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Gulfport Energy Corporation (NASDAQ:GPOR)

Q4 2008 Earnings Call Transcript

March 10, 2009 12:00 pm ET

Executives

Paul Heerwagen – Investor Relations

Jim Palm – CEO

Mike Moore – SVP and CFO

Analysts

Ron Mills – Johnson Rice

Biju Perincheril – Jefferies

Michael Pena [ph] – Simmons & Company

Sven Del Pozzo – C.K. Cooper

Jason Wangler – Wunderlich Securities

Ross DeMont [ph] – Midwood Capital

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year-End 2008 Gulfport Energy Corp. Earnings Conference Call. My name is Becky, and I will be your coordinator for today. (Operator instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Paul Heerwagen of Investor Relations. Please proceed.

Paul Heerwagen

Thank you, Becky and good morning. Welcome to Gulfport Energy’s fourth quarter and year-end 2008 earnings conference call. I’m Paul Heerwagen, Investor Relations. With me today are Mike Liddell, Chairman of the Board; Jim Palm, Chief Executive Officer; and Mike Moore, Chief Financial Officer.

During this conference call, the participants may make certain forward-looking statements relating to the company’s financial condition, results of operations, plans, objectives, future performances, and business. We caution you that actual results could differ materially from those that are indicated in the forward-looking statements due to a variety of factors. Information concerning these factors can be found in the company’s filings with the SEC.

In addition, we may make certain reference to other non-GAAP measures. In this – if this occurs, the appropriate reconciliation to GAAP measures will be posted to our website. An updated presentation was posted this morning to our website in conjunction with today’s earnings announcement. Please review at your leisure.

At this time, I would like to turn the call over to Jim Palm.

Jim Palm

Thanks, Paul and good morning to each of you. I’d like to start out today by providing you with an update on our operations, as well as some insight on some strategic moves that we have made. We are very pleased with our 2008 operating results, which produced 1.76 million barrels of oil equivalent, generating $131 million of operating cash flow, $136 million of EBITDA, and $88 million of net income, excluding a non-cash impairment charge.

As you know, we operate in a very challenging environment and Gulfport has acted accordingly. In the fourth quarter of 2008, we pulled back our drilling and capital expenditures in response to declining commodity prices and inflated service cost. We are focused on cutting costs and have delayed drilling until service costs reach levels that are in line with today’s commodity price environment.

In the meantime, we’ve improved our liquidity position by paying down debt and payables. We took down our hedge to realize significant cash gains, but have since renewed our hedge position and currently have a significant percentage of our 2009 and 2010 production under fixed price contracts.

As of September of last year, we had accounts payable of $23 million and $9 million drawn on our revolver. At the end of February, Gulfport had approximately $15 million of accounts payable and $59 million outstanding on our revolver. The net change from the third quarter is approximately $39 million.

Meanwhile, production continues to be steady, averaging approximately 4,500 barrels of oil equivalent per day year-to-date and 4,800 barrels of oil equivalent per day in March. Following the $39 million monetization of our 2009 fixed price contracts, we have entered into new contracts for 2009 and 2010. These hedges represent $90 million in future gross revenues and position us to operate as a strong and profitable business regardless of turmoil in the market.

Looking toward reserves, we ended the year with 25.5 million barrels of oil equivalent in total proved reserves and we had a 3.6 million barrel revision, largely attributable to prices. Going forward, we have minimal capital obligations to maintain operations. From a lease perspective, we are held by production at West Cote and at Hackberry.

In the Permian, our leases only require us to participate in a total of two gross wells during 2009. And in Canada, we have the benefit of 15-year leases with an additional 15-year option on evaluated acreage. As we work to reduce costs, we have an extensive inventory of uphold recompletions in Southern Louisiana that can be performed at a fraction of the cost of new wells while still yielding approximately the same production impact.

We expect substantial reductions in the cost of drilling and completing wells in today’s new world. These reduced costs will allow us to replace our produced oil over the next few years while leaving us with significant cash to either pay down debt, drill more wells, or make new acquisitions.

