Swift Energy Q2 2009 Earnings Transcript

| About: Swift Energy (SFY)

Swift Energy Company (NYSE:SFY)

Q2 2009 Earnings Call

August 06, 2009 10:00 AM ET


Paul Vincent - Manager of Investor Relations

Terry E. Swift - Chief Executive Officer

Alton D. Heckaman, Jr. - Executive Vice President and Chief Financial Officer

Bruce H. Vincent - President & Secretary

Robert J. Banks - Executive Vice President and Chief Operating Officer


Leo Mariani - RBC

Joseph Allman - JP Morgan

Andrew Coleman - UBS

Kevin Smith - Raymond James


Good afternoon. My name is Mark and I will be your conference operator today. At this time, I would like to welcome everyone to the Swift Energy Second Quarter 2009 Earnings 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). Thank you.

Mr. Paul Vincent, you may begin your conference.

Paul Vincent

Good afternoon. I'm Paul Vincent, Manager of Investor Relations. I'd like to welcome everyone to Swift Energy's second quarter 2009 earnings conference call.

On today's call Terry Swift, Chairman and CEO, will provide an overview. Alton Heckaman, EVP and CFO, will review the financial results for the second quarter. And then Bruce Vincent, President and Bob Banks, EVP and COO, will provide an operational update. Terry Swift will then summarize before we open it up to questions. Also present on the call today are Mike Kitterman, SVP, Operations and Jim Mitchell, SVP, Commercial Transactions and Land.

Before I turn it over to Terry, let me remind everyone that our presentation will contain forward-looking statements based on our current assumptions, estimates and projections about us, our industry and the current environment in which we operate. These statements involve risks and uncertainties detailed in our SEC reports to which we refer you, along with cautionary statements contained in our press releases and our actual results could differ materially.

Today, Swift Energy also announced its secondary common stock offering. We will not be discussing or taking any questions directly or indirectly related to this offering during today's conference call. We expect our presentation to take approximately 25 to 30 minutes and have allowed additional time for questions.

Terry E. Swift

Thanks Paul. Thank you again for joining today's conference call. As planned we did not undertake any new drilling operations into the latter half of the second quarter of 2009. By allowing time for industry service costs to come in line with hydrocarbon prices, focusing on recompletions and improved operating efficiencies, Swift energy performed at or above its operational and financial guidance targets for the quarter.

This level of performance tends from the exceptional efforts and focus of everyone in the organization. Although there was a normal driven activity during the first six months of the year, Swift energy has properly positioned itself for future growth and streamlined its operation while high grading its drilling and inventory across all its core areas.

During the second quarter, offshore drilling and service costs continued to moderate while crude oil prices stabilized and then began to improve during the quarter. Unfortunately, natural gas prices declined due to demand pullbacks related to the global recession.

The outlook for the EMP sector for the rest of 2009 and heading into 2010 remains uncertain. But we're beginning to see signs of stability that cannot be ignored. With significant decrease of the oil and gas industry, rig count is a leading indicator of future supply reductions, particularly natural gas supplies.

With a recovery of oil prices to the 50 to $60 range, we're beginning to realize highly budgeted cash flows which will enable Swift Energy to enter 2010 with an emphasis on reserves and production growth. Therefore we are increasing our 2009 capital expenditure budget from 125 to $150 million range to 160 to $180 million range. Additional spending in 2009 will be directed towards growing oil production in Lake Washington for a recompletion and shallow and intermediate drilling program, targeted at proved, developed, profitable and possible reserves.

The losses spend money expanding our horizontal drilling operations in the Olmos formation in AWP commencing horizontal drilling operations in the Eagle Ford shale formation and drilling oil wells in the northern portion of AWP as well. We expect this increase in activity will deliver a daily production rate of 24,000 to 26,000 net barrels of oil equivalent to the Corporation by year-end.

