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Noble Energy, Inc. (NYSE:NBL)

Q2 2009 Earnings Call Transcript

July 30, 2009 10:00 am ET

Executives

David Larson – VP, IR

Chuck Davidson – Chairman & CEO

Dave Stover – President & COO

Analysts

Dave Kistler – Simmons & Company

Michael Jacobs – Tudor Pickering Holt

Irene Haas – Canaccord Adams

Leo Mariani – RBC Capital

Ellen Hannan – Weeden & Co.

Dan McSpirit – BMO Capital Markets

Crystal Choi [ph] – Raymond James

Operator

Good morning. Welcome to Noble Energy’s second quarter 2009 earnings conference call. As a reminder, this call is being recorded. For opening remarks and introductions, I would like to turn the conference over to David Larson. Please go ahead, sir.

David Larson

Thanks, Rogy. Good morning, everyone. Welcome to Noble Energy's second quarter 2009 earnings conference call and web cast, and thanks for joining us. I'd like to start out with a few introductions. On the call today, we have Chuck Davidson, Chairman and CEO; and Dave Stover, President and COO.

The agenda for the call includes some opening comments from Chuck, who will also review a few financial items for the quarter, as well as discuss some of our major ongoing project developments. Dave will then go over our operating highlights for the quarter and an outlook on major projects going forward.

We will leave some time for Q&A and try to wrap up the call in less than an hour. Should you have any questions that we don’t get to in this morning's call, I’d encourage you to call Brad Whitmarsh or myself, and we will do our best to answer your questions.

We hope everybody has seen our earnings release that we issued this morning. Of course later today, we expect to be filing our 10-Q with the SEC, and it will be available on our Web site.

I want to remind everyone that this conference call does contain projections, forward-looking statements based on our current views and most reasonable expectations. We provide no assurances on these statements as a number of factors and uncertainties could cause actual results in the future periods to differ materially from what we discuss here. You should read our full disclosures on forward-looking statements in our latest news release and SEC filings for a discussion of the risk factors and influences on our business.

We will reference certain non-GAAP financial measures as well today such as adjusted net income or discretionary cash flow. When we do, it is because we believe they are good metrics to use in evaluating the company’s performance. Be sure to see the reconciliation in our earnings release.

With that, let me turn the call over to Chuck.

Chuck Davidson

Thanks David and good morning everyone. While the second quarter continued to experience the challenges of a weak global economy, I'm somewhat encouraged by recent trends and certainly have a more optimistic outlook today than I had at the end of the first quarter.

Within our industry, both the debt and equity markets have opened up and many have taken advantage of these markets to plug some holes. And in the commodity markets, while natural gas remains weak we've seen a significant improvement in the oil markets, which has seen oil climbing from approximately $50 per barrel at the end of the first quarter to close to $70 at the end of the second quarter.

And for Noble Energy, I'm even more encouraged with regards to our position and outlook today. With 40% of our current volumes being global liquids we're benefiting from these improving oil markets. Our portfolio diversification has allowed us to significantly mitigate the risk of the US gas market with only 30% of our production coming from US gas. In addition, we have almost 50% of that gas hedged for 2009, and we've significantly increased our gas hedges for 2010.

As many of you know, the remaining 30% of our production is from international gas, which is mainly sold under either fixed prices or price formulas tied to oil. Operationally, as Dave will cover in a moment, we believe we are positioned extremely well. The unique issues we highlighted at the end of the first quarter that impacted second quarter production have been mainly addressed and we are now entering the third quarter at much stronger production levels.

We've completed our appraisal well at Tamar in Israel and announced that discovered resources have been grown by approximately 25% there to 6.3 trillion cubic feet. With three wells drilled in this program, all being successful, we've now found nearly 7 trillion cubic feet of gross natural gas resources in a new basin that is just now beginning to be explored.

Finally, we have just sanctioned the Aseng oil development in Equatorial Guinea. Aseng, which used to be known as Benita is the first of many projects being advanced to develop our West Africa discoveries.

Turning to our quarterly results, our financial performance was a bit above our internal estimates and appeared to be ahead of most of the Street expectations. Adjusted net income for the quarter was $116 million or $0.66 per share diluted, and that's after removing certain items, primarily our unrealized mark-to-mark hedge losses. Rolling the adjustments back in, we had a GAAP net loss of $57 million this quarter or $0.33 per share diluted.

Earnings and cash flow benefitted over the first quarter from improved oil prices as well as the oil component of our production mix being up a couple of percent. Cost performance for the quarter was strong as well.

