Clayton Williams Energy, Inc. (CWEI) CEO Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Clayton Williams Energy, Inc. (CWEI)
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Clayton Williams Energy, Inc. (NYSE:CWEI)

Q2 2013 Results - Earnings Call Transcript

July 25, 2013 02:30 PM ET

Executives

Patti Hollums - Director of Investor Relations

Clayton Williams - President and CEO

Mel Riggs - EVP and COO

Mike Pollard - SVP and CFO

Ron Gasser - VP of Engineering

Analysts

Ryan Oatman - SunTrust

Welles Fitzpatrick - Johnson Rice

Irene Oiyin Haas - Wunderlich Securities

Adam Michael - Miller Tabak

Mike Kelly - Global Hunter Securities

Ravi Kamath - Global Hunter Securities

Ipsit Mohanty - Canaccord Genuity

Sean Sneeden - Oppenheimer

Glenn Williams - Sidoti & Company

Operator

Good day, ladies and gentlemen, and thank you for standing by and welcome to the Clayton Williams Energy Incorporated second quarter 2013 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder today's conference may be recorded.

Now my pleasure to turn the floor over to Patti Hollums, Director of Investor Relations. Please go ahead.

Patti Hollums

Good afternoon and thank you for joining our second quarter 2013 results conference call. Participating on our call today is Clayton Williams, President and CEO; Mel Riggs; Executive Vice President and COO; Mike Pollard, Senior Vice President and CFO; and Ron Gasser, Vice President of Engineering.

During this call we will discuss our second quarter results that were issued this morning. This call will be recorded and available for replay on our website at claytonwilliams.com.

Our call today will consist of financial presentation given by Mr. Pollard, an overview by Mr. Riggs and then an operations update given by Mr. Williams. We will then undertake a question-and-answer session for as long as time permit. Please be advised that our remarks and answers to your questions include statements that we believe to be forward-looking statements. All statements that relate to future results are forward-looking statements that are based on our current expectations. Actual results may differ materially from those expressed or implied by these forward-looking statements because of the number of risks and uncertainties affecting our business, including those discussed in our quarterly and annual SEC filings and in the cautionary statements contained in our press release and on our website.

With that being said, I will turn the call over to Mr. Mike Pollard. Mike?

Mike Pollard

Thank you, Patti, and welcome everyone. I am glad you tuned in today. The second quarter 2013 results were a net loss of $1 million, which was $0.08 per share on total revenues of $98.9 million and we generated $38.6 million of cash flow from operations. The net loss included a non-cash, pre-tax charge of $19.6 million to impair certain of our non-core oil and gas properties. When you adjust for the non-cash items, our adjusted net income was $11.7 million.

Our current quarter results are not really comparative to prior periods because of the previously announced sale of 95% of our Andrews County Wolfberry assets and that sale was effective April 1, 2013. So today, my comments will basically filter out the historical operating results of the Andrews properties so that we can provide a more accurate assessment of the current operations to pre-Andrews results.

Taking a closer look at the quarter, our average daily production on a BOE basis was 13,875 for the second quarter of 2013, that's up 8% from the 2000 quarter as adjusted to remove the Andrews properties. Oil averaged 9,527 barrels a day, up 11%. Gas averaged 17,582 Mcf per day, down 20%. NGLs averaged 1,418 barrels per day, up about a 144%. Our adjusted oil and gas sales, excluding amortized deferred revenues, were up $12.2 million which is $3.1 million with price variances and $9.1 million due to production variances.

Average prices were $93.71 per barrel, up 6%, average gas price $3.89 per Mcf, up 17% and natural gas liquids were $31.07, down 33%. On an as adjusted basis our operating costs per BOE were $20.68, which is down 11%. Repairs and maintenance in the current quarter and some work-over activities this quarter were lower than normal and we are creating part of that decrease. We are also continuing to see significant lowering of LOE costs due to our infrastructure in the Reeves County area.

Derivatives, the loss on settled contracts was $0.5 million versus $800,000 for 2012 quarter, but the non-cash mark-to-market gains in the current quarter were $5.4 million compared to a $37.8 million loss in the previous quarter, of course all of that subject to due to changes in commodity prices.

Our G&A expenses were down 35% to $2.8 million from $4.3 million in the 2012 quarter. The cash G&A was actually up $5.2 million due mostly to increased personnel cost which included payments to participants under four of our IPO reward claims that were tied to the Andrews County property sale.

On the other hand, our non-cash G&A during the quarter decreased $6.7 million, which was due to the reversals of those previously provided compensation expense from APO reward plans, most of which again due to the Andrews County sale.

Looking at our balance sheet, we reduced our total long-term debt during the quarter by 20%, down a $180 million to $665 million largely due to the proceeds from the Andrews County sale. Our current outstanding on the revolver is $315 million and the other $350 million is senior notes outstanding. We have a $150 available on the revolver as of the end of the quarter and still have $26.5 million proceeds from the Andrews County sale held in escrow pending clearing of the few title feedbacks which we probably expect to get those cleared by the end of the third quarter.