During the fourth quarter, in Southern Louisiana, we performed a total of 12 recompletions of West Cote and two at Hackberry before releasing the rig in early December. We brought completion rigs back to the fields in mid-February and performed seven recompletions at West Cote and three at Hackberry before again releasing the rig.

In the Permian, we dropped our rigs at the end of 2008 and have been performing a significant amount of science work to help us optimize our frac treatments and identify which rocks are the best producers in our area. Additionally, we have worked hard on negotiating lower prices with our service providers. This investment in time will help us maximize results going forward as we drill the remaining 147 locations on 40-acre spacing on our Permian acreage.

In Canada, we are continuing to work the assets and we had a good year of drilling, having already completed our 2008 to 2009 winter drilling program. We drilled a total of 14 locations at Algar Lake and Kodiak and one successful water supply test for Algar. We believe this year’s drilling has increased the size of our Algar Lake project and is likely to have positive impacts on future contingent resource estimates.

For now, because we have 15-year leases, Grizzly has the luxury of pushing back developments in Canada. No major CapEx will be spent on Grizzly until such time as prices support oil sands development. In the meantime, Grizzly will incorporate data from our newly drilled acreage into our regulatory application. We expect that the recent price collapse will ultimately result in a much cheaper cost to put our oil sands acreage into production.

Keep in mind, we got into the oil sands for a long-term call on millions of barrels of oil and that option is still very much intact. And the reserves we are creating are not included in our asset base. Algar is our first commercial PUD and we expect it to be the first of many projects.

In the Bakken, we spudded a total of 37 gross wells during 2008. The vast majority of the wells in which Gulfport has participated are located in the Parshall area. We have 17,660 acres in the play and approximately 26% of our acreage is located in Mountrail County, an area that is clearly a sweet spot.

The number of drilling proposals we received has decreased dramatically in response to the current low oil prices together with the impact of higher oil differentials in the Bakken. For the most, the proposals we do receive are in areas where the operator anticipates exceptional IP rates and reserves.

And finally, in Thailand, the Phu Horm field continues to produce, averaging 88 million cubic feet of gas per day and 433 barrels of oil. At present, we are in the process of shooting 3-D seismic on our newly acquired 1 million acre concession block, and we expect to receive data for interpretation within about three months.

In 2009, Gulfport has a considerable amount of flexibility with regard to where and when we fund future activities. While we have hundreds of drilling locations, we are not bound by lease obligations that are plaguing our peers through the resource plays. Meanwhile, our recompletion inventory serves as a steady source of production to offset declines.

Our 2009 capital program will be funded from within the generated cash flow. This way, we are able to protect and strengthen our balance sheet while still affording ourselves a high degree of operational flexibility. In a world in which oil prices are in the low 40s, we plan to halt production plan in 2009, producing in the range of 1.6 million to 1.8 million barrels. However, even assuming WTI averages around $40 per barrel in 2009, we expect to generate approximately $46 million of EBITDA and to spend $22 million of CapEx.

Should oil prices recover and/or the costs decline more quickly than expected, the level of investment and resulting EBITDA values would increase accordingly. Given even the flat production at $40 oil levels with our hedges, we still expect $24 million of cash available to acquire, drill, or reduce debt and we did not plan to just be treading water during 2009.

We expect to return to drilling in Hackberry first. The wells drilled at Hackberry in 2008 produced excellent results and we are looking forward to bringing the rig back to the field to drill some exciting prospects. Meanwhile, at present, we are leveraging our inventory of uphold recompletions at West Cote at the highest return application for our valuable capital.

I’d like to end my remarks today by reminding everyone that Gulfport is first and foremost an oil story. Over the next few years, we believe oil will continue to prove to be the stronger commodity. We posses a diverse portfolio of high quality, full weighted assets, providing a high degree of oil exposure.

We have strong positions in some of North America’s most significant oil plays in Southern Louisiana, the Permian, and the Bakken, we are active in three of America’s most prolific basins, and our 15-year leases in the Canadian oil sands provide long-term optionality in the largest oil play in the world, outside of Saudi Arabia. No other small to mid-cap E&P company has an asset portfolio that as efficiently balances the value of low risk development with the enormous upside our assets provide.

