Executives
Patrick Cassidy - Director, IR
Scott Josey - President, Chairman and CEO
John Karnes - SVP and CFO
Analysts
Anne Cameron - JP Morgan
Neal Dingmann - Wunderlich Securities
Richard Tullis - Capital One Southcoast
Pavel Molchanov - Raymond James
Chad Potter - RBC Capital Markets
Mariner Energy, Inc. (ME) Q4 2008 Earnings Call February 27, 2009 10:00 AM ET
Operator
Good day ladies, and gentlemen, and welcome to the Fourth Quarter 2008 Mariner Energy Incorporated Earnings Conference Call. My name is Eric, I will be your audio coordinator for today. At this time, all participants are in a listen-only mode. We'll facilitate the question-and-answer session at the end of the presentation. (Operator Instructions)
I would now like to turn your presentation over to Mr. Patrick Cassidy. Please proceed.
Patrick Cassidy
Thank you, Eric. Good morning and welcome to Mariner Energy's 2008 full-year and fourth quarter earnings conference call. Today's call is being webcast, and a replay will be available on the Mariner website following this call for the next ten days.
I am Patrick Cassidy, Director of Investor Relations for Mariner Energy. On the call today are Scott Josey, Chairman, Chief Executive Officer and President of Mariner; and John Karnes, Senior Vice President, Chief Financial Officer and Treasurer.
The news release announcing the company's results was issued early this morning before the market opened and is available on our website. In today's call, Scott will provide opening remarks and an operational update. John will discuss the company's overall financial performance. And you're welcome to ask questions after we complete our prepared remarks.
Before Scott begin his review, please note a few caveats about non-GAAP measures, forward-looking statements and reserves information in today's presentation. Our press release issued today reconciles non-GAAP measures of adjusted net income and operating cash flow and explains reserve replacement rate and reserve replacement cost calculations. Today's presentation may include forward-looking statements reflecting Mariner's view about future events and their impact on company performance.
All remarks other than statements of historical fact that address activities that Mariner assumes, plans, expects, estimates, or anticipates and other similar expressions will, should or may occur in the future including our guidance of forward-looking statements.
Such forward-looking information may involve risks and uncertainties that could affect the company's operations and financial results causing our actual results to differ from our forward-looking statements. These risks and uncertainties are described in Mariner's filings with the Securities and Exchange Commission including our Form 10-K for the year ended December 31, 2007.
The SEC generally has permitted oil and gas companies in their SEC filings to disclose only proved reserves. Mariner's uses the terms probable, possible and non-proved reserves, reserve potential or upside or other descriptions of volumes that reserves potentially recoverable that the SEC may prohibit in SEC filings.
These estimates are by their nature more speculative than estimates of proved reserves, and accordingly are subject to substantially greater risk that should have been realized by Mariner. Information disclosed during this conference call does not constitute an offer to sell or solicitation of an offer to buy any of Mariner's Securities.
Before I turn the call over to Scott Josey, I wanted to note that in our news release issued this morning Mariner reported a loss of $389 million, or $4.44 per basic and fully diluted share for the year ended December 31, 2008. We also reported a net loss of $649 million, or $7.41 per share for the fourth quarter 2008.
The full year and quarterly results reflect the impact of non-cash impairments and other items. These included a ceiling test impairment of approximately $576 million and impairments or changes for goodwill and other items of $311 million. These are purely financial statement events and do not affect Mariner's actual oil and gas reserves in the ground as cash flows or cash balances.
Now, I will turn the call over to Scott Josey.
Scott Josey
Thank you, Pat and good morning. 2008 was another excellent year for Mariner despite the affects of falling commodity prices, hurricane effects and financial markets turmoil. For the year, we achieved record production of 18%, which would have been up around 40% were not for the effect of Hurricanes Ike and Gustav.
We had the record year end reserves, proved reserves of 974 Bcf despite 29 Bcf of price related reserve write-downs. And we had reserve growth across each of our core areas. This equates to a 17% year-over-year reserve growth and 217% reserve replacement.
We had record cash flow of $886 million, up 42% year-over-year equating to approximately $9.80 per share. We had a very successful capital program of about $1.381 billion including acquisitions in all core areas 80% drilling success rate offshore and a 100% success rate onshore.
Our strategy has been to build the company focused on rate of return, cash and living within our means. This model has served us well in the past and will work well in the current challenging environment.
