Plains Exploration & Production Company Q2 2009 Earnings Call Transcript

| About: Plains Exploration (PXP)

Plains Exploration & Production Co. (NYSE:PXP)

Q2 2009 Earnings Call

August 06, 2009; 09:00 am ET


Jim Flores - Chairman, President & Chief Executive Officer

Winston Talbert - Executive Vice President & Chief Financial Officer

John Wombwell - Executive Vice President & General Counsel

Scott Winters - Vice President of Corporate Communications


David Heikkinen - Tudor Pickering

Duane Grubert - CRT Capital Group

Joe Allman - JP Morgan

Jeff Robertson - Barclays Capital


Good morning. My name is Kelly and I will be your conference operator today. At this time I would like to welcome everyone to the Plains Exploration second quarter earnings results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

I would now turn the call over to Mr. Scott Winters, Vice President of Corporate Communications. Please go ahead sir.

Scott Winters

Thank you very much Kelly and good morning everybody. Welcome to PXP’s 2009 quarterly earnings conference call which is also being broadcast live on the internet. Anyone may listen to the call or the replay by accessing the company’s website at

Also located on the website are the earnings release and the 10-Q. In addition to the earnings press release issued this morning, PXP issued a press release announcing an equity offering. Please note that the company is unable to take or answer any questions with respect to the equity offering during this conference call.

Before we begin today’s quarterly comments, I’d like to remind everybody that during this call there will be forward-looking statements as defined by the SEC. These statements are based on our current expectations and projections about future events and involve certain assumptions, known as well as unknown risks, uncertainties and other factors that could cause our actual results to differ materially.

Please refer to our Forms 10-K, 10-Q and 8-K filed with the SEC for a complete discussion on forward-looking statements. In our press release and in our prepared comments this is morning, we present non-GAAP measures and explanation and reconciliation of the non-GAAP financial measures is included at the end of the release.

On the call today is Jim Flores, our Chairman, President and Chief Executive Officer; Winston Talbert, Executive Vice President and Chief Financial Officer; John Wombwell, our Executive Vice President and General Counsel; and Hance Myers our Vice President of Investor Relations.

For the quarter, we reported $44 million of net income or $0.37 per diluted share, on revenue of nearly $279 million. We reported lower operating and administrative costs and higher Haynesville Shale in Flatrock production. We also announced an amendment to the Haynesville Shale joint venture agreement with Chesapeake Energy. We’ll have more on this transaction later in the call.

For the second quarter, adjusted net income was approximately $171 million or $1.44 per diluted share. This is a non-GAAP measure which includes realized gains and losses, and excludes unrealized gains and losses on our mark-to-market derivative contracts, and excludes a legal settlement recovery, as well as a beneficial income tax effect from a change in our balance of unrecognized tax benefits.

Operating cash flow, a non-GAAP measure was approximately $392 million. This amount does not include the $87.3 million legal settlement received during the quarter. Sales price realizations before derivative transactions were 83% for oil and 96% for natural gas.

Daily sales volumes were 80.6 thousand BOEs for the second quarter and 80.7 thousand BOEs for the first six months of this year. We’re slightly above the midpoint of our full year 2009 guidance range of 78 to 82 thousand barrels of oil equivalent per day.

Higher sales volumes from the Haynesville and Flatrock properties are primarily responsible for a 9% increase in total sales volumes in the second quarter of 2009, compared to the second quarter of 2008, after excluding the impact of divestments made in 2008.

Total production costs were $14.43 per BOE for the second quarter, compared to $15.89 per BOE during the first quarter of this year, and $20.49 in the second quarter of 2008. Between the second quarters of 2009 and 2008, total production costs per BOE declined 30%. Lease operating expense, a component of total production cost, decreased 19% to $8.64 per BOE in 2009 versus $10.70 per BOE in 2008, due primarily to the implementation of the cost reduction program.