As I mentioned earlier, the largest of the adjustments to our GAAP earnings was an unrealized mark-to-mark loss in our commodity derivative instruments with the second adjustment item being a gain associated with our Argentina assets sale. For those of you saying what sale of Argentina assets, this was the sale we completed in the first quarter of 2008. While the purchaser paid us at that time and took the government over a year to approve the sale, which prevented us from booking the transaction. Schedule 1 in our earnings release table shows the adjustments in specific detail.

Sales volumes for the quarter averaged 206,000 barrels of oil equivalent per day, while production was around 207,000 barrels per day right in the middle of the guidance range we provided at the end of the first quarter. Primary difference between sales and production was due to timing of liftings in the North Sea. Second half production is already off to a very strong start. Our volumes in deep water are coming back after repairs from the 2008 hurricane impacts and in Israel, completion of customer maintenance, seasonal effects and new power plants are driving sales volumes to very high levels. And our developments in the North Sea are placed to exit the year at strong rates.

All of these production increases are further enhanced by higher oil prices, and that even implies to Israel, where our primary customer, Israel Electric Corporation, announced last week their agreement to purchase undedicated Mari-B gas at prices substantially higher than what we have been receiving under our original contract there. The actual price received under this new agreement will be tied primarily to a basket of liquids prices. The agreement also calls for all sales going forward to be proportionately allocated between the old and new agreements regardless of the volume sold. And this is a major change from the past where when we have sold undedicated gas to Israel Electric, only the portion of the volume sold over our base amount received premium prices.

To give you as an example, for the month of July volumes have been quite strong averaging nearly 150 million cubic feet per day net. And under the new pricing terms, our average blended realized price for July should be approximately $4 per Mcf, which is approximately 50% above the cap of our original contract. There is room for this to increase further in coming months if oil prices remain strong as the price calculation lags current market prices by several months. This is in -- from our perspective, a very encouraging step for not only ourselves and our partners and that, of course not only implies to Mari-B, but also the implications from a long-term perspective when considering the vast amount of resources that we have discovered offshore Israel.

Our cost metrics for the quarter came in below our expectations. Lease operating expense on a unit basis was down over 6% from the first quarter this year as our operational folks been doing a great job of identifying opportunities to trim some costs. DD&A per barrel was down sequentially as well. In addition, exploration expense was a little lighter than expected, with continued strong performance from our exploration programs.

Looking forward for the remainder of 2009, we haven't made any changes to our guidance metrics provided last quarter. Volumes have ramped up, and we continue to expect to be in the low portion of the original range of 212,000 to 220,000 barrels equivalent per day on average for the full year.

Quick note on the balance sheet, which remains in good shape. Cash was just under $1 billion at the end of the quarter, total debt was stable at $2.4 billion, and our debt to cap ratio was at 29%. Once you factor in the cash balance, debt to cap net of cash was only 19%, and we had about $1.3 billion in remaining committed availability under our revolving credit facility. Our capital spending for the year remains at approximately $1.4 million, and through the second quarter we had spent right at 50% of the full year amount.

In the past, we have noted that as a policy we have not hedged more than 50% of our production. After reviewing the US gas market as well as our near-term spending outlook, our Board of Directors recently authorized an increase in the limit of US natural gas hedged to a maximum now of 75% for 2010 only. As a result, we’ve continue to hedge natural gas production aggressively and I'd refer you to today's 10-Q to review our most recent positions on hedges.

Over the last 2.5 years, our exploration program has discovered what now amounts to over 700 million barrels equivalent, net to Noble Energy, of new resources and virtually all of this is unbooked from a reserve basis. This is equivalent to approximately 80% of the proven reserves we had on our books at the end of 2008. We focus on exploration and we know that there is tremendous value that can be created through best in class exploration.

For us, the value creation doesn't end with top-of-the-line exploration, high-level project execution is another critical component of the value creation chain. That’s an area where Noble Energy has been diligently focused. This is why we like to operate and drive the majority of the projects that we participate in. Since our first quarter conference call, we continued to make important progress in each of our three major project development areas. In the deep water Gulf of Mexico, we’ve continued planning and taking care of long-lead items for our oil developments at Isabella and Santa Cruz, also in the deep water Gulf of Mexico Gunflint moving forward.

In Equatorial Guinea, the Aseng project sanction represents a very important milestone for our company. This stand-alone project is a key component of our long-term growth strategy there and will provide critical infrastructure for our various other discoveries in the area. It also represents the first operative [ph] production in the region for our company. Initial development of the field will consist of multiple subsea wells flowing to an FPSO where the production will be processed with natural gas and water re-injected back into the reservoir to maintain pressure and maximize oil recoveries. Over the life of the project we expect to recover gross liquid volumes of approximately 100 million barrels to 120 million barrels. The 500 Bcf or so of gross gas resources will be cycled until the gas outlet is available. Initial Aseng production is estimated to commence in mid-2012 at a minimum of 50,000 barrels of oil per day gross, or about 16,500 barrels per day net to us.

