PetroQuest Energy's CEO Hosts Acquisition of Shallow Water Gulf of Mexico Assets Conference (Transcript)

| About: PetroQuest Energy (PQ)

PetroQuest Energy, Inc. (NYSE:PQ)

Acquisition of Shallow Water Gulf of Mexico Assets Conference Call

June 20, 2013 9:30 am ET

Executives

Matt Quantz – Manager, Corporate Communications

Charles T. Goodson – Chairman, President and Chief Executive Officer

W. Todd Zehnder – Chief Operating Officer

J. Bond Clement – Executive Vice President, Chief Financial Officer and Treasurer

Analysts

William Green – Stephens Inc.

Ronald E. Mills – Johnson Rice & Company LLC.

Richard Tullis – Capital One

Kerr Friedman – Simmons & Company

Ravi Kamath – Global Hunter Securities

Operator

Good day and welcome to the PetroQuest Energy Inc announces Acquisition of Shallow Water Gulf of Mexico Conference Call. All participants will be in listen-only mode. (Operator Instructions)

I would now like to turn the conference over to Mr. Matt Quantz, Manager of Investor Relations. Mr. Quantz the floor is yours sir.

Matt Quantz

Thank you. Good morning everyone. We would like to welcome you to our Gulf of Mexico acquisition conference call and webcast. Participating with me today on the call are Charles Goodson, Chairman, CEO, and President; Todd Zehnder, COO; and Bond Clement, CFO.

As you’ve come to expect, we would like to make our Safe Harbor statements under the Private Securities Litigation Reform Act of 1995. Statements made today regarding PetroQuest’s business, which are not historical facts are forward-looking statements that involve risks and uncertainties.

For a discussion of such risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see Risk Factors in the annual and quarterly SEC filings and in the forward-looking statements in our press releases. We assume no obligations to update our forward-looking statements. Please also note that on today’s call we will be referring to non-GAAP financial measures including adjusted EBITDA. Historical non-GAAP financial measures are reconciled to the most directly comparable GAAP measures in our press release including in our Form 8-K filed with the SEC today.

With that, Charlie will get us started with an overview of the transaction.

Charles T. Goodson

Thank you, Matt. Thanks and good morning. We’re pleased to announce this transformative acquisition located around our existing Shallow Water Gulf of Mexico properties and operations. And at this call we’ll lay out plans on how this acquisition creates value and build upon our existing Gulf Coast Basin assets. Once integrated this property will impact our long life strategy as we plan to utilize the top marketing cash flow to increased activities allowing us to efficiently grow reserves and lengthen RP ratio.

The acquisition is an excellent strategic fit to current Gulf of Mexico operations and production. More importantly these assets add meaningful growth to our oil production. We folded into our Company the acquisitions as immediately accretive to virtually every metric.

Beginning with the acquisition terms, we’re acquiring a group of new and vibrant Shallow Water Gulf of Mexico assets from private companies for approximately $193 million. Ryder Scott has independently estimated the 1P proved reserves associated with these assets as of December 31, 2012 at approximately 2.1 million barrels of oil, 134,000 barrels of natural gas liquids and 23.8 billion cubic feet of natural gas, or approximately 6.2 million barrels of oil equivalent.

The 1P PV-10 value as of July 1, 2013, is estimated to be $171 billion using prices of $92.32 per barrel of oil and $4.37 per Mcf of gas. These properties are fully develop and we estimate they will require less than $1.7 million in recompletion costs to fully develop the reserves and realize the high margin cash flow. In addition, we estimate there are 2.3 million barrels of oil equivalent that are in the 3P category as either simply down dip or off (inaudible) reach reserves that we expect to produce.

Just looking at the proved stream, and not considering any future drilling opportunities, our internal 3P reserves and 3P PV-10 value estimates as of July 1, 2013 increased to 8.5 million barrels of oil equivalent, which is 41% liquids and $278 million respectively or put more clearly an additional $100 million of discounted potential value that will not require additional capital.