At this point, I'll turn it over to Mel and we’ll take questions on financials later.

Mel Riggs

Thank you. Mike. Appreciate that. We think we had a great quarter. We are pretty excited about the results. As Mike said operating metrics improved substantially taking the Wolfberry properties out. We're happy with our performance here in our key areas. I'll just go real quick. I want to talk about first of all the Eagle Ford. As you know, just to recap what we have there and we said in the past we have the 127,000 acre target, 50 miles loan, two-thirds its held by production wells in Chalk wells. We are not pressed to drill in that area right now, but we do have a rig there and we think there is 30 million barrels in place per square mile in the shale and so to arrive at that, multiple that, you got a five billion barrel target, it will be attacking in the second quarter and for most this year we’ve had one rig.

What’s amazing about that one rig running there is we had not only offset the decline in the Austin Chalk based product but in also group production. So I think that tells us and obviously what we are seeing with well perform as we’re doing good. So very pleased with it and we think we have a huge inventory there shaken up. We said in the past we will reiterate that we are using the 168 acre spacing again. So far our wells are scattered our in some case many miles apart.

We think we got at least 750 wells with denser drilling which we will probably need to increase the recovery factor out of the one plays and then we may be looking at the multiple three to four times that 750 wells. So we have got a huge target there. It is performing at this point. It appears that this results in the second quarter.

Over in the Wolfbone, it’s over in the Delaware Basin south of Pegasus, Texas primarily in Reeves. We’ve done (inaudible) land rush space. We had both leasing on our own and plus the format that that we had with the Chesapeake in our shale. We had to put together. We’ve got the large acreage position in the whole region including some other counties outside of Reeve. We have got around 90,000 acres that we went to the period of time, we start to spin our wheels there is no doubt trying to figure to pay out while we are trying to chase the acreage and hold down acreage, but I think we are going to see, we see now in the second quarter we are getting traction. We had some good well performance. We are still though in the early stages of this play, there's no doubt about it. Everybody else out there will say the same thing, it’s very complex. But we think we've got quite a bit of traction in the second quarter with some of our new horizontal wells and some vertical wells.

We are chasing and it’s pretty much been publicized in the areas at the Bone Springs and the Wolfcamp formations there could be as much as 400 million barrels of oil in place per square mile. It’s a huge target. We have already drilled and tested six different horizontal zones; you can see the complexity of the geology.

Our latest effort has been in the upper Wolfcamp Shale. We are very pleased so far with the performance of those wells, it’s early but they look good and if so we feel like the Shale is very consistent across our acreage and we are going to go from two rig program. We are going up to three rigs there now and eventually we will go to a fourth rig in early 2014.

We’ve talked about in the past about a potential JV in this area. We are still pursuing that. We are in, if so we are talking to a company now. We will probably start a full blown process in the near future and its overall it’s going well and if we also have plans that we do not get a JV done and we are still very helpful with if we will. We are working on ideas on how we can hold the acreage together by pushing the drilling program out some in the future. There are some options that we can pursue in that. We will pursue to do that.

So we feel good about our position there. And so overall, if you look at the company right now step back and take a look, we've got in Texas in the state of Texas which is wonderful state two businesses in (inaudible)File6, 1:44. We've got over 360,000 acres. We've got 12 million shares of stock outstanding so each of our shareholders, each of our owners has great exposure to some really exciting plays and I think that Mr. Williams in here looks pretty smart. He has held on his shares and he has also avoided the dilution of his shares and other shareholders by holding back on issuing stock and so we have tremendous exposure to a huge upside and with that I'll turn over to Clayton.

Clayton Williams

You said it all, good job. We do have over 1,000 proven locations in the Eagle Ford and each sector affects us and the Wolfcamp, Bone Springs and West Texas. We have cut back substantially on drilling to take a period and pay down our debt and get real solid. In the meantime, we're fortunate to nearly all of our acreage and with all the wells we're talking about drilling that go with acreage that's held by production.

So we have very little pressure on us to accelerate in terms of what we have. One way to accelerate will be to take advantage of more opportunity. We got a lot of drilling to do. I will repeat. I have over 100,000 acres. That's probably, 700, 800 wells in the Giddings, Eagle Ford. These are large multi-stage frac, 20 stages. They are fairly expensive and the wells costs probably 5 million plus. That (inaudible)File 7, 1:26 payout especially is a 160 acre. So that’s where I come with 750 to 850 wells proven locations in East Texas, Eagle Ford.

Moving to the Delaware Basin, look out to Wolfbone which is a combination of Wolfcamp and Bone Springs. We have 85,000 acres. We require additional 15,000 to the Chesapeake format or now Chesapeake Shale format. We drilled 86 wells, 70 vertical, 16 horizontal. So that we have enough information and production history that were fairly comfortable in the resource and the production in the payout as we go forward. We are going into a three rig program for the time being. But by the first of the next spring we will accelerate it because the release of many wells, 800 wells, as we must accelerate what we are doing now.

So as far potential locations in the Wolfbone and probably 400 more or less in the Eagle Ford, also in addition, we have completed 70 miles on pipelines which is now in place and we are collecting the oil and gas and water and distribute them into the proper price.