Our third major project development area is Israel where we're narrowing the list of potential development scenarios for Tamar and Dalit, beginning the contract discussions with customers and sourcing potential rig resources to put us in a position to bring new gas to Israeli shores in 2012.

As we look at our major project pipeline, including these discussed and multiple others, there are some key themes that apply. First, each of these projects is generated from our exploration programs, primarily representing the 700 million barrels of unbooked discovered resources I referenced earlier. Each is operated by Noble Energy with the sole exception being Isabella in the deep water Gulf of Mexico. All of these projects are in core areas for Noble Energy where we have significant current production. And finally all of these projects are located in basins where we continue to have a deep portfolio of future exploration opportunities that provide even more growth upside.

Significant capital expenditures for these projects will begin in 2010. Based on where we are today with our disciplined investment approach, strong balance sheet, and phased-in project timing, I feel we're in very good position to bring these projects in on schedule. Our teams are in full-development mode, a lineup of our ongoing major development projects is very impressive and it is set to transform Noble Energy over the next few years and should result in very significant growth for our company; growth in book reserves, growth in production, growth in earnings, growth in cash flow, and expected margins.

So I'm very excited about the position we're in today, every optimistic about our future, and the plans that we have going forward.

So for a few more details, I'm going to turn the call now over to Dave.

Dave Stover

Thanks Chuck, and good morning everyone. I would like to first expand on the strong start to the second half of the year that Chuck mentioned earlier. Our July volumes have averaged about 216,000 barrels equivalent a day, up over 4% from our second quarter production. The main drivers have been the increased volumes from the North Sea and Israel, and I will discuss each of those areas in more detail later.

Beginning with our onshore US business, we are operating seven drilling rigs and primarily targeting projects that have a nice liquid component. We continue to experience marked improvements in drilling efficiencies in several areas. As an example, our Western Oklahoma program has experienced over 30% decreases in average drilling days per well since the first quarter.

Our largest onshore asset, Wattenberg, set another high point this quarter with record production averaging 282 million cubic feet equivalent per day net, including liquid production of over 21,000 barrels per day, a tremendous accomplishment for our teams managing that business. When we completed the Patina transaction in 2005, Wattenberg was producing about 200 million cubic feet equivalent per day. Total production has increased now 40% in the last four years with significant growth coming differentially from liquids. In the last month, we have reduced our rig count in Wattenberg to three as we are in the middle of crop season but we intend to be back at five rigs by the fourth quarter.

With the continued decrease in drilling time per well, our operated new drills are still planned at about 400 wells, including a few additional horizontal Niobrara wells in the second half of the year targeting oil potential in the field.

In the Piceance Basin, we are down to one rig as we recently moved a rig to our Iron Horse Field in Wyoming. Utilizing directional pad drilling we expect to drill about 10 wells in that area during the second half of this year.

One final item of note onshore in the US concerns our Shelby County, Texas acreage, where we brought in a partner on our Hainesville potential. Petrohawk has joined in our approximately 15,000 acre position and will operate the first four wells before we resume operatorship. This joint venture, with Noble retaining 60% working interest, represents an excellent opportunity to partner with one of the leading developers of the Hainesville Shale, and we look forward to working together to better understand this emerging resource. Our first well spud late May and we should have results in the third quarter. We are also participating in a 25% Hainesville well in the Caspiana Field in Louisiana with another operator.

Moving offshore, in the deep water Gulf of Mexico, second quarter production benefited from ongoing strong performances at our Swordfish property; however operations continued to be impacted by the effect of last year's hurricane. Ticonderoga partially started up toward the latter part of May and is expected to return to full production within the next week. This will add an incremental 3,500 net barrels oil equivalent per day.

We were awarded 22 of the 24 high bids from the March lease sale, including all of our primary prospects. As a reminder, these blocks added about 650 million barrels oil equivalent unrisked net resources to our extensive inventory.

Looking at our deep water Gulf of Mexico exploration plans for the remainder of the year, we noted previously that we were soliciting additional partners for our large Deep Blue prospect. In the process, an operator approached us to get into Deep Blue in exchange for Noble gaining access to another significant subsalt niacin opportunity. This provides us the possibility of two substantial exploration tests beginning in the fourth quarter. Back at Deep Blue we're busy finalizing the mapping from our reprocessed wide azimuth seismic. Isabella and Santa Cruz are moving forward with plans to bring first oil in 2011. We anticipate utilizing one of our contracted rigs to help with the development, which should commence towards the end of the first quarter next year. We will plan to complete the existing wells and drill the offset Santiago prospect. This subsea development, tied into an existing facility as host, is targeting initial gross rates of about 30,000 barrels per day.