We also have taken steps to improve the financial aspects of our business as well. We've reduced borrowings on our credit facility during the second quarter when compared to the first quarter and continue to work with vendors and service providers to reduce costs in our day to day operations.

We believe that with an increase liquidity profile and increasing operational momentum that the Company is well positioned to grow its asset base while generating appropriate returns for our shareholders. Additionally, and as another sign that the buyers' period of the current economic downturn maybe behind us, the capital markets have recently become active. Recognizing the current availability of the capital markets, Swift Energy also announced the public offering of common stock this afternoon after the market closed in a separate press release. Additional information relating to this offering would be disclosed after the offering has closed.

Operationally, even with the significant reduced capital spending budget and activity levels, Swift had an excellent quarter. Bob and Bruce will review all of our operating activities in the next few minutes. But first, I'd like to take a few moments to touch on the highlights and applaud the efforts of everyone in the organization who were asked to do more with less and therefore exceed with our expectations.

Operational highlights of the quarter include the complete and collection of sales for the BDC UC #8 well in our Bay de Chene field which is not only performing very well but it represents another step forward in recovery efforts from Hurricane Gustav last fall.

This well was actually drilled during 2008 but could only recently begin flowing to sales as repairs in the field progressed. This well began flowing to sales in mid May and for the month of July produced at an average rate of 5.3 million gross cubic feet per day of gas. Currently we expressed all the players at Bay de Chene to be concluded by the end of the third quarter 2009.

The Shasta discovery also in South Louisiana was brought on line and flows steadily throughout the quarter. The performance of this well will be very helpful as we prepare our exploration and exploitation inventory and a very high potential shale developing between Lake Washington and Bay de Chene.

Our first oil well and the Olmos formation drilled late last year continues to perform well and has affirmed our belief that the AWP field can be successfully extended using new drilling and completion technologies. The first well of our 2009 horizontal drilling and completion program targeting the Olmos formation at the AWP field recently finished drilling and is being prepared for completion. The rig that drilled this well will soon be moved to begin drilling operations on the second well of this 2009 program.

With the planned increase in capital spending for 2009, this Olmos horizontal drilling program has expanded and will continue into 2010, and a number of oil locations will also be drilled in the northern part of AWP as well.

Swift Energy is also planning to drill horizontally in the Eagle Ford shale formation during the second half of the year in the AWP field area. Further, Swift Energy is also considering a strategic joint venture with an industry partner to accelerate the Eagle Ford shale development and increase the value of the existing acreage position. Although we are still in the early stages of evaluation, many industry experts believe that the Eagle Ford shale will have resource potentials similar to the Haynesville shale play.

In our Central Louisiana/East Texas core area, the Company recently entered into a joint venture with Anadarko for development and exploitation in and around the Burr Ferry Field in Vernon Parish, Louisiana. The Company, as fee mineral owner, leased a 50% working interest and approximately 33,600 gross acres to Anadarko. Swift Energy will retain a 50% working interest in the joint venture acreage as well as a fee mineral owners rights that we have there.

Anadarko is an outstanding operating partner who has built an exceptional track record in the Austin Chalk development and value creation.

Although the oil and gas environment in the U.S., global and economic conditions remain difficult during the second quarter. The outlook for the rest of the year has improved substantially. Higher oil prices, operational improvement and increase cash flows have encouraged us to increase our 2009 capital spending. The expanded operations will target value adding projects which will enable us to grow our production and reserves substantially in the future.

And with that I'll ask Alton to present the second quarter 2009 financial result.

Alton D. Heckaman, Jr.

Thank you, Terry, and good afternoon everyone. The oil and gas sector continued to experience a low although somewhat improving commodity price environment during the second quarter of 2009. Swift Energy's financial results for the second quarter reflect this.

Revenues were 82.9 million, a 58% decrease from 2Q '08. Our loss from continued operations was 2.2 million or $0.07 per diluted share, down significantly from 2Q '08 levels, yet beating first call mean loss estimate of $0.13. Cash flow before working capital changes decreased 77% per diluted share to $1.36, and 2Q '09 production decreased 16% to 2.3 million barrels of oil equivalent.