We have also add in the history in the Wolfbone that we don’t know what the economics are, we don’t want proper pricing, so it’s for some two years, two and half years, we’ve been in the exploration gaining knowledge, now we think, we pretty well understand the reservoir and payouts. So we are moving ahead into a development program.

So between the two, we have some more between 900 and 1,200 wells and been up I think it’s closer to 1,200. We got a team in place, we’ve got good markets. So we are real happy of where we are and with that I invite your questions.

And we are happy to take them as well Mel and Mike. So how about it?

Question-and-Answer session

Operator

Thank you, sir. (Operator Instructions) And our first question will come from Ryan Oatman with SunTrust. Please go ahead, your line is now open.

Ryan Oatman - SunTrust

This Eagle Ford obviously sounds like you guys have increasing success and confidence there. Can you just talk about what in the recent wells resources just kind of given you that confidence? And then did I hear you correctly that the kind of acreage count perspective, it also sounds like that's expanded a bit from about a 100,000 net acres to about a 125,000 is that correct?

Clayton Williams

Very good question. We drilled wells on east sides, in the middle and the far west side over 100 miles of length, over 100 miles. We then we drilled these in less two years so we have adequate production history to say that we're very comfortable with the bracket of reserves that make us convinced that we got a good economic play out. We're also closer to the market in East Texas, we're also producing sweet oil. So we probably have a $9 barrel advantage on our production in East Texas in the Eagle Ford compared to West Texas with this crude. So I hope I answered your question, but if I miss please tell me.

Ryan Oatman - SunTrust

No, no that's great. I mean I think if I remember correctly; there was a third horizontal well that you all were drilling. Do you have any specific update on that specific well or is it more just kind of cumulative effect to the program?

Clayton Williams

That would be from the wells we've drilled. We started drilling the first horizontal well some year and half ago. So we have at least four or five completed wells with production history, 12 and we have lengthy production history around six or seven. So we are fairly comfortable with the number. We are also comfortable geologically because they referred, talked about 500 feet under the Austin Chalk.

So we also have confident in the geology which is consistent and it follows the Gulf Coast. So we got a lot of work to do there. We have a lot more certainty of the reserves there and we will continue to learn on the Wolfbone in west Texas. Did I get to your question?

Ryan Oatman - SunTrust

Yes, sir. Just another one if I may and then I will right go back into the queue, I mean given the success that you are having in the Eagle Ford here and you know also what’s going on over there in the Wolfbone, is there a chance of the Eagle Ford could be the one divested and the Wolfbone held on or JV that just says goes to divested but is there is a chance that you might hold onto Wolfbone and look for the Eagle Ford to divest to get the balance sheet more in order?

Clayton Williams

You are reading our mind. We planned to keep the Wolfbone because of $8 a barrel partially differential. West Texas is so accrued, the wells are little more expensive to drill but we intend to make some sales at some part and most likely we are concerned still in a partial interest might be a quarter and West Texas down that way to pay down debt or you pay out of debt then reserve more drilling and that’s a little bit of ammo, we will drill and develop a while and we will start making much money pay down then start to process over.

So we made same pay down selling Andrews County over a little over $200 million. Now our project is to develop. The one thing that we have and for which I am real pleased is all development drilling. We have enough locations to drill, we've done no wall (inaudible) which sometimes I get bold and I'll admit that but development drilling is where we came from, had a reasonable payout, good [project] with products so we're going full speed but thank you for that question.

Mel Riggs

Yeah, Ron, I'd like to add one thing I think right now looks like the economics and the areas are pretty comparable but again the Wolfbone has some pressure to drill to hold the acreage, so we need capital, we need to run more rigs. The Eagle Ford is pretty well maintained. We don't even have to be running a rig right now but so that's a great question is we've kicked it around but right now we've got a Wolfbone kind of JV planned out. We will see where we go and see if what happens but it's mainly driven by the need of capital in the Delaware Basin.

Clayton William

I think one important fact I would add to that we have time to drill in the Eagle Ford, it's held by production at some point you have some requirements' but we're under no pressure the Delaware Basin we have explorations (inaudible) so we must keep maybe up to eventually five rigs for some period of time to continue developing all the acreage there. So we have more of a pressure in West Texas. We're not going to (inaudible) somewhat in Eagle Ford but we have some drainage situation we have to drill some wells there as well. Really we're in pretty good shape on holding our acreage or developing it.

Ryan Oatman - SunTrust

All right. Thank you, gentlemen.

Mike Pollard

Thanks, [Steve]

Operator

Our next question wcomes from Welles Fitzpatrick with Johnson Rice.

Welles Fitzpatrick - Johnson Rice

The Eagle Ford well, the 9 or so that you have now am I remembering correctly that all of those were landed in where Eagle Ford just below the Chalk and if so, do you have any plans to try and land in the lower Eagle Ford like, some offsetting operators are doing just above the Buda?

Mike Pollard

Ron Gasser is here. He's our VP of Engineering. Ron will talk a little bit about of what we're doing?