Hopefully, I’ve adequately conveyed our optimism concerning the future of the company. We are very comfortable from a balance sheet perspective. Going forward, we feel as though we’ve positioned ourselves in today’s new world to continue to grow the company and look forward to the opportunities that lay ahead.

That said, I’d like to now turn the call over to Mike to cover the details of our financial results. Mike?

Mike Moore

Thanks, Jim and thank you all for joining us for our call. For the year ended December 31st, 2008, production totaled 1.76 million barrels of oil equivalent or 4,800 barrels of oil equivalent per day. In the fourth quarter of 2008, production volumes totaled 496,000 barrels of oil or 5,400 barrels of oil equivalent per day.

Fourth quarter volumes increased 24% sequentially over the third quarter and 15% year-over-year. Quantified production impact from Hurricanes Gustav and Ike totaled approximately 170,000 barrels in 2009 with an approximate impact of 40,000 barrels in the fourth quarter.

Revenues for oil, natural gas, and natural gas liquids in the fourth quarter increased by 22% relative to 2007 to $37.6 million. Full year 2008 oil and gas revenues totaled $141.6 million, an increase of 33% year-over-year. In the fourth quarter, our realized price for oil after the effects of our fixed price contracts was $80.05 per barrel.

Average realized price for gas was $6.25 per Mcf and average realized for natural gas liquid was $0.60 per gallon or $25.39 per barrel. Our blended price for the quarter was $75.82 per barrels of oil equivalent and our average realized price per BOE for the full year 2008 was $80.30 a barrel.

Less hurricane impacts, operating expenses for the fourth quarter were $5.2 million or $9.71 per BOE and $19.4 million or $10.06 per BOE for the full year. G&A before hurricane impacts were $1.6 million or $2.93 per BOE for the quarter and $6.8 million or $3.54 per BOE for the full year of 2008.

To conclude our income statement discussion, EBITDA for the fourth quarter was $62.8 million. EBITDA for the full year of 2008 was $136 million, an increase of 91% compared to 2007. Net income, less the impacts of our non-cash impairment charge, was $47.7 million in the fourth quarter or $1.12 per share based on average diluted shares outstanding of approximately 42.6 million. For the full year, net income, less impairment, was $2.07 per share. Our hedge sale resulted in additional earnings per share of $0.92.

Operating cash flow before changes in working capital was $60.9 million for the quarter and $131.5 million for the full year of 2008. Moving on to the balance sheet, the company had $70.7 million of total debt outstanding at year-end including $64.4 million drawn against our revolving credit facility. As of March 10th, the balance on our revolver is now at $59 million. In terms of capital expenditures, we invested a total of $101 million on our 2008 activities, not including capital invested in Grizzly of approximately $10.7 million.

Turning to reserves, as of December 31st, 2008, total proved reserves were 21.8 million barrels of oil, 22.2 billion cubic feet of natural gas, for a total of 25.5 million barrels of oil equivalent. Our year-end PV10 value was $126 million at $41 oil. As you noticed, we, like many of our peers, had an impairment charge at the end of the year.

The SEC rule says that reserves are to be measured at the year-end price and that price this year was $41 per barrel. But to give you some sense of relevance, the SEC has changed that rule for next year and the years going forward and if we had applied that rule back to this reserve report and used those new SEC regulations that take effect in ’09, our PV10 value would have remained approximately the same amount and we would have no impairment charge. A detailed table of reserves and total cost incurred can be found at today’s press release.

Finally, I would like to highlight the fact that we have entered into fixed price contracts for 825,000 barrels during 2009 at a weighted average price of $55.01 before transportation and differentials and 789,000 barrels during 2010 at a weighted average price of $56.78 before transportation and differentials. Again, a schedule summarizing the hedge positions can be found on our website.

Thank you again for joining us for our call and we look forward to answering any questions you might have.

Paul Heerwagen

Becky, if you’d please queue up Q&A for us?

Question-and-Answer Session

Operator

Certainly. (Operator instructions) And your first question comes from the line of Ron Mills of Johnson Rice. Please proceed.