Both crude oil and natural gas were prices have substantially lowered in the second quarter 2008 levels. Swift's average realized price in 2Q '09 decreased 62% to 36.71 per Boe due primarily to crude oil prices declining to an average of approximately $55 per barrel when compared to approximately $125 per barrel in 2Q ''08.

Natural gas prices declined also to an average of just over $3 per Mcf compared to over $10 per Mcf one year ago, resulting in a decrease on a quarterly oil and gas revenues of 69% when compared to the second quarter 2008.

With the pricing decline, we have continued to focus on our controllable per unit cost and metrics especially given the decline in volatility and the downturn in the oil and gas industry.

G&A came in at $3.36 per barrel on the low side of our guidance. Our DD&A per unit came in at $17.90 per Boe below our guidance. Production cost came in well below guidance at $8.34 per barrel as cost in several categories were reduced.

Interest expense came in at $3.46 per barrel below our guidance due mainly to lower interest rates on our line of credit and production taxes came in within our guidance as a percentage of revenue. The result, as I mentioned, was a loss from continuing operations for the quarter of $2.2 million or $0.07 per share both, basic and diluted.

Cash flow for working capital changes for 2Q '09 came in at 42 million or $1.36 per diluted share or EBITDA was 47 million for the quarter. The quarterly CapEx on a cash flow basis of 32 million you can see how we live within our cash flow.

Given a recent global credit crisis and the effect on the financial markets, let me spend more with the highlights for a solid financial position and discuss a few of our cost containment initiatives.

As I mentioned, Swift continues to maintain our cautious historical decision to maintain our CapEx within our cash flows, our two senior notes that are currently outstanding at very good interest rate and are well in line with our long term assets.

As previously mentioned, we fully expect the rest of 2009 will continue to be a difficult but improving operating environment and will require continued discipline and emphasis on controlling our cost across the enterprise.

In 1Q '09, we implemented reduction in our work force and have also implemented other cost saving initiatives in the G&A area that will have an impact going forward and its reflected in our guidance. And as Terry mentioned, we continued looking closely at our capital expenditures and operating expenses and have identified several cost saving opportunities in all of our core operating areas. We are also working closely with all of our vendors for additional cost savings for the goods and contract services.

With respect to our line of credit with our 10 member bank group that currently runs through October 2011, our borrowing base and commitment amount remain at 300 million.

Swift had an outstanding balance underlying of 228 million at the end of the second quarter and that has comedown since then. Our current cash flow forecast, however, do not anticipate our drawdowns exceeding 215 million at any point during 2009. So we therefore feel our liquidity and resources are solid and available to weather these financial times.

We will continue to maintain a conservative financial discipline and that of 2009 budget has enabled us to live within our means with limited drawdowns on our line. We are in compliance with our debt covenants and expect to remain fully compliant in our future periods.

And as always, we've included additional financial and operational information in our press release including additional guidance for the third quarter of 2009 and the full year. This remains difficult times in our world and in our sector Swift is well positioned financially to take advantage of the opportunities that always present themselves during periods of uncertainty and adversity. We've been through these cycles before and we're up to the challenge.

With that, I will turn it over to Bruce Vincent for an overview of our operations.

Bruce H. Vincent

Well. Thanks, Alton, and good afternoon everyone. We appreciate everyone listening in. Today I want to stress on second quarter 2009 activity including our productions volumes, our recent drilling results, our activity in our core operating areas and more importantly our plans for the rest of 2009.

Bob Banks will then provide greater detail on a couple of our activities we want to highlight today.

Beginning with production, Swift Energy's production during the second quarter of 2009 totaled $2.26 million of oil equivalent, 13.53 billion cubic feet equivalent. This was slightly above the high end of our second quarter 2009 production guidance, primarily, as a result of better than anticipated performance from our Bay de Chene field.