I will now go into more detail on specific topics starting with our 2008 reserve report. As you saw in the press release, we had another strong year with our reserve growth, including our probable reserves we stand at 1.2 Tcf equivalents.
Our proved reserves have always been fully engineered by Ryder Scott, and we took the extra step this year of having our probable reserves also fully engineered by Ryder Scott. We do this to provide reserve information to our shareholders that we believe is of the highest integrity.
We experienced a write-down of 29 Bcf due to lower year-end commodity prices, but we expect these reserves to be restored when drilling and completion costs reset to the current commodity price environment.
We believe the immaterial write-down during this extraordinary environment is a testament to the conservative nature of our reserve reporting. Our reserve replacement costs for 2008 on the service may appear high, which I view as distorted.
We successfully invested significant capital in many projects in 2008 in which we received a little to no proved reserve bookings in 2008. These investments include approximately $150 million of leasehold expenditures.
As well as capital expenditures for Dalmatian, Heidelberg, Smoothie, Gopher, Bushwood, SMI 150 et, cetera, as well as additional costs incurred as a result of hurricanes. Most of these projects were delayed due to hurricanes and reached total debt in early 2009.
Overtime the F&D cost will average out, but as I mentioned they are artificially high for 2008 primarily due to timings, because we expect to receive significant reserve bookings from these projects in 2009, once these projects come online.
Our three-year average reserve replacement cost is approximately $4 per Mcf equivalent based on our estimates. In exploration, we drilled 25 wells offshore in 2008 with excess at 20 of them. Most notable is the Gopher discovery, which was followed by Gopher 2 and a near field discovery announced earlier this month at Bushwood.
The bottom hole location for Bushwood is located in Garden Banks Block 463, which is adjacent to our Gopher development on Block 462. We formed an area of mutual interest with the leaseholders of Garden Banks Block 463, 506 and 507 to jointly explore and develop portions of these four blocks.
Our Gopher field is not part of this AMI. With the discovery of Bushwood, we were working with our partners to determine next steps in apprising the field and developing its resources.
We have several options to tieback Bushwood to our host platform for existing subsea production systems, which will be determined after Gopher is online. And we hold a 30% interest and are the operator at Bushwood.
Moving to Heidelberg, this discovery which is operated by Anadarko was announced along with Bushwood. It's a subsalt expanded Miocene play with potentially significant gross reserves in excess of 100 million barrels of oil equivalent.
Mariner formed into Heidelberg in 2008, acquiring 1/8 interest in four blocks. Green Canyon 859, where the discovery well was drilled as well as Blocks 860, 816, and 903. Next steps include possibly drilling an appraisal well as soon as a second half of this year, we are very excited about this project.
I believe it has a potential to add significant value to our company. It is also our first success in the subsalt, which has been a focus of our business plan for the past couple of years. Our Owl Creek Prospect is located at a couple of blocks, east of Heidelberg.
We also announced a discovery at Smoothie in South Tim Block 49, which is one of the prospects we acquired in the Statoil transaction. This is a deep shelf field, eligible for royalty relief provided production commences by May 3rd, which we are endeavoring to achieve, Smoothie has gross recoverable reserves internally estimated between 25 to 50 Bcf in Forsan and we hold a 100% working interest.
We have had fourth discovery well at South Marsh Island 150 D2. This is a prospect that was originally scheduled for testing late last year. But Hurricane Ike destroyed the drilling rig contracted for the well. We secured a new rig and drilled two wells on the structure, we are currently drilling a third.
Our next steps are to complete the wells, test them and proceed with hookup and commissioning to commence production, we think, over the next several months. And we hold a 100% working interest in these wells, where the pre-drill estimates were 20 to 30 Bcf equivalents.
As far a shelf development projects at Vermilion 380, we are progressing with our development there. We drilled four wells and completed one of them before Hurricane Ike damaged the platform. Remaining development involves drilling of one additional well and completion of all wells. And we hold a 100% interest in the new drilling at Vermilion 380.
We estimate approximately 40 Bcf in proved and probable reserves in this field. And as soon as the pipeline and platform repairs are completed, we will commence production from the new wells, which should occur in the next several months.
Going back to Gopher, this project remains on schedule for production by the end of March. We have completed most of our work repair to Stingray export line owned by Inbridge is the critical path item.
