, we shut in offset wells ahead of time and we keep those wells shut in until the completion frac spreads have moved further away from those wells before we bring them on. So the 49 was a rate at the time. When we shut wells in, sometimes we shut in as much as 10 wells around our producing wells. Production goes down until we complete them, and then we bring those on as we move down the road of development. So it's a -- it was a rate we're producing at the time and as we report those rates, it'll be lumpy but we'll see continued growth for a long time.

Welles W. Fitzpatrick - Johnson Rice & Company, L.L.C., Research Division

Okay, perfect. And as far as your Pearsall leasing strategy, it seems like with some other guys active in the area, it might be a little competitive. How -- or are you willing to kind of chase the play along the whole trend upwards to the Gonzales area? Or are you guys staying pretty close to Atascosa and LaSalle?

John D. Clayton

All right. I mean, without telling you exactly where we're leasing because I don't think that would be fair for our guys upstairs who are doing all the work. What I'll tell you is we do have a polygon that we think high grades the Pearsall, and we're attempting to lease in that. And this polygon is pretty large. So it's not across the entire play, but I'll also tell you it's not limited to one county either. So as I said, we've got 50,000 net acres of Pearsall rights just associated with what we have today. The key of this play is going to be to identify where the different hydrocarbon phases are, real similar to what our industry went through in the Eagle Ford over the last 3 years. And then who can identify that the quickest and take advantage of it will be the company's that benefit from it. There's no coincidence that we drilled our farthest in the northern lease block up in LaSalle County. I don't think it's a secret that as the Pearsall moves up to the northwest, the rocks start getting a lot more liquidy [ph], but our polygon is pretty large. It extends more than one country, but it's not across the whole play.

Welles W. Fitzpatrick - Johnson Rice & Company, L.L.C., Research Division

Okay. And then with the $640 million to $700 million, keeping that high end at $700 million, is that because you guys might look to accelerate past that kind of the typical 10% for new ventures that you budgeted in the past?

John D. Clayton

Actually the $640 million still has our 10% for new ventures in the original budget in that number. So the $60 million of flexibility is -- that's not associated with new ventures. We still have quite a bit of new venture capital in the $640 million.

James E. Craddock

Yes. Well, I would just add, I mean, we think the $60 million of savings is real. We're pretty confident in the well cost estimates that we're using, but we want to maintain a little flexibility. It's early in the year, testing a lot of different things. And some of those things, if they work, we may want to be able to have some capital available to shunt that direction, so it's really just a degree of flexibility we'd like to maintain at this stage of the game.

Welles W. Fitzpatrick - Johnson Rice & Company, L.L.C., Research Division

Perfect. And congrats on the new positions. And Randy, thanks for everything. It's been enjoyable working with you.

Operator

Our question comes from Leo Mariani of RBC.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Obviously, you picked up some new acreage prospective for the Eagle Ford this quarter. You mentioned 1,700 gross acreage in Atascosa. What's you're working interest in that, and can you maybe talk a little bit about plans to add other Eagle Ford acreage? It certainly looks like you guys are marching towards free cash flow by the end of the year. So I just wanted to get your sense of acreage that's available and what Rosetta's appetite is there in Eagle Ford?

John D. Clayton

Leo, this is John. The new acreage we picked up in the Eagle Ford, the Live Oak County piece that I talked a little bit about in the script was a farm-in, and I think I gave you guys the interest in that. It's almost purely targeting Eagle Ford. It's in a good area at Eagle Ford and we're pretty excited about what those wells can offer. As you move in Atascosa, as you guys know, the Eagle Ford ends a little bit and gets a little shallower, but we do, now that we drilled a couple of extended length laterals in Dimmit County, we do think the Eagle Ford up in that area offers us opportunity, however you do start in that area moving into probably -- and I won't talk a lot about it, but probably a little better high-graded Pearsall area. So we kind of look at that as both an Eagle Ford Pearsall opportunity set for that acreage. And we are currently leasing and trying to lease around those areas.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay, that's helpful. And I guess in your NGL pricing, I noticed that it was down a couple bucks versus the third quarter of '12. I looked at your pricing unaffected by hedging gains, and Belvieu prices were up a little bit this quarter. Anything going on in the NGL side that we ought to be aware off in terms of your pricing relative to, say, Mont Belvieu?

John E. Hagale

Really, not. So I mean, it's consistent with what we've said in the past. If you take the unhedged or without derivatives, it ought to be roughly Mont Belvieu less $3 or $4 for fractionation. So I'm not sure what you're seeing there, Leo.