Second quarter production decreased 16% and with $2.69 million of oil equivalent or 16.16 billion cubic feet equivalent produced in the same quarter of 2008 as a result of no new drilling activity, the shut-in production at Bay de Chene and natural declines. Sequentially, production decreased 5% when comparing second quarter 2009 to production in the first quarter of 2009.

Now for our drilling results. Swift Energy completed one development in Bay de Chene during the quarter. Overall, the BDC UC #8 was drilled in 2008 but could not be completed until repairs in the field and then made the damage caused by Hurricane Gustav.

I'll briefly review our activity in each of the core operating areas starting with the South East and Louisiana core area, which includes the Lake Washington and Bay de Chene fields.

Production during the second quarter of 2009 averaged approximately 13,025 net barrels of oil equivalent per day or 78 million cubic feet equivalent per day in this area which is unchanged when compared to our first quarter 2009 average net production from the same area.

Lake Washington averaged approximately 9,976 net barrels of oil equivalent per day or 60 million cubic feet equivalent per day, a 6% decrease when compared to first quarter 2009 volumes.

This production decline was offset by Bay de Chene's sequential production increase of 25% to 3,049 net barrels of oil equivalent per day or 18 million cubic feet equivalent per day. This increase production is primarily due to the completion of the BDC UC #8. Oil volumes in Bay de Chene, along with low pressure of natural gas, remains shut-in until further hurricane related damages are completed later in the third quarter. In total, we estimate approximately 1,500 to 2,000 net barrels of oil equivalent per day as production are currently shut-in in this field.

At the Lake Washington field in Plaquemines Parish Louisiana, an extensive production optimization program involving gas lift enhancements and sliding sleeve shifts which began during the first quarter of 2009 continued during the second quarter. Bob will provide more details on this program as well as update the Shasta well which is now flowing to sales.

In Bay de Chene, the Company expects to have rebuilt the infrastructure that was damaged or destroyed during the 2008 hurricane season on line by the end of the third quarter. All our shale in production should be restored on completion or facilities construction. These upgraded and new facilities will be more drillable and should prevent extensive downtime after severe weather in the future.

Swift Energy maintains a growing drilling inventory at Bay de Chene which will also be viable on these facilities during the quarter. The Company continues to evaluate low cost metrics to increase its oil production during 2009 in its Southeast Louisiana core area. Bob will discuss how the announced increases in our capital expenditure budget will impact activity in this area this year.

In our South Texas core area, which includes our AWP, Sun TSH, Briscoe Ranch and Fasken fields, second quarter 2009 production averaged 7,351 net barrels of oil equivalent per day or 44 million cubic feet equivalent per day, a 12% decrease in production when compared to first quarter 2009 production in the same area. This decrease is primarily a result of significantly reduced drilling activity in the area.

The first well of our 2009 horizontal drilling and completion program targeting the Olmos formation in the AWP field recently finished drilling and is being prepared for completion. The rig to drill this well will soon be moved to begin drilling operations on the second level of the program. Bob's also going to discuss this program in more detail in a few minutes.

The Central Louisiana/East Texas core area the includes our Brookeland, Masters Creek and South Bearhead Creek fields contributed 2,441 barrels of oil equivalent per day production in the second quarter of 2009. Terry mentioned earlier the recent format of a 50% working interest in the 33,623 acres in this area that Anadarko, which we believe will bring increased activity beginning next year.

In our South Louisiana core area which is comprised of Horseshoe Bayou/Bayou Sale, Jeanerette, Cote Blanche Island and Bayou Penchant production area subtraction is 1,774 barrels oil equivalent per day or 10.6 million cubic feet equivalent per day during the second quarter, adecrease of 21% when compared to first quarter production in this area, primary a result of reduced activity level and natural declines.

And now I am going to turn the call over to Bob Banks to review some of our more notable activity during the quarter.