Ron Gasser

Yes, we feel like we talked about where we landed on the floor and Sam Lyssy, our VP of Exploration has picked the target and we've got it mapped across our acreage and we don't have any plans to go lower. We think that we're in the proper target and the results we're seeing are confirming that. So we're in the same target. We've been in all alone. The only thing we've change that Clayton said is we drilled across the entire acreage block now and had similar results which really gives us a good comfort in the fact that we have a lot of wells moving forward.

Clayton Williams

Let me give you one optimist answer as well. Below the Eagle Ford, some 500, 600 feet, is the Georgetown and that is a potential reservoir in the Gulf Coast series we've not drilled at that. Basically it's all types of Eagle Ford held by production but there are other reservoirs down the road that would be a future for us but we have a lot of work to do. 750 wells, that's $5 billion of drilling just to develop what we have Eagle Ford.

Welles Fitzpatrick - Johnson Rice

Okay, and to follow on Ryan's question, Mel, did you say there was 120,000 acres that you guys think perspective now?

Mel Riggs

Greg, our VP of Land is here. He can correct my mistake if there are (inaudible).

Greg Welborn

In the main block, it's the [Austin Chalk] field or (inaudible) fields. We have 100,000 acres. If you include the book ends of (inaudible) or Wilson County, being real close to that 120,000.

Mel Riggs

Because we've only drilled pretty heavily in [Wilson] four I believe there right now they're drilling the horizontal Eagle Ford's in that on that acreage.

Clayton Williams

I might add one other factor we've drilled those on 160 acres, I mean we have potential of in-field drilling and I think that potential is pretty good, but we make no reference to that main product as is yes, but it is a very real potential.

Welles Fitzpatrick - Johnson Rice

And then one last one, if I could, the Thomas with some rail road commission seems to have a highest rate at about 800 barrels up there in Northeast and then the [Balcor] and the (inaudible) little bit lower in the mid 500, is that function of the fact that the Thomas is the most recent of the three, and you are kind of climbing that learning curve or is it more a function of geology I think the formation thins a bit as move into Robertson maybe it's a little bit less fractures you move, southwest, can you put a little color around that please?

Ron Gasser

Well, we've been, this is Ron Gasser again. We have been modifying our jobs a little bit of frac jobs as we go along in increasing stages and also modifying how we up some of jobs. It could be a factor of our completion technique or it may be a little bit of variance in the rock, either way we're seeing that's it's all within a very small margin aware in, our most recent well that we haven't talked about yet, the (inaudible) is in the same

Mel Riggs

(Inaudible) right in the center, yeah.

Ron Gasser

Right in the center of our block and it seems to be looking a lot like the Thomas. So we are encouraged about our results, we're hoping that it's the we're smarter than them in learning as we go along, but it may also be variances in the rock, we know that it's not all good everywhere. But we're getting a pretty good footprint to determine what the average reserves are going to look like.

Clayton Williams

There is a geological reason as well for those consistency, and where this Eagle Ford where we're drilling was the same relative position to the Gulf, shore in the Gulf of Mexico. So it had pretty much the same geology deposition along the whole trend. And that's true a lot of all the Gulf Coast. And there the chalk had similar now the Eagle Ford they perhaps several depositions as to depth and brought in for an healthy development. So that gives us some confidence because we've drilled over that trend and we've drilled wells on each side and then the middle and in a few spots of our (inaudible) 100,000 acres.

So we feel pretty comfortable that's a reserve will be there and the production will be there and that the (inaudible) is maybe not reserves as much as control of cost. And as frequently in a play, and we've been a little bit of (inaudible) but the costs still up and this play be shut down not by production, but by the well cost getting so high we quit.

Welles Fitzpatrick - Johnson Rice

No, that's great. Congrats on all the success and I'll sneak one in, because you brought it up your last say you disclosed, I think was supply (Inaudible) if I remember correctly, is it still in that neighborhood?

Mike Pollard

Yes it is.

Mel Riggs

Yeah. That's great.

Welles Fitzpatrick - Johnson Rice

Thanks so much.

Clayton Williams

Thank you.

Operator

Thank you sir. Our next question will come from Irene with Wunderlich Securities. Please go ahead, your line is now open.

Irene Oiyin Haas - Wunderlich Securities

Yeah. Hi, my question has to do with returns for both place in the South Texas Eagle Ford what is doing you are in the returns you looking for similarly in the play, is it still a horizontal play vertical and what kind of you are really looking for what is your type curve?

Mel Rigg

In the Eagle Ford we reported that our [EOR] is about 270 barrels and if that $5.5 million investment you're looking around the three to payout 30% rate of return at $90 oil and [350] gas in, and when you do comparable economics in the Wolfbone, so the horizontal we're looking at about $6.5 million drilling complete and making about 307,000 MBO for a typical horizontal well that we're currently drilling all horizontal wells with our three rig program and that's very comparable with $90 oil to the three year payout 30% rate of return of also.

Irene Oiyin Haas - Wunderlich Securities

Okay, thanks.

Operator

Thank you so much. Our next question comes from Adam Michael with Miller Tabak. Please go ahead. Your line is open.