Lower steam gas costs per unit primarily reflect lower cost of gas used in steam generation. In 2009, we burned approximately 3.7 Bcf of natural gas at a cost of approximately $2.94 per MMBtu, compared to 4.2 Bcf at a cost of approximately $9.70 per MMBtu in 2008. Lower production and ad valorem taxes per unit primarily reflected divestments in 2008 and lower commodity prices.

Higher gathering and transportation expenses on a per unit basis reflect an increase in the production from Haynesville Shale and Flatrock properties. Total general and administrative costs declined 17% during the second quarter of 2009 compared to the prior year period. The cost reduction program contributed to this improvement.

In the second quarter of 2009, field work related to an IRS examination of certain of our federal income tax returns for 2009 through 2004 was completed and as a result, we reduced the balance of our net unrecognized tax positions related to certain deductions and tax credits, by approximately $29 million, which positively impacted our net income by approximately $24 million in the second quarter.

PXP continues to aggressively manage its project inventory, cost structure and commodity price risk. The company had no amounts outstanding under its $1.3 billion senior revolving credit facility, held approximately $455.8 million in cash at the end of the quarter, and has no near term debt maturities.

Approximately 80% of our 2009 estimated sales volumes, using the midpoint of our annual guidance are protected by natural gas volumes with $10 by $20 collars on our 150,000 MMBtu’s per day, crude oil volumes with put options, with a $55 strike price on 32,500 barrels per day and natural gas physical purchases for our California operations.

For 2010, PXP acquired natural gas three way collars on 45,000 MMBtu’s per day, bringing the total natural gas derivative position to 85,000 MMBtu’s per day. Crude oil volumes have put options with a $55 strike price on 40,000 barrels per day. Approximately 70% of our 2010 estimated sales volumes, using the midpoint of our annual guidance are protected by crude oil puts, natural gas three way collars, and natural gas physical purchases for our California operations.

As discussed before, the company’s 2009 capital spending is primarily directed to the Haynesville Shale, California long-lived oil resource base, Flatrock area development and delineation of that freezing discovery and a number of high potential exploration projects in the Gulf of Mexico. Since the first to the year, PXP has been moving aggressively on both our development and our exploration programs.

We announced today an amendment to the joint venture agreement with Chesapeake Energy that provides for us to pay the remainder Haynesville Shale drilling carries originally agreed to in July of 2008, on a discounted and accelerated basis. PXP previously agreed to fund 50% of Chesapeake’s share of drilling and completion costs for future Haynesville Shale wells, up to $1.6 billion over a several year period.

On August 5, 2009, PXP and Chesapeake entered into an amendment that provides for PXP to pay $1.1 billion of an estimated $1.25 billion carry balance on September 29, 2009. This represents an approximate 12% reduction in the total amount of drilling carry commitments due to Chesapeake.

In addition, Chesapeake has agreed to maintain a minimum level of activity on the jointly owned Haynesville acreage by drilling a minimum of 150 wells during each of the next three, 12 month period commencing on October 1, 2009. After the closing of the amendment, PXP and Chesapeake will each pay their proportionate working interest cost on future drilling.

To-date, the joint venture has drilled and completed 74 horizontal wells in the Haynesville Shale and continues to experience outstanding drilling results. Haynesville Shale average daily net production during the second quarter of 2009 was 28 million cubic feet equivalent per day net PXP, a 100% increase from the 14 million cubic feet equivalent per day, net averaged during the first quarter of this year.

Current production is approximately 43 million cubic feet equivalent per day net PXP, and is expected to exceed approximately 70 million cubic feet equivalent net per day by year end 2009, and approximately 125 million cubic feet equivalent net per day by year end 2010.

The joint venture expects to operate an average of 33 rigs in the second half of this year and 36 rigs in 2010. PXP now owns approximately 113,000 net acreages as leasehold in the Haynesville Shale, with 1,400 potential net drilling locations and 6.8 Tcfe of estimated net resource potential.

In the Gulf of Mexico, the Flatrock area wells are producing over 65 million cubic feet equivalent per day net PXP. As previously reported, in May 2009 the operator completed a planned facility expansion at the Tiger Shoal production facility.