Throughout our 28 year of history of operating in the Gulf Coast Basin, we’ve consistently realized positive reserve additions resulting in wells producing more than the SEC reserves originally booked at the time of discovery. One of the better examples of this is our Main Pass 74 field wherein late 2003 in early 2004 we had two discoveries, these wells were originally booked at a total of 7.6 Bcfe net. Today 10 years later these wells are still producing and have booked over four times their original amount to where now the ultimate reserves are 31 Bcfe net to our working interest, that’s over 23 Bcfe of net reserve adds or an increase of over 300% at no additional cost.

Now looking at a more macro Gulf Coast Basin data point, since 2007 our Gulf Coast Basin assets have generated over $300 million of cumulative net free cash flow, which essentially replicates the current market cap at our company. This cash flow is generated by reinvesting only 25% of our capital back into the basin. It’s this type of performance that once again highlights that many times there are significant performance provisions associated with Gulf Coast discoveries. Our recent successes at La Cantera, Ship Shoal 72 and Pelican Point have only strengthened our belief that the Gulf Coast is and should continue to be a critical and strategic part of our business plan.

Our success in this basin has highlighted PQ as a desired partner for the areas deal flow, and now we have many more potential future projects to draw from [because] [ph] of our continued success. Bottom line, we feel, we have utilized this area as effectively as any company and we will continue to do so. But we have no intention to make it our singular focus, a strategy we have continued to openly articulate to market, we will certainly use it to our competitive advantage.

As we integrate these new properties into our company, we will undoubtedly identify other opportunities that have not been attributed any value at this point in time. This acquisition includes interests in eight offshore blocks and leases totaling 14,000 acres. In addition we’ll continue to execute on our ongoing Gulf Coast Basin business plan, which includes existing assets such as Thunder Bayou and Sawgrass that we have plans to drill later this year.

In addition to the value of these acquired assets provide on a stand-alone basis, when the cash flow they spin-off is combined with our best in class Woodford and Cotton Valley programs that’s when even more of the value becomes evident. Now redeploying a disproportionate percentage of the free cash flow from these assets into our long life resource trends, we expect to be able to significantly accelerate our onshore drilling programs and therefore substantially alter the growth trajectory of the company while still operating within cash flow.

Under this accelerated development program, our liquids rich Woodford program is expected to ramp up later this year with over 50 wells planned next year compared to our 2013 estimate of 16 wells. This allows us to bring forward the present value of our joint venture cost structure. In addition, virtually all the newly acquired liquids rich Woodford acreage will be HBP by the end of 2014.

Same story in a Cotton Valley where the performance of this asset continues to exceed our expectations on every level, over the past few years this property has been under developed due to capital constraints. This will change after we begin redeploying the cash flow from this acquisition. We are now forecasting to bring a rig back to work later this year and expect to drill 10 to 15 horizontal wells in 2014 compared to our 100% working interest well that was drilled early this year.

Let’s further discuss this latest test, which continues to de-risk the property. The well came online in April of 2013 at 6.3 million cubic feet of gas in 458 barrels of natural gas liquids per day. Today, two months later, the well continues to flow at these rates. We currently estimate a growing inventory of approximately 200 locations in the Cotton Valley with an additional 200 locations in the Bossier Shale immediately below the Cotton Valley. When that development is complete a year from now, we’ll move up to Travis Peak. Bottom line, the Carthage property offers an exciting, low risk growth opportunity that has been screaming for capital and emphasizes once again why the strategic acquisition will have so much impact and it is so important.

We estimate that the impact of our acceleration plan and the strong Gulf Coast Basin production base translates into 16% and 43% production growth for 2013 and 2014 respectively. Focusing on production growth, this acquisition increases our estimated 2013 oil production in excess of 70%. For 2014 oil production is expected to average over 2800 barrels of day that’s a 130% increase from our current production levels. With this acquisition and implementation of our acceleration program the overall production is expected to shift from 80% gas, 20% liquids in 2013 to 70% gas, 30% liquids in 2014.

On our pro forma basis for the acquisition, our production mix is expected to shift slightly as we are forecasting approximately 40% of our 2013 production to come from our Gulf Coast Basin assets versus 30% before the acquisition. Post transactions our reserve mix is still well balanced with 78% of our pro forma proved reserves at December 12, 2012 located within our onshore assets and 22% in the Gulf Coast Basin.