Leo P. Mariani - RBC Capital Markets, LLC, Research Division

Okay. And I guess in terms of Karnes, you guys talk about drilling up your Karnes acreage and pretty much get all those wells tied in. It sounds like in the first half of 2013. Can you give us a sense of where you may rove Karnes rig to later this year?

John D. Clayton

Leo, this is John. We're probably going to get the Live Oak County property drilled or at least have a steady pace there. And these assets can only reach their full potential on efficiencies if you go into full development and pad drilling. So Briscoe Ranch is an area that we've got multi-years ahead of us and then Central Dimmit, especially we look at some of the results we're seeing there more specifically on the Lasseter & Eppright portion, the western side of it. I can see us putting a rig there full time.

Operator

Our next question comes from Pearce Hammond of Simmons & Company.

Pearce W. Hammond - Simmons & Company International, Research Division

I was curious about your outlook for service costs in 2013 and how you see that evolving in the year, specifically on pressure pumping as we might see more frac stages and potentially longer laterals in the Eagle Ford, especially maybe towards the end of 2013.

John D. Clayton

Yes, Pearce, this is John. Two parts to it. One of the 2 reasons our well costs over the second half of last year came down was a result of renegotiated pressure pumping, as well as cost of things like guar. But the well costs I gave earlier are all 15 stage completions, although we've drilled a couple of 7,000-foot well in our Central Dimmitt asset area, which will have more stages. I think the key to getting costs down in these plays, which I would put us at the forefront on, is having repeatable inventory, where the service companies can make less profit per well. But if you can complete more wells in the same time period, for instance, in one week, they can make more profit by putting them to work for us. So along those lines, the well costs we have going public with now are for 15 stage completions. However, we are drilling 4 well pads in the play now, and we're moving to 6 well pads in the play. And that should put us at the front end of being a leader as far as a consumer of those services. So the well costs we just gave, I guess, in a short answer are about where we'll see them for this year for '13 as long as we stick to 3 well pads, as long as we stick to 5,000-foot laterals. But as you can already tell, we've gone to 4 well pads and are getting ready to drill our first 6-well pad here pretty shortly, and then we'll work on the costs side once we get that under our belt.

Pearce W. Hammond - Simmons & Company International, Research Division

And then do you prefer shorter term service contracts or the longer term?

John D. Clayton

Right now, we're under fairly short term service contracts. The play has taken off a lot and it has served us well, we'd like the equipment that's coming into it, and shorter term right now seems to be what we prefer.

Operator

Our next question comes from Irene Haas of Wunderlich Securities.

Irene O. Haas - Wunderlich Securities Inc., Research Division

Randy, we'll definitely miss working with you. You certainly have left an organization that is in great shape, and I'm sure your new lieutenants will definitely take good care of the company. As a question, kind of wondering what is your next plan? Do you have a sort of appetite for another turnaround company or are you going stay in Houston, or are you going to leave town?

Randy L. Limbacher

Well, thank you. Thanks for the comments, Irene. And as you'll be able to tell from my response, I pretty much have a canned speech here that I think will cover all aspects of it, but just kind of to reiterate, I think the company is in great shape. There's no disagreements that I have with our board, this management team. I have no concerns about our strategy or our ongoing operations. I have not accepted another job, so I'm not sure where I'm going to be other than I have some lunch plans today. I would also say that since day one, we've had a very robust succession planning process in place. We have a shared leadership model here to make sure that we were ready when this time came. I would say that the leaders here are people that I've known for 25 to 30 years. And as such, this has been a team effort. So the strategy and results that we've experienced are a result of joint actions and decisions made by this entire team and probably more importantly, a great group of technical and professional employees. I'd say also, we've gone out of our way to make sure, as investors, you have exposure to this entire team. So these are people that all of you know well and have worked with in the past and should have a lot of confidence in. Everybody's aligned. They work well together, and so I just think the company is set up for great growth in the future, and that's not changed. And then I think probably the other strong statement I could make is that reiterate my confidence. I plan on remaining a large shareholder in this company. So again, I appreciate the kind words and comments and I think again, we're in good shape. And if there's other questions or comments people would like to have of me, I'd be glad -- I'll be in the office this week, so I'd be glad to take your calls as well. But thank you, Irene. I appreciate it.

Irene O. Haas - Wunderlich Securities Inc., Research Division

Okay. Congratulations to the new management team, which is very -- folks that we know and have worked alongside, so good luck.

Operator

Our next question comes from Jeff Hayden of KLR Group.