Positive drilling results at the Blueberry Hill deep gas exploratory well, operated by McMoRan and located on Louisiana State Lease 340 in the Gulf of Mexico indicate a potential discovery. Operations are currently underway to deepen the well to a proposed total depth of 24,000 feet to assess deeper targets. PXP holds 47.9% working interest.

A drilling rig is on location at Davy Jones prospect located on South Marsh Island Block 230 in the Gulf of Mexico. McMoRan as operator is reentering a previously abandoned well bore and plans to deepen the well to a proposed total depth of 28,000 feet. PXP has a 30.8% working interest in this prospect.

Four more high potential exploration prospects; each one with a reserve potential of more than 100 million barrels of oil equivalent net to PXP are currently drilling or will begin drilling in the third quarter of this year.

The Friesian number two well operated by PXP and located in Green Canyon 643 is preparing to drill below 31,000 feet towards a proposed total depth of over 34,000. The drilled portion of Friesian number two well shows strong correlation, both geologic and pressure, with the initial Miocene field pay sands at the Tahiti Field.

The well has encountered a total of 478 net feet of oil pay, of which 389 net feet was encountered in the initial well and 89 net feet encountered in the deeper section of the well. A liner has been set and plans are to redrill the M-18 and drill ahead to the M-21 sands, the prolific main field equivalent sands at the Tahiti Field. Well, results are expected during the third quarter of this year.

The Northwood exploration prospect, operated by Chevron and located on Green Canyon Block 945 in the Gulf of Mexico, began drilling in the second quarter and is currently below 27,000 feet, drilling towards a proposed total depth of approximately 32,000 feet. PXP holds a 27.5% working interest. The Rickenbacker exploration prospect in the Gulf of Mexico and the Purple Tiger exploration prospect on Block 124 offshore Vietnam are scheduled to begin drilling in the third quarter of this year.

California, PXP’s T-Ridge project, offshore California, continues to maintain strong support and has benefited from the attention it received during the recent high profile California budget debate. Although the California State Assembly failed to approve legislation authorizing a path forward for the T-Ridge project, PXP intends to continue pushing for the project based on its merits to the state of California.

Quick update on guidance; for 2009, PXP has increased its capital budget to $1.4 billion from $1.05 billion, which excludes the $1.1 billion, September 2009 payment. The increase to $1.4 billion reflects our participation in anticipated additional Haynesville Shale wells and additional acreage purchases, offset by the elimination of the Haynesville carry commitments in the fourth quarter, combined with slower than anticipated reduction in rig rates and service costs, as well as additional Gulf of Mexico high-potential exploratory drilling. PXP reaffirms its estimated full year 2009 daily sales volume of 78,000 to 82,000 BOEs.

PXP is targeting a 2010 capital budget of approximately $1 billion of which 45% is discretionary spending, and the company estimates its full year 2010 daily sales volume to be 86,000 to 90,000 BOE.

PXP reported a strong quarter with lower overall costs and higher production in the Haynesville and Flatrock asset areas. PXP will continue to efficiently manage its business focusing on cost reduction and profitability, in maintaining its conservative balance sheet within an active hedge program, while moving to accelerate the Haynesville development, develop our existing properties with the exposure to Granite Wash in the Texas Panhandle and execute our high potential expiration program to build future development inventory.

With that, I’ll turn the call over to Jim.

Jim Flores

Thanks Scott. Good morning everyone. As I’d like to see from the cost side of the things, the financial, another strong quarter for PXP and which represented a strong production.

We are late on some of our wells and some of the drilling difficulty we had in July, so we’re looking forward to a eventful August, September with the drill bit in some of our exploratory projects. We are extremely proud of the Haynesville and how well it’s performing, and I want to kind of discuss and give you the rational for the transaction with Chesapeake from our advantage point.