In total on either our proved reserves or production this transaction does not meaningfully alter our balance between our higher margin Gulf Coast assets in our more predictable resource place as we maintain a well diversified portfolio.

While our gas production percentage is decreasing, our overall gas production rate is significantly increasing this fits nicely with our constructive view of gas prices over the next couple of years. We believe that we will be increasing our Woodford and Cotton Valley program in rising gas and NGL price environment which will drive even more cash flow growth which in turn will drive additional shareholder value.

With that, I will turn it over to Todd, who will give you a more in-depth summary of the properties and plans.

W. Todd Zehnder

Thanks and good morning everyone.

As Charlie mentioned we are very excited about this acquisition and are looking forward to integrating these new assets into our portfolio, which should be relatively easy task due to the proximity of these of these assets to or existing PetroQuest’s offshore properties. I’d like to spend a couple of minutes diving down into acquired properties. These assets consist of 14 producing wells with two additional wells that are slated to come online in the next four to six weeks. There are many great attributes to this package, but one of the best is the near term strength and growth profile of the existing assets.

In total, there are seven newly constructed platforms. It’s important to note that all of these assets are located in less than 200 feet of water and because of their age and design we believe that the risk of potential hurricane damage is relatively minimal. In addition, the 14 producing wells have been on production for average for only a couple of years and are forecasted to have many more years of productive life. Therefore, we do not expect to have any significant near-term P&A liability associated with these acquired assets.

As stated in yesterday’s press release, during May these assets produce on average approximately 1100 barrels of oil per day and 19 million cubic feet of gas per day. We want to highlight ongoing operations, which we believe will meaningfully increase near-term oil production. At West Delta, Block 89 there are two wells awaiting recompletion via slickline operations that we will perform after closing. We are forecasting that these two wells will come online at a combined daily rate of approximately 200 barrels of oil and 3.3 million cubic feet of gas net to PetroQuest.

In addition, we will be in the process of making topside adjustments on another West Delta well, which should increase its flow rate by approximately 300 barrels a day net. At Ship Shoal 238, we have two wells that have been drilled and completed; we are in the process of finishing topside adjustments and a pipeline hookup.

We expect that these wells will commence production in approximately four to six weeks at 500 barrels per day net. So in total, we have approximately 1000 additional barrels of oil per day net in approximately six to eight weeks. At that time, we expect the new properties to be producing approximately 2300 barrels of oil per day net.

As Charlie touched on, we believe that there is upside to the current book reserves of these assets, and we expect to see positive revisions in the coming years. We’ve already agreed to participate in two additional oil focus well that will ultimately be tied into the Galveston platform and are analyzing other potential projects. With our substantial Gulf Coast Basin experience, we fully expect that we will discover additional exploitation opportunities not considered in our current 3P estimates and we’ll have opportunities to participate in other future prospects with the seller.

The last thing I’ll touch on is the risk management aspect; we have adequately ensured these assets both from a structural and production standpoint, including obtaining comprehensive loss of production insurance on the most significant field in the transaction West Delta 89. Utilizing our longstanding experience in the Gulf Coast Basin, we feel that we have mitigated a significant part of the assets Gulf of Mexico presents.

With that I’ll turn it over to Bond.

J. Bond Clement

Thanks Todd. Quickly looking we’re at the financial impact of this transaction. As you can tell from our 2014 production guidance that we put out in yesterday’s release, we expect this transaction to meaningfully strengthen our cash flow profile.

For context, during the first quarter of 2013 the acquired assets generated adjusted EBITDA of $13 million, which is a 60% increase from PetroQuest on a standalone basis. That $13 million of adjusted EBITDA was generated with oil production of less than 1,000 barrels per day. As Todd just outlined for us, we have line of site on near-term oil production increasing to over 2,000 barrels of oil per day. The impact of which will be significant on our cash flow growth.

In order to lock in the expected cash flow from these acquired assets, we plan to hedge a meaningful portion of our estimated oil production here shortly. To that end, we recently hedged 250 barrels per day for July through December of this year at $97 per barrel and 250 barrels of oil per day for next year at around $92.50 per barrel. Both of these contracts were WTI indexed high.