Robert J. Banks

Thanks Bruce. First, the Bay de Chene UC #8 which was drilled in 2008 but could not be completed until the players in the field have been made for the damage caused by Hurricane Gustav was completed in the second quarter. This well was drilled to a depth of 14,176 feet and encountered 66 feet of true vertical play in two zones. This well began flowing to sales in mid-May and for the month of July, produced at an average daily rate of 5.3 million gross cubic feet per day of gas with the current flowing tubing pressure of 1,220 psi.

The inventory at Bay de Chene has grown and we view this field as having very high potential for our future. We brought the Shasta discovery well on line April 26 and it is now producing to the Westside facility in Lake Washington. For the month July, this well produced at an average daily rate of 4.6 million gross feet of gas per day and 329 gross barrels of oil per day at 9,600 psi on a 14/64 inch choke. Swift Energy has a 50% working interest in this well.

We continue to monitor the reservoirs performance as of this an important well in our understanding at the play fair way which is developing between Lake Washington and Bay de Chene.

As Bruce mentioned, we continue our production optimization program in Lake Washington during the quarter. All the work was completed on 13 wells and during re-completions we performed during the second quarter. This low cost program will continue throughout the year and will assist in the mitigation of natural fuel declines into drilling operations in the field.

In Lake Washington, we developed 10 recompletion opportunities in 5 to 10 year drilling opportunities which are at action above this year.

As a result of increased capital availability, we will begin this program this year and then will continue into 2010. Moving to AWP field located in the Company's South Texas core area, the R Bracken 34-H well, the first well of our 2009 horizontal drilling program in the Olmos formation this year we're aggressively drilling.

In this well, we drilled a 3700 foot lateral in formation with OCR (ph). We have run our 4.5 inch production line DTV and will fractures stimulate the well later this month. And we expect to be able to bring it on line by the end of August.

We are also moving the rig that drills this well to a new location to begin drilling in the second level of this program. As this program builds momentum, we'll begin evaluating its potential impact on extending resource potential and reverse booking.

Also in our AWP field, we are focusing our attention on evaluating the Eagle Ford shale formation. 60,000 of the approximate 89,000 acres perspective for this formation in our South Texas core area are located in and around the AWP filed, most of which we believe to be on trend with current competitive activity in the area.

We're currently forming a strategy to accelerate the development of our perspective Eagle Ford shale acreage which will consider all options available to us including the addition of a potential joint venture partner. Swift Energy does plan to drill a horizontal well to test the potential of the Eagle Ford shale formation during second half of this year. The increased capital spending and activity levels will deliver a daily production rate of 24,000 to 26,000 net barrels of oil equivalent by year-end 2009.

Thanks for your attention this afternoon and I'll turn it back to Terry to recap.

Terry E. Swift

Thanks, Bob. Before we open the line for questions, I'd like to summarize Swift Energy's second quarter results. To review some of the highlights from today, we have a low cost production enhancement program which continues to produce excellent results and help mitigate natural declines in Lake Washington during the quarter.

We intend to continue this program and expect to add up to another 10 rig completions through the 2009 program. We will also begin drilling shallow and intermediate depth bore wells in these fields during the second half of the year.

At Bay de Chene, repairs continue to move forward on schedule and all shut-in production as a result of hurricane Gustav should be restored by the end of the third quarter. We also continue to grow our high value inventory of development and exploration projects here.

Our first horizontal well in the Olmos tight gas sand drilled last year continues to perform at the high end of our expectations and the first horizontal well of our 2009 Olmos drilling program has recently been drilled. The next well of the 2009 program will soon start. As the rig has moved on the location and the program will then continue into 2010. These wells have successfully extended the original field limit to the AWP Olmos field.

Oil price increases in operational efficiency gains have improved our cash flow and our outlook for 2009. We've taken various steps to improve our liquidity and intend to further reduce our bank borrowings throughout the year.