The $1.25 billion of carry that we are obligated to pay going forward was factored down to about $1.1 billion on a cash transaction that we’d hope to close by the end of the third quarter. The rational here is multifaceted. Number one, from our standpoint, we’re 100% confident in the Haynesville’s productivity.

The Haynesville’s performance is much more than what we had modeled when we came in. The project and the flow rates, we’re hoping for $6 million a day; we have $25 million a day flow rates and on and on. So from that standpoint, we’re also very comfortable and [Inaudible] operate at Chesapeake and the job with them. We’re up to 31 rigs in the Haynesville and moving forward there.

Then from the standpoint of weather, we continue to participate in the carry structure for the next 2.5 years or finance it today and unlock that cash flow, and our capital structure really circles around what we feel is happening in the commodity price of the whole market. For instance, instead of spending the $500 million a year of extra money in the Haynesville for the carry, by financing the project this way, the $500 million of cash flow that we would be putting into the Haynesville, now we’re going to put into our other existing assets, like we have in the Panhandle of Texas in California and the Gulf Coast.

What that is going to do for our company and our investors is drive near term production and near term reserve growth in 2010 and 2011, over and above our existing guidance and forecast. We have been very vocal in forecasting 3% to 5% production growth in 2010, because the Haynesville is not a large enough asset to grow our business on a total basis more than that.

We’re redirecting the capital that we were going to spend just on the promote part of the Haynesville. We’re accelerating that guidance to 8% to 10% growth in 2010 and 10% plus growth in 2011 as the Haynesville continues to grow and the assets and the production that we’re going to get out of drilling development wells with this capital, and developing our assets in the Gulf of Mexico from a development standpoint with this freed up capital will provide for the company and the investors.

So this transaction jump starts, our production jump starts our reserves, and why we’re doing that? We are very bullish on late 2010 gas prices, and oil prices. We think we see a lot of supply/demand imbalances coming back into balance or turning into shortages, and we believe that we’re going to have an opportunity to really benefit from those in a rising production environment, because of redirecting this capital which as you know will be diluting our cost.

We’re on a great cost trend now. We’re physically reducing our cost. Now we’re looking forward to volume metrically reducing our cost, by raising volumes and diluting our cost per barrel and cost per Mcf. This transaction allows PXP to really run on all cylinders, instead of just the Haynesville and just California oil production. We’re going to be able to not only arrest declines out in California, but we think we’ll be able to swell production out there as well.

So our California assets, we’re scheduled to start declining say, second quarter of next year. We’ve been living-off of the spending we’ve done in 2007 and 2008 through 2009 and the first part of 2010. So we don’t see our California assets bearing any decline. If we get capital out the door in the fourth quarter and first quarter this year, we can actually see some production growth out there in 2010 with some great projects.

We have taken this time, the last year as we idled our business to really study, and to really drill down with all of our geologic and engineering talent, totally category inventory, all of our projects, we’ve learned a lot, we’ve learned ways to save money, we’ve watched new fields and force drill all the way up to our Granite Wash acreage and drill offsets to us and so forth. They’ve done a hell of a job defining that play.

We have 29 drills in the Granite Wash, very high potential wells where we can begin drilling in the fourth quarter. That’s really going to drive production growth there. It’s going to be an important add for the next couple of years.

On top of that we’re studying the recent Occidental discovery in Kern County, where we have a small amount of acreage out there, but it doesn’t take much with discoveries like that if they’re in the light spot. Occidental acreage in play is mostly on the planks of the Antelope shale.

Most of our acreage is on the crest of the structures, let’s say planks and the structure with the Antelope shale and we’re on the crest, so we’re kind of on the opposite ends, but we do have some residual key lands out there and leases that we’re looking at to what our potential could be and we might be looking at some of those opportunities early next year.

Our Gulf of Mexico with our Blueberry Hill discovery and delineation is going quite well. Friesian, where the horse is in the starting gate and the line are getting ready to drill out, we’ll have that development to talk about going forward.