We will layer in addition hedges over the coming months as we strive to take a dollar cost averaging approach to our program as we have consistently done in past. To build once again upon Charlie and Todd’s comments, this excess cash flow is planned to be redeployed into our long-life assets, with the Woodford and Cotton Valley programs being the primary recipients.

Our 2013 CapEx budget has been increased to $95 to $110 million range to reflect the initial ramp up in activity that is expected in a couple of months, along with the addition of two Galveston opportunities that Todd touched on earlier.

Our 2014 CapEx guidance of $125 million to $140 million reflects the acceleration of activity in both the Woodford and the Cotton Valley. Based on current pricing assumptions, we believe that our accelerated plan for next year will be fully funded through cash flow.

From a cost perspective, we do not anticipate the need for a significant increase in our G&A budget, given the small number of wells involved coupled with the acquired assets located close to existing PQ Gulf of Mexico assets.

Regarding operating expenses, we are forecasting an increase in LOE on an absolute basis, but when layered in with the incremental production, we expect per unit LOE to remain flat with our historical rates. While not reflected in our guidance, we do expect to realize cost synergies as we consolidate manpower and offshore transportation services related to wells and facility oversight and production monitoring. Additionally, with a bigger footprint in the Gulf, we believe we will be able to achieve scale efficiencies relative to insurance and general cost of offshore services.

On the financing front, we’ve secured $185 million bridge loan from a group of banks lead by JP Morgan. We are currently evaluating permanent financing options which will be dependent upon general market conditions.

In conjunction with the transaction our borrowing base has been increased from $150 million to $200 million and the commitment levels have increased from $100 million to $150 million. With the borrowing base increase and expected cash flow from the acquired assets we should have substantial liquidity to execute our accelerated 2014 capital plans.

With that I’ll turn it back to Charlie to wrap up the comments.

Charles T. Goodson

Well, much of the industry focus today is in crowded oily shale plays or in long lead time deepwater Gulf of Mexico. We see this developed Shallow Water Gulf of Mexico transaction as immediately strengthening all areas of the company; it will quickly unlock a significant amount of value for our shareholders and further highlight two of our core competencies in the Woodford in these sections.

The acquisition is simply an extension of our existing strategy that was established in 2003, which called for using free cash flow from the Gulf Coast Basin to fund our resource trend expansion, by doing so with our growing cash flow. Even with the acquisition of these short life assets we are not forecasting a material reduction in R/P ratio this year, in fact, as we look at over the next couple of years, we expect this ratio to increase from where it’s today as we accelerate our long-life programs. Our management team is looking forward to seamlessly integrating this highly accretive transaction into our company. The growth in all our core areas will be evident in the shareholder value as we move into 2014 and beyond.

With that I will turn it back over to Matt.

Matt Quantz

Yes everybody, I like to make you aware that we’ll have a presentation regarding this transaction on our website here and look forward mid-morning. At this time I will open it up for Q&A.

Question-and-Answer Session

Operator

Hey thank you sir. We will now begin the question-and-answer session. (Operator Instructions) The first question we have comes from Will Green of Stephens. Please go ahead.

William Green – Stephens Inc.

Good morning guys.

Charles T. Goodson

Good morning.

W. Todd Zehnder

Good morning, Will.

William Green – Stephens Inc.

Now, so I guess first off you guys are highlighting a pretty significant acceleration in the Woodford and Cotton Valley as a result of this. It doesn’t look like the CapEx budget is going up all that much. I do understand the JV presents probably some pretty low well cost for you guys. Is there any other color you guys could add to that? Do you have wells that are coming in under budget, versus what you’d originally planned earlier in the year, anything else if you could add there?

J. Bond Clement

Well I think the main thing Will is probably the lead time it takes to ramp up significantly. So you’ll see an increase in our CapEx and that’s really as a result of the new drill that we’re participating in, in the Gulf and the acceleration that we’re planning to ramp up later in the third quarter or early fourth quarter. So the true ramp is going to impact the 2014 budget in the number of wells that we’ll be able to drill down. So I think it’s just a lead time, it takes to take that done.

William Green – Stephens Inc.

So you guys will probably do some batch completions around year end or early 2014 and that’s reflected in the 2014 CapEx budget, is that correct?