We have been advised that it is scheduled to begin operation in the next couple of weeks, which should enable us to meet our timetable for first production. Any delays will most likely be out of control.
As we will have all of our work completed, we expect here in the next couple of weeks. Mariner hold the 60% in Gopher and gross initial production rates are expected between 125 to 150 million cubic feet equivalents per day.
Other deepwater developments, at Daniel Boone, we expect the major construction and installation work at Daniel Boone will begin soon. And this project should come online later this year. Daniel Boone is located at Garden Banks Block 646. We hold the 40% working interest in the project and it is operated by W&T Offshore.
Viosca Knoll 821. This project is on scheduled to begin production during the third quarter 2009. It's a short tieback to a platform on an adjacent block less than three miles away.
And the initial gross production rate is anticipated around 1,000 barrels of oil per day. We have a 30% working interest in the project. And these development activities are operated by Walter Oil & Gas.
Moving to onshore, our plan this year in the Permian is to further delineate our Blue Plate and Deadwood prospects. Such that if they are successful, we will have established an inventory of infill drilling locations once drilling costs are inline with commodity prices.
Blue Plate and Deadwood are located in Howard and Glasscock County, east and northeast of Midlands. We built a significant acreage position in this area with approximately 38,000 net acres. And we believe that our acreage is in an analog to a prolific area developed in the western Midland Basin.
We have drilled five wells in Deadwood, fracturing four of them. We have encountered Atoka, Strawn, Kline, Wolfcamp and Spraberry intervals. We performed multi-staged fracs and are evaluating the various intervals.
We expect to drill several more wells at Deadwood in 2009. Our Blue Plate prospect is located north of Deadwood and will target similar objectives. This is a very lightly explored area and we plan to drill two to three wells there later this year.
We are currently running two rigs in the Permian and we will be down to one rig shortly. Once costs reduce, our commodity prices increase, we have a very large inventory of low risk projects to pursue.
Our deepwater exploration program is on a brief hiatus as the Diamond offshore, Ocean, America rig is in dry dock for the next two months undergoing required inspections and safety checks. Once it comes out of the shipyard, it is schedule to move to our Arden prospect.
We are currently drilling one well at SMI 150 and are working on several other development projects in the shelf as well as deepwater. We will be moving on to our core dodge prospect in [West Cam 207] shortly, which is the deep shelf test.
Moving to production. We are currently producing approximately 340 million cubic feet equivalents a day. We expect another 15 million a day to return to production over the next one to two weeks as third party pipeline repairs are completed. After which we will have about 7 million cubic feet equivalents a day remaining to restore, some of which is outside operated and out of our control. In December, we gave production guidance for 2009 of 135 to 150 Bcf equivalents and we have no changed to that at this time.
I will wrap up my prepared remarks with some comments about liquidity. At year-end our revolving debt totaled $570 million as a result of capital spending to develop Gopher drilling wells at Heidelberg, SMI 150, Smoothie and Bushwood coupled with reduction in cash flows due to lower production in commodity prices. We anticipate our borrowings to increase to $600 million to $625 million before beginning to reduce as our capital spending decline and new projects come online.
Under our current revolver, we have significant liquidity. We are targeting significant reduction to our revolving debt by year-end as a result of spending less than we generate and the receipt of insurance reimbursements.
We had a GAAP hedges in the form of swaps in January totaling about 19 Bcf equivalents or Bcfe at an average price of $6.19 or MMBtu. Also we unwound approximately half our oil hedges, about a million barrels, earlier this month based on the view that oil prices maybe reaching a bottom.
As a result, we are currently approximately 40% hedged for 2009. We currently have no hedges in 2010. We may add or unwind additional hedges depending on our commodity price outlook. Our current hedge position including the value of the unwind is in excess of $200 million in the money.
With that, I will turn the call over to our Chief Financial Officer, John Karnes to highlight financial results.
John Karnes
Thanks Scott. As Scott mentioned even notwithstanding substantial hurricane shut-ins, 2008 in terms of achievement was a very successful year that should be viewed independently from the impairments and other year-end items that slip and otherwise strong fundamental performance into our financial loss. I think it's important to note that for hurricane shut-ins affecting around 22 billion cubit feet equivalents of production during the year, Mariner was well on-track to deliver 40% production growth year-over-year and even with these shut-ins Mariner still mange to deliver about 18% production growth for the year.