Then our expiration projects; even though Salida was a dry hole, it further proved our inboard pay regime concept for sand quality and we’re looking forward to seeing the results in Northwood, Rickenbacker and Purple Tiger. Then when we go on top of that, the T-Ridge menagerie, we’re going to continue to press forward with that at the governor’s insistence and see where that ends up in the August, September timeframe.

So with all that going on, this transaction at Chesapeake, unlocking our cash flow to develop that we think will be very rewarding to all of our stakeholders, our shareholders and our bondholder, and it will also improve our returns going forward, because that $500 million a year that we’ll be spending, will drive in to our new production, new reserve.

Just the go forward returns Haynesville dropped from $1.67 an Mcf on F&D cost on a go forward basis, down to $1.37, so that’s a 30% decrease in F&D cost on the Haynesville project alone on a go forward basis. So we look forward to discussing that further with you guys later today.

At this point in time, I’ll open it up for questions.

Question-and-Answer Session

(Operator Instructions) Your first question comes from David Heikkinen with Tudor Pickering.

David Heikkinen - Tudor Pickering

Hi, Jim.

Winston Talbert

Hi David.

David Heikkinen - Tudor Pickering

Just a quick question thinking about your CapEx for 2009. Can you walk through the breakdown of the increase in spending between Haynesville wells acreage and exploration?

Winston Talbert

Haynesville what acreage?

David Heikkinen - Tudor Pickering

Scott in his prepared remarks said there was an increase in Haynesville wells, there’s an increase in acreage and an increase in exploration and you commented that you’re spending some more money in California as well, so just trying to get in order of what is the breakdown.

Winston Talbert

We’ll spend more money in California in 2010. We spent about $32 million on acreage, some core acreage, right around some wells that were $25 million a day with Chesapeake. We did participate probably in $250 million worth of submittals, so we pulled off a few acreages there.

The rig counts moved up about three average rigs for the year and when you say three average rigs, the number of rigs I think was probably five drilling rig ahead, but its half years and there’s some math involved for the number of rigs. Probably 28 rigs versus 25 rigs what we earlier had projected. Sidetracking Friesian is not an expensive experience, so sidetracking that and also the Blueberry Hill and Davy John’s projects were not part of our budget.

David Heikkinen - Tudor Pickering

Northwood and Rickenbacker were already part of the budget?

Winston Talbert

Depends on which budget you’re talking about David.

David Heikkinen - Tudor Pickering

The $1.05 billion.

Winston Talbert

No we added those as well.

David Heikkinen - Tudor Pickering

So, total exploration sounds like the majority of the increase then, those rigs are net.

Winston Talbert

That’s right.

David Heikkinen - Tudor Pickering

Then on the production side, can you give us a breakdown of production in the second quarter, just averages for the quarter and that’s it.

Winston Talbert

Well, averages by asset?

David Heikkinen - Tudor Pickering

Yes, exactly.

Winston Talbert

We have too many assets, Dave. Let’s look at it this way; looking at where we’ve had strong production; obviously in the Haynesville, obviously at Flatrock we’ve had strong production. One of the areas we’ve had good production has been in the Madrid field and so forth.

I’d say it’s been strong because it’s been consistent, because it had a lot of surface facility production problems last year and they had to rebuild a lot of the compression trains up there, because they are CO2 and so forth. The field has been producing 25 years. So what we’ve seen is more consistent operations out of our base production, up in the Mad and then Flatrock obviously is coming around some and has made it even stronger from there.

What we are enjoying is pretty steady production in California and that’s where we are looking forward to spending some capital out there in 2010 to make sure we continue to have that at a good steady base.

David Heikkinen - Tudor Pickering



Your next question comes from the line of Duane Grubert with CRT Capital Group.

Duane Grubert - CRT Capital Group

Yes Jim, you mentioned in passing, the idea of growing California production with great projects out there; are you talking about heavy oil stuff or are you beginning to think about other stuff as well?