J. Bond Clement

That’s right.

William Green – Stephens Inc.

Thank you. And I guess second, you guys have a gas contract in the Woodford that’s rolling off fairly soon that should help differentials as far as I can tell, how should we think about natural gas differentials for you guys total company pro forma that contract rolling off and then after this acquisition?

Unidentified Company Representative

Well, I'll try to put it at somewhat high level and then maybe say call back later for specifics, but effective October you’re going to lower your blended differential in Oklahoma by probably somewhere in the $0.40 range we’ll have an improvement because that contract only makes up a portion of our gas and that’s an $0.85 (inaudible) that will be going away.

So we can get a little bit more specific after the call, but that piece ought to increase your Woodford overall $0.40 or so which is going to drive your company wide differential by call a $0.20, and those are very high level numbers. Now what the Gulf Coast does as everybody knows has very good realization as it relates to Henry Hub due to the proximity.

So your overall company back into differential backup is going to come down, we don’t have a general number yet, but typically the Gulf Coast is going to trade at somewhere between $0.10 and $0.15 higher than the rest of our region. So now that you bring in another $0.20 million a day of gas production whatever that weighted average due to our realizations; I would say $0.10 to $0.15 on the Gulf Coast.

William Green – Stephens Inc.

That’s pretty color. So we should expect a pretty significant improvement on your gas differentials from both of those, going forward?

Charles T. Goodson

Absolutely.

William Green – Stephens Inc.

Great. I’ll give someone else a chance. Thank you, guys.

Charles T. Goodson

All right, Will.

J. Bond Clement

Thanks.

Operator

Next we have Ron Mills of Johnson Rice.

Ronald E. Mills – Johnson Rice & Company LLC.

Good morning guys.

Charles T. Goodson

Good morning Ron.

Ronald E. Mills – Johnson Rice & Company LLC.

You guys walked through what is going to be sounds like at least a doubling of oil production here over the next six weeks from other recompletions and/or previous activities. As we look beyond that six week period on the acquired properties, any planned activities prior to drilling in the Galveston area, in terms of similar opportunities, the recompletions and whatnot or how should we think of that oil profile until you probably start spending some new capital in the area probably early next year.

Charles T. Goodson

Well, just based on the age of the wells, it’s going to have a pretty flat production profile. So between the new wells that are coming on, and then additional wells that you mentioned either in Galveston or other areas, Galveston will be the near-term one. And those really won’t have an impact until 2014, because of just the lead time of drilling them and hooking them up. But I would think that from a modeling perspective and it’s laid out in the guidance, we don’t have a significant rollover very, very minimal rollover of any on the package itself.

So you ought to think about oil on a net basis for these assets, they are staying relatively flat because of the ramp up and the recompletions in the new wells that are coming on. So the numbers we laid out don’t put a big hyperbolic decline curve obviously on, right. Just think of it as new production in the Gulf Cost that’s going to stay pretty flat until later in its life when either a pressure depletion or water depletion hits it.

Ronald E. Mills – Johnson Rice & Company LLC.

And you’ve highlighted the acceleration opportunities being able to transfer even more capital from the Gulf Coast to the Woodford and Cotton Valley, in terms of particularly the Woodford in the liquids rich area, what is your well inventory at this point, and you’ve been able to add 10,000 acres to 15,000 acres so far this year, what’s the outlook, still continue to add in that liquids part of the Woodford to complement, which seems to be 10 plus year inventory the in the Cotton Valley/Bossier?

Unidentified Company Representative

Right. Let me start the answer by saying this, first of all we are very fortunate to have the inventory put together in both the Woodford and which we’re adding to and the Cotton Valley. And the one thing I’ll say is, we’re going to have other opportunities in the Gulf Coast that are going to come up, and so we’re going to continue to find those (inaudible) La Cantera or Thunder Bayou or Sawgrass those type items, and we’ll manage our CapEx accordingly and fund those. In the Woodford specifically we’ve [stick] [ph] up somewhere around 12,000 acres this year in the liquids rich portion, which by our estimate gives you somewhere around 100 gross locations based on 120 acres spacing.