Wrapping up the discussion on our US operations, I want to point out that we’ve recently received two awards for safe operations; one in the Gulf of Mexico, which we have now won two-years running, and one for our operations in the Piceance Basin, so congratulations to our teams for continuing to manage our business in a way that protects the public health, our employees and the environments where we operate.

Now let's move to international. Overall international production was unexpectedly impacted over 1,000 barrels equivalent per day by second quarter down time of a plant turbine in Ecuador. This has been repaired and operations are back at full expected throughput.

Turning to the North Sea; production was greater than sales in the second quarter due to the timing of field liftings. In particular, at Dumbarton we had a net 123,000 barrel lifting that was delayed from the last week in June to the first week of July. At Lochranza, the first of two wells was TDed [ph] in June, and the float rate looks very consistent with our pre-drill expectation. Over the next couple of months, we will be performing some work to tie in Lochranza and optimize Dumbarton field production through facility enhancements. We still expect to see first production from Lochranza and increased Dumbarton production by the end of the year.

Our volumes in the North Sea are now at their highest levels for the year running around 10,000 barrels of oil equivalent per day helped by two new wells at MacCulloch and a new completion at Dumbarton. Combining MacCulloch with the ongoing work at Dumbarton and Lochranza production should exit the year with some very strong rates, setting us up for 2010.

In West Africa, operations at the Alba field remain steady. As Chuck mentioned, we are very excited about our recent project sanction at the Aseng oil field where extensive engineering and design work has been conducted over the past year. To improve overall recovery, the project now includes both water and gas injection wells and we've redesigned the production wells to be completed horizontally, which will potentially allow for higher flow rates.

With these changes, and our continued exploration success in the area, we have increased the gas and liquid processing facilities as well as storage capacity on the FPSO. A portion of the FPSO costs will be recovered through processing fees as additional projects are tied into this infrastructure. The project team is in place, long-lead items have been secured and the tender process for the FPSO and subsea equipment is substantially completed. We have now contracted a second rig to support the development work at Aseng, as well as to support further exploration in the area.

Our next development objective in West Africa will be to accelerate and maximize condensate production at Belinda through gas cycling. We are targeting next year to sanction Belinda, with first liquid production expected in 2013, and we have begun staffing to meet this objective. Following Belinda we'll be moving forward our oil discoveries at Diega and Carmen. In Cameroon we recently executed a production-sharing contract for the Tilapia exploration block. This was the result of an exclusive right to negotiate for this area, which complements the YoYo mining concession issued in March this year. Under these two agreements, we continue to have the same 50% participating interest in operatorship over the entire area of the former PH-77 block. The next step will be to conduct additional 3D seismic over the area.

In addition, we're continuing our discussions on the gas monetization side and are encouraged by the progress we've made to date. We are not forgetting about the vast remaining potential that we hold about 1.5 million gross acres or equivalent to approximately 260 Gulf of Mexico blocks, in this underexplored basin and I anticipate exploration activities will resume in 2010 with particular emphasis on oil.

Turning to Israel, we are encouraged that turbine repairs have been completed at Eshkol and that the plant at Agee [ph] is now accepting natural gas. These are positive developments as we enter the high demand third quarter period, and Chuck already mentioned the strong volumes we have seen in July. Along with the positive news on price realizations for additional Mari-B reserves, we expect to start up sales during the third quarter to a new customer, Israel Chemicals Ltd., with potential volumes up to 15 million cubic feet per day net.

Results from our Tamar appraisal increased the gross mean resources to 6.3 trillion cubic feet and we were very pleased to sign quality and consistency of the reservoirs, about 3.5 miles from the original location as well as the water contact where we expect it in the middle reservoir. This significantly reduced the downside risk in our models, resulting in the increased overall resources. Combined with Dalit we have confirmed the existence of very significant resources capable of providing important energy to Israel well into the future. Additionally, our drilling group did an excellent job completing operations of our three exploration wells, with costs 4% under combined expected AFE costs, despite being in somewhat unchartered waters. We also recently awarded a 3D seismic contract to cover about 1,200 square miles over multiple additional leads later this year. Given positive results, we expect to begin further exploration in the second half of next year.