Jim Flores

Well, most of our production out there is below 36 API, we’re doing kind of both. The aspect of swelling production, we can spend probably $30 million, $40 million and arrest decline out there in 2010, above our maintenance CapEx. We are talking about maybe another $50 million and it’s hard to call California growing production Duane as you know, but we would like to call it swelling. So 2% to 4% is more of a swell than a growth, so that’s the adjective.

Duane Grubert - CRT Capital Group

That’s good vocabulary lesson there. On the Saleda what can you say you learned from it; you mention it was helpful.

Jim Flores

Our inbound pay regime, we are looking for the better sands, so higher flow rates. We believe flow is what it’s all about in deepwater and our just reserve side, and we found some excellent, excellent sands as far as processing and portability and that’s great from a geology concept, but from the economy concept it’s a failure.

Duane Grubert - CRT Capital Group

Okay, and then you’ve had the success at Blueberry Hill and you worked with McMoran on the Davy Jones, notably absent from your comments is anything on Blackbeard. You care to mention anything on that?

Jim Flores

That project is idle as far as we are concerned until Davy Jones gets down. I mean there’s nothing to add there as far as other than engineering works going forward towards the completion and each one of these wells; the Davy Jones wells is going to be kind of an interesting project, because it’s the western if you will, all set to drill and below the [Inaudible]

We’re going to learn a lot about Blackbeard from the Davy Jones well and it’s a very inexpensive way to validate or confirm the play. So it’s just more ahead of us if Davy Jones is successful.

Duane Grubert - CRT Capital Group

Got you. Thank you very much.


Your next question comes from the line of Joe Allman with JP Morgan.

Joe Allman - JP Morgan

Thank you. Good morning, everybody.

Jim Flores

Good morning, Joe.

Joe Allman - JP Morgan

Hey Tim, with the amendment to the Haynesville Shale JV, are you still going to pay a promote for leasehold acquisitions?

Jim Flores

We have the option to do that, Joe. Unless acreage is right in the suite spot here and there, and that’s the reason why we don’t have a problem paying as much and promote. When we go and buy acreages, it’s worth a lot more than the promote. So we’re not going to be a sidecar acreage buyer with Chesapeake going forward, because it’s more of a blocking mechanism to keep us from competing with them.

Joe Allman - JP Morgan

Okay, got you, that’s helpful. Then I apologize if you covered this already, but do you plan on ramping up the Haynesville Shale more so than you did previous to this amendment?

Jim Flores

Well, it’s really going to be a function of gas prices. For example if gas prices go up, I’m sure Chesapeake is going to want to add 10 or 20 more rigs. I’m being a little [Inaudible] from a standpoint; we’re going to be as flexible as Chesapeake needs to be and one interesting thing about this too is that, Chesapeake is going to be spending 80% of the money, we are going to be spending 20%.

As we get into the development phase and so forth, there’s some soft sides to this amendment to where all the money will be spent, unless on a joint venture promoted basis, but it will be spent more on a years and mine basis, and that always helps in any relationship.

We haven’t seen anything like that with Chesapeake, but as things mature and so forth. We’re excited about the validation of the Haynesville Play. We wanted Chesapeake to take the risk of the Haynesville success, not our shareholders. That’s the reason why we had to carry structure in place, because remember, if the Haynesville hadn’t have worked, then we wouldn’t have needed to pay the money, but the aspect from a standpoint we drilled the 75 wells, at this point we’re comfortable with it and from our standpoint, it’s going to allow us to grow as fast as Chesapeake wants to grow.

Now it’s 25% of our budget instead of 75% of our budget, and when you look at running a company like this in volatile commodity price times, when you don’t really know what your cash flow is going to be, you try to hedge as much as possible, but you try to give everybody some flexibility to the upside, because it’s what we entered for. It’s difficult to have that large a portion of your capital budget to be totally committed and contracted where you don’t have any flexibility to cut capital if you need to.

For instance, next year if gas is $3 and oil is $40, we can cut 45% of our capital out depending on timing next year, where before the transaction we weren’t able to do that. So, we can be flexible from that standpoint, and at the same standpoint, if we see one play working better than another our existing portfolio, not all the capital is being drained to go to the Haynesville, which is obviously our best play at this point in time. We can move some capital around and be responsive to the industry and be able to grow and provide better returns to our shareholders.