Moreover, despite $100 drop in oil price, first half to second, operating cash flow was 42% up year-over-year and adjusted net income per share which as defined in our earnings release this morning ignores items typically excluded for comparability in financial analysis. We have done a record $3.25 per share, up over 90% from last year on a fully diluted basis. For the quarter, Mariner adjusted net income as we defined this morning would have been $14.5 million equating deposit of adjusted net income of $0.17 per full diluted share.
That being said, including as it is appropriate for financial reporting, the impairments in prior period of adjustments I will discuss next. Mariner is in fact reporting a net loss in the quarter of $649 million compared to net income of around $50 million for the fourth quarter last year. This equates to a loss of $7.41 per basic and fully diluted share, compared with earnings per share of $0.59 and $0.58, respectively, a year ago.
For the full fiscally year as Scott mentioned, this translates into a net a loss of about $389 million or about $44 per share. Items excluded in adjusted net income for the fourth quarter include first and foremost a ceiling test impairment of approximately $576 million which accounts for about $374 million of our reported net loss equating to about $4.27 per share.
Given Mariner is a full cost company, the book value of our assets is limited to the ceiling value essentially equal to our after-tax [PT10] value. Taking into account, flat year-end prices and costs for the remaining life of the reserve base. Since the book value of our properties exceeded our ceiling value at year-end given low year-end commodity prices, juxtaposed against disproportionately high service cost levels. We roll down our oil and gas properties to the ceiling value. This is a non-cash item and we will result in lower DD&A rates in the future.
And another ceiling cash write-down was exacerbated by numerous very successful projects like Gopher that Scott discussed earlier, with respect to which Mariner made substantial capital investments during the year, increasing our properties book value but for which we received little or no corresponding ceiling value benefit, substantial reserves cannot booked until production commences this year.
Other items excluded in adjusted net income involving impairments totaling $311 million take into goodwill and non-producing assets accounting for another $3.49 of our reported $7.41 per share loss. These impairments were strictly a function of the fair value assessments performed on Mariner assets in a distressed year-end credit and financial environment and in particular with respect to goodwill the excess of these values over Mariner’s greatly depressed enterprise value indicating a complete impairment of the goodwill reported in the forest oil Gulf of Mexico transaction in 2006, again these impairments are non-cash.
Also during the quarter, we recorded additional contingent withdrawal premium of $21.6 million before-tax, $14 million tax effected contributing about $0.16 per share to our reported loss. This item is a non-current, non-cash obligation and represents a liquidated amount for which Mariner would be obligated if it withdrew from the OIL Insurance Limited mutual and accelerated it's obligations rather than funding the obligations in due course over time through regular premium contributions as is Mariner’s present intention.
All the offsetting the negative effects of these items based on favorable developments during the quarter in the ongoing MMS royalty relief price for litigation. We took in to income about $46.5 million of revenue which we had previously suspended from prior periods, pending resolutions of our entitlement to royalty relief on four deepwater projects in prior periods. This resulted in a gain of $30.2 million after-tax or $0.35 per share, and again this is non-cash.
Turning to production for the quarter, for the fourth quarter we produced 23.5 billion cubic feet equivalent comprised 68% of natural gas and 32% of oil and liquids. Compared with the fourth quarter of 2007, our production was up 13% owing to approximately 14 billion cubic feet equivalent of shut-in production from hurricanes. For the hurricane shut-ins, again Mariner’s production for the fourth quarter would have been around 40% year-over-year.
Revenues for the fourth quarter 2008 were $237 million down 6% from $254 million recorded in the same period last year.
Again, please note revenues for the fourth quarter this year included about $46 million of revenue previously suspended from prior periods relating to the MMS royalty dispute.
Year-over-year the decline in revenue was, of course, primarily attributable to approximately 22 Bcf of Hurricanes shut-ins as well as lower prices compared to last year because of the weakening demands and increased North American natural gas supply.
Our average realized prices during the fourth quarter of 2008 were $7.44 per Mcf of natural gas, $65.29 per barrel of oil, and $26.63 per barrel of NGL. In the prior years fourth quarter, these were $8.07, $79.64, and $55.32, respectively, representing decreases of 8%, 18% and 52%, respectively.