Ron Mills – Johnson Rice

Good morning.

Jim Palm

Good morning, Ron.

Ron Mills – Johnson Rice

Couple – a couple of questions for you. Should I read into your comments that the basic – you are cutting your CapEx literally to a point where it’s basically maintenance CapEx in order to hold production flat, and if so, what’s entailed in that budget? Is it mainly recompletions or are there new wells also being added as – particularly in South Louisiana?

Mike Moore

Yes, I think that’s right, Ron. We are basically – the budget that we are using currently is a maintenance budget. It’s about $22 million of CapEx, which includes about $4.3 million of Grizzly. So, the rest is spent to drill just a few wells in West Cote, Hackberry, and Permian, and Bakken, just a few there, and then some recompletions in West Cote Blanche Bay.

Ron Mills – Johnson Rice

In the March production volume that Jim mentioned, is that purely in response to the recompletions that you outperformed in February down in South Louisiana?

Jim Palm

Yes, that’s pretty much it, Ron. We are – primarily the recompletions, we are doing a few stimulations and things too, but main thing is recompletion.

Ron Mills – Johnson Rice

Okay. And then, when I look at either your cash flow or the EBITDA and as you all talked about, is the plan then to first and foremost use excess cash flows that you generate to pay down debt in the absence of oil prices being at $50 or $60 or an attractive acquisition coming your way? Because I assume your redetermination is coming up shortly or is currently ongoing for your year-end reserves. Can you comment on that borrowing base?

Mike Moore

Yes, that’s right. We are in the middle of a redetermination. We don’t have the final numbers; we’re comfortable with where we are. We think we’re going to come back somewhere north of where we are now. Certainly all banks have changed their price deck, but the answer to your first question, I think for the excess cash that we are going to throw off this year, as well as on future years, we’ll just have to evaluate opportunities that we have to drill. Costs are going to have to come down obviously before we decide what we are going to do and what levels of activities we are going to have, but in the absence of that, as long as they do come down, then we’ll just have to evaluate where we think the best use of that money is for our shareholders.

Jim Palm

Ron, this is Jim. I might mention that with $24 million available, like Mike said, I think we are comfortable with where we are with the banks and I don’t think we anticipate any more requirements from them. We are actively looking for acquisitions and new opportunities, we are looking at some leaseholds that was expensive a little while ago, now we’ve got opportunities to buy some leaseholds. So, I’d like to see us put that to work now while the prices are down and we do expect the cost to come down, we certainly are going to drill, but it’s a good time to – we are assuming on that, again $40 oil. If it stays at $40, I think there will be some distress situations that we can maybe take advantage of. So, it just depends on where we can put the money to work to give the best return for the company.

Ron Mills – Johnson Rice

Then one last one before I turn it over. If you look at your West Cote, your Hackberry, Permian, and Bakken properties, just stateside for the time being, how would you rank those in terms of attractiveness? It sounds like Hackberry would be at the top of the list as that’s where you’ll probably start your activity, but how would the other three fall out?

Jim Palm

Well, is at the top of the list. Like I said, in the Bakken the differentials have been so high, but even in spite of differentials there is some – still some good returns out there, but we’re not getting more proposals. So, we are not planning on spending much money. Permian and West Cote is pretty close, they are a little bit different. They’re all good properties. One thing that’s attractive in Southern Louisiana, boy, we’ve sure got some nice rocks down there. So, they are all looking good.

Ron Mills – Johnson Rice

Okay, great. I’ll let someone else jump on. Thanks.

Paul Heerwagen

Thanks, Ron.

Operator

And your next question comes from the line of Biju Perincheril of Jefferies. Please proceed.

Biju Perincheril – Jefferies

Good morning. Jim, can you give us a sense of your inventory for these recompletions in South Louisiana? How many you plan to do this year and –?

Jim Palm

A sense of recompletion numbers? Mike –

Biju Perincheril – Jefferies

Inventory. How many opportunities you have?