Adam Michael - Miller Tabak

Hey, guys. I think lot of my questions have been answered, but I want to go back to the infrastructure as that you commented on in your remarks covering (inaudible) is up about 17 miles of pipelines so just wondering what is the capacity there and how valuables and asset that you think that is in being filling up with some other oil?

Mel Riggs

We can move 20,000 barrels of oil, I believe, you are going to about 25 to 30 million cubic feet of gas and it's valuable. And no case variable so I am getting emails and phone calls from pretty much every midstream company in the country it seems like I want to do something with us. What we want to do right now is fill it up with our own product as overtime that we're going drill wells and see what happens after that.

Adam Michael - Miller Tabak

What is the total amount of investment that you guys have in that pipeline and infrastructure system right now?

Clayton Williams

About $32 million.

Adam Michael - Miller Tabak

$32 million, okay.

Clayton Williams

It’s a (inaudible) that we had to do that because we had a flaring gas, we had no choice, we had to build a pipeline and the ability to, we gathered up all of our well. We are selling it to one parts or going at pace to the [Cushing]. So we get you know, we needed to do that to move our products out of there.

Adam Michael - Miller Tabak

And if I could just ask one follow-up on the Eagle Ford, what's your average oil cut on those wells look like?

Clayton Williams

You mean versus water, oil and water when it comes to gas.

Adam Michael - Miller Tabak

No, out of the 270,000 estimated on the EURs, is that what 90% oil?

Clayton Williams

Yeah, it’s 95% oil, very dry, very dead oil.

Operator

Our next question comes from Mike Kelly with Global Hunter Securities.

Mike Kelly - Global Hunter Securities

I would like to get a little more color on this JV process in Reeves County. It sounds like you got the ideal JV partner kind of picked out, but in your comments you said that you are also about to start full blown process and just trying to reconcile what that means, is that if it doesn't go through with this JV partner, you will look to potentially go explore other avenues or where we are at this right now?

Clayton Williams

Yeah, we have a company that we have had kind of an early look, we talked to them several months ago about the area and we are giving them the opportunity to dig in, do their evaluation, they've got third party engineering, it’s not a U.S. company, it's an international company. So they need some local help. They’ve got engineers hired and so we're going through a process. It will come down to evaluation. In the mean time though we do have an advisor lined up to help us market the JV like I said in a broader manner if we're not able to come up with the deal there. So that’s kind of where we are. I mean we're not pressed right now. If anything were, we've learned more. Our wells have seemed to have gotten better. I think our position is strengthening almost daily. So we really feel good about how the process is unfolding at this point.

Mike Kelly - Global Hunter Securities

Great, thanks. As it pertains to expectations out there, the obvious kind of comp in the neighborhood is the comp stock gross deal which on our map is down t0 about 12,000 acre undeveloped. Is that a fair comparison for your acreage out there? Maybe just kind of give us a feel of that if that really is appropriate sale to look at.

Clayton Williams

A friend of mine sold his company several years ago to another public company. He told me it was liking to quit. It was like one of those ones in a life time deals. I don't know where we will come out on that. I don't know exactly very well the metrics of what's involved. We kind of understood the comp stock area somewhat, but I wouldn't want to try to say it's going to be that. It might be less, it might be more. I just don’t know yet. We're not sure. We have our in-house, our own evaluation at the property what we think is worth and so we will compare that against our potential partner. We will just see where we come out and it's going to be a good deal though because we're planning on. I mean, we still have a plan in the works to, worst case, and it's not really the worst case, it might be the best case. We keep it and drill it ourselves.

Mike Kelly - Global Hunter Securities

Okay. Would you mind just what's that plan look like, how many rigs do you have to ramp up to really hold?

Clayton Williams

Okay. Yeah, there are several things that can happen right now that can all change a great well born who runs our land department, he is in-charge to the project group, he can, once he talk about what he say and then we are working on plans possibly to spread things out some.

Mel Riggs

So today we’ve drilled 44 carried wells on a format basis and we are required to drill 16 more between now and March 1st of next year. And by the way that's either 16 verticals or a horizontal or some combination of the two and we intend on meeting that and in extending the format and we do believe that we are going to earn may be another 15,000, 20,000 acres on a format, so that's a plan going forward.

Mike Kelly - Global Hunter Securities

Number of rigs that will be required, do think fully ramp-up.

Clayton Williams

To continue the format we are going to walk up to five rigs from three. We’ll be adding the fourth here in first quarter of next year and fifth a little after that and we will probably have to maintain that. I don’t know how long, we hadn’t really run it that much further out, but I would say for the rest of ‘14.

Mel Riggs

Yeah, I think it’s manageable, at one point in time we had nine rigs I believe in here and so. And I think we are getting much better results from our wells now, and so we’ll have some cash flow growth, production growth so that will help us.

Operator

Our next question comes from Ravi Kamath with Global Hunter.