For the full 12 months, Mariner posted record revenues of nearly $1.3 billion up from $875 million in the prior year. This reflects our substantially higher average price realizations in the first half and 18% increase in volume year-over-year due to the 13 Bcf contribution from the StatoilHydro acquisition as well as commencement of production at Bass Lite and Northwest Nansen which added around $8 and $13 billion cubic feet equivalent, respectively to the years production.
Our average prices for natural gas for the full-year 2008 were $9.31 versus $788 in the prior year. Oil was up $86.02 versus $67.50 and NGLs were around $55.02 versus $45.16. These prices reflect settlements during the period under Mariner's hedging program. For the fourth quarter, we realized average net hedging gains of $22.7 million and for the full-year net hedging losses were $100.8 million.
Turing quickly to expenses, our lease operating expense for the fourth quarter was $64 million or about $2.73 per Mcf equivalent which is up $1.31 over the same period in the prior year. Our LOE in the fourth quarter of 2008 was impacted by a number of factors, most of which were non-cash. The largest of these items was an accrual of the additional contingent withdrawal premium I discussed earlier coming out of 21.6 million. That alone contributed about $0.92 to the $1.31 per Mcf increased in LOE year-over-year.
Our unit LOE cost was also impacted during the quarter by roughly 14 billion cubic feet of shut-in production from Hurricane Ike. Since we had about one-third less volume than expected across, which the spread of fixed G&A cost.
Lastly we had about $800,000 of Hurricane-related LOE during the quarter from Ike, and about $1.9 million of workovers offset by around $1.4 million of insurance premium reimbursements from [OIL] all adding a net plus or minus $0.6 to LOE for the quarter.
So while our LOE was muddied up during the quarter because of the hurricanes and some contingent insurance approvals. When one backs out these extraneous audience for the quarter, we get back to our guidance range of about $1.60 to $1.70 per Mcf.
Our G&A expense for the quarter was about $23.4 million, up from $15.5 million in the prior year. This equates to $1.03 per Mcfe versus $0.57 for the same period last year. Our fourth quarter G&A reflects prior period items totaling about $9.1 million related to a combination of LOE reclassifications and overhead recovery adjustments accounting for about 39% of the increase for the quarter.
G&A also reflected prior period true ups of about $1.3 million, or $0.08 per Mcfe in connection with an adjustment made to the estimated forfeiture rates, which we use in calculating our stock comp expense to bring our assumptions under our stock comp expense more inline with our recent experience.
And of course G&A was substantially fixed on unit basis was impacted by hurricane shut-ins. It's also worth pointing out that $6.4 million of our G&A expense for the quarter about $0.27 per Mcfe related to our performance based restricted stock program adopted last summer, which is obviously non-cash and under which payouts are wholly dependent on Mariner's stock if any progressive trading thresholds of $38 and $46 per share.
DD&A expense decreased during the fourth quarter to around $92 million, compared with $100 million during the fourth quarter last year. This is the function of the 13% decrease in production year-over-year form Ike, offset by a slightly higher DD&A rate in the fourth quarter of this year, $3.91 per Mcfe, versus $3.71 last year.
In this regard you will note that our DD&A rate for the quarter is down $0.29 from our rate in the sequential quarter as a result of the ceiling test impairment, we addressed earlier.
This concludes our prepared remarks, and Scott and I will now open up the line for questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Anne Cameron with JPMorgan. Please proceed.
Anne Cameron - JP Morgan
Good morning, everyone.
John Karnes
Good morning.
Anne Cameron - JP Morgan
I'm just curious is there a commodity price at which you would revisit your 2009 CapEx budget?
Scott Josey
We will continue to monitor our capital spending throughout the year, depending upon commodity prices. We have a pretty same program this year already. We are mainly focused on developing existing discoveries. We really have a fairly small exploration budget and we are spending very little in West Texas.
We have the ability to further reduce that program to some extent, but we can't reduce it a whole lot less than where we are currently without removing some of the exploration projects that we have on the books.
We also have rig commitment with Diamond Ocean, America that runs through the later part of this year. And we have several projects that are associated with that. So, I don't see our program getting much below $400 million, but I don't anticipate it getting a lot higher either under normal circumstances.
Anne Cameron - JP Morgan
Okay, great. That's helpful. Also, have you seen any improvement in the cost in the Permian yet, and what would you have to see in order to reallocate capital onshore?
John Karnes
Well, what needs to happen in the Permian and a lot of places as well is just for the service company cost environment to reset to the commodity price environment, which is completely in a state of flux.