We have a goal internally to probably pick up about 5000 to 7000 and I think that’s where we will end up, so based on the rig count that we’ve laid out that’s a two-year inventory in hand, and probably moving more to a three, three and half year inventory just in the liquids rich basin. And you’ve touched on it; we’ve got plenty of other acreage of HBP on the eastern side of the trend that has great economics, it’s dry gas, but those are the higher EURs is a little bit deeper with higher pressure and a little bit higher drill cost. So as of right now we’re hanging out over in the liquids-rich area and have plenty of inventory and continue to add to it.

Ronald E. Mills – Johnson Rice & Company LLC.

Thank you. And in terms of the Cotton Valley, the move from over the last two or three years you’ve done one to three or four wells per year to 10 wells. Any limitations to that or was it just one of, it’s just pure example of capital starvation?

J. Bond Clement

It’s fairly, I think it’s two fold, it’s purely the capital allocation process is one out in the other areas. And the second piece is with kind of another six to 12 months of result in watching the production profile of these wells, we feel very comfortable and our portion of the Cotton Valley trend and the liquids cut that we’re seeing, as evidenced by this most recent well, that we’ve brought it on. I’m talking wet numbers years, but 7 million to 8 million a day and we sit here and look at the daily production report there is more and its producing 7 million to 8 million a day 60 days later. So it’s, not all the acreage has created equal, we understand that, but the wells that we’ve been drilling are clearly going to hold up against other allocation areas. And so we are planning to more capital, we’re going to drill some more wells. But just as important is our comfort in those results overtime.

Unidentified Company Representative

And realize Ron that’s a tight sand play versus shale play.

Ronald E. Mills – Johnson Rice & Company LLC.

Right.

Unidentified Company Representative

Yeah, so it’s performing so much better than I think we originally modeled. Now we’re totally comfortable of accelerating that we are our partner of Chevron to take advantage of it.

Ronald E. Mills – Johnson Rice & Company LLC.

And then one last one it seems like given the fact that you remain fully funded internally, this also does add some size and scale to not just your asset base, but your cash flows and EBITDA. And I would assume that based on that your liquidity as seen in your borrowing base goes up, but in terms of future plans are you still looking at incremental strategic opportunities, is this a good example where Gulf Coast is as targeted as onshore or what should we read into your A and D type outlook?

Charles T. Goodson

Yeah Ron, from a acquisition standpoint, we continue to look at opportunities in all three of our core areas being the Gulf Coast, the Mid-Continent and East Texas from a liquidity and debt covenant perspective as you’ve touched on post transaction, our balance sheet will have significantly more liquidity and then on a go forward basis as we look into 2014, the credit statistics across the board improved – from where they sit today.

Ronald E. Mills – Johnson Rice & Company LLC.

All right. I’ll let someone else jump in thank you.

Charles T. Goodson

Thanks.

Operator

Next is Richard Tullis of Capital One.

Richard Tullis – Capital One

Hey good morning.

Charles T. Goodson

Good Morning.

W. Todd Zehnder

Good morning.

Richard Tullis – Capital One

Todd, you may have touched on this, I didn’t catch it. What percent of the acquired assets is proved developed producing?

W. Todd Zehnder

Let’s see, that is about 40% right now.

Richard Tullis – Capital One

40%, okay.

W. Todd Zehnder

And the other – and just to make sure everybody else knows the other 60% is PDNP, we have no PUDs at this point.

Richard Tullis – Capital One

Okay. Looking out to 2014, what percent of production and revenues, do you think the total Gulf Coast, Gulf of Mexico will account for?

J. Bond Clement

In 2014, based on the current guidance you’ll probably look around 40% of the production, and on a revenue basis obviously it’s going to be more impactful where the oil production is going to come out of not only acquired assets, but our La Cantera and our organic Gulf Coast assets, so you’re probably looking at on a revenue basis 60% to 70% of the revenues coming from the Gulf Coast.

Richard Tullis – Capital One

Okay. And then Bond, if you could update us on the NextEra carry, how much is currently left, and how much you think will be used by year end 2014?