Ravi Kamath - Global Hunter Securities

Couple of questions. One based on your actual production in the first half of ‘13 of oil just under 10,000 BOPD. Based on your guidance, your recent guidance of 9,200 to 9,400 that would imply production declining in the second half to like less than 9,000, is that just being conservative or am I kind of missing something given that your Q2 production was 9,500 barrels per day?

Clayton Williams

We will be revising guidance in the next couple of weeks, but certainly we'll be walking up the old from our previous guidance. These latest results have been significantly higher than what we had expected. We usually try to stay in the low end, but we will definitely be walking it up. I can't give you a estimate now, but it would definitely be higher at least probably between 200 to 300 barrels higher than our previous guidance.

Ravi Kamath - Global Hunter Securities

Great. And then couple of others, one any kind of status update on the East Permian sale that you guys were looking (Inaudible)?

Clayton Williams

Yeah, we don't have any results on that right now.

Ravi Kamath - Global Hunter Securities

And the write-down that you took during the quarter what was what specifically was that related to?

Mike Pollard

Mostly of that was related to some old, very old work there. The step we were doing in [Bucket County] and the little bit over in [Glass Scott]. I mean it’s a little bit with this Permian area, but it was all Wolfberry stuff and it was somewhat triggered by the -- when we pull the Andrews properties out and it created a little bit of shortfall there, so that cleans a slight on those properties.

Ravi Kamath - Global Hunter Securities

Got it. And then couple of some housekeeping questions, the CapEx budget is still $251 million, does that still look good?

Mike Pollard

It will be, I am sure little bit higher, we will be including that in our 10-Q in a few days, but we will be walking it up some.

Ravi Kamath - Global Hunter Securities

Not materially.

Mike Pollard

Yes, it will be a material increase, but it will be somewhat higher.

Ravi Kamath - Global Hunter Securities

And then the last one, I guess you guys have mentioned on the last call of (inaudible) county well that you guys were looking to complete in June and given the significant portion of our acreages in that country. Just wondering if you could share any results on that particular well for the 24 hour IP or 30 day IP?

Clayton Williams

We said on the few moments ago, we have now, we drilled, when was that well play it Ron. It’s still about a month and half. It’s a strong well. I don’t know we’ve really haven’t publicized any kind of flow rates or anything but it’s kind of, we think it’s on par with one of our better (inaudible) county wells which one of the better wells and we have since I think drilled, completed another one in (inaudible). We have a big acreage position. That’s exciting area for us. It’s right in middle of our whole play, so it’s very encouraging.

Operator

Our next question comes from Ipsit Mohanty with Canaccord Genuity. Please go ahead. Your line is open.

Ipsit Mohanty - Canaccord Genuity

Good afternoon guys. Coming into at this time of the queue, quite a few of my questions have been answered but let me question a few if I may. If you could just, Mel if you could provide a little bit of color on the production cost, I mean I know you mentioned infrastructure improvements in Wolfbone but other than LOE what are some of the other components that you include in that production cost and then what does the trend look like going forward? Are you still sticking to your 1850-1950 guidance or you are going to see some improvements there?

Clayton Williams

Let me ask you a question, when you say production costs you mean the cost of lifting and pumping or do you mean the cost of drilling in completed wells?

Ipsit Mohanty - Canaccord Genuity

No the lifting and pumping, yeah.

Mel Riggs

Yeah, the lifting costs, work into the detail Mike Pollard has been looking at that, we are steady in that now it did drop significantly this quarter and I think Mike has been trying to understand that.

Mike Pollard

Yeah, just a level of activity varies from quarter-to-quarter. This particular quarter unlike the first quarter of ’13, we just had a lot less activity in the form of workovers and repairs and maintenance and we had a lot of costs like that in the previous quarter. They didn't recur this quarter.

So it’s a little bit of an anomaly on the low side but in addition, it’s definitely embedded in the lower cost this period compared to the second quarter of ’12. We are seeing savings from just having our infrastructure in Reeves County.

Clayton Williams

And there's one other thing too Mike, when you frac a well, there are several hundred thousands of barrels of water to dispose off and six months going by most of that's done so that cost though is included in operating costs which in reality is a result of the drilling. So it is distorted to make the production look worse than it is because some part of those production cost are a result of disposing the water that came from the frac. So the production costs are probably slightly less and you should shift it more to the ledger of completion costs but that’s not how it comes out of the whole.

Mike Pollard

So I think the answer to the question is we think the trend is good but we're not sure.

Mel Riggs

Yes, I would stick with it.

Mike Pollard

There is a lot more that we are trying to figure out.

Mel Riggs

1850 to 1950 would be the safest run rate and we're going to do our best to try to coming under that.

Ipsit Mohanty - Canaccord Genuity

Wonderful and then quickly on the realization part, debt saw an improvement as well, do you attribute that to the Permian or what you saw in Eagle Ford?

Mel Riggs

Part of it was a combination of FT pull out Andrews, you have a higher percentage of Eagle Ford, Austin Chalk which gets the Louisiana suite kind of passing that our improvement that Clayton mentioned a while ago. So it branched it up a couple of points to 99% realization this time and I think that’s anything between 97% and 99% on a go forward is good.