Just for some history, we began drilling Spraberry wells in October of 2002. Back then, we anticipated oil prices between $25 and $30 a barrel. And cost of those wells were between $400,000 to $450,000 and that was drilled to the tanks and first production, and we were generating 25% to 30% rates return on those projects.
We have seen the cost of those same wells increased to $850 to $1 million due to same thing in a $100 plus oil environment. No one is quite sure what the price curve is going to be going forward. But once those costs reset, so we are going to be in a $50 oil environment then we probably need to see $550,000 to $600,000 cost to drill and complete those wells before we would come very active again.
But we do believe this will occur. And once it does, as I mentioned, we have a numerous projects to pursue in the Permian.
Anne Cameron - JP Morgan
Okay. Thanks very much.
Scott Josey
All right. Thank you.
Operator
Your next question comes from the line Neal Dingmann with Wunderlich Securities. Please proceed.
Neal Dingmann - Wunderlich Securities
Good morning guys.
Scott Josey
Good morning.
Neal Dingmann - Wunderlich Securities
Hey, Scott, good color. I just wondered are you able to say anything more as far as timing behind like the Heidelberg, Bushwood or Smoothie any ideas as far as when we could start to see more of those?
Scott Josey
Starting with Heidelberg, as I mentioned, we believe this is a significant discovery but we will let the operator, Anadarko handle discussions about the prospect. As we said, we were very pleased about it. And believe it has significant potential and has added significant value to our company.
I mentioned that we anticipate a possibility of an appraisal well being drilled possibility by the end of this year, which will better define the extent of the accumulation. I suspect that after that that's when discussion will get serious about how to develop the project which ranges anywhere from subsea tieback possibilities to setting of independent structure of such spar.
It's just too early, and the other thing I could add is that. This is when the project is going to come online, quickly this was a project that could take a while maybe two, three, four years before it comes online.
But nevertheless, we do believe it is a significant discovery and has added a lot of value to the company. As far as Smoothie, as I mentioned, we are endeavoring anyway to have that online by May 3rd, which is when the royalty it's the time for that we had to have it online order to receive royalty relief. It appears that we will meet that schedule, absent delays caused by Mother Nature, so right now that project looks like it will be online before then.
And then I think your other question was about Bushwood. Bushwood, successful discovery and we have a variety of options for developing that. The plan currently is to bring our local wells online, which as I mentioned it should be online by the end of March or around first part of April.
Depending upon the performance of those wells then that will help us decide how we wish to go forward with Bushwood. The options here are to lay an independent low line, umbilical to Bushwood to a production facility, or it may involve bringing it into the existing infrastructure as the production declines from Gopher.
So, we will have to wait and see how Gopher performs and from there we will be able to make a decision. We are very pleased with the results of Gopher and Bushwood.
Neal Dingmann - Wunderlich Securities
Would you change, is the timing in these are pretty locked up, what I wondering is if commodity prices cooperate and would sort of take off, let's say late third quarter and fourth quarter. Do you have other developmental projects deeper on the shelf that you would bring online to take advantage of this, or is it more there are just, what are the timings, what they are?
Scott Josey
Well, we have in the fourth quarter of last year we had several projects as we mentioned Vermillion 380, Eugene Island 342, SMI 150 all of which were delayed because of the effects of the hurricane even Smoothie was delayed, Heidelberg was delayed, Bushwood as well and Gopher. So, what we are doing in the first half of the year is primarily bringing all of those projects online. So, we are not spending a lot of dollars on exploration, we are mainly focused on developing the existing discoveries.
There are a few other projects, before I say that we are very focused on actually spending significantly less than we generate this year. And so we are going to be very disciplined about our capital spending until we either become more comfortable with the commodity price outlook or the capital markets. So, we are not planning on adding a lot of other projects this year. If anything, we may as the first caller asked we might even look at reducing a project or two to conserve our capital. But we have a significant inventory of things to pursue many of which can be added into our budget very quickly.
Neal Dingmann - Wunderlich Securities
Got it. Scott, the lease blocks sale next month, do you foresee you all being very active in that?
Scott Josey
Yes, we do anticipate being active at the sale as we have always been active with these sales. The sale will not be as large as some of the previous sales, so we don’t see more than likely we are not exposed dollars, the magnitude that we have in the past. We then very pleased with the results of the past several sales and we have spent at least $140 million to $150 million range adding to our inventory. But we will be active and that’s coming up in mid-March and we will see how we do.