Jim Palm

We’ve – well, I’ll tell you, there is lots of zones upholding there. As you know, we – just in the last three years, we drilled about 60 producers in South Louisiana and we average about six zones per well. Now of course, we’ve completed some of those, but we’ve got our wells previous to the last three years. So, there is lots of opportunities. It always gets down to at what level are we willing to quit producing the zone we’re in before we go uphold to the next one. So, we can’t just go out and recomplete another 60 wells today if we wanted to, because there’s – some of them are doing too well to go off and leave them. So, there is hundreds of opportunities uphold. That’s been a real strength to our South Louisiana and that’s something that you make about Gulfport is that when times are tough like they are now, we can fall back on South Louisiana and make cheap recompletions and then when the costs come down and the prices go back up, we can go back to drilling wells again.

Biju Perincheril – Jefferies

So, would it be then fair to say you will be able to keep production more or less flat, even in 2010 with a similar sort budget that you have that level of opportunities for recompletions?

Jim Palm

That’s true. Yes, we could grow production from our recompletion. We just don’t think it’s a good plan for the company at today’s prices to go recomplete those reserves that we can save for better prices.

Biju Perincheril – Jefferies

Okay. And just – and these reserves are in your – categorized as proved undeveloped, these uphold locations?

Jim Palm

Well, they’d be proved, developed, and non-producing [ph].

Biju Perincheril – Jefferies

Okay, got it. All right, thanks.

Paul Heerwagen

Thanks, Biju.

Operator

And your next question comes from the line of Michael Pena [ph] of Simmons & Company. Please proceed.

Michael Pena – Simmons & Company

Good morning, guys.

Jim Palm

Good morning.

Michael Pena – Simmons & Company

Question for you Jim. On the negative price – the negative reserve revisions, you said most of those were price related. Any idea as to exactly how much of those are price related and were there any upward performance revisions as well?

Jim Palm

Most of the revisions were price related. They were just a killer at 41 bucks. So, as far as upward revisions due to performance, gosh, I don’t know, everything is pretty well performing about like we expected it to in all our areas. So, I can’t say that we got anything that was upward related due to performance revisions. It’s pretty much like we thought it would be.

Michael Pena – Simmons & Company

Okay. And then, the breakdown between PUDs and PDs. Is it similar to last year, on the 77% range?

Jim Palm

I think Mike has got some numbers he can give you.

Mike Moore

Yes, we actually – the PDP went up this year. It’s about 14% compared to about 9% last year.

Michael Pena – Simmons & Company

Okay. And then Mike, I guess just to build on Ron’s previous question on free cash flow, I know you said you’re comfortable with your borrowing base and given that you guys are going to be generating a lot of free cash flow, assuming if prices were to recover, given where you are trading right now at kind of $4.50 a barrel for proved reserves, how would you consider a buyback as opposed to acquiring reserves, given that current acquisition costs don’t seem to be that low right now. Are you guys seeing something different than that?

Mike Moore

As far – if your question is would we buy back stock. Is that your question?

Michael Pena – Simmons & Company

Yes, yes. And comparing that an acquisition because buying back stock essentially.

Mike Moore

Honestly, with debt outstanding it doesn’t seem to be appropriate to buy back stock.

Michael Pena – Simmons & Company

Okay.

Mike Moore

In addition, as Jim discussed, we have an assortment of high return projects, and so I just don’t think that that’s something that we would consider with this excess cash flow right now.

Michael Pena – Simmons & Company

Okay. Great, thank you.

Operator

And your next question comes from the line of Sven Del Pozzo of C.K. Cooper. Please proceed.

Sven Del Pozzo – C.K. Cooper

Yes, hello. The future development costs that are baked into your SEC PV10, if you could quantify it and also, how much we might expect that to go down at this point in time and I realize last conference call you guys talked about – you saw a significant reduction in development costs and how that trend has continued since the last time you updated us?

Jim Palm

Well, I think the things that are in the reserve report are the costs at year-end that are being used and we’re still seeing the costs drop, Sven. We’re seeing continued dropping since then and they’ve dropped real fast in the Permian. There’s lots of rigs that work there, they’re still dropping in. West Cote is a little behind the Permian and South Louisiana, but costs are continuing to drop and certainly they are overstated in the reserve report as compared to what we think they’re going to be when we are drilling wells again.