In closing, we are pleased with the increase in production we have already seen in July, and the progress we have made on our major discoveries. In the deep water Gulf of Mexico, we expect to sanction Isabella and Santa Cruz in the next quarter, while preparing for additional exploration in the fourth quarter. We have sanctioned the Aseng project to kick off our development activity in West Africa and we've secured a second rig to supplement our development and exploration program in that region for 2010 and 2011. In the Eastern Mediterranean, we increased our discovered resource size with the recent appraisal, moved forward with our 3D seismic program to delineate additional potential, and are in the process of securing a rig to kick off additional drilling activity in the second half of 2010.

So with that, at this time, we would like to go ahead and open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Dave Kistler with Simmons & Company.

Dave Kistler – Simmons & Company

Quick question with respect to 2009 CapEx, with the uptick in rigs in 4Q, can you just indicate whether that has a bias to push that upward or was it already in plan?

Chuck Davidson

No, that's already in the plan. We had anticipated that we would slow down the drilling in Wattenberg, which is a crop season, that there is a lot seasonal reasons why it makes sense to slow down a little bit there. So, no. That was all really part of our plan. We clearly anticipated that if the markets didn't cooperate or there are other reasons that we could stay at a lower rate for the rest of the year. But our plan basically is being followed.

Dave Kistler – Simmons & Company

Great. And if we look at the economics of that play right now for you guys with the liquids-rich portion of it, is there a gas price at which point you decide despite the large differential between oil and gas, that you would maybe adjust that plan?

Chuck Davidson

I would say -- and Dave can add some -- his thoughts on it is that -- we have a very unusual situation here, with liquids prices being at the $60 and $70 levels and gas prices floundering around, so it's probably not so much of an impact on gas price because it’s very resilient. But I think what we have to be sensitive to is the gas market itself and if we should run into a situation where storage is full and pipes are full then the gas actually just doesn't flow. But we haven't seen that yet, and that program is extremely strong with the drilling efficiencies and the costs that we’ve seen. Dave, you want to --?

David Stover

Yes, no, Chuck, I tend to agree. I think with any reasonable expectation of oil price, I don’t see that program ramping down in near term. It would take a pretty significant decrease in both gas and oil price I think.

Dave Kistler – Simmons & Company

Okay. So, just so I understand correctly, it's really more an issue of if there is available capacity for the gas to be taken, when we’ve got the kind of spread between oil and gas right now, gas could effectively be at zero you'd still run that forward?

David Stover

I think the dilemma you've got is if the gas doesn't move, as you point out, then you've got to slow things down. And we are also tending to focus on areas that have a little higher liquid production on some of that additional drilling, Dave.

Dave Kistler – Simmons & Company

Yes. I appreciate that color. Then looking at the fact that you guys added a rig for 2010, are you finding the market at sort of a level where it makes sense to, with all of your development plans internationally and in deep water areas to be looking at locking down rigs at this point?

David Stover

Well, still when you look at the international and deep water rigs there is a desire on both the drilling contractors, as well as ourselves, to contract them for an adequate time period to cover your programs, so in that particular case I think it’s a little over a year that we've contracted for that rig, and the pricing is fixed for that. And that's generally been the case for our deep water program as those contracts continue to be for a year or two in length and I think that works well because those are long-term programs with a lot of activity. Certainly, the terms are improving for certain portions of that market, but the big driver as you know is the discoveries and moving those towards development and continuing our exploration programs.

Dave Kistler – Simmons & Company

Absolutely, and I guess my question's really more focused on, as you indicated, pricing has become more attractive, is pricing at a level where it just makes sense to even be looking at locking things down that are development projects that you really don’t get moving forward until 2011 or 2012 even?

Chuck Davidson

Well, the market is still such that you have to -- in order to gain capacity for the rig you've got to secure these contracts well in advance. The rig we'd be looking for Israel would be a year away. So there is still very significant utilization of these deepwater rigs so you've got to do a lot of planning ahead and that means you will have to commit to a contract.

David Stover

And Dave, you continue to look at matching (inaudible) timing availability with our needs. I mean that's something we will continue to look at hard.

Dave Kistler – Simmons & Company

Yes, it makes sense to me. I think that from a planning standpoint it makes a ton of sense. I guess the question is more just in terms of the softening of rig rates. You obviously got this last one at a very favorable rate to what it had previously been contracted at and I'm just trying to think forward in terms of, as that capacity becomes available or appears to be coming available, do you take advantage of that even though, as you highlight, you’ve got a one-year or in some cases three-year lead time before you actually put the drill bit down.

David Stover

Sure, sure.

Chuck Davidson

You have certainly more choices today than what we had in the past. We just have to be sensitive to, is it more of a commodity rig we're looking for or is it a high-end specialty rig, and we can adjust to the market with that.

Dave Kistler – Simmons & Company

Great. Well, I will let somebody else hop on and hop back in the queue. Thanks guys.