Swift Energy's 2009 capital expenditure budget was increased to 160 to $180 million from the previous 125 to $150 million budget range. Additional spending will be directed towards our South Louisiana and South Texas core areas and we believe that we'll deliver a net corporate daily exit rate of 24,000 to 26,000 net barrels of oil equivalent per day by year end.

At this time, we would like to begin the question-and-answer session portion of our presentation. But before we start I would like to remind everyone that we would not be taking any questions related to our stock offering during this conference call.

Question-and-Answer Session


(Operator Instructions). Your first question is from the line of Leo Mariani.

Leo Mariani - RBC

Hi, I hope you can reply.

Terry Swift

Yeah, Leo.

Leo Mariani - RBC

Question on your JV, Anadarko there, any specific formations that you are starting over there? and, Terry, could you kind of more specifically work with the Shasta in terms of gas you are getting (ph)? Terry, I need the wells over there.

Terry Swift

Well, as you are aware, Swift Energy has drilled in the off shafts for many years. We have a position there in Brookeland as well as Masters Creek and the appropriate position, largely on trend between those two fields. Some of that Burr Ferry acreage actually goes a little bit further down. Therefore we've seen some success there over in the Brookeland area. It's been in the field down there.

We've watched other players including Anadarko that have been active over in the Brookeland area drilling wells. We think there is a good opportunity to take some of this acreage where are the royalty. We only been through our work with the another in this case with Anadarko. They will specifically be going after the Austin Chalk in that area; that's pretty much the plan. A good operator, a good partner they have, we think it's a good move.

Leo Mariani - RBC

Okay, I think you're going to go 50, 50 on wells going forward?

Terry Swift

Yeah, the actual terms of the format there will remain confidential. Anadarko will have a 50% interest in the venture going forward. They're going to need some time to see how many wells they've got and what wells to drill will be working at the moment. I think it's a very much a joint venture relationship structured to be fit.

Leo Mariani - RBC

Okay. And jumping over to your AWP field, you guys talked about some shallow oil drilling in more important field, I guess from my understanding that was principally about the gas field for you guys. Could you talk a bit more about kind of a shallow wells whether or not you've tried to exploit that in the past and then looking at the sense of what the economic will be until then?

Robert Banks

Yeah, I'll take that. AWP has principally been a gas field. But if you go to original development, particularly to the north in acreage, we want it better and there was a fair amount of gas in those wells, excuse me, a fair amount of oil and the shallow.

Typically you could look at a roll in that area coming in at 50,000 barrels per day on the low side due 300,000... excuse me reserves 50,000 barrels of reserves on the high side. We've done some areas that are in that shallow area.

We are looking at wells with probably in the mid to lower range of that with initial market with great wells coming in the 100 to $200 barrel range with the simplified job typically four year to spacing individually not that but as a package we think we will now see investments.

Leo Mariani - RBC

Who got the best bulk up there?

Robert Banks

The remaining million dollars for those wells.

Leo Mariani - RBC

Okay thinking of the sort of well cost question, Terry, turning to that Olmos well finished drilling the expense of some well cost on that?

Terry Swift

Yeah, the first horizontal well cost us about 9 million but we did a lot of finance on that well, lot a more engineering; we shot some of the micro seismic offset monitoring wells. This next actually wells we think that we are come in 7 to $8 million range, but we really expect to get these well cost down into the 6 to $7 million range depending on whether or not we're able to move the intermediate industry which we're looking at very seriously for maybe not just next well, but the well is down the road.

Leo Mariani - RBC

Okay. Thanks.

Robert Banks

Thanks, Leo.


Your next question comes from the line of Joe Allman.

Joseph Allman - JP Morgan

Yes. Thank you and good afternoon everyone. Just on the increased CapEx budget, with that increased budget, do you still expect to understand cash flow for the third quarter, fourth quarter and what are you seeing in terms of commodity prices in that estimate for the third quarter and fourth quarter?