Sven Del Pozzo – C.K. Cooper

Okay. And the positive comments regarding your Hackberry drilling program, would you just go into a little more detail on what’s been encouraging at Hackberry so far this year?

Jim Palm

Well, we drilled the four wells on land, they produced quite well. We’ve been real pleased with them. They are kind of (inaudible) over there. They are – every one is in a new fault-block, but we’ve had a 100% success over there so far, and we’re looking forward to having some more. It’s gotten cheaper to drill the wells over there. We were at about $1.8 million last year. I think by the time we start drilling again in Hackberry, we’ll be at about two-thirds of that cost.

Sven Del Pozzo – C.K. Cooper

Okay. And I’m under the assumption that the Hackberry isn’t really well represented in the SEC reserve report as relative to West Cote. Is that true? And if it is, what about – what do you – if these are drilled in new fault-blocks, I mean that sounds like you are discovering new reserve accumulations at Hackberry?

Jim Palm

That’s true, and of course, it’s a smaller field than it is over West Cote. So, it’s not as big, but yes, the locations that we drill would be more like probables that we turned into proved reserves when we drilled at Hackberry, those planned locations.

Sven Del Pozzo – C.K. Cooper

Okay. And – so, is it having more of an impact on production than in reserves at this point in time?

Jim Palm

Yes. It is, but we think we’ve got a number of locations that are similar to them. We think we’re going to have a nice project area overtime there in Hackberry.

Sven Del Pozzo – C.K. Cooper

And would you remind us of the depth and quality of the oil that’s coming out of there?

Jim Palm

Well, we drilled all the way to 12,000 feet on land, but most of the success came around 9,000 feet in both at Hackberry and at West Cote. We’ve got Louisiana suite, we have real good quality all out there. So, it’s a prime place as far as the quality of oil and the demand for it.

Sven Del Pozzo – C.K. Cooper

Okay. All right, thanks very much.

Operator

And your next question comes from the line of Jason Wangler [ph] of Wunderlich Securities. Please proceed.

Jason Wangler – Wunderlich Securities

Good morning, guys. Nice update.

Mike Moore

Hi, Jason.

Jason Wangler – Wunderlich Securities

Just two quick ones. As far as the two Permian wells gross you’ll have to drill, is that just basically waiting until the pricing comes down so maybe second half of this year?

Jim Palm

That’s – that said, it’s – prices are down, it’s still coming down. We’re also, Jason, right now doing our science work and we’re actually swabbing – where we got ten zones perforated in wells, we’re actually swabbing some of those wells and looking at each individual zone, we’re learning about that stuff. And so, we’re finding some ways to complete our wells better, investing some time in the future. So we’ve got some of that to do too before we get back to drilling.

Jason Wangler – Wunderlich Securities

Okay. And just one other thing. Either in the Permian or the Bakken, is there any type of – if you do go non-consent on a well or something like that especially I guess in the Bakken where you may be looking at it if they propose it? Is there any type of penalty that would go forward or any other acreage or anything like that or was it basically just that well?

Jim Palm

Well, in the Permian, first, we’re not likely to go non-consent there. That’s the place where we are drilling on acreage that’s a 100% Windsor and Gulfport. So, we’re not likely to go non-consent there. Up in the Bakken, the general rule is that if you don’t participate in a well, you’re going to have a three to one penalty before you come back into that well and you maintain your acreage and you maintain your ability to participate in future wells that are proposed when they start drilling increased density wells. So, we only give up one well if we don’t participate. It’s a pretty nice position to be in up there.

Jason Wangler – Wunderlich Securities

Okay, great. Thanks, guys.

Paul Heerwagen

Thank you.

Operator

And your next question is a follow-up question from the line of Ron Mills of Johnson Rice. Please proceed.

Ron Mills – Johnson Rice

Mike, just to ask a question about the cost. You talked about G&A and LOE, excluding storm impacts in the fourth quarter. Can you provide a better run rate now that the storm related costs are behind you, hopefully?

Mike Moore

Yes.