Neal Dingmann - Wunderlich Securities
Okay. And then last question maybe for John as far as, so when you were talking about LOE given up some of the guidance going forward. Just kind of wondering what are you assuming for some of the service costs and such baked into that guidance?
John Karnes
For the guidance we provided at the beginning of the year, it was with our year-end outlook which was stable prices, so we do not have anticipated price, substantially anticipated price declines in our guidance. What will happen is obviously the costs as we continue to add productions and in absolute terms may go up, but we will begin to add more production particularly as Gopher comes back on that we will begin to absorb more of our fixed costs and keep our total LOE in that guiding price range.
Neal Dingmann - Wunderlich Securities
Okay. Thanks guys. Great work.
Scott Josey
Thank you.
Operator
Your next question comes from the line of Richard Tullis with Capital One Southcoast, Inc. Please proceed.
Richard Tullis - Capital One Southcoast
Hi, good morning.
Scott Josey
Good morning.
Richard Tullis - Capital One Southcoast
Looking at the production for 2009, Scott, how do you see it playing out over the year by quarter? Would 3Q be your high point of the year, or do you see it growing throughout the year?
Scott Josey
Richard, I don’t have that in front of me, but I think I can answer your question generally. The first quarter our production has been off just a little bit from where we had budgeted because it's taken a little longer for these pipeline repairs, third party pipelines to be restored. We are in constant contact with these third parties. We have asked them routinely about what we think are the timing and I know they are dealing with the lot of issues but it seems like we keep getting these delays.
But nevertheless, we are only slightly behind where we thought we would be at this point in the year. Then we have a lot of production getting ready to come on in the second and third quarters with Gopher coming online around April 1st, end of March-April 1st timeframe with Smoothie which we have a 100%. Coming online, we hope by late April to early May. We will start bring online the SMI 150 wells as we do those completions once we finish the current well Eugene Island 342, Vermillion 380.
So there is a lot of things coming online over the course of the next three to six months and then you also have Daniel Boone and VK 821 coming online probably in the latter part of third or fourth quarter. So, I think what we will see is really kind of a steady build through the year, but it's going to be, once it build, I think what we will have is a steady build through the year with the fourth quarter and third quarter by being about the same.
Richard Tullis - Capital One Southcoast
Okay. What’s your expected initial rate for Smoothie?
Scott Josey
Richard, I don’t know. It's probably going to be in the 10 million to 20 million a day range, something like that.
Richard Tullis - Capital One Southcoast
Okay. Looking out into 3Q, how many days of production downtime do you have built into the '09 guidance for hurricane shut-ins?
Scott Josey
Well, what we try to do, Richard, is assume something for, what we think is kind of a normal season and so when we provide our guidance with the range that we have with the 135 to 150, we have taken some of that into account. We do not do our guidance to deal with years like we had this past year with Ike or with few years earlier with the Rita and Katrina. So, we do incorporate some of our reserves, we expect some of that to be offline and that’s usually in the few percentage range of our guidance that we expect to have hurricane downtime or mechanical downtime and that type of thing. So, we believe our guidance that we provide to the street is reasonable and conservative, but at the end of day you don’t know.
Richard Tullis - Capital One Southcoast
Okay. How much do you expect in insurance reimbursements?
Scott Josey
I will let John add to this, but we have significant amount of dollars that we have spend on Rita, Katrina, its north of $100 million and we are expecting that to be reimbursed. We are not sure if we will get all of that this year but we are expecting to get some of those this year. We are also working with our insurance adjusters on Hurricanes Ike and Gustav, to be able to get those reimbursements fairly quickly. So, I will let John add to that.
John Karnes
I think Scott, you are absolutely right. To-date on Rita and Katrina we have invested a little more than $80 million in CapEx. As last year we received the reimbursement of 48.5 from our excess carriers and we got right at 15 from Ohio. Our hope is this year we will get in a range of 50 to 75 on Rita and Katrina could be higher than that. But it's hard to estimate the exact adjustment process.
With respect to Ike we spent about $21 million last year and $10 million deductible, so hopefully in 2009 we will receive $10 million from Ike on the account of 2008. We will make probably $30 million of repairs between $30 million and $40 million of repairs on Ike this year. And we are hopeful we will be in a position to collect much quicker on Ike. So, with, getting Q4 ahead of ourselves, I would hope to get as much as $20 million or maybe, potentially $30 million for Ike this year as well.