Bruce Vincent

Our expectation we've got actually borrowing the equity operating is really divided in kind of phase I and phase II approach moving ahead with phase I given the certain outlook for prices and expanded within the phase II with a larger into that spending range. The plan is to really extend cash flow obviously balance that precisely by the end of the year is probably not easy to do but we think only that's bring pretty close to cash flow.

We've hopefully done that; we've operated what we often call the discretionary spending or capital budget. We like to spend realized cash flow in our forecast and cash flow and so as we move in the year we've got a better idea there was going. Right now what we tend to do is look at the strip that we balanced that with a governor on it by looking... by not using prices more than that past 40 day moving average Q2 is get into aggressive in term rate possibly has been cash flow.

Joseph Allman - JP Morgan

Okay. It's very helpful and when you... your expectation for production drive between now and year end, what do you think the biggest drivers are for that increase in production?

Terry Swift

Well, obviously the biggest drivers from our prospective which is just an implementation of the program. We've got everything lined down; we are ready to put the rig back to work. We had purpose to slow things down and in fact wait for these rig cost to get down and steel price to get down. They're very much in line with where we want.

We've got our permits; we're ready to go and work through all the years and we have got some ways of shipping things around to. But I'll take time which is probably the most interesting and we've got all that lined up.

Joseph Allman - JP Morgan

So, well before I think you are looking a decline in production, is it pretty evenly spread out, the contribution from the different program or are there a couple of programs that can contribute more to the increase between now and year-end?

Robert Banks

That's a good question. And probably the best way to answer this is we've risked all of these results. That's the way we do it, we risk them at the time and we risk some of the initial expectations. And based on the risk, I think it's fairly well spread between South Louisiana and South Texas, maybe just a little bit more in South Texas but if you take the oil fields that we put in South Texas it probably better sits between oil and gas.

Joseph Allman - JP Morgan

Okay. I guess some hurricane went through there.

Robert Banks

Yeah. It's not how you forecast that. We obviously talked about but that if we were completely offer that and we don't know what is that and what actually the timing, that's a good point with the hurricane probably, the Hurricane factor is probably the most difficult one to trigger out but we did expected in April.

Joseph Allman - JP Morgan

Got you. Okay, very helpful. Thank you.


(Operator Instructions). Your next question comes from the line of Andrew Coleman with UBS.

Andrew Coleman - UBS

Good morning folks.

Terry Swift

Hey, Andrew.

Andrew Coleman - UBS

Yeah. A couple of questions, Terry. Looking at the way spending and the wrap up done in the third quarter that was I guess more an optimization activity, is it fair to assume then that most of that will be expand or really over capitalize some of that?

Terry Swift

A lot of that's going to be capitalized.

Bruce Vincent

The... some of that will be expensed and some of this capitalize; it just depends on what the specific activity but the recompletion work specifically planned for the third and fourth quarter much of that will be capitalized.

Andrew Coleman - UBS

Okay, and then thinking about how, I guess, ROE is going up little bit on per unit basis. Is that more driven by this kind of commodity price kind of outlook or what?

Bruce Vincent

Yes, it's really driven by the lower production rate in the third quarter than anything else.

Terry Swift

And then we have some non-operated planned activity that came back on line in the latter part of the second quarter that will be running at a 100% third and fourth quarter.

Bruce Vincent

Yeah and particular that's the Lafourche plan which you are quite familiar with and Plaquemines Parish that is been offline in first and second quarter as a result of the hurricane last spring time and Swift holds actually an equity interest in that and that comes back on line, the value get revenue from the equity goes through that, the negative even increase in LOE.

Andrew Coleman - UBS

Okay. All right. Great. I terms about the higher, slightly higher oil price environment with the additional spending perhaps in this year you foresee be able to replace all your production across your business this year?

Bruce Vincent

Well, I don't think we expect to replace all of our production across each region because we're not allocating the capital as much of a capitalization is being allocated to Southeast Louisiana and South Texas as opposed to the energy.