Ron Mills – Johnson Rice

At least, until late this year maybe?

Mike Moore

Yes, Ron. We hope so. With those costs behind us Ron, and with the cost reductions that we are seeing and expecting to see, we actually think that our LOE will be in the $8 to $10 range on a company basis for 2009 and our G&A will probably be in the $3 to $4 range, but probably on a lower end of that.

Ron Mills – Johnson Rice

Okay. And from a production tax standpoint, I can’t remember if you talked about it on a BOE basis or on a percent of revenue basis.

Mike Moore

Yes, we – a lot of it is based on value. So, you would expect that to come down in 2009. So, I think we’re expecting to see a $5 to $6 a barrel production rate.

Ron Mills – Johnson Rice

And then lastly, just to get a sense in terms of the CapEx build throughout the year. Since you were able to pay down an additional $5 million on your revolver so far this quarter, it seems like your CapEx is going to be back-end loaded. How should we look at the CapEx as in terms of quarter-to-quarter?

Mike Moore

Yes, there is going to be – it’s going to build throughout the year, but definitely, I’d say, 65%, 70% will be spent in the last two quarters. So, a little bit in the first quarter, building into the second quarter, but 65%, 70% in those last two quarters.

Ron Mills – Johnson Rice

Okay, great. Thank you, guys.

Mike Moore

Thank you.

Operator

And your next question comes from the line of Ross DeMont of Midwood Capital. Please proceed.

Ross DeMont – Midwood Capital

Hi, guys. How are you?

Mike Moore

Hi, Ross.

Jim Palm

Fine. Ross, how are you?

Ross DeMont – Midwood Capital

Good. I just want to make sure I heard something right. If you spent $22 million in CapEx, you’ll hold production flat and at $40 a barrel that would be $46 million in EBITDA. Is that what you said?

Jim Palm

Right.

Ross DeMont – Midwood Capital

Is that formal guidance, or is that color, because you didn’t include anything in the – that I saw in the press release and the presentation?

Mike Moore

Well, that’s a good point. It’s formal guidance for where we are right now, really with – given current commodity prices and costs that we’re seeing. So, it’s a maintenance CapEx holding production flat, budget. So you could say that’s where we are right now, Ross.

Ross DeMont – Midwood Capital

Okay. And of that $46 million of EBITDA, that obviously includes the benefit of the hedges. So, probably a third of that, about $15 million or $16 million is the hedge benefit and then sort of remaining $30 million would be something closer to operating EBITDA?

Mike Moore

Right, right.

Ross DeMont – Midwood Capital

Okay.

Mike Moore

It’s important to note that – hopefully, commodity prices will recover this year and so, with the cash we’re throwing off even at $40 oil, it just builds as commodity prices hopefully recover this year.

Ross DeMont – Midwood Capital

Right. And in this – someone characterized this as sort of a maintenance CapEx level, but in some sense I’m assuming if you did this into perpetuity and we just kept doing these recompletions, our proved reserve level is going to go down because we’re not to going to be proving up new reserves. Is that a fair – or substantially, is that a fair assumption?

Jim Palm

That’s right, Ross. If we’re producing 1.7 and we only drill ten wells, which is more or less what we’re talking about.

Ross DeMont – Midwood Capital

Okay.

Jim Palm

We are going to lose ground, but –

Ross DeMont – Midwood Capital

Okay.

Jim Palm

Realistically, we don’t expect to be at $40 at the end of the year and before it’s over, we’ll probably be changing those directives and haven’t really called it guidance, but certainly we don’t expect to really be at this level for the whole year, but if the oil prices force us to be there this year, we’ll be there, we’ll be around, we’ll be ready to go when the prices kick back up again. And again, we’re still seeing the costs drop.

Ross DeMont – Midwood Capital

Understood. I agree and hope for the same thing. I just wanted to make sure I understood that at this CapEx level, reserves will go down. And then in terms of the payables that came down, I had expected your net debt to go down by a little more because I hadn’t figured in that there would be this big a reduction in payables. What was the source of that or what were those payables for and are we at a new normal level or are we low or are we high?