Richard Tullis - Capital One Southcoast
Okay. And finally, I know the budget that came out yesterday from the Federal Government had some new proposals for taxation for Gulf of Mexico, or really for the industry as a whole and Gulf of Mexico is included in there. Have you guys started looking at it all? Do you think you could be impacted by any of the, I guess, it was 1990s leases in the Gulf of Mexico that are the main driver there?
John Karnes
Yeah. We have only just begun to analyze that legislation, Richard, so we just don’t have a position on it yet.
Richard Tullis - Capital One Southcoast
Okay. Well, thanks very much. I appreciate it.
John Karnes
Thanks.
Operator
Your next question comes from the line of Pavel Molchanov with Raymond James. Please proceed
Pavel Molchanov - Raymond James
Hi guys, when you look at the Permian Basin, do you see any distressed sellers at this stage in the cycle, and if so are you looking to perhaps pick up some of those distressed assets based on your opportunities you have?
Scott Josey
Pavel, we are always looking at opportunities whether that’s in Permian or other places onshore or even offshore. There has not been a lot of assets come to the market. I think that’s a two-fold. One is, companies do not wish to sell in this environment. It's pretty difficult. There is not a lot of capital out there to acquire assets and I think people are concerned about the pricing that they will get if they were to acquire something. The other thing that I will add about Mariner is we believe that in this environment, that liquidity is very important and preserving the liquidity is very important.
And so, our interest in spending very much of our cash for acquisitions in this environment is going to be limited under certain circumstances to the extent that we saw companies that were more beat up than we are, and feel like that we could do something accretive for our shareholders. We would consider using our stock but that's easier said than done. But we will be, I think, just to sort of repeat myself, we just have not seen a lot yet but we do think that this commodity price environment persists, that many people, and a lot of places have picked up significant acreage positions and do not have the cash flow to be able to develop those acreage positions, and it may present an opportunity for us and we are constantly on the look for those.
Pavel Molchanov - Raymond James
Understood. Thanks very much.
Scott Josey
Thanks Pavel.
Operator
(Operator Instructions). Your next question comes from the line Chad Potter with RBC Capital Markets. Please proceed.
Chad Potter - RBC Capital Markets
Good morning.
Scott Josey
Good morning.
Chad Potter - RBC Capital Markets
I guess, at this point, just a couple of sort of housekeeping modeling questions. Can you guys provide a breakout of the hedging as far as the non-cash mark-to-market and the realized?
Scott Josey
Yes, for the quarter, I think our non-cash mark-to-market was $2.7 million, that’s the total of gain. Bear with me one second. Chad, were you talking about historical or were you talking about of our current hedge position. Chad?
Chad Potter - RBC Capital Markets
Sorry, I put it on mute. Regarding the fourth quarter number?
Scott Josey
Regarding the fourth quarter, 2.7 was non-cash and effectiveness. I think it about $20 million was actual settlement.
Chad Potter - RBC Capital Markets
Perfect. And then as far as taxes the kind of cash and deferred tax split?
Scott Josey
Well, for the remainder of the year it's going to be virtually 100% deferred, particularly given the net operating loss that we got right now. So, I think we are actually modeling 95% deferred, but for 2008, for example, we ended up, our total actual cash tax payment was a little under $1.5 million of credit. So, it's substantially all deferred again for '09 as well.
Chad Potter - RBC Capital Markets
So, it's $1.5 million of total cash taxes during 2008?
Scott Josey
Right.
Chad Potter - RBC Capital Markets
Perfect. Thank you.
Operator
And we are currently showing no more questions in queue at this time.
Scott Josey
Pat, before you say, I want to make a correction, just in case I have said something wrong. Earlier when I was addressing the company's $389 million loss for 2008, if I accidentally said, that was $44 per share, I apologize. That's $4.44 is bad enough, so I would like to have 44 in those metrics. Again the actual loss for 2008 was $4.44, and I apologize if I misspoke. Pat?
Patrick Cassidy
Okay. Thank you, Eric. As a final note, I would remind you that this conference call will be posted on the company's website this afternoon and will be available for replay through March 9th, 2009. Thank you again for participating in our call this morning.
Operator
Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect and have a good day.
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