Chuck Davidson

Thank you.

Operator

(Operator instructions) We will move on to Michael Jacobs with Tudor Pickering Holt.

Michael Jacobs – Tudor Pickering Holt

Thank you. Good morning.

Chuck Davidson

Good morning.

Michael Jacobs – Tudor Pickering Holt

I have one question and a follow up, and I wanted to first start up with the follow up on the CapEx question. If I think about last quarter's full-year guidance of $1.4 billion roughly, you spent about half that over the first six months with a lot of exploration activity over that time frame, is it fair to say that when we factor in service cost, deflation, the trajectory probably continues to head lower?

David Stover

Yes, I think, Mike, when you look at our capital spend by quarter, obviously the first quarter was a little higher with some of the deep water activity that we had in Israel and in the deep water Gulf of Mexico. Second quarter came down partly because we didn't have as much of that activity with the deepwater Gulf of Mexico piece being gone. Third quarter, as Chuck mentioned, will continue to be probably more like the second quarter, a little lower than we saw in the first quarter with the no big deep water activity. And then the fourth quarter will start to ramp back up and probably look more similar to the first quarter with the activity in the deep water Gulf of Mexico and the increase back in Wattenberg. So that's really how that looks quarter to quarter for us.

Chuck Davidson

And I think also to keep in mind that what we're probably seeing also is, while the larger development expenditures will be in 2010 and 2011 with the sanction of Aseng and some of our early lead-time items we're doing at Tamar, we're also starting to layer in some major project expenditures in the third and fourth quarter. So all of that's factored into our estimate for the year.

Michael Jacobs – Tudor Pickering Holt

Great. Thank you. And, Chuck, on your comment on Israeli gas, if I stall for spot prices in July I get to roughly, call it $5.25, $5.50 (inaudible) for the spot gas and when we think of Tamar analogue, if oil prices hold should we think of Israel gas as a $5 commodity?

Chuck Davidson

Well, I think as we look forward, keep in mind also the comment that that estimate for July was based on lagging oil prices so it was actually based on oil prices that occurred a few months ago. So there's probably room for that spot price to, as you calculated, to move up even further in coming months. We have to go through and talk with all the potential customers in Israel for Tamar so I hesitate to draw any conclusion other than one, and that is, the value of natural gas in Israel has gone up significantly in recent years and especially in the past six to 12 months as the need for gas in Israel has become more clear and it also is more clear that global energy prices have moved up. And even at these prices, $5, $6, that is still a tremendous incentive for Israel to continue to convert to natural gas. So I guess my conclusion, without doing the negotiations on all the other contracts, is the value of gas continues to go up and I am encouraged where in the past we've talked about the Mediterranean being a $4 world, we're clearly seeing contracts now that are at well above those levels.

Michael Jacobs – Tudor Pickering Holt

Great, thanks. And if I could squeeze in just one last question before hopping in the queue. When I think about wells that are drilled but not completed, do you have -- can you give us an idea of a, if you have an inventory, and b, if you do how big that is?

David Stover

Yes, Mike, probably the only place where we really have a so-called inventory -- and it's really the timing of completions -- is probably in the Piceance. We probably have plus or minus 15 to 20 wells that were in the stages of completing and it's just -- we're kind of doing them in an orderly fashion, one at a time right now up there.

Michael Jacobs – Tudor Pickering Holt

Great, thank you very much.

Chuck Davidson

Thank you.

Operator

Thank you. We will now move on to Irene Haas with Canaccord Adams.

Irene Haas – Canaccord Adams

Just very quickly, maybe a little more color on your Hainesville acreage. I assume is on the Louisiana side and once again, would you tell me which parishes and what's your net footprint?

David Stover

The one we have talked about, that new joint venture, Irene, was in Shelby County, Texas.

Irene Haas – Canaccord Adams

Okay.

David Stover

That’s the 15,000 acres or so. Now we are, about 25% interest in some wells up in Louisiana, and then our smaller acreage position around Caspiana field, yes, I think that's around De Soto Parish. The new venture that we’ve talked about that's down in Shelby County, Texas.

Irene Haas – Canaccord Adams

Okay. Great, thanks.

Chuck Davidson

Thank you.

Operator

(Operator instructions) We will move on to Leo Mariani with RBC Capital.

Leo Mariani – RBC Capital

Yes, good morning here, guys.

Chuck Davidson

Good morning.

Leo Mariani – RBC Capital

Just trying to get a sense of what your second quarter ’09 deep water Gulf volumes were.

David Stover

Let me see, I should have that. It was -- if I'm looking at it right, it was right around 21,000 barrels equivalent per day.