Mike Moore

Well, we’re still – we’re getting to the normal level. We still had some, as you might expect, some builds coming in from 2008 activities, but we’re getting close to being at a normal level.

Ross DeMont – Midwood Capital

Okay. And final question was any of the reserve revision related to the Lake at Hackberry because I forget how many reserves you had associated there at your 2007 report, but the land has gone well, the lake didn’t go so well. So I had assumed we might see that come in some.

Jim Palm

You’re right, Ross. We wrote down about 1.8 million barrels at the lake.

Ross DeMont – Midwood Capital

Okay – okay, so that’s now at a – well, I guess it’s at a level that, to your best guess, accurately reflects the reserves on the land.

Jim Palm

Yes, we think we’ve taken into account what we’re seeing out there and by the same token even though we’re optimistic about the land because those aren’t PUDs and the lake was PUDs. We didn’t add any reserves on land.

Ross DeMont – Midwood Capital

Okay.

Jim Palm

Those are not PUDs, they are not of different producers with new fault-blocks. But nevertheless, we think we’ve got some great probables that are real strong out there.

Ross DeMont – Midwood Capital

Okay, perfect. Thanks very much.

Mike Moore

Thanks, Ross.

Operator

(Operator instructions) And your next question comes from the line of Sven Del Pozzo of C.K. Cooper. Please proceed.

Sven Del Pozzo – C.K. Cooper

Yes, I’d just like to know a little bit more about the cost reductions that you envisioned. I guess in layman’s terms what can you tell us and how much CapEx might that involve and when might we start seeing results from it?

Jim Palm

Sven, with regards to drilling costs and CapEx, in general in Permian and South Louisiana, mostly we drilled about $1.8 million AFE wells last year. We expect to be drilling at about $1.2 million this year. So, they’re significant and we’ve already seen drilling rig costs come down by that percentage and completion rate costs come down by that percentage, and pipe has come down even more. So, we’re – we know that we’re to that kind of a number. Another thing I might point out is that in the Permian because of so much competition around the Midland area, not only the cost is coming down on a day work basis, but we’re actually getting some turkey bids in, which shifts responsibility over to the drilling contractor and so, it also enables us to really firm up our AFEs. And also in Permian, this science work that we are doing, I think we are seeing some things that we can change about the way we frac the wells and make – spend less money to frac them and make a better well by the time we get through. So, we’re getting cost reductions in a lot of different ways.

Sven Del Pozzo – C.K. Cooper

And – so most of the cost reductions are in the CapEx category, not as much in lifting costs, although I recognize with the new lifting cost guidance, it normalizes for those one-time items for the hurricanes. And I know they’re coming down, but are there going to be any efforts to reduce lifting costs as well?

Jim Palm

We’ve been making efforts to reduce our lifting costs. We’ve been bidding out – going through another round of bidding. We’ve actually found – for instance on our pumpers that we’ve got down there, we contract for those people and we are getting the cost reductions from them based on the price of oil. We’ve actually negotiated some reductions down while the price of oil is $40, we’ve got one price. When it goes back up to $50, we got another price. We’re working on chemicals, compression has been a big deal for us. We’ve got mechanics out there full-time now whereas a year or so ago, we didn’t have mechanics full-time for our compressors. So, we’re keeping our costs of running our facility down. We also put in SCADA, which is equipment out at the well that allows us to real-time monitor how much gas we are injecting. Of course, we use gas injections to lift our oil out in West Cote. So, we’re better equipped than we were last year to do that. There has been a lot of ways that we’re reducing our costs out there.

Sven Del Pozzo – C.K. Cooper

Okay, thanks very much.

Mike Moore

Thanks, Sven.

Operator

And there are no further questions. I would now like to turn the call back over to Mr. Paul Heerwagen for closing remarks.

Paul Heerwagen

Thank you, Becky. I believe that concludes today’s call. Replay of the call will be available temporarily through the Company’s website and can be accessed at gulfportenergy.com.

Thank you for your time and interest in Gulfport Energy this morning. This concludes our call.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect, have a great day.

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Source: Gulfport Energy Corporation Q4 2008 Earnings Call Transcript
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