Ipsit Mohanty - Canaccord Genuity

And just quickly moving away from Permian and Eagle Ford and just focusing on your drilling services and midstream, I think your drilling services margins went down. What could you attribute that to and how do you see that kind of going forward?

Mel Riggs

Remember, our drilling rigs are there for our own purpose. We use them to drill for third parties when we can and when we don’t need them. We happen to be in a situation where in the first quarter of ‘13 we had four rigs working for third parties that averaged about two rigs working for third parties in the second quarter. Therefore, the margins were down because anytime they are working for (inaudible) we eliminated. It's only the portion for third parties that gets reported as revenue earnings and experience there, so that's all that’s going on.

Ipsit Mohanty - Canaccord Genuity

Got you. And going forward what's a good rule of thumb if I might or how would I think going forward?

Mel Riggs

I would use the lower rate, I would use something similar to the second quarter of ’13 and run that forward for the rest of the year that would assume two rigs working for third parties and that's achievable.

Operator

Thank you so much sir. Our next question comes from Sean Sneeden with Oppenheimer. Your line is open your question please.

Sean Sneeden - Oppenheimer

Most of my questions were answered, but Clayton or Mike I think you guys mentioned that you don’t feel rush to accelerate drilling. I think in particular in the Eagle Ford? Is it fair to say that you guys are trying to run for the foreseeable future cash flow you can hold position until you get a JV done Reeves or find some other ways of drilling next year?

Mike Pollard

Yeah. I mean we are cash flow, I guess sort of cash flow constraint, we have allocated capital and that we have got sort of allocating more to Wolfbone, because we are going to be stepping up the rig count. And so we don’t, so we are going to have to balance that out, we kind of maintain the debt, keep the debt levels a little lower and to get some others possible smaller divestitures to working on it would help maybe pay down some more in the pieces. Until we get a JV or just come from a different…

Sean Sneeden - Oppenheimer

Okay. That's helpful and then kind of some more lines, Mike highlighted that 315 million up under the revolver, how do you guys think about maybe turning that out to produce liquidity can give you more bigger room as you think about some of your plans that has developed you left exercise it?

Mike Pollard

Yeah. That's certainly is an option it's one that we look at and consider as among the many options that we have available to us. So I wouldn't rule it out, but at this point we don't have anything eminent that we'd be looking to doing there.

Operator

Thank you. And our next question will come from the line of Glenn Williams with Sidoti & Company. Please go ahead, your line is now open.

Glenn Williams - Sidoti & Company

Most of my questions were asked, I mean answered, I did have I guess one quick question. In terms of the balance sheet, even with what seems like a pretty aggressive payment on debt, is there a particular level of debt or debt-to-capital that you guys are targeting? And then I guess you may have spoken about this, but if you could maybe expand on the areas where you being inclined to go to denser well spacing 80 or 48 acre spacing. And those two questions I had.

Mel Riggs

Okay. On the debt level, we typically try to stay in 3 to 1 debt-to-equity ratio and three times EBITDA for kind of debt coverage and we're heading toward those with this reduction in debt and further expectations of additional cash coming in on a JV that we're not doing Reeves. So what--

Mike Pollard

I think (Inaudible) we have a parameter in the company, we use on the debt is Mr. Williams, is it the last time of it he said a lot of it and if he gets nervous about the debt that’s the time to start paying the debt down. That's the way it really is.

Clayton Williams

I would just add to that too much, balance fair bit and may move that with the opportunity that’s out there. And frankly, when there is not lost opportunity actually we pay down debt, when we see a lot of opportunity that is when we go deeper in that reach, and I think we are somewhere in between…

Mike Pollard

And second question, what was the second part?

Mel Riggs

When it comes to well density?

Glenn Williams - Sidoti & Company

Yeah, the second just a little bit, I may have missed this just in terms of where you would be potentially be inclined to go to denser spacing on the wells?

Mel Riggs

Now the first thing we are going to do is try to hold that all with production. So field rules of 160 or dependent on where we are and then as economics and data, reservoir data confirm we will go down spacing as one as we can make oil and make more money. So it depends on each individual play.

Mike Pollard

And once you know other companies do in terms of drilling, I mean we obviously we can learn a lot from that on their dollar. So we are going to watch that.

Clayton Williams

I might add in field drilling is always a future hope that we must always remember that when you drill the wells closer, you’ll spend more and less the same money but you are probably going to get less recovery because you are going to be joining in there, that is slightly or partially driven by the initial well. So it’s a judgment and it’s engineering call then you did (inaudible) in order to be, you need to be sure that is going to be profitable, sometimes it is, sometimes it is not, and in all of our acreage, we do have in field potentials but we have so much more to drill and plan and develop and in some part when we have it all develop, then we’ll look at in field drilling probably some areas that will and some it won’t.

Glenn Williams - Sidoti & Company

Okay, thank you very much.

Operator

Our next question comes from the line of Welles Fitzpatrick.

Welles Fitzpatrick - Johnson Rice

Hi, just a couple of more. The Eagle Ford EURs I think on the last call you said you were looking for 200 and then maybe at the AA you said that that could move up. Is 200 still the number you are looking for is that moved north a little bit.