Terry Swift

I think to add to that, earlier in the year we did guide towards a small reductions in reserves and given that we don't have the level of activity to really be testing out all of these new opportunities that we're going to count for that guidance but I'd mentioned it in South Texas in particular there is a significant resource supply or resource potential reserve what we're going to be evaluating and appraising through the drill well.

Bruce Vincent

Now there is a little bit of a wild card obviously this year for us and everyone because it's a new SEC reserve disclosure rule and also because, in our particular, because the expanded resource labels in the Olmos and Eagle Ford depending on the activity we get depending upon what we feel and our outside engineers feel if we can actually work that will certainly have an impact on that reserve to expect a number.

Andrew Coleman - UBS

Okay. And the last question I've is does the guidance that in this release does it incorporate the operating earnings, can we get something additional color down the revenue?

Terry Swift

We can't really comment on the offering and I think you understand that we've discussed here today is relevant to all that we intend to discuss is relating to the second quarter and our outlook for how we believe we can go forward given the present environment.

Bruce Vincent

I think what we can say is the earnings release was made prior to the release of launching the offerings.

Kevin Smith - Raymond James

Okay, great. Thank you.


Your next question comes from line of Kevin Smith with Raymond James.

Kevin Smith - Raymond James

Good afternoon, gentlemen.

Bruce Vincent

Hey, Kevin.

Kevin Smith - Raymond James

Just a few questions; first off, what type of rate returns are you expecting in your Olmos drilling program? And really more I guess where do you think... what do you think gas prices need to be for that wells in the economic sense?

Robert Banks

Yeah, I mean that the actually we think $4 gas is very economic for us, especially if we can drag these drilling cost down. So we can make money at $4.

Bruce Vincent

Yeah, we think the Olmos specifically is a 3 to 5 Bcf tough well used for the mid range, difficult standard 7 that you're going to find some $2 grown finding cost in there. So, we think, 450 market, that's very economic in that environment. We got infrastructure in place, the additional operating cost to another Olmos well in a field of 500 plus wells is negligible.

Kevin Smith - Raymond James

And what type of... I know it's gas well, but I mean is it like 100% methane or is there any liquid at all involved in it?

Bruce Vincent

There is generally about 1,200 Btu gas, so you've got good liquid content in that, your process and everything in that field.

Kevin Smith - Raymond James

Okay. Thank you, that's helpful. And the other question is what are you hoping that Eagle Ford JV, are you looking for more drilling expertise or just are you basically are you planning on operating, are you really looking more for the capital dollars still about the operating?

Terry Swift

Well, I'd say it's really three things we're focused on there. First of all, we have a very substantial position in South Texas in both the Olmos and the Eagle Ford and we clearly want to implement our Olmos program.

We believe it's a very, very viable and in part of our corporate strategy none of that is on the table, but as to the Eagle Ford we want to get with that. So the first time to consider here in a JV is how can we accelerate that without diminishing our movement forward in the Olmos as well.

The second thing is obviously we want the right kind of partner. We would like the partner that will bring more than just consideration to the table but the partner that is good to work with, have some good technical experience and we're certainly are seeing that there is a lot of folks out there with need criteria and we are interested in that. And of course, third consideration is important. The nature of that consideration in various ways such as cash other things truly valuable.

Kevin Smith - Raymond James

Do you expect to be the operator or do you expect your JV partner be able to get one to be the operator.

Terry Swift

Well, we have a substantial position in South Texas and given that we have over 500 wells in the area and we have worked with the land owners and we have all the infrastructure there, we intend to be the operator.

Kevin Smith - Raymond James

Fair enough, Thank you, gentlemen.

Bruce Vincent

Thank you.


There are no further audio question at this time. Are there any closing remarks?

Terry Swift

Okay, we thank you very much for joining us today on our conference call.

Bruce Vincent

Thanks for your time and attention. We appreciate it.


This does conclude today's conference call. You may now disconnect.

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