Chuck Davidson

And of course, as Dave noted, that still didn't really include much from Ticonderoga, which we expect another what, 3,500. I think the Ticonderoga impact is a little under 1000 barrels a day for the quarter.

Leo Mariani – RBC Capital

Okay. And so obviously we will get a nice ramp-up in the second half of the year, then, okay?

David Stover

At least starting off the third quarter.

Leo Mariani – RBC Capital

Yes. Okay. And I guess I wasn't -- I have to admit I wasn't 100% clear on what you guys said about gas prices for the existing Mari-B gas. Could you just maybe hit that one more time in terms of some of the uplift you had on the uncontracted volumes? And obviously your production was up materially in July, can you remind us of what the contracted piece of that 150 million net was, and I thought that that was capped around $2.65, so maybe you could just kind of review those numbers real quick for me?

Chuck Davidson

Let me try it a different way on that. Yes, you're exactly right. There was a base contract a number of years ago and it was a formula contract but it hit a cap and that cap was right around $2.65. The important thing in the new agreement that we have reached is that we are going to preset so that all gas will receive a blended price, regardless of volume, so we don't have to worry about exceeding -- in the past I think it was somewhere around 170 million, maybe closer to $200 million, somewhere in that range is where -- when we went above that, we started receiving spot prices. Going forward, all gas will receive a blended price that I provided in the call, which was for July about $4. So that blended price will move around going forward based on liquid prices because of just the various proportions. But, again, whether the volume that we deliver is on the low end or the high end we will receive this blended price. So it is a nice uptick. It's about -- as I mentioned, it's about 50% higher than what that original cap was.

Leo Mariani – RBC Capital

Okay. So it almost sounds like you're prior contract with the amounts that were capped is almost not in existence anymore, if I'm reading that correct?

Chuck Davidson

It exists but we’ve agreed to come up with and look at the undedicated and original dedicated blended together and come up with a new price. So if that is not real clear, give the guys a shout here and they will take it -- go through in detail with you.

Leo Mariani – RBC Capital

No, I think that was a good explanation. I got that now. Obviously that'll give you guys a pretty significant uptick, I would think, in revenues out of Israel for the second half of the year.

Chuck Davidson

I think it does quite a bit in a lot of areas. You bet.

Leo Mariani – RBC Capital

Okay. Well, great. Thanks, guys.

Chuck Davidson

Thank you.

Operator

We do have a follow up from Michael Jacobs, Tudor Pickering Holt.

Michael Jacobs – Tudor Pickering Holt

Thank you. Just wondering if you can help us think ahead to 2010 on the CapEx side, just when we think about your major development spending incrementally 2010 versus 2009, can you give us an idea of how much you've earmarked for next year?

Chuck Davidson

Well, we're still, as you would expect, assembling the budgets on that and there's some wild cards there on the timing of sanctions of some of the follow-on projects Dave referred to. Overall we expect that 2010 and 2011 spending will run north of our cash flow, but still very manageable within our balance sheet and our cash on hand. I guess I would ask, Mike, you give us a little bit longer to see how these projects are going to time out and then we'll give you some better guidance on 2010. But we think it's a manageable program for the two years but it will run above our cash flow.

Michael Jacobs – Tudor Pickering Holt

Great. Thank you. And one last question for Dave. If I heard correctly on net acreage positions and working interests in East Texas, have you added bits and pieces over the last quarter or two?

David Stover

Not really over the last quarter, Mike. If you remember, back in last fall we were adding some acreage down there, so we had built that up to -- especially in the Shelby County piece that 15,000 acre position or so. That's not a gross acreage piece, the 15,000 acres.

Michael Jacobs – Tudor Pickering Holt

Great. Thank you.

David Stover

Thanks.

Operator

Thank you. We will move on to Ellen Hannan out of Weeden.

Ellen Hannan – Weeden & Co.

Hi, good morning.

Chuck Davidson

Good morning.

Ellen Hannan – Weeden & Co.

One follow-up question here. On your Deep Blue prospect in the Gulf of Mexico, you mentioned that, I think last quarter that you were looking to sell down that and then you alluded, Chuck, I think that you had been approached and had found a partner for the swap. Could you just give us a little color on that?

Chuck Davidson

Yes. We've had this out to industry in terms of securing a partner basically looking at promoting down some of our interests. As you recall, we had 75% working interest and we were really targeting to get that probably below 50%. And in that process, one of the companies, which we don't want to announce at this point, came forward with, I think, a pretty interesting swap idea. And they had a very nice prospect that was, we thought, of a very high quality. We did a lot of due diligence on it and we thought it was a nice way to mitigate the risk and basically take a position and have a position in two prospects rather than just sell down on Deep Blue. And that's what we are pursuing now. We've got basically an agreement in principal, but we need to finalize some things before either of us really want to announce it. But that was the -- where I think we've come out. We've accomplished our objective of reducing and mitigating risk and did it by diversifying it across two prospects rather than just sell down in one.