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

A couple of quick questions for you. One, I know you guys kind of talked about the 29% kind of current oil production. Where do you think that percentage is when we get to kind of the end of the year? I mean, are we still kind of around that high 20s? Do we drift down a little bit? Can you just kind of give us a little color on how you see that progressing?

John E. Hagale

Yes. I think it bounces right around 29%, 30%. As the guys have said before, it's a little lumpy. Some months, it might be 28%. But I think we're given guidance that it is going to be 29% to 30%. Yes. Actually, they're just showing me here one of the slides that shows 30% is what we're guiding you to for the year.

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

Okay. And then when you guys look at the Pearsall, I guess, first, how many additional wells are you planning on drilling in the Pearsall this year?

John D. Clayton

Yes, Jeff, this is John again. It'll depend on the on test on this well. I'll tell you a little bit about the well, though. Some will probably ask, but I'll tell you what we're willing to disclose. When you look at these Pearsall wells, they have a tendency to come on at high rates, and they have a tendency to decline quick. And real similarly, what we've done in the past is we waited until we got a stabilized rate to kind of tell you guys where we thought these wells could do. This well, as we tested it early, did have several hundred parts per million of H2S in it. So in knowing we needed an extended well test, we had a very short well test. And then once we get the well hooked up under more safer conditions, run it through an [indiscernible] and so forth, will be able to get an extended test and then provide meaningful information.

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

Okay. And I understand if it's too early for this question, but when you guys kind of look at your target Pearsall window, as far as the oil NGL gas split, do you think that's about the same as your kind of existing Eagle Ford assets? A little more a little less weighted toward oil, how should we think about that?

John D. Clayton

I think your first point was probably on for where we are in the play. It's pretty early to tell. The polygon I mentioned earlier, I think when Welles asked a question, is pretty large. And there's going to be areas that transition a lot quicker and areas that transition a lot slower from wet gas to condensate to even oil. So I'd hold off on answering that for at least a while until get more wells behind us as an industry.

Jeffrey P. Hayden - KLR Group Holdings, LLC, Research Division

Okay. Well, guys, I appreciate that. And Randy, I just want to echo what some of the other people said. It's been a pleasure working with you and good luck to you and your future endeavors.

Operator

[Operator Instructions] Our next question comes from Mike Kelly of Global Hunter Securities.

Michael Kelly - Global Hunter Securities, LLC, Research Division

With the Klotzman inventory being drilled up here, I think it probably is worth revisiting just the returns across the portfolio here. So what was the average IRR you'd expect from a Klotzman well versus now where you maybe allocating capital to talk about the Gates Ranch in particular? It will be helpful.

John D. Clayton

Mike, I guess I'll start off, the other guys can join in. I'm not sure that we put out IRRs in the past on these things. We do disclose type curves, so you got a lot of data that you can look at on the wells as we forecast them. It's safe to say that these are tremendous wells and their rates return are probably north of 100% Klotzman and Gates Ranch, so they're tremendous wells. We've talked about payout times of 6 to 9 months at Gates and I think Klotzman, with the oil prices we saw last year were probably that or maybe a little bit better. So these are tremendous projects and -- but yes, they have tremendous returns.

Michael Kelly - Global Hunter Securities, LLC, Research Division

Okay. So we are not seeing any real deterioration in returns there, it seems like. And then the other question that I have really kind of falls off on Jeff's question on the split between oil gas and NGLs. And I think you just said that Q4 could be chalked up to lumpiness, but it's look like a 26% oil cut in Q4 can now potentially bounce you back to 30%. Is there anything there in particular that caused that split to be lower in the fourth quarter?

John D. Clayton

Yes, Mike. It's -- this is John. The way to understand that is to talk about bringing some wells on in the Karnes Trough area late in the fourth quarter of last year. And what hurts the oil production is when you have to shut in the wells around the wells you're getting ready to stimulate. So we not only had wells coming on later in the quarter. Prior to those wells being completed, we shut in the offset Karnes Trough wells around them in order to get off the fracs like we wanted them to get off. So it's kind of a double hit there. Now that we're back up, those wells are producing, I think, that's kind of what the percent oil you'll see going forward. And as Hagale said earlier, we guided 30% in the slide deck that's I think attached to this for our percent oil exit rate.

Operator

And at this time, I'm not showing any further questions. I'd like to turn the call back to management for any closing remarks.

Randy L. Limbacher

Okay. That's all the time we have this morning. We'd like to thank you for allowing us to visit with you about the first quarter results, and we just wish everyone to a good day. Thank you.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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