So that flexibility with our existing portfolio that we have now, that we’ve been working on and preparing for drilling and so forth, and we think on the back drop of higher gas prices late next year and going to 2011, should be a good time to develop those assets.

Joe Allman - JP Morgan

Okay. In the amendment, is there any change in terms of the agreed pace of drilling or was that just the soft part of the amendment?

Jim Flores

Since we are ahead of the agreed pace, no. There hasn’t been any change. We haven’t really had any discussion along those lines from that standpoint. We did put a safety catch in there, that Chesapeake, and it would easily drill 150 wells a year, and that’s at about I think 28 rigs or 30 rigs; 25 rigs at seven wells a year. So that we have 31 rigs in the field right now and accelerating that. So it’s a pretty low step, but it does give us the 600 unit development by the end of 2012 that we were seeking.

Joe Allman - JP Morgan

So that was not part of the original agreement, but that’s part of the amendment? Is that right?

Jim Flores

The original agreement was predicated on “We’ll pay this, and the faster you drill, the fast you get the money.” So actually Chesapeake was paid to accelerate from our standpoint, the development.

In this case, we’re going to develop it as the leasehold requires to capture it, which is at a rate higher than 100. It’s probably 180 wells that required to hold the leasehold in Haynesville. I think we’re drilling at about 210 to 215 rate right now on an annual basis, and so we just put the 150 in as just a protection at this point in time.

Joe Allman - JP Morgan

Okay, that’s helpful. Again I apologize, so what was the issue with Salida?

Jim Flores

High and wet.

Joe Allman - JP Morgan

Okay, got you. I appreciate it. Thank you

Jim Flores



(Operator Instructions) Your next question comes from Jeff Robertson with Barclays Capital.

Jeff Robertson - Barclays Capital

Thanks; Jim, a question about the 2010 capital program. You all said that it’s sounds like 55% if it is committed, 45% is discretionary, is the discretionary amount that capital that could be deployed in the event you need development dollars or for additional Gulf of Mexico exploration or expand the plays, and how does that relate in terms of the uncommitted capital to the 8% to 10% production growth?

Jim Flores

Let me attack it this way, Jeff. First the committed capital; the committed capital is our base maintenance plus the Haynesville. Okay, so Haynesville is part of our committed capital in our mind. We’re going to drill it because of the leasehold requirements and so forth to develop it. So the 45% uncommitted capital, yes what we did, we added back about $300 million of capital to our other assets.

So lets take a step back, let’s take you took the $1 billion to $2 billion budget we were talking about and you took the Haynesville promote out about almost $500 million bucks. That gets you back to $600 million to $700 million, okay. So we are adding $300 million to get to $1 billion, which helps accelerate the production from 3% to 5%, to 8% to 10%, that’s that $300 million.

Now those are all on well-to-well commitments and so forth. Those are assets onshore that we can start, stop and so forth. If any of that capital needs to be diverted say to another well at Blueberry Hill and offset and freeze it, we can do that. So that capital is fundable and we can add $100 million of capital.

Since we have only 55% of our budget that’s committed, and 45% discretionary, we also feel much more comfortable about using our revolver as a financing tool and carry it over multiple years. So now our revolver becomes engaged in our capital structure from a CapEx standpoint in it relieves the pressure from any other financings post this transaction with Chesapeake that keeps us from having so much committed capital. Does that make sense?

Jeff Robertson - Barclays Capital

Yes. So you are a lot freer to chase the highest return project in your asset base?

Jim Flores

And use our lowest cost of capital in our revolver. That’s correct.

Jeff Robertson - Barclays Capital

Okay. Thank you


(Operator Instructions)

Scott Winters

Okay everyone, thank you for participating, and we’ll talk to some of you in the rest of the day. Thank you.


Thank you. This concludes today’s conference call. You may now disconnect.

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