J. Bond Clement

At the end of the third quarter we had about $61 million available under that cost sharing arrangement. As we look at the accelerated plan that we like to implement for 2014, our model indicates that we will effectively utilize the entire carry by the end of 2014. So when you think about a net asset value standpoint that’s a $60 million asset that’s not reflected on our balance sheet currently, and we plan to bring that forward in terms of value creation over the next 18 months.

Richard Tullis – Capital One

Okay. And then just lastly for me, how much of the 2014 CapEx do you think will be dedicated to drilling Gulf Coast exploration wells?

W. Todd Zehnder

Right now as the budget lays out and we haven’t gone geographic detail, but internally we’re looking at a budget that only had some 10% to 15%, because those are the projects that are line of sight either completion dollars from this year or project that we know we will drill early next year. As always we’re refining that and that’s why we typically don’t put CapEx budget out too early, because we have a slate of projects that we’re always working toward and permitting and getting ready. And so I would say that you would probably end up somewhere between that 15%, no higher than maybe a quarter, which is I think where we ended up this year by about 25% of our CapEx.

Richard Tullis – Capital One

Okay so at 25% level the CapEx number would go up, or would just go up toward the high end of that range?

J. Bond Clement

It would probably be somewhere in that range, you know as always we operate probably about 90% of what we do. So we can put a governor on certain levels of spending, or we can increase others and obviously with a range of $20 million there we could just play around in between that upper end of the range. Once again, just to lay out our philosophy, we plan on fully funding CapEx out of internally generated cash flow.

Richard Tullis – Capital One

Okay. All right that’s been helpful. Thanks so much.

Charles T. Goodson

All right Richard.

Operator

The next question now comes from Kerr Friedman of Simmons & Company. Please go ahead.

Kerr Friedman – Simmons & Company

Hey good morning guys.

Charles T. Goodson

Good morning.

J. Bond Clement

Good morning.

Kerr Friedman – Simmons & Company

Just curious given the recent acquisition, any change of plans or updates for the Mississippian. I know you are kind of waiting on some seismic to come back there, but let’s hypothetically assume that seismic comes back positive, would we see potentially the 2014 budget augmented or reallocation of capital or would the Mississippian kind of be pushed closer to 2015, 2016?

J. Bond Clement

No, I mean as soon as we finish our review, our plans are like you said if successful and tying in all our well bores and we see where we can be successful in the play, we will immediately get back to drilling there. And you’re correct it’s either moving dollars around or [just sitting] [ph] on where oil and gas prices are, possibly increasing the budget. So where we don’t want to really dig down into that, because really don’t have an answer yet, we’re waiting on the rest of the seismic to come in. But we definitely fell like that it’s something that’s going to be probably a 2014 event.

Kerr Friedman – Simmons & Company

Okay, great, that’s helpful. And then just a quick question on rates of return, could you just remind us at the current [strip] [ph], what type of RORs you’re all generating in the liquids Woodford both with and without the carry and then as well in Cotton Valley?

J. Bond Clement

Yeah on a promoted basis using our type curve that we have out there and we’ve had out there for a while in the liquids rich, using a $4 gas price you’re going to be somewhere in the 75% to 80% rate of return range. On the Cotton Valley wells based upon our type curve of about 1 million barrels of oil equivalent which is a Ryder Scott number, we’re going to be somewhere in the mid-30s using that same pricing assumption.

Kerr Friedman – Simmons & Company

All right, great, that’s helpful, that’s all I got. Thanks guys.

J. Bond Clement

Thanks.

Operator

(Operator Instructions) Next we have Ravi Kamath of Global Hunter.

Ravi Kamath – Global Hunter Securities

Hey guys, just had a couple of questions; one, could we get a breakdown of the year-end PV-10 by the PDP versus PDNP?

W. Todd Zehnder

For the acquired assets?

Ravi Kamath – Global Hunter Securities

For the acquired assets, yes.

W. Todd Zehnder

Yeah, the PDP portion of it would be about 30%, and then the PDNP piece would be about the remaining 60%, 70%, it looks like about 35%, 65%.

Ravi Kamath – Global Hunter Securities

35%, 65%, okay, got it. And then how much asset retirement obligations would be – will you guys be assuming with the purchase?