Mike Pollard

It's moved northward the 270 MBoe range right now.

Welles Fitzpatrick - Johnson Rice

Okay and is it safe to say that the Eagle Ford is largely what's pushing that oil guidance higher or is it mainly the acceleration in Reeves.

Welles Fitzpatrick - Johnson Rice

It's a combination.

Clayton Williams

Outside I would say (inaudible).

Mike Pollard

It's about both areas are contributing to the increase.

Mel Riggs

Yeah.

Welles Fitzpatrick - Johnson Rice

Okay and then one last one on the spacing if I remember correctly it's about 500 feet from the bottom of the chalk to the top of the Buda in the (inaudible) area. Do you have any idea how far down the fracs penetrate, I guess what I'm getting at is that if the third party concept of the lower Eagle Ford works and upper Eagle Ford works maybe a Chevron design comes out to Buick what becomes the ultimate development mode or is that, does that make sense from where you are all sitting, if the lower Eagle Ford concept works?

Mike Pollard

Yeah, our models are for 150-foot height growth either way up and down so you're talking about draining something 500-foot deeper than us and that's a whole new potential play that we would have that we could go develop and that would be similar to what we've done in the Eagle Ford after we've drilled and completed the Austin Chalk.

Welles Fitzpatrick - Johnson Rice

Okay, perfect. Thanks, let me hop back, in that's all I have.

Operator

Thank you, sir and our next question will come from Ipsit Mohanty. Please go ahead. Your line is open.

Ipsit Mohanty - Canaccord Genuity

Just quick on Delaware, the current production, the quarter production released today, would you be possible to give a breakup between the Wolfbone and then the horizontal program and did I hear you right, how would you split your [rate] between the two programs going forward?

Mike Pollard

We have not broken out between horizontal and vertical production in Reeves County. We reported all as one and we really, when we look at each individual well, but we haven't added it up individually. So as far as where we are today, there are three rigs running and they are all three going horizontal.

Ipsit Mohanty - Canaccord Genuity

Does that, we heard about one or with the other Wolfbone over the (inaudible) programs saying that they can penetrate all the zones in a multi-stack lane and hold those zones going in to the deepest but you're still migrating towards the horizontal versus Wolfbone. What's your thought in that?

Mike Pollard

We're going towards the horizontal currently because that is the best economic deal we can obtain by drilling and completing well. As far as holding the acreage, that depends on each individual lease.

Ipsit Mohanty - Canaccord Genuity

Got you and then could you qualify what comes in to your other line item in your production? I saw a jump in night gas and oil both this quarter versus the first. What qualified for the other rich regions exactly?

Mike Pollard

You're talking about other operating revenue or other --?

Ipsit Mohanty - Canaccord Genuity

Production.

Mike Pollard

The other production, I am sorry, Louisiana and South Texas, and it's primarily South Louisiana.

Ipsit Mohanty - Canaccord Genuity

Was there a reason for the jump in gas and oil both this quarter over the last?

Mike Pollard

There are some wells that we have shut in last year that have now come on in South Louisiana.

Ipsit Mohanty - Canaccord Genuity

Got you, and going forward should we just baseline it how we would be think?

Mike Pollard

Wait for the guidance. It will be out – we have do to something (inaudible) just run it on that the way it is for the second quarter.

Ipsit Mohanty - Canaccord Genuity

Thank you so much guys. Thank you.

Clayton Williams

Anything else, any other questions?

Operator

I am showing no additional questions in the phone queue. I would like to turn the program back over to Mr. Williams for any additional or closing remarks.

Clayton Williams

Thank you and thank you for tuning in and we appreciate. In summary we have well over 1000 proven locations, in Texas, and the two areas we're up by which South Texas, Eagle Ford trend, and (inaudible) Wolfberry.

Now with these wells, the first of the basically all of them are held by production so we're not facing deadlines in the case of the Eagle Ford and the Delaware basin there's some lease like questions. So we're facing in West Texas our continuous development problem of sorts all of which were in there cash flow. We are drilling only production wells and we'll be doing that for some years.

Now I have to admit personally I enjoyed (inaudible) but we got the most development drilling to do, it's taken all our cash flow, we have got a lot of proven wells to drill and we have the team and the capability of drilling that have good payouts and the current environment and so our job is to keep drilling and to watch our cost and to be efficient. Because we have longer payouts do, the cost of drilling than we did into pay. So it's more important for us to be very cost conscious in our drilled and development and we get in a tight.

Now we are fine, broadly having our own rigs out and frac is a major part so we're on top of that, we're confident in the results that we have enough production history. And all these areas that we're not speculating as to reserve, we haven't within pretty low records. So we got a lot of drilling to do, we're familiar with the reserves of each of the areas and our job is to execute and do the job that we are capable of doing it and turn a profit.

With that, I'll say thanks for tuning in and we'll keep on, keep it on.

Operator

Thank you sir and thank you ladies and gentlemen. This does conclude today's conference. Thank you for your participation and have a wonderful day. Attendee you may disconnect at this time.

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