Ellen Hannan – Weeden & Co.

So I guess at the end, then, what you've done is give yourself additional exposure but you're not saving any future CapEx.

Chuck Davidson

That's exactly right. That was the trade-off. We looked at do we want to save CapEx and just stay in one prospect, or would we like to utilize the full CapEx but spread it over two, and given our view of the deep water Gulf and the quality of prospect that was being offered by the other party, we felt it made sense to spread it over two.

Ellen Hannan – Weeden & Co.

Great. Thank you very much.

Chuck Davidson

Thank you.

Operator

Thank you. We will move on to our next caller in the queue. We will hear from Dan McSpirit out of BMO Capital Markets.

Dan McSpirit – BMO Capital Markets

Gentlemen, good morning.

Chuck Davidson

Good morning.

David Stover

Good morning, Dan.

Dan McSpirit – BMO Capital Markets

Can you speak to your 3D seismic program offshore Israel in terms of timing, costs, what's budgeted for this year and maybe next, and also, what your expectations are in terms of it revealing anything more than what's not known today?

David Stover

Yes, Dan. I think that program will actually kick off here probably toward the latter part of the third quarter, run through pretty much the rest of the year. We will get -- start to see some data back probably towards the end of the year, early part of next year and give us a chance to really see what we can firm up prospect wise by midyear, which would work out good with what we're looking at as far as potential rig timing and then have the ability to kick off additional exploration in the second half of next year.

Dan McSpirit – BMO Capital Markets

Okay, very good. Thank you. And then on the same subject, or at least in terms of the operating area, again offshore Israel, you talked about pricing, what about the cost side? Can you give us any ranges on a development basis in terms of -- and on a unit basis what operating costs might look like, all in an effort to better gauge what the margins are for developing that asset?

Chuck Davidson

Well, we are probably little bit ahead on -- in terms of trying to come up with that estimate because we're looking at a lot of development scenarios. The big question is going to be how much of Tamara do we develop in the first phase? And we don't know the answer to that, that's going to depend on some of the marketing aspects of it going forward. On the operational cost side, everything we see here this is going to be very low. This is going to be -- on a unit basis it is going to be low. The key is going to be the capital investment and the timing and the phasing and all that and it's just too early to provide that and before providing it, I'd want to make sure that we were well synchronized with our partners at our public companies that that would be a material disclosure to them.

David Stover

I think the main thing, Dan, is just the well productivity here on these wells is going to be so great that will especially keep the operating costs very low on any kind of unit basis.

Dan McSpirit – BMO Capital Markets

Got it. I understand. That's all I have. Thank you.

Operator

Thank you. We will now move on to Crystal Choi [ph] with Raymond James.

Crystal Choi – Raymond James

Good morning.

Chuck Davidson

Good morning.

Crystal Choi – Raymond James

I was wondering if we can switch gears a little bit. Can you give some comments on what you are doing in China now and how much more capital you've put in here and what your plans are?

David Stover

Yes, in China we talked a little bit, I think, the previous call about some encouragement we'd seen on some horizontal wells that we had been drilling. The plan is to actually bring a rig back in there -- and I think it's probably closer to the fourth quarter, and drill a couple more wells this year followed up with a couple more wells next year to really keep that production up and actually start to see that increase some more later this year and into next year. But I think we had put a little bit more money in there for additional drilling late this year and we'll see some more money in there for some drilling again next year.

Crystal Choi – Raymond James

Okay. Thanks. And Granite Wash, any more comments on activity or on your horizontal results here?

David Stover

We're kind of keeping an eye, as everybody else is, on what's going on out there. We have I guess probably around 22,000 acres that are, I'd say, Granite Wash and a large part of that’s developed. We had a pretty extensive program a couple years ago for a couple of years on vertical wells out there, particularly in Buffalo Wallow and Billy Rose fields. So we probably have plus or minus 350 well bores out there that -- right now what we're doing is making sure we're looking hard at those wells and particular are looking at the zones maybe a little deeper to see what kind of potential they may have relative to all the things we are seeing out there. But we're way early in the stages of that.

Crystal Choi – Raymond James

Okay. Thanks a lot.

Chuck Davidson

Thank you.

Operator

At this time there are no further questions. I'll turn it back over to our speakers for any additional or closing comments.

Chuck Davidson

Thanks, again, for everybody joining us today on the call and hope you have a good day. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude today's conference call. We thank you for your participation.

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