J. Bond Clement

Yeah, based upon the numbers that we’re looking at today, we’re forecasting somewhere between $15 million and $20 million on a discounted basis that take some work that the seller has done in conjunction with independent contractors to come up with those estimates. We’ll likely refine those estimates over the next couple of months before we finalized the booking in terms of our year-end audit financial statements. But I think $15 million to $20 million is probably a pretty good range on a discounted basis.

Ravi Kamath – Global Hunter Securities

Got it. And I know you are reviewing your financing plans, but just was wondering are there any plans to issue any amount of equity to finance the transaction?

J. Bond Clement

Right now, as we've laid out in the press release. We’re evaluating our permanent financing options. We do have a bridge in place with JPMorgan for guaranteed funding. And we’ve got an effective shelf out there $250 million universal shelf, so we have options and the additional borrowing base capacity is certainly one of those options as well.

Ravi Kamath – Global Hunter Securities

Got it. And then last any update on the Eagle Ford Shale?

Charles T. Goodson

No update at this point. This one has kept our (inaudible) team a little busy so.

Ravi Kamath – Global Hunter Securities

Understood. Thanks guys.

Charles T. Goodson

Sure.

Operator

Next we have Ron Mills of Johnson Rice.

Ronald E. Mills – Johnson Rice & Company

Hey guys, I have couple of follow-ups, just moving on a little bit. Any update on La Cantera in terms of getting the third well online, if so, is it kind of that $25 million to $30 million a day you expected and is the plan upgrade still on track for later by the end of the third quarter or so?

J. Bond Clement

Yes, third well is online, brought online I guess at the end of the last month, and we’ve walked up about $30 million a day, so we had facility running at $100 million a day plus associated liquids. We are doing some topside adjustments on our facility right now, and we’ll let it flow at that looking like for the reminder of the next couple of months. I’ll remind you guys and I think you just touched on it, the liquids yields are a little bit lower than what we’re expecting in the late third, early fourth-quarter, because the plant is being significantly upgraded onshore, and that looks like it’s on track for a September timeline. So although those numbers are laid out in guidance as appropriately put out I guess with our first-quarter earnings and then put in today’s release or yesterday’s release.

Ronald E. Mills – Johnson Rice & Company

And am I correct in assuming the capital program and the production impact that you’ve outlined is really just from the current proved developed reserves that you have booked? How many more opportunities are out there, I realize you’re just scratching the surface, but you have the two oil projects at in the Galveston area, if you look at across the asset base and where the properties are located from a technical standpoint, you guys are pretty excited about being able to kick the tires and if so am I correct in assuming that that would really be kind of upside relative to the numbers you’ve laid out related just to the development of, or the production of the current developed reserves?

J. Bond Clement

Right. I’d say yes. Just to clarify the PV number that we put out include nothing to do with future drills and we do have CapEx associated with these two wells this year that are about 1.5 million barrels and a bcf of gas on a gross basis that were at 20% of those. Our numbers don’t include any of that. And I would agree that our guys are excited about looking over the fields and excited about working with [Shallow] on future deals as well. We definitely see that our success down at La Cantera just recently along with Pelican Point and Main Pass and Ship Shoal over the years as they player down here that people look to participate with, and we’re going to continue to do that, and I think this acquisition only further strengthens our ability to participate in deals and generate new prospects on these assets along with everything else that we have including of Thunder Bayou prospects.

So I would say yes that numbers have significant upside, we can’t quantify it, because we just don’t know yet, but looking at historical basis is the easiest way to analyze it, and the number that always fix up to us is we borrow $300 million from this space to other idea and it’s just going to continue that process.

Ronald E. Mills – Johnson Rice & Company

Okay, great. Thanks again.

J. Bond Clement

Thanks Ron.

Charles T. Goodson

Thank you.

Operator

Well it appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. At this time I’d like to turn the conference back over to management for any closing remarks. Gentlemen?

Charles T. Goodson

Yes I would like to thank everybody for their time this morning, and then again be on the lookout for that presentation will be uploaded to our website here shortly. Thank you.

Operator

And we thank you sir, and to the rest of the management for your time. The conference call is now concluded. We thank you all for attending today’s presentation. At this time you may disconnect your lines. Thank you and take care.

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